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Friday, March 30, 2012

Charts I'm Watching: March 30, 2012

Original Post:

Two news items in particular are catching my eye this morning.  First, consumer spending continues to outpace personal income by a wide margin.  In February, spending grew .8% while personal income was up only .2% (an inflation-adjusted -0.1%, I might add.)  Because spending should track income over the medium/long term, this divergence is unsustainable. 

Second, the NY Times ran an article regarding Moody's downgrades at BAC, C and MS.  They touch on the impact this will have on derivatives in particular -- the one colossal danger hardly anyone is discussing.  As bad as the Euro-Mess and China's hard landing might be, I think the unraveling of trillions in derivatives stands to be the story of the year.

Zerohedge has done a great job of discussing the issue.  Here's the latest.  The average ratio of derivatives to total assets is over 30, with some banks such as C (47) and GS (54) coming in much higher.   Morgan Stanley is particularly susceptible to foreign exchange (98% of total), while virtually all the banks' derivatives are OTC.  

In other words, who knows what they're worth or how well they'll hold up in the event that one of more counter-parties, however many degrees removed from the originals, goes belly up.

And, lest we forget, derivatives/assets is meaningful, but derivatives/capital is the ratio that we should really worry about.

Charts coming.

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