Happy days are here again. It’s like someone turned back the clock to 2007. You’re a crank and a nutjob if you think there are serious problems in the financial system. Don’t you know this is the recovery you moron!
A report on U.S. payrolls showed that the American economy shed around 491,000 jobs last month. This was less than expected by forecasters and the least amount of jobs lost in the U.S. since October of last year. So in a manner of speaking, losing half a million jobs in a month is an improvement.
Financial markets were encouraged by this news. In fact everything seems to be encouraged. The Dow was up. The S&P was up. Gold was up. Oil was up. Up, up and away!
Not even the news that Bank of America may require US$34 billion in new capital could bring the mood on the Street down. The results of the ‘stress tests’ have been duly leaked so the market can digest the rumour (and sell the news). The good news is that Morgan Stanley, JP Morgan, Goldman Sachs, and American Express all seem to have ‘passed’ the test and do not require additional capital (at least according to government accounting). Of the 19 backs quizzed, it looks like 10 will need more capital and 9 will not.
Whether the ‘stress tests’ really tell the truth about the banks or not doesn’t seem to matter at the moment. There has been a huge cloud of uncertainty hanging over the banks (and thus the market) regarding their solvency. Just the idea that the cloud may be dissipated (and that the economy is free to recover) is sending stocks higher.
Don’t take our word for it. Look at the Aussie dollar. Look at commodity prices. As we said yesterday, risk is back. If we get a resumption of the carry trade (borrowing in USD and Yen to buy higher yielding assets) it can only be good news for Aussie stocks. We just don’t know how long the party will last.
Of course no one really knows how much capital the banks will need over the coming years to offset losses. It could be a lot more. U.S. real estate site Zillow.com says that 22% of Americans owe more on their homes than their homes are worth. That’s what we call “negative equity.” If it were true, it would mean more than 20 million homes are underwater.
Do you think the stress test included the possibility that 20 million Americans would default on their mortgages? Probably not. It’s an almost apocalyptic number. But it IS a credit depression. And it WAS a pretty big bubble in housing.
Here in Australia, everyone’s going berserk spending government money. Retail sales hit $19.3 billion in March. That was a 2.2% gain over February. Nothing like a little national retail therapy to deal with a structural problem in the economy, is there?
That structural problem-similar to America-is an economy built on consumption and housing and the financial industry. That said, this looks like a rally you don’t want to get in the way of.
Even Rupert Murdoch thinks “the worst is over.” “There are emerging signs in some of our businesses that the days of precipitous decline are done and that revenues are beginning to look healthier,” he said, after saying that he expects the full year operating profit to be 30% lower than last year’s figure.
He also said he believed advertising dollars are fleeing print newspapers for good, to the web. And it’s worth noting that one of Murdoch’s properties-the Wall Street Journal-is one of the few newspapers that charges for online content. It’s not a coincidence that the Journal is one of the few profitable papers in the U.S. Its circulation is rising.
Hmm. Charging for on-line content. It’s a thought.
for Markets and Money