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The new run on banks: Why rising rates are bad

Jeff Brown, Special to CNBC.com
Monday, 7 Oct 2013 | 4:53 PM ET
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Recapping the day's news and newsmakers through the lens of CNBC.

Notes:

At first glance, it doesn't seem to make sense, but banks are worried that rising interest rates will cause huge withdrawals of deposits—a threat to bank earnings and, perhaps, the prices of your bank stocks. Since bank savings have paid virtually nothing for years, you'd think higher yields would draw more deposits. But no: banks figure customers will pull cash to invest in other assets that pay more as rates go up. As customers favored safety over yield, and found banks paid a smidgeon more than money markets, deposits surged 40 percent between September 2008 and last month, to $9.57 trillion. Much of that cash is now tied up in things like loans, so banks may have to borrow to cover withdrawals.

Quote:

"Banks were fighting each other for deposits in 2004, 2005, and 2006, but since then, deposits have become easy. I've had bankers tell me, 'I can't turn the deposit faucet off.'"—Scott Hildenbrand, a strategist at investment bank Sandler

A laborer pushes a cart of boxes in New York.
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A laborer pushes a cart of boxes in New York.

Next recession to come in ... 2018

Notes:

The bad news: another recession is all but inevitable, as one typically comes every six or seven years. The good news: the next one's at least two years away. That's the view of the overwhelming majority of mainstream economists. Most think the next recession will hit by 2018, though it would be sooner if the U.S. defaults on its debt. A key problem is that consumers have not increased spending as much as many economists had hoped, causing banks like JPMorgan and Barclays to downgrade GDP estimates for the current quarter.

Quote:

"Ben Bernanke may be a remarkable man, but we are asking a bit much to assume he has abolished the business cycle and created the nirvana of never-ending growth."—Charles Robertson, global chief economist at Renaissance Capital

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Who buys more gold than the hedge funds

Notes:

Doomsday preppers love to cite the merits of gold in tough times (though medicine and ammo might be handier in a zombie siege). But what really drives gold prices, anyway? It turns out blushing brides in India are critical. Gold dropped 2 percent last week, but believers say India's upcoming wedding season should turn things around, with a little help from the Hindu festivals of Dussehra and Diwali, when gold buying is considered auspicious. After that, though, demand could be hurt by the weakening growth in India, the falling rupee and government restrictions on gold imports.

Quote:

"Indian wedding season demand will support the trade but it is likely to be much more subdued in terms of price impact this year."—Victor Thianpriya, Commodity Strategist at ANZ Research in Singapore

SEC Chairwoman Mary Jo White
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SEC Chairwoman Mary Jo White

Twitter's SEC problem

Notes:

So far, it's been a fine year for IPOs. There have been about 150, up 50 percent from last year as high stock prices makes issuing new shares more profitable. But that could change if—you guessed it—the government shutdown drags on. The SEC has used some leftover money to keep up with IPO paperwork, but could run out in a couple of weeks. High-profile IPOs like Twitter's will likely go ahead, as will many of the others also expected in November. But December's batch is iffy.

Quote:

"This is where wealth creation happens. If you want a very, very, very powerful lever to screw up the wealth creation in the economy, defunding the SEC is a good one."—Michael Fertik, founder and CEO of Reputation.com

House Minority Whip Steny Hoyer (D-MD) speaks during a protest held by furloughed federal workers outside the U.S. Capitol to demand an end to the lockout of federal workers caused by the government shutdown in Washington, DC.
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House Minority Whip Steny Hoyer (D-MD) speaks during a protest held by furloughed federal workers outside the U.S. Capitol to demand an end to the lockout of federal workers caused by the government shutdown in Washington, DC.

Debt ceiling stock market dogs

Notes:

We all know that failure to raise the federal debt ceiling could cause interest rates to soar, with all sorts of other bad things to follow. But what types of companies would suffer most? There's something of a precedent in the debt-ceiling showdown of 2011, though the ceiling was raised at the last minute.

Among the most badly hurt: Bank of America, whose stock plunged 26.2 percent on worries the bank had too little capital; American International Group, down 15.1 percent on doubts about its turnaround plan; mortgage insurer MGIC Investment, off 57.4 percent over capital concerns; commodities firm Alpha Natural Resources, down 29.3 percent on fears of a commodities crash; ETF Direxion Daily Financial Bull 3X Shares, down 42.2 percent due to its high stake in financials.

By Jeff Brown, Special to CNBC.com

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