It's A Wonderful Life:
GEORGE: Now, please! Now, now, please, folks! Now, just a minute! Just a minute, now, please!
CHARLIE: Tell us about our money, George? Where's our money?
GEORGE: Now, please! Now, wait a minute! Listen to me! Now, you're thinking about a building and loan all wrong. Your money's not here!
PEOPLE IN THE CROWD: What?
GEORGE: Wait a minute, now, let me tell you. Let me tell you. Your money's in people's houses! In the Kennedy house, and the MacClaren house, and in your house, and a hundred others. You all put your savings in here and then we make loans to people to buy homes and cars and other things. Now, what are you going to do? Take their homes and cars and things from them?!
CHARLIE: Tell us about our money, George? Where's our money?
GEORGE: Now, please! Now, wait a minute! Listen to me! Now, you're thinking about a building and loan all wrong. Your money's not here!
PEOPLE IN THE CROWD: What?
GEORGE: Wait a minute, now, let me tell you. Let me tell you. Your money's in people's houses! In the Kennedy house, and the MacClaren house, and in your house, and a hundred others. You all put your savings in here and then we make loans to people to buy homes and cars and other things. Now, what are you going to do? Take their homes and cars and things from them?!
How quaint, and how times have changed. In George Bailey's time, even though banks didn't actually have money in them, they at least knew where that money was. Today the system has morphed into something so large and unimaginable I often question why I even play along. The problem is not Government debt per se. The real problem is that $70 trillion in G10 debt is the collateral for $700 trillion in derivatives, that equates to 1200% of Global GDP. So none of us should be surprised when JPMorgan's Jamie Dimon wasn't aware that his risk management unit had a few hedges that were a bit more directional than they'd like, and losses totaled a few billion. A few billion is a rounding error, or as my accountant wife was fond of saying, "mice nuts."
Bank runs are scary, scary things. In a world built on the backs of currencies, backed by nothing but the full faith and credit of the issuing nation, faith is the most precious of all commodities. People work hard for their money, and when they have a few extra bucks they've been enticed to save for that rainy day, college, or retirement. But sometimes things don't go as planned. Governments screw up, and citizens start to question their faith in their financial institutions. Faith that they'll get their money back, and faith that it will be worth what they thought.
Lets look at Greece, Spain, and Italy. Savers and investors sense that maybe, just maybe, the money they have invested in the local bank might not be worth as much in the very near future. Greeks especially are afraid that they may awaken one day soon to find that those Euros they had in savings are suddenly called Drachmas, and are subsequently worth much less than they hoped. Not surprisingly they've been pulling hundreds of billions of euro's out of their local banks and transferring it to Switzerland and Germany. The trend has spread from Greece to Spain and Italy, not a run, just a brisk walk for the exits.
Who can forget the images of bank runs from the Great Depression, people lined up around the block hoping to get their money back. Today's bank runs are not nearly as photogenic. I remember reading about a Greek news station sending a camera crew to the local bank to see if they could get some footage to use on the nightly news. No such luck, today's runs are mostly electronic, money is transferred over the internet to banks in other countries with a few strokes of the key. Nothing to see. We simply must trust the reports we're getting from the banks and the governments as to how much is being withdrawn. There we go again, that trust word. Trust the government to tell us the truth about how many citizens don't trust the safety of their deposits. Government officials lie. Especially when they can lie under the guise of preventing widespread panic.
There is nothing like a national bank run to get the attention of politicians. Not just a run on a specific bank, but a run on the nations currency. Citizens pulling all money out and saying, "sorry, I'm not going to play any more." We're reaching this point in Europe today. What they do to stop the run will be interesting. Believe it or not, the United States is seen as a safe haven, or at least the least dirty shirt in the laundry. You know things are crazy when pundits say that at least our government isn't as dysfunctional as Europe's. In the 1930's our government stopped the bank runs by stepping in and guaranteeing all bank deposits. Of course back then our currency was backed by gold. Today in Europe the bank runs are because the citizens don't trust their governments currency. The trillion dollar question now becomes, how do you instill faith in a currency that you have actively been trying to devalue for years? As my daughters say, "Good luck with that."
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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