How Will the U.S. Stress Tests Impact Asia?

This week should see preliminary results on the US Stress tests for 19 banks. What is the view from Asia?

(I have taken some of my views below from today's Bloomberg ("U.S. Officials Signal No Need for More TARP Funds From Congress", by Timothy Homan and Robert Schmidt.)

• Release dates of the stress tests:
  • The methodology behind the stress tests are scheduled for release on Friday, 24th April, in the form of a white paper by the Fed,
  • The 19 companies may get the results of their own stress tests already on 24th April, and
  • The results themselves are to be released publicly on Monday, 4th May.
    
• The aim of these stress tests is: do banks and other financial companies have enough capital to weather a deeper storm?
• But, fog prevails:
  • According to today's Bloomberg there is no set plan for
    • what information will be released
    • how to categorize the results, and
    • who will announce the results.
    • All of this suggests that there will be deliberate obfuscation so that nobody really knows what is going on. This will be akin to Prof. Bernanke telling a Congressional sub-committee that he could not reveal the collateral that individual banks had pledged when they received government loans.
  • Also, disclosing the results has morphed into a political issue in Washington. Treasury is fighting more disclosure of the results, while the Comptroller of the Currency wants less disclosure.
    • The reason for this tug of war is that the Comptroller is more concerned about what happens when the weakest institutions release their results. This lends credence to the old saying that "a chain is as strong as its weakest link."
    • Another reason is that Dr. Geithner is in a lose-lose situation:
      • If all banks pass the stress test, then the credibility of the test will be questioned, and
      • if some companies do not pass, they will need more government aid - and that will fuel even more "T parties". They will need more government aid if they cannot raise capital in the markets within the next six months, i.e. between May and November of this year
• Thus, what we see is hypocrisy at its best: American politicians are yelling at China for her perceived "fog", but then are creating very thick fog in Washington!
  • Indeed, the banks have not been told exactly what information concerning the stress tests may be released.
  • Meanwhile, it seems to me as if many banks do not want too much revealed about the "true" state of their balance sheets.

According to US earnings announcements so far, what are implications for Asian corporate outlook?

• Do you trust any of these announcements?

There are tentative signs of recovery in the global economy - do you think they are sustainable?

• Back to the stress tests: Under the Treasury's more "averse" economic scenario, unemployment could rise to 10.3% next year; that would be 36% above the original 7.6% unemployment rate that prevailed when the Treasury initially created these forecasts!
• One test in logic is that if what is stated is true, so must its opposite be.
• So, imagine a world in which politicians and (well paid) official economists from the IMF and OECD started saying that things really were NOT improving?
• Indeed, if politicians keep talking about stimulus packages, what does that reveal?
• It seems to me as if the governments have done what they can. Now prayer time starts: what else can governments do? Excesses have to be removed from the system, and no set of government bailouts can achieve this.

What does the Q1 Asia economic data tell you the state of health of Asia economies and the outlook going forth?

• Broadly speaking, it seems as if the Asian economies are holding on to growth with their fingernails.
• What this suggests is that there is too much exporting going on, and too little consumption. That is virtuous in that Asians are prudent savers - but is not so virtuous in that the sustainability of growth is out of the control of domestic policy makers.
• The bottom line is that more policy thinking has to be devoted to creating more domestic demand AND keeping the domestic banking system safer than in the US, where anyone could borrow and spend.

What is your outlook for the Asian markets in the next 2 quarters, and what investment strategy would you recommend?

• "Sell in May and go away."
• It seems like the policy makers have run out of ammunition. Now it is time for prayers and for crossed fingers....

Comments

[Dave Wrixon:]

I am not really clear on what any of this has to do with Asia?

Apr 20 07:49 AM

[kelm:]

Anecdotal evidence I am hearing from China indicates that domestic Chinese growth is coming on pretty well and that we may be starting to see a sea change in the drivers in Chinese growth from export driven to domestic driven. The decoupling of markets did not occur on the way down but I believe we will see it re-assert itself on the recovery as Asia in particular grows while the US prays and crosses its fingers.

Agree that we are creating a fog. Having gotten the stress test results, which are needed, they now have to grapple with the consequences of that knowledge and the fact that events may already be in the stress scenario.

Apr 20 08:39 AM

[conceptwizard:]

If the US Leadership fails to instill confidence by creating clarity it will serve to undermine the whole process. China at this point has already written off a quick recovery from their biggest trading partners US and Japan and are concentrating on moving themselves forward internally through protectionism. (China index fund is worth a look)
The administration has failed to create a comprehensive plan forward that would instill confidence in the market. I believe that they in fact are in uncharted waters and are out of control trying to combat the inevitable freefall we are in.
The facts: Housing is still freefalling in price & foreclosures, March numbers are the highest yet. Unemployment numbers are falling unabated, Commercial Real Estate is unravelling and will be the next collapse, Commercial Loans portfolios are in Jeopardy, the tax receipts in April 2009 are projected to be down 28%, Spending is up 46% from 2008 an already record year. Congress is unwilling to release any more money (thank God), Most of the budget went to military spending and bailouts & debt servicing, tent cities are popping up. pensions are unfunded, retirement is gone for most people, trillions of wealth vanished, the 12 trillion national debt has a rocket tied to its butt and will be the next thing on the moon, and we are having friggin tea parties to celebrate instead of throwing grenades.
I mean DUHHHH! who in frig is in control of this massive ship going sideways to which it has to go over the edge because the world really is FLAT!
Any one of the above can take this country out. We need someone who is going to make some hard choices, not play patty cakes with wall street.

Apr 20 09:59 AM

[john redmond:]

The doctors have conferred and there is no perceived brain wave activity from the Congress /Fed/ Obama Cabal. It's time to turn off the life support machines and let this ugly monster die a well deserved death.

Apr 20 10:22 AM

[Dustinian:]

I really doubt I will be selling Asian stocks in May. Perhaps American stocks.

Apr 20 11:18 AM

[woodsey:]

Seeing through China fog is easy. THE auto show is in China. Chinese people are WORKING. Chinese people are BUYING cars; even American union made cars.

Apr 20 03:28 PM

[Friar Hilarius:]

If banks fail a stress test they deserve to fail or be merged?

Why in the name of all that is holy does America need so many banks?

When are Americans going to pay their debts by making things that people actually need

Entertainment trash is not a need ... it is an escape

Best Wishes

Friar Hilarius
[e-mail]

Apr 20 06:18 PM

[Gem Hudson:]

If spreading more of a sub prime around is withdrawing more than what is deposit in our hard earn buck and paying off the Chinese with what they already bought more than what they could afford is to hyper-inflate. The dollar is going to crash.

Apr 20 08:51 PM

[TERN:]

[The methodology behind the stress tests are scheduled for release on Friday, 24th April, in the form of a white paper by the Fed, ]

This will be the interesting part: How bad IS the worst case economic scenario foreseen by Treasury.
Will it be too optimistic? Then the test is rather worthless.
Will it be too pessimistic? Then it may create more panic in its own right.

I look forward to see the blogs and interviews of the best economic brains scrutinizing the methodology.

Apr 20 09:22 PM

[Old Trader:]

woodsey,

According to Bloomberg, all is not what it seems at first blush in the Chinese auto market. Evidently, the big bump in sales is in cars with under 1.6 liter engines, and stripped minivans sold to trades people and farmers. This is because of the way the Chinese stimulus package was structured.

While the increased sales will goose the overall revenue figures and unit count, it'll do little, if anything for the companies' bottom line. Just like in the US in the 70's, when GM and Ford preferred to sell Impalas and Crown Vics, rather than Vegas and Pintos.

I would suggest, it DOES bode well for oil prices going forward.


On Apr 20 03:28 PM woodsey wrote:

> Seeing through China fog is easy. THE auto show is in China. Chinese
> people are WORKING. Chinese people are BUYING cars; even American
> union made cars.

Apr 20 11:14 PM