Bill Miller: The layout for the certainty of the rise

Bill Miller/Wen with the stability of the United States and the world economy, risk aversion will weaken and money will return to credit and equities. In this crisis, financial markets have become the focal point of contradictions, but also a huge opportunity. In the past, banks were only willing to lend to their best customers.　　Now the "shadow banking system" (the asset-backed securities market) is no longer in existence and cannot be rebuilt in the short term. The Government's policy towards banks remains a bellwether for restoring market confidence and stability, as well as economic recovery. By the end of last year, most of the government's efforts had been counterproductive, exacerbating the loss of market confidence. By banning the payment of dividends to preferred holders, the government has made the capital loopholes in the banking system more and more (Fannie Mae and Freddie Mac prefer preferred stock to banks). At the same time, the government has shut down markets that raise capital by issuing preferred shares, an important channel for previous private-equity banks.　　The decision to let Lehman collapse led to a catastrophe that shorted the entire credit system. The elimination of private capital and the imposition of punitive policies on financial institutions are difficult to induce private capital to invest in these financial institutions. This is precisely the opposite of the policy's objective-to restore market confidence, encourage private investment and avoid wasting taxpayers ' money. The Government is aware of this and the policy has begun to improve. The bank was killed by the market sentiment. First, let's look at the bank. Banks ' profits come from credit creation, and if large loans turn sour, they will not have enough capital to support them. Previously, the U.S. bank debt and capital ratio reached 10:1. As a result, banks would go bankrupt as long as the value of their assets fell by an average of more than 10%. The S & P 500 index fell 38% last year, and many market-denominated assets fell sharply.　　The banking system is thus unable to repay its debts, or be nationalized by the government, or a trillion-dollar new capital infusion is needed. Some argue that banks are technically "bankrupt" on a technical level. But this is clearly not in line with the overall situation of the banking system, nor is it applicable to the problems faced by any big bank. In fact, the banks are well capitalised, with a steady stream of deposits, with an excess reserve of 800 billion dollars at the Fed.　　Most big banks have recently reported earnings, most of them improving their capital adequacy ratios. Analysts who had expected the banking sector to lose money in the first quarter argued that the bank's profits came from non-recurrent items, irregular market conditions and accounting gains.　　The same conditions, of course, have led to huge losses last year that are much more real than the profits now brought. Those who are worried about the financial situation of banks think that accounting standards can transcend economic reality. But in fact, accounting standards are only used to reflect the financial situation of the economy, the bank's financial situation is determined by market confidence and cash flow, rather than accounting standards.　　Now that the cash flow is growing and the liquidity of the banks is growing, it's time to look at the accounting system. Accounting standards based on market capitalisation have caused a lot of controversy. Proponents argue that Mark-to-marketThe objective of financial transparency helps to disclose the real financial position of an enterprise.　　Opponents argue that the market-value approach, which confuses market prices with potential values, injects unnecessary volatility and confusion into the bank's financial statements. There are other points of view on market capitalisation, such as a good thing to reflect the market value of an asset or to estimate market value, but it would be wrong to draw the bank's capital adequacy ratio into the adjustment range. Aside from the current debate, banks will have to label their assets at high prices, no matter how exaggerated the price, as long as there is an asset bubble.　　It is clear that demand pressures will arise, and that people want only those assets that are priced cheaply. Finally, talk about stress testing.　　In order to stabilize public confidence in the banking system, the ill-conceived plan, in fact, is just adding to the confusion: first, banks have been working with regulators to do stress tests, so the stress tests are redundant; second, the top 19 banks are fully capitalised, according to regulators. Indeed, the capital adequacy ratios of most banks are much higher than those required by regulators (including Citigroup). The problem is that the stress tests are designed to identify potential capital shortages in an economy that is worse than it is now. And today is the worst economic situation since the Great Depression.　　The main design flaw in the stress tests is that the government suggests that today's capital-rich banks will be asked to raise more capital to cope with a possible further deterioration of the economy. Pre-emptive capital raising is a perverse one. If the economy worsens further and banks ' capital adequacy ratios fall sufficiently low, they need to raise more capital. If private capital cannot be sustained, the government needs to inject capital into it, diluting the share of existing holders. Forced dilution is a harbinger of forcible seizure, a disaster for government-funded businesses. A three-year return to value-led forced funding would lead to perverse motives that were diametrically opposed to policy objectives. The easiest way to raise capital is not to borrow and then push borrowers to repay.　　As assets fall and capital adequacy ratios improve, we all suffer as the economy declines because credit is ineffective. Keynes pointed out in the 1930 's: The behavior of individual rationality may be the collective irrational behavior. It is reported that stress tests also check whether banks have sound capital, or common stock. This requirement is somewhat disorganized. According to this assertion, common stock is the first line of defense against loss. Other stocks, such as the state's priority share for the allocation of toxic assets, are slightly inferior.　　Stocks are stocks, and the cash the government uses to buy preferred shares could have been used to buy common stock, but the government expects the taxpayer to hold a higher stake than the average holder. Whether the conversion of government-held preferred shares into common stock is a contentious issue. No one noticed that the new capital had not been created by this conversion, but that the order of the stocks had changed (dividends would only be used to create new capital thereafter). It is hard to understand that in this shift, abandoning the fat dividend and falling in the capital system will give the governmentEconomic or political benefits.　　No new net worth was born, but dilution of common equity would lead to a fall in share prices, which is consistent with the goal of the transition. Buffett recently said he never used common stock to assess the bank's financial strength. Coca-Cola, he said, had few common shares but remained financially solid and profitable. ' Your income comes from the difference between the cost of your capital and the loss of your assets, ' said Mr. Buffett. Losses can be absorbed by banks through various forms of capital, such as loan losses, not just common stock. That is why policymakers decide to use tier one capital, core capital and leverage rather than common equity to assess banks.　　The right policy should do so rather than make banks look weaker than they really are, or raise money when banks don't need to raise money. Debt spreads will gradually shrink, as the economy develops steadily, the stock market rises, credit starts to flow and volatility declines. I expect the US stock market to grow at the end of the year.　　In the short term, there will still be problems exposing the recovery of markets and confidence. Our portfolio is neither based on macroeconomic expectations nor on trends in the next few months for equities, but on stocks that are undervalued over the long term.　　We believe that, regardless of whether the stock market will start to rebound this year, the certainty of growth in the next few years is high, and the company will gain a profit that meets their competitive advantage and management capability. Three years after the market was driven by price and panic, value began to dominate the market again, and in most cases 70% to 80%. As the US and the world economy stabilise, risk aversion weakens and money flows back to credit and equities. This investment in value assessment strategies is undoubtedly beneficial and will be directly reflected in our portfolio income. (The author is Legmansson Value fund manager, the Fund is one of the most acclaimed stock-type mutual funds today.) Xu Yidan translation)