Dangerous times

The more this stuff is kicked down the road the worse the end will be.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aColIYAe.RaU&refer=home

All these subsidies are akin to creating a dam, when the weight of toxic assets (which continue to rise with each passing month and each additional new high in unemployment) get too large and collateral/income streams too small/diminished the dam will burst and it won't be pretty.

The only chance we have is if Obama comes to his senses very soon (months) and put the FDIC in charge of an orderly liquidation of many of these banks. As someone (I think it was Simon Johnson) said recently "Too big to fail, should mean too big to exist".

http://www.bloomberg.com/avp/avp.ht...//media2.bloomberg.com/cache/vp.9zmd2f5HU.asf

http://www.hussmanfunds.com/wmc/wmc090420.htm

Last week's issue of Barron's included an interview with William Black, who served as deputy director of the Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s. That article included these clear-sighted comments on reality of the situation:

“We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.

“With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale. These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. Right now, things don't look good. The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening. The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

“We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.”

 

Mvic, based on what Simon Johnson states, and I have little reason to doubt his expertise, the unstated cost of the recapitalization of the banking system to the U.S. taxpayer alone, will exceed 3 trillion dollars.

If you include the costs of providing money to lend into the next 3-5 years, and the costs of backing the CDSs and other private party contracts that do not show up on exchanges, but the kind which threatened to sink counterparties to AIG, the cost to the U.S. taxpayer, in a bad case scenario (where there's even a moderately high scenario of defaults) could exceed 5 trillion dollars on 14 trillion in guarantees and purchases of defunct debt.

 

Yes I agree, and he is likely right given his background at the IMF. His blog is a great read.

While Soros has since downplayed this theory of his it certainly seems to fit the current times.

http://www.geocities.com/ecocorner/intelarea/gs1.html

http://www.imf.org/external/np/sta/gdlink/Financial Sector Indicators_111.pdf

Look at the Monetary Base figures, you can see where the Fed has had to pump money in to the economy. It doesn't look like things are getting better does it, funny how the rally and the Fed Monetary expansion correlate so well. Meanwhile industrial production continues to fall and unemployment to rise albeit it at a slightly slower pace.

http://www.imf.org/external/np/sta/gdlink/Market Indicators_111.pdf

"The IMF forecast for the United States, the world's largest economy, is even bleaker. It predicts the U.S. economy will shrink 2.8 percent this year and will not see any growth in 2010."

And the market rallys! LOL

http://www.voanews.com/english/2009-04-22-voa40.cfm

What should be of particular concern is that in Jan 09 the IMF was saying that growth was going to slow to POSITIVE 0.5% and in the intervening 2-3 months, despite all the hundreds of billions of stimulus, the massive global central bank easing, and all manner of kick the can programs that hide the real nature of losses, the banks projection STILL managed to fall to NEGATIVE 1.5%.

What they get that the market doesn't is that the US is ahead of the world in this economic cycle so far and that overseas economies are going to deteriorate much further than they have done. That will come back and hit US earnings harder than most are expecting right now. It also explains why names like J&J and PG have been relative under performers in the recent rally.

 

Global real GDP growth likely to contract in 2009:

•IMF (April WEO) expects global economic activity to contract by 1.3% in 2009 (1.8ppt lower than the 0.5% growth they expected in January) before staging a modest recovery (+1.9%) in 2010. Advanced economies are forecast to contract by 3.8% in 2009, with the U.S. economy shrinking by 2.8% and the euroarea by 4.2%. Emerging and developing economies will see positive growth of 1.6% in 2009, bouncing back to 4.0% in 2010.
•The IMF scaled down its growth outlooks for all major economies and regions since January 2009 and expects global economic activity to be 1.8ppts lower than it did in January (0.5%). and 3ppts less than it expected in November (1.7%). Global GDP growth was 3.75% in 2008 and 5% in 2007.
•The U.S. contraction will push the output gap to levels not seen since the early 1980s. In the Euro area, the impact of falling external demand has been larger and policy stimulus more moderate than in the U.S., though automatic stabilizers are larger

•OECD (March): Economic activity in the OECD is expected to plummet by an average 4.3% in 2009 with unemployment rates reach double figures by 2010 in most countries for the first time since the early 1990s. Trade is forecast to fall by over 13% and world economic activity to shrink by 2.7%. The big emerging economies will also suffer abrupt slowdowns in growth before a policy-induced recovery builds momentum through 2010. U.S.: -4% in 2009, 0% in 2010; Japan: -6.6% (-0.5%); Eurozone: -4.1% (-0.3%). Brazil’s GDP is expected to decline by 0.3% in 2009 and Russia’s by 5.6%. Growth in India will ease back to 4.3% this year and in China to 6.3%.
•RGE Monitor (April) Global economic activity is expected to contract by 1.9% in 2009. Advanced economies are expected to contract 4% in 2009. Japan and the eurozone will suffer the sharpest downturns. U.S. GDP will continue to contract, albeit at a slower pace throughout 2009, with negative growth in every quarter. Emerging markets will slow down sharply from the stellar growth rates of the past few years, with the BRIC economies growing less than half their 2008 pace of 7.5%
•World Bank: Global GDP will be least 5ppts below potential. World trade is on track to register its largest decline in 80years, with the sharpest losses in East Asia. Growth of high income OECD economies is expected to rebound to 2% in 2010 and China is expected to grow 6.5% in 2009
•MS: Massive global policy action has moved us further away from a Great Depression-type outcome, and the risks of contracting output and structural deflation have waned. Global output will probably start growing in 3Q09, with G10 output growth turning positive in 4Q. Growth for 2009 as a whole will stay firmly in negative territory for all regions except AXJ (where China and India will keep growth in positive territory)
•Baseline: The global economy remains weak across the board, with no significant signs of improvement. Moreover, growth in 2010 is not a foregone conclusion.
•Goldman: growth in the emerging world may likely keep the global economy from contracting in 2009, but risks are tilted to the downside. The global economy may expand by about 1% y/y in 2009, down from about 3.2% in 2008. Most of that growth will come from Brazil, Russia, India and China as domestic demand growth will offset declining exports. China alone may contribute more than 60% to global growth in 2009
•Citi: the nadir for growth in most regions remains late this year with 1.7% global growth expected, with shallow recoveries expected in 2010. The deepening global recession is creating greater challenges to policymaking. Markets will face more challenges to growth after the recession due to a rise in the cost of financial intermediation and the potential to draw the wrong lessons from the crisis.

•Merrill: global financial crisis is bringing an end to the vendor financing model, whereby excess consumption in the US was financed by a savings glut in the emerging world. The market will ensure this adjustment finally happens
•Deutsche Bank: global growth to be barely above 0% in 2009 with downturns in all major regions setting records not seen in the past 50 years

From Roubinis RGE Monitor site

Look at Goldman's and Citi's projections and see how they are at odds with what others are projecting. They key difference is expectations for EM. The Merrill outlook explains in part why they are wrong, the savings glut is gone. See in the below IMF chart how projections for world outlook have changed for 2010 from +1.9 to -1.1 since January. The +1.9 scenario for 2010 is what the rally was built on.

http://www.imf.org/external/pubs/ft/survey/so/2009/RES042209A.htm

 

O'neill from GS expect China to go back to 10%+. Apparently they can keep growing at massive rate while at the same time the entire world is delevering, world trade is depressed. He mentions domestic demand, credit growth and investment. Looks like China is trying to blow a credit bubble on their own, looks totally unsustainable

 

(source: http://online.wsj.com/article/SB123810562770552071.html )

Private consumption in China is nothing to write home about. Once the government built all the bridges and has financed enough empty high rises, then what?

China is basically making one gigantic leveraged bet on an impending V-Shaped recovery of the global export business.

 

Then the chinese will riot on the streets and demand from the government a new bubble to invest in