02 September 2010

Banks and the Recovery

As my earlier blog post noted a recovering economy should result in serious revaluations of highly revalued banks stocks. Would one expect they would be sunk for a long time, just the way some tech stocks were. That is a very difficult question to answer because it implies share prediction.

But we can move this onto the investing structure by which one can expect a company to rise to the potential financial analysis reveals for it. The hard point is that these companies were very good at generating revenue from assets which turned out to be inflated.

The problem is their asset value was itself predicated on these assets. That is something for financial regulation to avoid happening, and indeed that seems to be a direction of the new financial bill.

However that was a general feature of money flow economies. They are predicated on the fact that asset values rise when money flows into them. The cash replaces asset growth from traditional ways, the kind which show up in financial statements.

That is based essentially on a computational view of companies, it is focused on that happens in the space where money is inputted and where money is outputted. It requires that mix of factors, management, creativity, financial management and so on some investors look for.

It is my experience all this shows up precisely in the financial statements. A money flow economy does not care about this, they care about companies having visibility. Investing prefers a lack of visibility at the time of investing, in essence it is necessary to invest before money flow finds it.

Put simply, it is all about creative minds engaged in structured action in this world. Put simply again a money flow economy is not democratic. The housing bubble was an attempt to make it so, by giving the capacity the relatively few have to bootstrap their house on a long term loan, to the many.

My own sense of this as I argued is that this is the fair thing to do, but the economy collapsed because of this. Another way is to create sufficient asset value from financial structure that the economy can afford to do this. Another way for a country to generate asset value is to have commodity wealth.

The only solution for these countries, is to have an investing economy when that asset value disappears. When this happens assets get effectively revalued, as that source of money flow is extinguished. The lucky thing about the US is a reliance on money flow from asset inflation backstopped by the dollar itself, did not destroy its investing economy, centered in its companies.

But the government really should be doing that it can to regenerate this. The stimulus bill was a good idea, because it contained funds for real infrastructure building and science and engineering research. It was a move for a moment away from a focus on taxes.

But in general the government does not need to do much. For a money flow economy, well it has to do what has been done since the crisis. In the run up to the crisis it had to manage money flow with the conduits produced by interest rate differentials between economies. This is something the blog has discussed.

All an investing economy needs is the capacity of some to create in a purposeful and structured way and express this in companies. This the US has an unparalleled ability to do. When other countries talk about wanting their economy to be more like that of the US, this is what they mean.

So answering the big investing question about bank shares, well, those companies were really good at generating revenue, so give them a real recovery, businesses to lend to, Wall Street booming, they will probably do really well. What about those toxic assets.

Real asset growth will make them less and less a problem on the balance sheet. Those toxic assets have made the statements of financial companies hard to see structurally, but one can look at the results of  their structure, their behavior as revenue generators. Just give them something good to generate revenue on.

© 2010 Guy Barry - All Rights Reserved.