More Opinion on the Stress Test and the Unemployment Rate
Below is an op/ed piece from Alan Abelson at Barrons that is very interesting and easy to read. Once again the Fed bank stress test is called into question. Also he tries to determine why an unemployment rate of 8.9% is good news. Text in bold is my emphasis. From Barrons:
WHAT'S ALL THE EXCITEMENT ABOUT? SIMPLE: the economy has stopped falling off a cliff and -- Glory Hallelujah! -- it's now merely rolling briskly downhill. (We couldn't resist cribbing that description from Société Générale's Albert Edwards.) No guarantee, mind you -- economies being notoriously quirky -- that on the way down, if it espies another nice-looking cliff, the blamed thing won't decide to take a leap off that one.
You doubt that's reason enough for the stock market to go racing for the moon and, in just a couple of months, rack up a 37% gain? Come to think of it, you're right to be skeptical, and we feel sheepishly negligent. For not only are things getting worse more slowly, but equally as important in the remarkable revival of euphoria is that investors en masse, taking a leaf from Federal Reserve Chairman Ben Bernanke, have become budding botanists, able to espy green shoots of recovery in virtually every compost pile.
We're also a tad remiss in not mentioning that the dread stress tests, designed by the famed financial-testing firm of Bernanke, Geithner & Co. to determine how much of a pulse the nation's 19 largest banks still have, proved not to warrant much dread after all. Just by way of example, disclosure that Bank of America was in need of $34 billion in fresh capital promptly sent its shares soaring 17% on Wednesday. Who can blame shareholders for wistfully wondering how high the stock would have jumped had the bank needed $68 billion?
Geithner, Bernanke & Co., nothing if not adept at the care and feeding of investors, sought to take any possible sting out of what they found as they combed through the murky balance sheets of the banking behemoths (the Environmental Protection Agency might have been a better choice, considering the toxic material involved). They did so by cunningly contrived leaks, designed more for reassurance than revelation, in the weeks leading up to D- (for disclosure) Day as to the likely results of their examinations. By last Thursday, when the "scores" on the stress tests were actually released, those leaks had become veritable geysers.
As Philippa Dunne and Doug Henwood, proprietors of the Liscio Report, shrewdly observe, the highly publicized exercise made it look as if Washington's aim was "to restore confidence in the financial system before restoring the financial system." And the stress test itself struck them as being "precooked, with just enough talk of raising fresh capital to be credible, but not so much as to induce fear."
The presumed point of the two-month probe was to determine how the banks would hold up, were the economy to confound the expectations that the worst was over and, instead, suffer further declines. The "worst-case scenario," as the cliché goes, that the Fed crew was able to dream up was one in which the unemployment rate, already a hair under 9%, would rise to 10.3% next year, housing prices would fall another 22%, and the economy -- which has been shrinking at more than a 6% annual rate the past two quarters -- would contract at a 3.3% pace.
Undeniably, that represents something less than a heartening prospect. But to call it a worst-case possibility for the economy is a good deal less than a creditable postulate; rather, it bespeaks a surprising failure of imagination on the part of the same folks who've been able to spot plantlets of recovery in even the most unforgiving data.
Should worse come to worse, those fearless (or feckless?) forecasters allow that the major banks could take a $599 billion hit.
However, our financial guardians decided that it would be enough to dissipate any stress in banking by requiring the 10 big lenders that got less-than-passing grades to come up with a total of nearly $75 billion. That may sound like a lot of money -- because it is -- but to a populace that has become inured to seeing trillions tossed at the banks like confetti, it's not apt to cause a whole heck of a lot of angst.
While gratification at what the stress tests showed evoked widespread relief, touching on giddiness, not everyone was satisfied, much less elated. Ah well; there are always some chronic doubters in every crowd, we suppose.
Just by way of example, Barry Ritholtz, chief of the eponymous Ritholtz Capital, seems more than a tad aghast at the idea that Messrs. Geithner and Bernanke, after duly weighing the results of their not-exactly-stressful tests, have concluded that banks will be fine in the future with 25-to-l leverage (Tier 1 capital equal to 4% of risk-weighted assets).
And while 25-to-l leverage may have been appropriate for depository banks in the relatively sedate days before the Glass-Steagall Act was dismantled, it seems more than a little much to Barry in "today's toxic-asset-laden banks." As to the cause of the seemingly generous standard, he suggests it may have something to do with the Treasury's new role as "shareholder and cheerleader for bank profitability." That explains at least why Tim and Ben never leave home without their pom-poms.
And then there's Chris Whalen, who, via his Institutional Risk Analytics, keeps a gimlet eye on the banks -- big, small and in between. Institutional Risk Analytics sounds wonderfully authoritative, but it's a mouthful, so we'll content ourselves with referring to the service as IRA. By whatever name, we find it always worth perusing, not least for Chris's caustic take on the financial scene.
As it happens, IRA performs its own stress tests on some 7,600 banks using the vital statistics compiled by the Federal Deposit Insurance Corp. and it has even fashioned a stress-test index. Its latest ratings of bank safety and soundness -- the handiwork of the outfit's Dennis Santiago -- tell a much less comforting tale than does the Washington version.
More specifically, IRA's bank-stress index, which stood at 1.8 at the end of the final quarter of '08, shot up to 5.57 in the first quarter of this year (the benchmark year, 1995, equals 1). Behind this sharp increase in stress is the startling number of the nation's banks -- 1,575 -- that wound up in the red in the first quarter.
In a follow-up report, Chris comments that it's "pretty clear that the condition of the U.S. banking industry is continuing to deteriorate, and we are still several quarters away from the peak in realized losses for most banks." Indeed, he adds, "We're not even on the right block to make the turn."
And, not surprisingly, he feels strongly that this isn't the time for investors to go ga-ga over financials. In case you're wondering, there's no evidence that he's color-blind and just can't see all those green shoots littering the financial landscape.
PERHAPS THE MOST ELOQUENT expression of how delusional Wall Street has become was its response to Friday's report on what happened to employment -- or, more importantly, unemployment -- in April. Payrolls shriveled by 539,000, less than the 550,000 to 600,000 guesstimates of the seers as well as March's initial tally of 633,000. That was enough for the choristers to start humming Happy Days Are Here Again.
A slightly more careful look suggests rather emphatically that they're not. The unemployment rate extended its doleful rise, hitting 8.9%, the highest level since 1983. The jobless ranks have swollen by 5.7 million since the recession got underway in December 2007, and there are now 13.7 million people out of work.
Moreover, our favorite measure of unemployment -- favorite because we think it a truer gauge -- is the Bureau of Labor Statistics' U-6, which includes the likes of workers laboring part-time because they can't land full-time jobs, rose to a fresh peak of 15.8%. That means 24.7 million people are effectively unemployed. It's a figure that doesn't get too much notice -- maybe it's just too depressing -- but it should.
For that matter, bad as it is, 539,000 doesn't do justice to the severity of the payroll shrinkage. For one thing, it was puffed up by the 72,000 federal census takers signed on by Uncle Sam. And for another, it includes 226,000 supposed jobs, or 60,000 properly adjusted, courtesy of what David Rosenberg calls the Alice-in-Wonderland birth/death model. Ex this pair of extraordinary items, he points out, the headline number would approach 670,000.
In one of his valedictory scribblings (David's leaving Merrill Lynch and returning to the glories of his native Canada and money management), he also notes that private-sector employment sank by 611,000 in April, and did so across a wide swath. "The data," he contends, "just don't square with the conventional wisdom permeating the investment landscape."
Take the notion that we're enjoying a commodities boom; If so, it seems more than passing strange that natural resources shed 11,000 jobs last month. Or, how do you reconcile the burst of enthusiasm for leisure/hospitality stocks with 44,000 busboys, bell captains and bartenders being laid off? Or retailers' giving pink slips to 47,000 workers -- atop the 167,000 slots they let go in the first quarter -- if they thought anything more than the timing of Easter underpinned their April results?
Looking ahead, David scoffs at the idea that the "jobs data are about to get better because the markets have enjoyed a nice two-month rally." Among the reasons he's skeptical: the still record-low workweek, at 33.2 hours; the 66,000 downward revision to the back data (which, he avers, tends to feed on itself); the 63,000 slide in temp-agency employment; and the high levels of both initial and continuing jobless claims.
All of which, he believes, foreshadow a further 550,000 payroll plunge when the May data roll out early next month.
To David, as to us, the present buoyant mood on the Street is obviously more the result of rose-colored glasses than of green shoots.