The Clueless Recovery

Here is a riddle for you, what is the difference between the following Lloyd Blankfein (GS CEO) quotes?
"Some of Wall Street's biggest names have been proclaiming in recent weeks that the worst of the financial market turmoil is likely done. JPMorgan Chase's Jamie Dimon thinks it is "maybe 75 percent to 80 percent over," while Goldman Sachs' Lloyd Blankfein says "we're closer to the end than the beginning."
"The end is already in sight, in the sense we're talking about it, and we have some confidence we will reverse out of (the downturn). And that is what I think is making the markets cheerier than they have been for while, and which has surprised people."
The difference would be about a year. The first quote is from a FOXNews article published on 4/22/2008, while the latter was is from 5/10/2009 Reuters article. Anyone who believed Blankfein in 2008, got their heads handed to them in September. Nevertheless, it appears that the investing public didn't learn much the first second time (remember 2001) and is lining up to get a third helping of pain. Personally, I believe that Wall Street is running a pump and dump PR campaign in order to sell new equities that are desperately needed to maintain adequate capitalization of BAC, C, JPM, GS and the like.

OPEC called BS on the our pseudo-recovery in their May 2009 monthly report (bold type is mine):
Growth for the global economy in 2009 has been revised down further by 0.6 percentage points to now show a decline of 1.4%. The Euro-zone slipped deeper into recession; as a result the forecast has been revised down by 1.2 pp for a decline of 4.2%. Despite some positive signs, the US is still expected to decline at a rate of 2.8%, down 0.2 pp from the previous forecast. Growth expectations for China and India remain unchanged at 6.5% and 5.0% respectively. In general, it remains to be seen whether the current positive momentum is sustainable and whether the measures taken by central banks and governments will be enough to support an economic recovery.

Apparently, this is the only country where the banking stress test farce played well. The OPEC analysis of our financial system is surprisingly frank and bears no resemblance to the Green Shoot PR campaign being advertised in the US media (color is mine):
Despite those better-than-expected earnings in the banking sector, it remains to be seen whether these improvements in earnings are sustainable. Most of the earnings came from onetime actions like asset sales or accounting changes and/or potentially unsustainable trading income. Secondly, it has to be ensured that the need for new capital for the sector in general will not exceed the amount that is currently being considered appropriate. This has to be closely watched as well, as the accounting for asset-backed securities was recently changed in favour of US banks and there might be a danger that the values currently being reflected on the balance sheets might make further write-downs necessary. Thirdly it also remains to be seen whether the 19 banks of the SCAP are able to raise the amount of $75bn without any friction.

It is somewhat amusing that Green Shoot PR campaign can be debunked in one paragraph.. First, OPEC alludes to how AIG was used to backdoor the TARP process, by using CDSs to opaquely funnel money into the major investment banks. (I find it ironic that AIG CDS contracts were deemed sacred, while GM bond contracts are entirely negotiable.) Next, the silliness of letting banks test themselves and negotiate the results is questioned. Finally, the viability of the current pump and dump aspect of the Green Shoot campaign is doubted. Here, the analysts slip up due to their underestimation of the gullibility of the US public. Their concern regarding banks experiencing "friction" when raising new capital in the equities markets is unfounded--the American public has been lubricated more thoroughly than ever.



  1. Higher prices cause folks to 'believe.'

  2. I suppose, but I've got a problem with the government and media selling a recovery as a return to the bubble years. This absolutely can't happen.

  3. It's one of the few tools they have left. Gotta figure they'll use until it stops working.