Now the race is on and here comes pride up the
Heartaches are a-going to the inside
My tears are holding back
They're tryin' not to fall
The race to recovery continues and heartache remains strongly
in control. Investors and consumers alike have shown a willingness
to attempt to transact - however, I believe this will be more like
the Indy 500 than a preliminary heat at your local dirt track.
Certainly, the markets have given a resounding cheer to the
government's bank stress tests. The takeaway for many market
participants is that the 19 big banks are healthy and resilient
enough to withstand the "more adverse" economic scenario outlined
in the tests. In addition, recent "green shoots" of possible
recovery, along with the market rally itself, have reduced the
probability of this more adverse scenario as well - at least in the
minds of many investors.
What is amazing to me is how these investors have ignored the
coming effects of massive job losses in recent months. Last
Friday's employment report uncovered another 539,000 net jobs lost
in the month of April. This brings the grand total since last
January to 5.7 million. But the most challenging statistic is that
3.9 million folks lost their jobs in the last six months. Remember,
all of these numbers are net changes.
How will these people continue to pay their mortgage? The Obama
administration's "Making Home Affordable" plan surely helps, but is
only a drop in the bucket when you consider it is 0.58 percent of
the mortgage market. And a plan to pay off mortgages for
non-working families is certainly not in the realm of imagination
The resulting spike in defaults later this year will cause
green-shade accountants to revise their loss estimates for the
mortgage sector, potentially leading to further write-downs on
existing mortgage portfolios. This, of course, means less capital
available to support bank lending and potentially another round of
capital injections later this year.
There will also likely be calls for more government programs and
probably even a Stimulus III package later this year. But all of
the government spending in the world will not reverse the cycle -
though it can help on a temporary and regional level. Instead,
investors and consumers are focused on job and home price stability
and until these are addressed appropriately, activity will remain
muted and only at bargain basement prices.
This is not to say there won't be tremendous movements in the risk
markets, as we've seen already. But I believe these movements are
more tied to the amount of cash on the sidelines as outlined in our
Chart of the
As we muddle through 2009, expect to see more delinquencies and
defaults in the housing sector creating more fret and worry on the
part of homeowners everywhere. This will lead to another dip in
consumer confidence, a pullback in activity, and more layoffs. In
short, we will whip quickly around the vicious cycle once again.
None of this is built into the market's interpretation of the bank
stress tests. Instead, I believe the markets are putting
weight on downward economic scenarios, buying into
the notion that we have bottomed. Unfortunately, this isn't the
case. Key Developments
The results of the much-heralded bank stress tests were released
and all, it seems, received a passing grade. Several of the banks
will not have to raise capital, however, some will, with the
highest hurdle at Bank of America. The ability of these banks to
raise capital was not put into question, causing a rally in the
stock market on the news.
The worsening trend of unit labor costs continued in the first
quarter, rising 3.3 percent. This correlates with a slight increase
in productivity of 0.8 percent in the first quarter following a
similar decline in the fourth quarter. When we begin to emerge from
the recession, productivity should increase as employers' hiring
activity will lag.
Although job losses slowed in April to 539,000, when factoring in
the 66,000 upward revisions to prior months, total new known job
losses were as expected. Federal payrolls grew by 63,000 continuing
a recent trend while business services, manufacturing, and
construction continued to lead the decliners list. Total jobs lost
in this downturn now stand at 5.7 million or 4.1 percent of total
workers when the downturn began last January.