Sunday, April 5, 2009

Not All's Well Despite Ending Well

As far as weeks go, all's well that ends well?  We beg to politely differ.

Many people have seized on snippets of less-than-horrible economic data in February and March to proclaim that the newly-minted bull market (all major averages up over 20%) has "legs".  Let us hope, but here are some narrow-bore comments and bigger picture points gathered by EBR over the past few days.

Firstly, an expert opines negatively:

NEW YORK (Reuters) - U.S. credit markets are not showing the same optimism on the economy as U.S. equities, suggesting that the recession will run far longer than most expect, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said on Friday. . .

"In general, credit markets have not demonstrated the same sense of enthusiasm as the equity market," El-Erian said, adding corporate credit spreads are still elevated.

"I suspect technical factors are in play (in the equities market), and have been over the last few days," he added. "The weakening correlations suggest that fundamental drivers are being overwhelmed, for now, by short-term technical repositioning."

Next, Nouriel Roubini (RGE Monitor, subscription required), who has not been proven wrong yet throughout this economic and markets agony, has just now disclosed all his financial assets are in cash except for his (relatively small) 401(k).  He continues to reaffirm his bearishness both on the economy and stock market.  He looks for 11% headline unemployment by about midyear 2010 and for the economy to underperform consensus by shrinking every quarter in 2009 and only rebounding to keep pace with population growth in 2010.  Here is a summary from his website of different unemployment forecasts:

Unemployment rate forecast (not online)- RGE Monitor: 10% by 2009-end and 11% by Q3 2010 with close to 4.6 mn job losses in 2009; Morgan Stanley: 10% by 2009-end; Goldman: 9.5% by end-2009 and 10% by 2010-end; JP Morgan: 8.7% by 2009-end; Merrill: 9.9% by Q4 2009 and 10.4% by Q4 2010. Merrill Lynch: depression-style job losses with close to 3 mn net payroll loss during Oct-08 and Feb-09 with steepest employment loss since the 1940s. Fed: 8.5-8.8% in 2009, 8-8.3% in 2010 and 6.7-7.5% in 2011.

Note the Fed is the outlier in the above listing!

Roubini is therefore bearish on the stock market at this level and incidentally is bearish on gold, as he is in the deflationist camp.

Meanwhile, the publicists highlighted the "good" news.  What was not highlighted as much was information such as the following:

A services index from the Institute for Supply Management, a Tempe, Ariz.-based trade group of purchasing executives, fell to 40.8 last month from 41.6 in February. Economists surveyed by Thomson Reuters expected the index to edge up to 42.

"We haven't stopped free-falling," said Joel Naroff, president of Naroff Economic Advisors (ed:  Bloomberg's top economist for 2008).

The highlighting of positive news items is seen in bull markets.  Look to buy economically sensitive assets when there is legitimate good news but it is being ignored, such as in the winter and spring of 2003.

Other bits of truly bad news from the March unemployment report were ignored or nearly ignored.  The unemployment rate increase was correctly dismissed as a "lagging" indicator.  However, January unemployment data were quietly revised to show almost a 100,000 greater count; and, there are 3 forward-looking bits in the unemployment data, and 2 of the 3 were unequivocally bearish:  hours worked (record low since data collected in 1964), and temporary help employment. 

It is good to go to as many experts who have predicted matters correctly this cycle.  Here are excerpts from an interview with the correctly-bearish financial company analyst, Meredith Whitney, in U.S. bank woes just the start, says Whitney:

As recently as six months ago, she was forecasting that at least $2-trillion (U.S.) of available credit card lines would be eliminated by nervous bankers by the end of next year. Now she thinks she underestimated the cutback and has revised the number to $2.7-trillion. Although it's not possible to gauge the direct impact on spending by already depressed consumers, the effect is bound to be enormous.

“Since 2006, you've had liquidity coming out of the market. That's caused consumer credit to worsen. Liquidity continues to come out of the market. Therefore, consumer credit continues to worsen,” she said logically.

And the effect on the banks? “The assets on bank balance sheets are worth less and less. And they need more and more capital.”

Without doubt, more U.S. banks will fail or end up effectively nationalized. And if that's not enough grim news, there's another black hole still to come – commercial real estate. No wonder she recently opined: “It remains clear to us that core liquidity fundamentals are deteriorating at an accelerated pace.”

Consider reading the entire (brief) article.  

In the meantime, the thought leaders in the blogosphere who detested G W Bush continue to move farther away from their last best hope for this country.  Barry Ritholtz of The Big Picture ( wrote today, in the comments section of Part 2 of his flaying of Larry Summers, that he was "horrified" that Tim Geithner has done little more than "adapt" the Paulson approach to this crisis.  Mr. Ritholtz, a prominent Republican for Obama ("Obamacan") last fall, has to be only a hop-skip-jump away from naming Mr. Obama himself.

This issue is of special interest at this blog, which was founded in large part because the blogosphere that had harshly criticized the Bush-Paulson (+Bernanke-Pelosi-Reid-Frank etc) actions last year had expected the Obama administration to be much better, when in fact candidate Obama had supported every bail-out action by word or vote, andevery signal that came out of President-elect Obama was one of continuity with the Bush policies.

If the "bears" who have simply been correct realists continue to be correct, such as Dr. Roubini and Ms. Whitney, and assuming no dramatic change of course by President Obama, then the suspicion at EBR is that, public opinion will gradually follow that of the thought leaders, andin that case confidence in Barack Obama's policies toward Big Finance would then wane substantially.

As stated recently in an EBR post, we have already witnessed the greatest sudden wealth transfer by government from taxpayers to private companies in the history of the world.  The analogy made was to Watergate, where bombshells arose ex nihilo, and one of the most sweeping electoral victories ever by Richard Nixon in 1972 was reversed and then some.  Could Big Finance be in a situation similar to that of Nixon? 

Copyright (C) Long Lake LLC 2009

1 comment:

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