From David Rosenberg’s morning note, some red meat for the doom and gloomers:
Congress moved to extend jobless benefits seven times, as has been the case
over the past two years, at a time when almost half of the ranks of the
unemployed have been looking for at least a half year.
The unemployment rate for adult males (25-54 years) hit a post-WWII this cycle
and is still above the 1982 recession peak, and the youth unemployment rate is
stuck near 25%. These developments will have profound long-term
consequences – social, economic and political.
The fiscal costs of the depression continue to mount, with the White House on
Friday raising its deficit projection for 2011 to $1.4 trillion from $1.267 trillion.
That gap in the forecast – $133 billion – was close to the size of the entire
budget deficit back in 2002. Amazing.
You also know it is a depression when you find out on the weekend that the FDIC
seized and shuttered another seven banks, making it 103 closures for the year.
What a recovery!
Meanwhile, how are the surviving banks making money? By cutting their
provisions for bad debts (at a time when the household debt/income ratio is still
near record highs of 120% and at a time when one-quarter of the consumer
universe has a sub-600 FICO score – which means they are also ineligible for
Fannie or Freddie mortgage financing. The banks thus far have reduced their
loan loss reserves between 23% (Cap One) and 73% (First Horizon) – as Jamie
Dimon said last week, these are not real earnings.
You also know it’s a depression when a year into a statistical recovery, the
central bank is still openly contemplating ways to stimulate growth. The Fed was
supposed to have already started the process of shrinking its pregnant balance
sheet four months ago and is now instead thinking of restarting Quantitative
Easing. Of course, we are in this bizarre environment where bank credit
continues to contract – last week alone, bank wide consumer credit outstanding
fell $2.2 billion; real estate lending contracted $9.2 billion; and commercial &
industrial loans slid $5.1 billion.
What did the banks do this past week? They replaced cash with government
securities – the $47.5 billion net buying was the second largest in the past three
years. As the banks find few opportunities to lend – households are either not
creditworthy enough to lend to or are busy paying off debts and companies that
do have any expansion plans have enough cash on their balance sheet to
finance their initiatives – they are likely to use their $1 trillion in excess reserves
buying government and related securities, especially with the yield curve so
steep and the Fed ensuring that it has no intention of taking the ‘carry’ away for
a long, long time.
Did we mention that you also know you are in some sort of depression when
after two years of record $1+ trillion deficit financing to kick-start the economy,
the yield on the 5-year note is sitting at 1.8%? What do you think that tells you?
It tells you that the private credit market is basically defunct, especially when it
comes to the securitized loans, which played such a critical role in promoting
leveraged economic growth from 2001 to 2007 – the amount of securitized
credit that has vanished since the credit bubble burst two years ago is $1.4
trillion – 40% of this market is gone. And what replaced it was this rampant
government intervention into the economy – aimed at putting a floor under the
economy. But insofar as the government stimulus fades and the contraction in
credit persists, it will be interesting to see what sort of spending, output and
income growth we are going to see in the near- and intermediate-term.
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