This Economy Ain't Healed Yet

Is it weird that so many of the distressed financial institutions are ready and willing to repay the government's money so soon? I am not going to get into the debate over who needed the money and who didn't but clearly many of them do not need it now. Amazing how things magically turned around!

Just what did they do with the money, anyway? From what we read, they certainly have not lent it out to kick-start the economy. We read about boosting their balance sheets and other activities - anything as long as it gives them a better return - including not getting their credit ratings lowered or going under - than lend it out.

And the top banks come out stronger then before or so it seems. Meanwhile AMEX (AXP) lays off 4000 workers.

I am no economist but to me it seems as if the government spent billions on PR, not economic kick-starts. My idea of the United States Bank funded with the hundreds of billions given to the banks and empowered to lend to businesses and consumers directly still looks pretty good to me. Let the esteemed managers who got us into this mess fall on their swords so the smaller, well-run financial institutions can take their place.

Bottom line - Don't be fooled by a bear market rally. The economy ain't healed yet - although a lot of banks seem to be fat and happy again.

Comments

[Fighting Yoda:]

Michael - Of course follow you on Barron’s welcome here. Well said “..it seems as if the government spent billions on PR, not economic kick-starts…” This whole stress test was nothing but a PR blitz. In some ways the strategy worked – market is up, BofA even raised $13.3 B today. But of course the economy has not healed and it is not even close. With mega bankruptcies and 500K+ job losses, we are very far from it. All this talk of green shoots comes only from Wall Street paid economists.

Read an interesting piece published by the San Francisco Fed- “U.S. Household Deleveraging and Future Consumption Growth“.

www.frbsf.org/publicat...

It talks about how much the US consumer has to deleverage and its impact on the economy. U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s.Then, over the next two decades, leverage proceeded to more than double, reaching an all time high of 133% in 2007.
Going forward, downward pressure on debt is likely to come from both lenders and households. On the supply side, tighter lending standards will require more income, collateral, and documentation for any given loan. Demand for mortgage debt could also wane as expectations of future house price appreciation are adjusted downward to reflect market conditions. Concerns about future job security and the risk of foreclosure or bankruptcy may spur consumers to boost their precautionary saving. Moreover, the need to rebuild nest eggs held for college education or retirement may prompt consumers to shift toward a more saving-oriented lifestyle.
A simple model of household debt dynamics can be used to project the path of the saving rate that is needed to push the debt-to-income ratio down to 100% over the next 10 years—a Japan-style deleveraging. The household saving rate would need to rise from around 4% currently to 10% by the end of 2018.A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year.

May 20 01:57 AM

[Mad Hedge F...:]

The greatest assemblage of ships since the D-Day invasion, some 735 bottoms totaling 42 million tons are begging for charters. With China-Europe 40 foot container rates down from $1,400 to $150, and bulk carriers falling from $300,000 to $10,000 a day, it could be a long wait. Singapore became the parking place of choice because of cheap labor, fuel, shipyards, mild weather, and minimal environmental regulations. A 300,000 ton crude carrier can make a pretty messy neighbor. Easy finance sparked a shipbuilding boom and oversupply that is now leading to major losses by European banks. Isn’t this a story we’ve heard before? There is something wrong with this picture. Does a 35% move up in the Dow jive with 4% of the world’s commercial fleet rusting in a forlorn Asian port? I don’t think so. When I read stories like this, I go home and stroke my short positions until they purr, telling them their day in the sun is coming.

May 20 07:03 AM