Friday, April 17, 2009

Stress Test On, Crisis Over

Anybody else out there remember what our government leaders were doing one year ago next month, when the financial system was heading into free-fall after a decade of profligate home-lending?

They were holding hearings about oil prices.

Specifically, they were investigating the role of hedge funds—who else?—in the price spike that was saw oil hit an unsustainable, demand-choking level of $150 a barrel (see “Congress Blames the Hedge Funds—Yeah, That’s It!” from May 23, 2008).

Of course, Congress never actually did anything about it, because oil prices almost immediately began collapsing, what with the financial crisis and all.

But they sure held hearings.

Now, if Congress had wanted to do something serious about reducing our dependence on oil, it might have thought about doing something before a crisis began: but that is not the way democracy works.

Democracy responds to the front page of the newspaper—or, the latest viral YouTube video—which is in itself a response to whatever is currently a problem, not what might be a problem years down the road.

So as we ponder the collective holding-of-breath over the impending results of the so-called “Stress Test,” by which our nation’s banks are being subjected to all manner of what-if scenarios by the same regulators who never bothered to do this stuff when times were good, it occurs to us that if the government has decided it is time to conduct a serious analysis of the ability of our nation’s banking system to withstand an economic tsunami, well, then, the tsunami must already be behind us.

Indeed, listening to Jamie Dimon and his team on the JP Morgan earnings call yesterday, the outlook sounds a whole lot better than it did last year around this time, back when Congress was too busy holding hearings on the price of oil, naked short-selling, atonal music and whatever else it could think to blame on hedge funds, to worry about the kind of financial crisis our regulators are just now getting around to stress-testing.

Putting it into a formula, we derive the following:

Improving Fundamental Outlook + Severe Government Reaction = Crisis Over.

And we think you can take that to the bank.

Meantime, the Top Ten Questions for Warren Buffett have been selected, and will be revealed here on Monday.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Anonymous said...

well, although I'm with you in this notion, and despite some nobel laurates reservations i would suggest some caution in posting such a claim, especially after the "ladies and gentlman, start your aquisition post of late July :)
it may take some more time...
for the long run investor though it does look like crisis over.

Anonymous said...

This balance sheet recession may cause consumers to behave differently. While Government will attempt to start a recovery, the question is whether consumer demand decision making around the globe has been paused/altered/fundamentally changed for a generation?

JS Rogers said...

It would appear to be a bit premature to make the call... I don't see the improving fundamentals unless you count the accounting gamesmanship and government life support. And we still have a trillion in Option Arms that are just about to hit.

Having said that, in principle I agree with the formula. What I would add is that they wildly over-react to something that was not the problem (short sellers?)... and leave the catalyst for the crisis as-is. The market is what really cleans up the mess and the gov't tries to take the credit.

M said...

Why so harsh on just Democracy? Isn't that the way most of the corporations work? Would we be in as much of a mess if the "bright" minds of Wall Street did some of this "planning ahead" voodoo?

Lyon Jewett said...

Crisis over? Not by a long shot. Demand destruction remains in full swing and credit is still contracting.

Fundamental attitude shifts among consumers is occurring. Deleveraging is the name of the game and with more income (for those who still have jobs) going to debt servicing and actual principal reduction, the USA will transition into a nation of savers.

In spite of the pablum spouted on CNBC, our economy was hit by the "stun gun" and no amount of "everything is OK now" from Bernanke to Geithner to Obama is going to change the fact that dollar velocity is continuing tom decrease.

The Fed could print a quadrillion dollars but if they don't get into the hands of consumers, all they have is a large balance sheet.

Think fiat currency and as Mike Shedlock referred to in a piece he wrote on his blog on Feb 19th..'Called Fiat World Mathematical Model.'

A great read and a great analysis.

I stand squrely in this camp.

john said...

Out of curiosity, Jeff, how do you define "crisis" for the purposes of this post?

texalope said...

Remember when Nationalization was the rage.

Jeff Matthews said...

1st Anonymous: ouch, you picked a doozy. "Ladies and Gentlemen, Start Your Acquisitions" from July 21 was about as badly timed as they get. I'd like to reprint it right now, because I do think we're going to see a wave of deals now that credit is loosening up. (I'd point out that "How We Know Oil is Going Down," which was posted two days after "Ladies and Gentlemen...", when oil was $140 a barrel, did get it right. But no matter...)

2nd Anonymous: Sure, consumer demand decisions have been altered. Ask your neighbors if they've made adjustments.

But overlooked in the gloom over consumer spending is the supply side of the equation, which has been likewise altered.

Count how many retail stores and manufacturers have gone out of business, and consider this: the retailers and manufacturers that have survived should do fine, even if the demand recovery is below trend.

'JS Rogers' sums up the situation quite well. Sarbanes-Oxley didn't prevent Lehman from going down.

'M' asks why I'm so 'harsh' on Democracy and points out that companies act just as manic-depressively as Governments. Well, sure: I've been making the point about the culpability of companies and Wall Street bigshots for years.

'M' apparently never read "The Shareholder Letter You Should, But Won't, Be Reading Next Spring" from August 8, 2007, about the mindless share buybacks and special dividends that companies were being goaded to implement by while I called the 'Barking Seals' on Wall Street. The post began,

Dear Shareholder:
Well, it seemed like a good idea at the time. I am referring to your board's decision to approve a massive share buyback and huge dividend last summer, when the buzzwords going around Wall Street were 'returing value to shareholders.'...

So not only does 'M' not read our blog regularly, 'M' misses the main point of "Stress Test On, Crisis Over," which is that by the time Democracies get around to doing something--in this case, a "Stress Test" on the nation's banks--it's usually too late to bother. Like global warming: we'll get around to doing something dramatic about that when the icecaps have long since vanished.

'Lyon Jewett' lays out the basic end-of-the-world-as-we-know-it case. I can't say he's wrong. I can only say this is what makes markets.

'John' asks how I define "crisis" for purposes of this post. Not being an economist, this is dangerous territory for me, but I define "crisis" as the breakdown in the financial system that triggered the current recession.

Thanks for reading, and commenting.

The Inscrutable Chicken said...

JM, I'd like to pick up on this comment:

"I define "crisis" as the breakdown in the financial system that triggered the current recession."

It's interesting to me that you have identified cause and effect here but I wonder whether it is cart and horse?

Did the breakdown in the financial system trigger the recession? Or did the recession trigger the breakdown in the financial system?

Jeff Matthews said...

"Inscrutable": yes, the financial crisis triggered the Great Recession. Things were slowing down, but the Lehman bankruptcy caused a near shut-down in credit markets in September. This caused every company in America to a) cut spending, b) fire people.


M said...

Pardon me Jeff for not having found your blog in 2007 or having read every one of the back posts, god knows I tried. My point stays the same, however.

People running the government are no different than(and often are the same as) people running our large businesses. And the short sighted thinking is prevalent no matter the party affiliation or the industry they are in. While I can see how a sum of your posts basically says "they all suck" that hardly sounds like a solution and instead just some more complaints about how "they all suck."

I am all in favor of tougher regulation (both in laws written and actual enforcement), but how exactly do you get around the obvious co-dependency of Wall Street and politicians?

Jeff Matthews said...

M, forgive the remark about your not reading the blog--it was meant as a factual statement, not a criticism. Had you been a regular reader you'd have seen we've been pointing out the deficiencies of this wonderful world of Wall Street for years--that's all.

As for summing up our posts as 'they all suck,' however, that isn't accurate at all.

While we don't endorse stocks, we're big fans of companies like Google, Wal-Mart, and Amazon that do what they're going to do, regardless of the impact on quarterly EPS.

As politicians, I'm a big fan of governments such as that in Spain which actually did something concrete about reducing dependence on fossil fuels rather than yapping about it.

And towards your question regarding how to reduce the co-dependence of politics and Wall Street, well, first, I have no opinion at all, and second I can't imagine how you could, and third I have no proposed solutions, either: in the investing world, you play the hand you're dealt.


Ray Lindsley said...

I'm not sure it is quite over, but we are certainly on the mend- but your point is well taken. I think there is some pent-up demand that will provide some pop to retail sales when consumer confidence returns, but I do not se cinsumer spending to go back to where it was. Savings rates will remain higher than what we have experienced for a while. But as you said, leaner retail models will help.

The Inscrutable Chicken said...

I'm still not sure.

Lehman bankruptcy did precipitate events but it was already clear that house prices would be in free-fall for some time, that credit would be reigned in, etc.

I can see both sides but on balance, for me, Lehman was a symptom of the recession rather than the cause. It was running like Wile E. Coyote running off the edge of the cliff - by the time he looked down to see there was no solid ground beneath him, it was already too late.

An Intelligent Investor Wannabe said...

The political system is set up that unless something is horribly wrong. The Congressmen do not want to risk ending their political career changing something that is workable. Also, because of pork barrel and other compromises required in order to get anything passed, most Congressmen are more interested in having a safe two years then get themselves reelected.
When they preach to change after the latest video, they most likely just want to get the media attention. There are 235 members, and it is hard to have a 5 second sound bite on cable TV. Also, most of the time when the fleeting frenzy ends and they get their 5 second, they can just go back to their old role – doing nothing and getting reelected.

Anonymous said...

I disagree with the statement that the worst is over. Sure things are looking better now, but is this a bear market ralley. The stress test is being conducted not because the crisis is over, but because the majority of residential tsunami has hit. The stress test is being done to see if the banks will be able to handle the next wave of commercial and credit card defaults. And to make sure the fed is not throwing away their (well, our) money now just to follow up with more funds.