“When a thing is funny, search it for a hidden truth.” George Bernard Shaw
The recent quarterly results given out by the banks has brought great cheer worldwide, with stock markets rallying and suddenly there is a talk that the depression (not recession as claimed by politicians) is about to see its imminent end.
When I see the good cheer all around on these positive notes I find it difficult to reconcile with some facts regarding the US economy. Why should we take that as the bell weather of the world economy? Well there is no escaping the fact that the US GDP is actually 25% of world GDP. Any positive there would rub on everywhere else and the reverse holds true as well. Therefore there are certain facts which are difficult to overlook:
1. Unemployment figures have risen to 8.5% in March 09 and are expected to reach 10.3% in Oct 09 as per the http://forecasts.org/unemploy.htm.
The recent quarterly results given out by the banks has brought great cheer worldwide, with stock markets rallying and suddenly there is a talk that the depression (not recession as claimed by politicians) is about to see its imminent end.
When I see the good cheer all around on these positive notes I find it difficult to reconcile with some facts regarding the US economy. Why should we take that as the bell weather of the world economy? Well there is no escaping the fact that the US GDP is actually 25% of world GDP. Any positive there would rub on everywhere else and the reverse holds true as well. Therefore there are certain facts which are difficult to overlook:
1. Unemployment figures have risen to 8.5% in March 09 and are expected to reach 10.3% in Oct 09 as per the http://forecasts.org/unemploy.htm.
2. Retail sales per the US Census http://www.census.gov/marts/www/marts_current.html) are heading south month on month, year on year.
3. Car sales are heading south as well and are in fact down by about 36% from march 08 (http://www.motorintelligence.com/m_frameset.html).
4. New House sales in the US have shown a slight pick up in February 09 as opposed to Jan 09, but are still at 41% lower than Feb. 08 as per the website http://www.census.gov/
(http://72.14.235.132/search?q=cache:TV7nXG0Tz88J:www.census.gov/const/newressales.pdf+new+home+sales&cd=2&hl=en&ct=clnk&gl=in)
The fear on rising credit card defaults is adding to a sense of concern. So where is the profit coming from? Is it that existing mortgages are being refinanced to take advantage of the low mortgage rates?
Another important aspect not commented upon is that the “American Recovery and Reinvestment Act of 2009” which seemingly had a $ 787 Billion for the stimulus, actually has a 37% component or $ 288 Billion tax rebate. Now this is a one time rebate which will put a couple of hundred dollars per person on the table which may help in some minor family expenses, but what effect will it have on the economy? Will this sum help to pay an installement or two on a mortgage, thus postponing the inevitable, which is more default?
It seems as if we are postponing current challenges for a future date when we could see another round of great losses.
“Three things cannot be long hidden: the sun, the moon, and the truth.” Buddha
7 comments:
These statistics are revealing.
The problem has little to do with economy more to do with greed and shortsighted thinking.
There is general feeling that governments are failing to solve this crisis due to poor governance standards.
Economy fails due to bad resource and infrastructure management. If they want employment to pick up what stopping them from taking existing institutions into confidence to develop better resources - read people.
Especially, they should teach management guys to take risks with accountability. Taking bonuses after failing is not accountable behavior.
It's not just the bailout that contributed to the positive results. Bank of America had a $1.9 Billion pre-Tax gain on the sale of shares of China Construction Bank. See the supplemental first quarter 2009 financial fnformation here:
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjMxMHxDaGlsZElEPS0xfFR5cGU9Mw==&t=1
See footnote (1) at the bottom of page 29 of the pdf file in the link above .
also archived here:
http://www.garlic.com/~lynn/2009g.html#3 Do the current Banking Results in the US hide a grim truth?
and followup
http://www.garlic.com/~lynn/2009g.html#5 Do the current Banking Results in the US hide a grim truth?
MF: Banks Need Billions More
http://www.forbes.com/2009/04/21/imf-europe-banks-markets-equity-recession.html
Bernanke Says Crisis Damage Likely to Be Long-Lasting
http://www.bloomberg.com/apps/news?pid=20601087&sid=arpJXeelvfY4&refer=home
from above (something of an understatement):
Bernanke said the packaging and sale of mortgages into securities "appears to have been one source of the decline in underwriting standards" because originators have less stake in the risk of a loan.
... snip ...
Bank's Hidden Junk Menaces $1 Trillion Purge
http://www.bloomberg.com/apps/news?pid=20601039&sid=akv_p6LBNIdw&refer=home
from above:
So investors betting for quick solutions to the financial crisis could be disappointed. The tangled web that banks wove over the years will take a long time to undo.
At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.
... snip ...
The Quiet Coup
http://www.theatlantic.com/doc/200905/imf-advice
from above:
But there's a deeper and more disturbing similarity: elite business interests -- financiers, in the case of the U.S. -- played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
... snip ...
The audacity of hope; Optimism that banks' fortunes have reached bottom may be premature
http://www.economist.com/finance/displayStory.cfm?story_id=13496794&source=hptextfeature
from above:
More blows are coming. Banks worldwide have written down their assets by $1.1 trillion. The final tally is expected to be double that, or more. The pain is only now starting to spread through commercial property and commercial loans. As a result, the first-quarter reprieve will turn out to be a "head fake", says Chris Whalen of Institutional Risk Analytics.
... snip ...
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40+yrs virtualization experience (since Jan68), online at home since Mar70
your doubt is fully justified.
You never know what is being cooked inside. Its not a game of banker but many parties involved in this including politicians. we may never ever get to what is the truth but we can easily assume something wrong inside.
-Ketul
Hi Sunil,
Absolutely correct, you are on the dot, it’s all accounting gimmick. The modification by the Financial Accounting Standards Board (FASB) allows banks to “Mark to Market” at required value and not distress sale. This artificial change in the accounting rule will only temporarily enable banks balance sheet to look stronger.
Interestingly, as the market is waiting to know the outcome of stress test, the fate of the banks will not be known in real terms unless the real value is determined. FED has indicated that banks need to raise New Capital or Cash will be required, as Capital of 19 of the largest US Banks has reduced substantially. These nineteen banks hold two-third of the Assets and one-half Loans of the Banking system.
Therefore, I support your view that we are going to see another round of Bankruptcies in future, though I am sure of the time frame.
Cheers
Asad
I think the current banking results are smoke and mirrors. I do believe they are earning their way out of trouble due to the low cost of funds. However, I think that many of the banks are sitting on large losses that have not reserved for and will see their future earnings impacted negatively. Also, some of the positive earnings this quarter is due to MTM on liabilities. For example, Citibank record a $1 billion gain due to spreads widening on their issued debt while Morgan Stanley took a $1.5 billion hit to earnings because the spread on their debt tightened. Totally nonsensical and the reverese of what you would expect.
Links:
http://barrons.com
http://wsj.com
http://www.cnbc.com/id/15840232?video=1098607767&play=1
Private Note:
great question. I worked in structured finance for 8 years at AEGON and saw first hand the crappy loans that were issued. The banks tried to structure that stuff and push to the investors - we weren't buyers especially of the home equity paper. Now, I work for a hedge fund and we are still very nervous about the financial institutions. A good book to read that I just finished is called "Meltdown". I also am starting "House of Cards" by William Cohen.
Michael G. Herp
mike@mainstreaminv.net
One of the things to be careful about when looking at the statistics is that there are usually some lag affects. The economy will start to pick up (as measured by GDP while unemployment is still increasing. So rising unemployment all on its own is not necessarily an indicator that the economy is continuing to weaken.
Larry
www.iLG-Edge.com
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