By the end of the month, the Treasury will release at least some information on the "stress tests" that the 19 largest banks are going through. It seems very likely that they will only release aggregate info on the banks as a group, and not the results for the individual institutions.
Think of these as sort of like the standardized tests that states put together to see if kids are meeting the "No Child Left Behind" standards. Unless your kid has severe disabilities or goes to a horror show of a school, he should be able to pass. These stress tests are not particularly stressful.
If Citigroup Inc. (C) can't pass the baseline scenario, then it really does deserve to be riding on the short bus. If Bank of America (BAC) passes, that's nice, but please don't treat it as if they won Olympic Gold -- it's more like the participation trophies that six year olds get for playing T-ball.
The table below shows the underlying assumptions that go into both the baseline and the "more adverse" scenarios being tested. We will not have any information about the GDP growth rate until the end of this month, and it is possible that GDP growth will surprise to the upside, given the better net exports data and some indications that personal consumption expenditures have not been collapsing as much as people had feared.
Still, the improvement shown in the out quarters of the baseline scenario are extremely rosy. I don't know how much longer the good net export data will continue. The price of oil has rebounded a bit, and most of the improvement in the trade picture has come from falling imports, not a surge in exports.
Remember that the rest of the world has been affected by the economic crisis at least as much as the U.S. has, and will not be on a buying spree for U.S.-made goods. The "more adverse" scenario should be treated as a most likely case, not as a worst case scenario.
If General Motors (GM) files for bankruptcy, even it will probably be optimistic. As for the Unemployment Rate, we already know that it averaged 8.1% in the first quarter, well above the "more adverse" scenario. The new and continuing claims for unemployment insurance data have not given much indication of a dramatic slowdown in the pace of job losses. In March, the unemployment rate was 8.5%, and revisions to the employment data have been uniformly negative over the past year.
The baseline scenario actually calls for unemployment to start to fall as soon as this month, and to only rise another 0.4% by its peak in the first half of 2010. It seems far more likely that the unemployment rate will rise by 0.3 or 0.4% in April alone. If it starts to plateau there, then it will be in line with the more adverse scenario. I really don't see that happening, even if GM can stay away from the courthouse. If GM files for bankruptcy, as a back-of-the-envelope calculation, add two full percentage points to the unemployment rate to what your base scenario was.
The housing price index is based on the Case-Shiller (CS-10) 10-city composite. It resets it so the fourth quarter of 2008 is 100. The data is available only with a two-month lag, so we only have the information for January. Translating the stress test scenarios to the existing index, then the January reading to be on target for the baseline scenario should have been 159.69. For the adverse scenario it should have been 158.07. The actual reading for January was 158.04, or slightly worse than the "worst case" considered.
Housing prices still have a ways to fall, and that assumes that rents do not start to drop significantly. If they do, the equilibrium price for housing will fall still further.
The fact that the results are being delayed until after earnings season and that the level of detail to be released is very limited is very disturbing. If the tests, as easy as they are, were going well, don't you think that the results would be trumpeted in a major press conference, held at least by Geithner, if not by Obama himself? While I would love to see the baseline scenario work out, I would also love to win $100 million in the Powerball Lotto. I would not base my financial plans on either of those two things happening.
--Dirk van Dijk