No Deposit, No Return

I was looking at parallel online stories today, and I have to say that I loved the juxtaposition of these two headlines: Loan Defaults May Surpass Depression (AP 4-6-09) and, right next to it, Economists See Recovery on the Horizon (CNNMoney.com 4-6-09). Yummy push-pull, eh? Unemployment is higher, banks are seem to be unwilling to relinquish their debt position in Chrysler putting their Fiat deal (and their survival) at risk, GM is heading down the tubes as autoworkers think their connections to the Democratic party will save them, reports are out that the retail numbers have been overly optimistic, overtime is all but gone, and unless you work for a blind Wall Street company, bonuses are a distant memory. So I want to believe we’re getting better.

In the first article, we learn that “Calyon Securities analyst Mike Mayo said [on April 6^th] the default rate on loans will exceed that of the Great Depression…. In a research note, Mayo said U.S. banks will see a ‘rolling recession’ by asset class as loan losses across various assets peak at different times. While banks might be nearing the end of write-downs in risky investments, they are still early in battling loan losses, Mayo wrote in the note.” Pessimism abounded with loan loss projections going up to 3.5% in 2010 (from 2% now) – about $600 billion to $1 trillion worth over the next three years. The government could go easy on the banks, but their balance sheets would still be over-valued (impairing their ability to function), or it go hard on their financials (makin’ real), but that would serious dilute (if not destroy) the shareholder values.

In the second article, on CNN, you are hoping for the good news based on the headline. But the analysis is that things have gotten so bad that the rate of decline seems to be slowing down (but we’re still falling!), and that’s the good news. Okay, they put it nicely: Economists “say that a number of indicators appear to have bottomed out in recent months. Job losses may have peaked in January. Home sales are starting to pick up. Stocks are enjoying a strong rally [not the last few days, actually]… And because the economy has experienced such a steep decline in the current downturn, some economists are hopeful the recovery ahead will be much stronger than the anemic gains that came about after the end of the previous two recessions.”

The April 6^th New York Times had this headline, which made my heart beat fast: Muted Signs of Life in the Credit Markets. Look, I am trolling for some good news. The article notes: “Companies with good credit are borrowing more money in the bond markets. Confidence in the banking industry seems to be returning, despite the daily ups and downs of financial shares. Even junk bonds, the high-risk corporate debt instruments, are luring brave souls again.” Brave souls? That’s not exactly terrific, but it’s better than a sharp stick in the eye.

The next day, however, try this NY Times headline on for size: Economy Falling Years Behind Full Speed. Noting that plants are being closed, workers let go and equipment being placed in “mothball” storage, getting the US anywhere near a recovery rate will take even more time: “This idled capacity, like baseball players after a winter off, takes time to bring back into robust use. So even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle… The mathematics are daunting. The shortfall is running at more than $1 trillion in annual sales and other transactions. Only once since the Great Depression has there been such a severe loss of output — in the 1981-82 recession — and after that downturn, it was seven years before the economy regained the lost production.”

It comes don’t to the old adage, “nobody knows nothin’,” and I guess that includes me. But this conflict of stories is also reflective of how we feel… and consumer confidence is the foundation of our “recovery.” If the professionals are confused, the rest of us are beyond baffled. We watch North Korea fire a big old missile (with mixed results), President Obama sweep a few Europeans (and a Turk or two) off their feet, but when we look at the median price of a house in Detroit (a bit over $5700 according to the April 6^th Time Magazine) and think of all those folks we know who have lost their jobs or their homes (or if we are such folks) or read about those human interest stories about recent (but now former) homeowners living in cars and trying to figure out how to qualify for food stamps, we’re just plain scared!

Scared and confused, but lookin’ for the Easter Bunny? All these articles still seem unanimous about one thing: we are not in a recovery now, things are still getting worse and a recovery is not expected to begin until at least late this year (more likely into 2010). Hope springs eternal!

I’m Peter Dekom, and I approve this message.