A look at the % of banks whose Allowance for Losses on Loans & Leases (ALLL) is

greater than their levels of Non-Performing Loans (NPLs).

I’ll give anyone $100 who *dares* to ski down a slope like this. No, I won’t let you use
a parachute as a substitute, that’s cheating.

1
As a technician, I’d be quick to point out the well-defined channel that the Y-o-Y %
change finds itself in. Given the preponderance of real estate lending that banks had
done over the past decade, this is pretty significant.

2
 % of RE Loans to Total Loans

60.00%

55.00%

50.00%

45.00%

40.00%

35.00%

30.00%
0

9
00

01

02

03

04

05

06

07

08

09
l-0

l-0

l-0

l-0

l-0

l-0

l-0

l-0

l-0

l-0
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
Ju

Ju

Ju

Ju

Ju

Ju

Ju

Ju

Ju

Ju
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja
This just isn’t good. Real Estate is illiquid. You don’t trade this stuff the way you trade
commodities, precious metals, or stocks & bonds. One of the things that all of us too
damn young to remember the Great Depression have found out/are finding out is that
in times like this, when the effects of the liquid Vicodin & hallucinogenic cocktail
known as a speculative bubble have worn off, we all just want our freakin’ money back.

But guess what? There ain’t enough cash to go around. So we do mildly psychotic
things like cut our asking prices by 25-50%. Yes, Vegas degenerate gamblers
homeowners, I’m talking about you.

3
What a suprise – Net Charge-Offs (NCOs) are up & continuing to climb. Take a look at
the next slide where I take a closer look.

4
 2.50

2.00

1.50

1.00

0.50

0.00
1988- 1989- 1990- 1991- 1993- 1994- 1995- 1996- 1998- 1999- 2000- 2001- 2003- 2004- 2005- 2006- 2008- 2009-
03-31 06-30 09-30 12-31 03-31 06-30 09-30 12-31 03-31 06-30 09-30 12-31 03-31 06-30 09-30 12-31 03-31 06-30

-0.50

-1.00

NCO Ratio Y-o-Y Change in Ratio

Here I wanted to look at the Y-o-Y change in the NCO ratio. Quarterly data is too
granular to see “big picture” trends, so I don’t like to use it. Others prefer the granular
stuff, but as the famous bard shitmydadsays says “You people – you think I got
microscopic fucking eyes.”

Over the last two recessions, Once the Y-o-Y change in the ratio saw a change of ~+50
bps, you could see the ratio start to drop and once the ratio saw a Y-o-Y change of ~-75
bps, it started to climb again. This time, it has just kept on going up. And with the % of
RE loans to Total Loans increasing at the same we have many more months worth of
foreclosures hanging around with a bulk-sized can of Morton’s salt, this is a war wound
on bank balance sheets & asset quality reports that’s going to stay fresh, raw, &
excruciatingly painful for some time. Sorry, but I thought it was better than saying that
banks were going to continue to get waterboarded – I don’t condone torture.

5
 Velocity of Money
M Z M Basi s

3.6 3.6

3.2 3.2

2.8 2.8

2.4 2.4

2.0 2.0

1.6 1.6

1.2 1.2
75 80 85 90 95 00 05
Source: Haver Analytics

Any economist worth a damn should look at this & be worried. As velocity slows,
money supply growth becomes ineffective at boosting GDP. The tried & true equation
of monetary economics is GDP = M X V. M represents money supply while V
represents velocity – the # of times in a year a dollar changes hands in the economy.
Transactions are the lifeblood of the system. People have to actually want to transact for
something in order for the economy to keep moving – otherwise everything just
stagnates. As you can see, we want to conduct fewer & fewer transactions these days.

So lowering rates won’t get banks to lend & people to borrow now because like the
degenerate gambler who just wants out of the casino, everyone just wants to leave it all
behind & decompress now – having taken it in the shorts so thoroughly they need the
assistance of a doughnut to sit down. They’re tired of the frenzy, the glittering lights, the
complimentary cocktails & the cold air that gets pumped in to keep them going. No,
everyone seemingly wants to head for the casino exits at once. Probably to head to the
hotel pool to watch yet another act of public indecency by people younger, dumber, &
more innocent than we are.