[Ilargi] I was reading Arthur Delaney at The Huffington Post today talk about emergency unemployment benefit extensions, and how they’ve been strangled in the entire debt ceiling debate debacle, and I was thinking I can’t remember having heard one word on job creation during that entire debate.
Which I find an utter disgrace; not just because it’s insulting to the 10-20% of Americans who don’t have jobs, but also because it should be blindingly clear that without new jobs, and lots of them, the American economy can’t possibly recover.
But at least I now know why that is, why no-one in Washington talks about unemployment in connection with the federal debt. All I have to do is look at the stock markets.
According to Google Finance, over the past year, August 4 2010 to August 3 2011, the Dow Jones index has gained 10.41%, while the S&P 500 even rose by 11.48% (at the moment I checked them earlier today). That looks good. But it’s only part of the story, and not just because the Dow lost 5.7% and the S&P 6.05% over the past month.
I’ve had a ‘fictional’ portfolio of financial stocks for a while now at Google Finance, and used it in posts before. Before today’s US market opening, it looked like this:
As you can see, there are a number of stocks in there that not everyone would have in a finance portfolio, and some others that may be missing. But I like it this way. I still left Lehman and Fannie and Freddie in (though none are exchange traded anymore), and included GE and Société Générale, among others.
This portfolio shows a completely different picture than the complete Dow and S&P numbers. The financial world is not doing all that well.
My portfolio is down 15.46% from August 4 2010 to August 3 2011, not up 10% or 11%. What’s more, from its peak on February 8, 2011, it’s down over 30%. That is in less than 6 months. Here are a few examples from my list:
- Bank of America’s stock is down 34.1% over the past 12 months, 34.51% over the past 6 months, 14.2% over the past month alone.
- Citigroup is down 9.78% YoY, 22.64% over 6 months, 13.22% over the past month.
- Morgan Stanley: down 24.23% YoY, 30.12% over 6 months, 12.33% over one month.
- Goldman Sachs: down 13.95% YoY, 19.93% over 6 months, 3.53% over one month.
- JPMorgan: down 3.21% YoY, 12.54% over 6 months, 4.38% over one month.
- Société Générale: down 34.82% YoY, 36.39% over 6 months, 30.28% over one month.
- Crédit Agricole: down 30.9% YoY, 31.66% over 6 months, 30.8% over one month.
- Deutsche Bank: down 31% YoY, 17.61% over 6 months, 16.48% over one month
- RBS: down 35.61% YoY, 25.12% over 6 months, 17.73% over one month
I guess it should be obvious that we’re watching an unfolding bloodbath here (even Goldman lost almost 20% in 6 months). But then again, when JPMorgan CEO Jamie Dimon said recently that banks are so flush with cash they’re going to issue nice and juicy dividends, I think he meant, and believed in, what he said. It’s just that they’re flush with your cash, not their own.
But there’s nothing, nothing at all, on the economic horizon that carries even the least bit of hope that these banks will be able to make good on their lost stock values. No jobs increases, no increases in home sales, none of that. They’ll just be gutter dwellers, if they stay alive at all, though, granted, your money may provide for plush gutters.
One major issue with all this is that all of the banks above, except for Crédit Agricole, are primary dealers. Wikipedia:
The primary dealers form a worldwide network that distributes new U.S. government debt. [..]
In the United States a primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System (“the Fed”). Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed’s open market trading desk, and to participate actively in U.S. Treasury securities auctions.
They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.
Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market [..] … all of the top 10 dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume.
They make the world go ’round with God’s work, if you catch my drift..
Another, and equally important, issue is that these banks were among the recipients of the AIG bailout. And that, of course, gets us back to the derivatives trade. Which will soon, if these developments don’t stop, bring us to another bail-out. Well, either that or failing banks.
Société Générale is shedding stock value like it was dandruff (9% today alone). It issued a profit warning today that put the blame on its Greek debt. It also has a lot of liabilities connected to Italy, though. And Spain. Both of which are in the bond market’s crosshairs. Greece will soon be back there, and Cyprus will need a bailout imminently. Portugal and Ireland are about to return to the limelight. Belgian sovereign debt is getting pressurised. And even France sees the spread with German bunds widen.
A lot of European banks are going to need serious assistance, and soon. There are no Italian, Greek or Spanish banks in my portfolio, but numbers for banks like Italy’s Unicredit (down 47.39% YoY) and Spain’s Santander (down 29.51% YoY) are in the lower (worst) range of those I mentioned above.
The EU and ECB are not even going to be able to save all the countries that are in trouble, let alone the banks. All the markets have to do is to slowly tighten the screws, and that’s what they will do. If Cyprus is lucky, it can still get a few billion. But the European Financial Stability Facility, which would be needed to fund anything bigger than Cyprus, isn’t even properly set up yet, and already Italy looks like it’ll go from net donor to recipient as early as this year.
That would leave more responsibility on Germany. But it just so happens that Germany’s own Spiegel magazine writes today:
Germany staged an impressive recovery from the 2008/2009 global economic crisis, but there are increasing signs that the boom is now coming to an end. After almost two years of strong growth, its economic outlook is starting to deteriorate, due to a slowdown in major emerging markets including China and fears of a possible United States recession caused by $2.4 trillion in spending cuts linked to the debt ceiling deal.
Various indicators released in recent weeks point to a deceleration of Europe’s largest economy. The Ifo business climate index for July fell sharply to its lowest level in nine months, and analysts say it is likely to keep dropping. The ZEW investor sentiment index showed the weakest level since January 2009. And the Markit/BME purchasing managers’ index for the German manufacturing sector fell 2.6 points in July to 52 points, its lowest level since October 2009. “New order levels went into reverse in July, as fewer export sales helped end a two-year period of sustained growth,” Tim Moore, senior economist at Markit, said.
Doesn’t look like Berlin can carry the entire EU on its shoulders. But then, it never could. The fact is simply becoming more pronounced and obvious now.
So where do the derivatives come in? Remember AIG. Billions of American taxpayer dollars went to foreign banks like Deutsche Bank and Société Générale. There were a lot of voices raised in protest stateside. But they were simply counterparties to derivatives deals AIG had written -and never meant to pay-. In the murky world of derivatives there are many known unknowns, and one of them is that most credit default swaps still originate in US financial institutions, and tons of them, on Greek and Italian debt, for instance, were sold to European banks.
If Greece -or, heaven forbid, Italy or Spain- were to default, and let’s make that a “when, not if” for Greece, Société Générale et al will be desperately gasping for air because of their bond losses, the EU and ECB won’t be able to come to all the rescues, the only way for these banks to come out alive will be their legitimate claims on CDS written on Wall Street once a credit event has been declared, and the US Treasury and/or Federal Reserve will once again be called upon to save the Mediterranean day at the cost of Joe and Jane Main Street, My Town, USA.
No, I think I do understand why Washington didn’t talk about jobs when discussing the debt ceiling (even though Obama goes on a “jobs tour” soon, talk about timing, but Happy Birthday all the same, sir).
They got bigger sardines to fry out there on Capitol Hill. The very big and very ugly kind that eat political careers for breakfast. It’ll be bloody, and not even a fair fight.