Yesterday Dallas Federal Reserve President Richard Fisher threw a little cold water on the V-shaped recovery madness everyone seems to be buying into these days.
Please consider Fed’s Fisher: GDP Growth In Third Quarter Likely Lower Than Reported.
Speaking at a conference in Tyler, Texas, Fisher said he was willing to venture that the increase would not be “as robust as originally reported.”
He did say, however, that the growth rate would still be positive – though it would be closer to a rate of 2.5 percent – and that growth would also be positive for the fourth quarter.
Even though he said economic growth would be positive, Fisher cautioned that the high unemployment rates would cause recovery from last year’s financial crisis to be slow.
Got the idea the Fed is attempting to manage expectations? If so, that is precisely what the Fed is doing.
When asked about the dollar at a question and answer session following his speech, Fisher said that lower interest rates have not increased the risk of the dollar declining in value. Rather, he said, the weakening of the dollar was due to other major currencies entering the world’s economic system.
“You’d expect with more participants that there might be some kind of rebalancing,” but such evolution would be orderly and gradual, he said.
Let me get this straight: The dollar is falling because “other major currencies [are] entering the world’s economic system“.
Is he serious? What this proves is these guys absolutely cannot think beyond their prepared remarks.
The Effect of Stimulus
A $trillion in stimulus (not counting bank bailouts) and other stimulus measures not labeled “stimulus” because everyone is getting tired of the word, only got us 2.5%-3.0% of GDP growth.
Dave Rosenberg was talking about GDP in today’s Breakfast with Dave
Heightened appetite for risk does not mean that credit problems have gone away as we see the global speculative-grade corporate default rate rise 12 basis points in October, to 9.71%. And Fitch just published a report indicating that the U.S. banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see “significant” cuts in their credit ratings.
DOWNGRADE TO GROWTH FORECASTS? THAT DOES SEEM TO BE THE CASE
Dallas Federal Reserve Bank President Fisher suggested yesterday that the Q3 real GDP print will be taken down from 3.5% at an annual rate to 2.5% — despite massive government stimulus. (Is that all you get for your money?) And the Philadelphia Fed survey of professional forecasters shows that this collection of 41 economists just took down their 2010 Q1 GDP call to 2.3% from 2.5% and for next year’s Q2 to 2.4% from 2.8%.
Meanwhile, the S&P; 500 is currently trading as if the economy is going to expand at nearly a 5.0% rate in the coming year. If the consensus is right, then fair-value in the S&P; 500 is closer to 900 than it is to 1,100. This by no means suggests that the speculative run is over; it only means that the folks allocating their capital to the stock market today do not adhere to the adage of ‘buying low and selling high’ and are very likely the same folks who were buying at the top back in 2007 when “excess liquidity” themes were all the rage.
The Stall Rate
I am of the belief that the first 2.0-2.5% of GDP is fluff hedonics, imputations, distortions, and unproductive spending that does nothing nor produces anything.
Heck, it is likely much higher than that, but Bernanke has stated that the economy needs to grow faster than 2.5% to gain any jobs. Now bear in mind the name of the game is not just to gain jobs, but to gain 100,000 jobs or more because that is his estimate as to how fast the labor market is expanding. Please see Bernanke’s Outlook For Recovery and What It Means For Jobs for details.
At 2.5% GDP or even higher, unemployment will keep rising even as the effect of the stimulus is starting to drop off. Meanwhile the much touted ECRI leading indicators dropped 1.4 points and hit an eight week low. Those green shoots (which was in reality nothing more than government throwing money around), are starting to die on the vine, even as Obama is concerned about rising deficits and inflation hawks on the Fed are rattling cages about removing stimulus.
Those touting a “V-shaped recovery” are forewarned: Shockingly bad news is on the horizon and it is the shape of an “L” or “WWW”.
I quoted Rosenberg above as saying “And Fitch just published a report indicating that the U.S. banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see “significant” cuts in their credit ratings.”
What the report actually said was “possible” not “expect” although it is entirely possible that Rosenberg was reading between the lines as to what Fitch meant. Here are the actual pertinent statements in the report as sent to be by one of the major brokerages.
Therefore, Fitch expects rating actions taken as a result of its CRE review will be concentrated among the midsized regional and smaller banks. In most cases, rating actions will likely be limited to one notch, but more significant downgrades are quite possible among the banks with the greatest exposure.
Banking companies that see their TCE/TA ratios fall below the 4% threshold will likely see ratings downgraded by a notch, with further downgrades possible for those firms that fall considerably below that level. That being said, Fitch acknowledges that it has already taken a number of rating actions on banks in the past year, so further downgrades may not be imminent for all firms low on capital, as their current rating levels may already reflect that risk.
Fitch does not intend to use the severe stress to help determine a specific rating level; however, results of the severe stress may help the rating committee determine the appropriate Rating Outlook for a specific company. Fitch anticipates that most banks or thrifts that would generate TCE/TA ratios far below the 4% benchmark under the severe stress will likely see their Rating Outlook remain at or move to Negative in the future.
Mike “Mish” Shedlock
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