Annus horibilis continues to tease and torment us. In less than five seconds, three deadly news confronted me today evening:
1. According to a survey by the National League of Cities, the US local governments may cut upto 500,000 jobs as property taxes take a plunge, social security schemes need more money and state & federal aid contracts
2. Surging foreclosures have resulted in ownership of homes in the US to its lowest in decades. According to the US Census Bureau, the number of vacant properties now stand at 18.9 million
3. US consumer confidence index, the Conference Board Sentiment Index declined to 50.4 in July, the lowest in five months - indicating how badly scalded the US consumers have been
Mother of all recessions really.
Last Friday, seven more US banks were closed donw, leading to the total bank closures crossing the 100 mark this year. While I thought that 140 bank closures in the previous year (i.e. 2009) might be difficult to beat, the pace of bank closures this year is well ahead of that of 2009. With five more months still to go (by this time last year, the regulators closed a mere 64 banks), 2010 might turn out to be an even difficult year.
With so many bank failures, FDIC's coffer have been depleting very fast and it actually recorded a deficit to the extent of US$20.7 billion as of March 31. More importantly, the number of banks on the FDIC's "problem" list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years.
Clearly the small and midsized banks are the most vulnerable given their heavy exposure to real estate sector where the pain continues.
The FDIC expects the cost of resolving failed banks to total around $60 billion from 2010 through 2014. The only thing that is positive about all these developments is that lot of inefficient players are being cleaned out of the system which is likely to emerge healthier in years to come.
As was mentioned in my post a few hours before the release of the actual result, the aim of the test was clearly to assuage fear rater than real stock taking. To me, it was more a political exercise rather than an economic one. The authorities did not want to risk further battering of the euro zone and, by default, Euro as the credibility of the EMU has been questioned in many quarters. It was like the powers that be, saying if you are not convinced about the EU, we will conduct a test to show you are wrong.
Given the stress that is there currently, it is absurd to believe that only 7 banks (out of 91) will fail. Not surprisingly there were 5 Spanish banks. But no French, Irish or Italian banks? That's a surprise. Clearly, the conditions applied were not as stringent as economic prudence would have suggested.
According to a CEBS release, the evaluation took into account only the potential loses on the government bonds that the banks trade and not the ones they hold to maturity. This clearly means that sovereign bond holdings are given a kid glove treatment. While one needs more time to read the fine prints, there is hardly any doubt that the test leaves a lot to be desired. It would be interesting to know how many banks are on the brink and just about avoided failure.
Everybody seems to be waiting with bated breath as the results of the stress testings are to be declared soon. Overall, about 91 banks are in the fray. My feeling is that there might be failures in the region of 15. Usual suspects being German 'Landesbaks', Spanish 'Cajas', French banks and, needless to say, Greek banks. Doubts though remain about the quality of result in terms of stringency of parameters applied. More so, given the objective of the test being to assuage fears.
More than 2.5 million Americans have exhausted their jobless benefits since the deadline expired in June. More than 40 million Americans are living on food stamps. Real painful set of data. Not surprisingly Obama is trying to force an extension of the extended jobless benefit scheme, as his popularity wanes dangerously. Whatever it is, the resilience of the US economy is being put to severe test.
I am back after a long hiatus and have just uploaded my recently published article (Dalal Street Investment Journal) on the US economy.
This post is an update to the same. It is a proof (if ever one was required) about how severely the US consumers have been affected. According to figures provided by FICO Inc., 25.5% of the consumers (roughly 43 million people) now have a credit score of 599 or below. This means that more than a quarter of Americans have high credit risk associated with themselves. It is, therefore, quite unlikely that they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use. So, where is the consumer demand going to come from?
Recently the Fed came up with a piece of news that was music to the ears of many people who are betting on fast US recovery. According to Fed, Americans slashed their revolving consumer credit—mainly card balances—by about US$7.4 bn in May. That's an annualized rate of 10.5%. What is also very important was that, since the end of 2008, the US consumers have cut those balances by about $127 billion, or 13%. Dig deeper and one finds the real story behind this. According to the Federal Deposit Insurance Corporation, about US$18.7 bn of outstanding credit card balance has been written off. WOW.
In the same vein, giving data of mortgage delinquencies, the Mortgage Bankers Association stated that 4.6% are already in the foreclosure process. And another 10% are more than one month in arrears. In total we are talking about 14.6%, which means that nearly one in seven home loan is in trouble. In other words, for every credit card that's still delinquent, there are about four times as many home loans in trouble. Recovery anyone?