Are we in a time when fundamentals no longer count?
By Daniel at 3 August, 2009, 12:39 pm
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
No, it’s just that too many misread the figures describing the fundamentals because they’re led there by mainstream financial media pump monkeys:
http://market-ticker.org/archives/1284-Pump-Monkey-Orgasms.html
Pump Monkey Orgasms
The Pump Machine is in full swing this morning; apparently England’s manufacturers bought into the “green shoots” meme and expanded production. Building inventory is going to be interesting down the road, and I’m grabbing the popcorn for this one.
Why?
The reason is quite simple: The GDP report showed exactly what was going on, and none of this has anything to do with an “economic recovery.” We had two distortions that made the first quarter look worse than it should have, and the second quarter (much) better!
Here is the adjusted 2Q GDP:
[table]
Now let’s go through it.
Government spending in the previous (first) quarter was down at a 4.3% annual rate. The government is 30% of the economy, so we must either (1) add back in that to the 1Q report or (2) subtract it from the second quarter.
But in the second quarter government spending increased at a 10.9% annual rate! So now we must take 30% of that and subtract it off the GDP to get consumer and business activity.
When you do, you find that the “adjusted” (that is, apples to apples in the private economy) GDP shrank at a 6.46% rate.
This, by the way, is more reasonably comparable to the following numbers:
* Revenues across the firms that have reported thus far, which are down some 11%.
* Sales tax receipts, which are down double-digits virtually everywhere.
* Goods shipped (rail and truck), along with port statistics, are all showing double-digit declines averaging 15-20%. You can’t sell what’s not in the store and to get it in the store you have to ship it.
Since both of the above are actual numbers, that is, not subject to “adjustments” and “seasonality”, they are trusted figures. But we can indeed get reasonably close when we look at GDP with the government ex-ed out, yes?
Some will argue that the government can’t be ex-ex out, since the government spending is real. Sure, it is.
For how long, and what happens when the stimulus capacity (either due to political will or ability to borrow at a reasonable cost) disappears?
All that additional pulled-forward demand disappears, right?
Steve LIESman mentioned this on the Sunday news shows. Funny how he didn’t mention the government distortion Friday when the GDP report was released though, right? Funny indeed how it wasn’t until I brought it up on Dennis Kneale’s show that it had been completely buried by the mainstream press, and then, only mentioned in passing.
Now add into this the FDIC mess. After I posted my missive yesterday I was sent a table showing the FDIC’s remaining funds. I have not done a comprehensive analysis on this but I did eyeball it and the quick check appears to be good; I can’t vouch for this on my own detailed analysis but if this is accurate the FDIC is down to $800 million dollars, and a failure of any of the three “seriously in trouble banks” - Colonial, Corus or Guaranty - would blow that tiny little pile of money to Mars.
And oh, by the way, Colonial (which closed at 60 cents Friday) is trading premarket at 48 cents, and reported a stunning loss of $3.02 a share after the market closed Friday - or some five times its per-share price. They also announced that a rescue financing pact they were working on has collapsed, making a FDIC take-over almost certain (if the FDIC ever does its job!)
Inquiring minds are wondering if the correct meme is in fact something like this:
The economy is “improving” because the government showered borrowed money in the form of massive handouts into the economy. However, the government also allowed banks to hide stupendous losses - a trillion dollars or more - by intentionally overstating the value of assets.
“Prompt Corrective Action” is supposed to insure that when the FDIC takes over a bank it suffers little or no loss. This has worked well for over a decade and justified the FDIC holding only $50 billion in cash to insurance $8 trillion in deposits.
But the government’s policy of allowing these outright lies in relationship to asset values has now resulted in the FDIC taking 40% losses against assets on average for the banks it has closed since this crisis began.
The consequence is that what looked like a reasonable policy - holding some 1/2 of 1% in insurance, or a leverage ratio of almost 160:1 - has now been shown to be insanely reckless.
These losses are almost entirely as of yet unrealized, but they are real and they are inescapable. They WILL be taken. The FDIC has a “credit line” with Treasury but there is no possible way for it to be able to absorb $400 billion - a rough estimate of the amount that _will be absorbed_ - without a tremendous burst of new debt issuance and the risk of an all-on collapse in both the stock and credit markets.
Enjoy the rally, but keep your eye on the door and your path to it.
The curtains are on fire.
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
No comments yet.