OK.
I have written three positive posts about the markets in a row.
Time Out.
Back To Reality.
I woke up this morning, and I was mumbling something in Japanese. Funny thing I don't speak Japanese. I craved Sushi, but have never eaten fish. I don't text at all, yet I felt like texting someone. For what ever reason, I felt very much Japanese this morning. I quickly snapped out of it,but not before I sat down for a moment and thought about my little walk on the wild side. This financial crisis has been a tough one, and many have exhibited outer body experiences, for good reason.
While each financial crisis in its own right is distinct, some if not all share striking similarities. The one we are currently mired in is eerily similar to the one that Japan had two decades ago. Its the same crisis that grips that country to this day. The run up of asset prices, in debt accumulation, in growth patterns, and in current account deficits are scarily similar. The majority of historical crises that have occurred have been preceded by financial liberalization. The financial bailout is just the New Deal of the 21st Century. Maybe this time will be different. Who knows. Nevertheless, the quantitative, fiscal, monetary, economic, and financial parallels in run ups to earlier industrialized country financial crises are worthy of note, and cant be pushed aside so easily.
The Japanese Banks kept on with ludicrous lending all through out the 80's. After the real estate bubble popped in Japan, the Japanese Banks just kicked the can, never taking responsibility for the losses. The Government in Japan went along with the charade. Many economists believe the unwillingness of our government to make the banks see proper religion is the same type of behavior. Its beyond ironic that the same ones today who are in favor of government socialization of bank losses are the same ones that wanted Japanese Banks to come clean on their losses twenty years ago.
Today we are willingly committing the same mistakes that the Japanese committed, thus two decades of deflating prices was the end result. The Japanese kept on telling everyone that the crap on their balances sheets were not toxic but just temporally non performing. Sound familiar?? We also heard "We are not Zombie Banks" all through out the 90's, while the Nikkei was breaking down technically. The Japanese banks were allowed to take obscene risks with leveraged money and the resulting hammering of their economy the last twenty years is something that should be in the back of every US Citizen.
The IMF has basically stated that 86% of systemic banking crises have ultimately required government restructuring plans that included closing, nationalizing and merging banks. Yet the policy response of the U.S. has been akin to putting a band aid on an untreated infection. Worse, not only has the underlying infection been overlooked, but thanks to the easing of FASB mark to market rules early this year, we have at least temporarily stopped reporting on the status of that infection. Its all been one large scam after another. The Japanese banks were never forced to properly come clean on their losses, the result was a crap zombie economy for the better part of the last two decades. Bad loans, mortgages, and debt needs to be cleansed and exorcised from the system, but so far the "demon" has only been transferred to the Tax Payer.
What we saw in Latin America in the 80's was timely loss disclosure, this was very beneficial and helpful in properly accessing the damage. It allowed time for the restructuring and forbearance of all that bad debt. The Latin Americans bought time to restructure the debt. We have bought time by telling everyone involved that debt is not really the problem. Instead we go around celebrating bailouts and forced shot gun mergers. Its every possible excuse not to restructure and eliminate debt.
Former Resolution Trust chairman William Seidman once noted in regard to the U.S. savings and loan crisis, "Sometimes forbearance is the right way to go, and sometimes it is not. In the S&L industry, all rules and standards were conveniently overlooked to avoid a financial collapse and the intense local political pressure that such a collapse would have generated. But in this case there was not a visible plan for a recovery, so the result of this winking at standards was, as we know, a national financial disaster. On the other hand, in the case of Latin American loans, forbearance gave the lending banks time to make new arrangements with their debtors and meanwhile acquire enough capital so that losses on Latin American loans would not be fatal."
The stock market has gained some 60% since early March, credit spreads have narrowed back to 2007 levels, its all back to business as usual. Why do we even need to bring up Lehman and Bear Stearn's?
We have not solved any of the problems that brought us into this mess. Its just been temporally buried under public tax payer money.
There is still no mechanism by which large under capitalized banks would be able to absorb large losses with their own balance sheets other then them being bailed out. The problem is there is too much crap and not enough real equity on bank balance sheets. Even today there is just not enough cushion to withstand another severe downturn.
There is still no regulatory structure to break up banks. There is no clear cut way for anyone in government to take over failed systemic institutions. The market didn't collapse because Lehman failed, it collapsed because of the way Lehman was allowed to fail. It was a chines fire drill down by five year olds, with real money and live at stake.
The economy has bounced like Garfield, but is anyone convinced that the conditions that brought us into the abyss has actually abated? Housing is still a disaster across many parts of the countries. Many banks are not even foreclosing anymore, because they cant keep up with the business.
Many ARM mortgages are about to reset at any moment. There is usually some 6 months before foreclosures catch up, so 2ND quarter 2010 is going to be brutal for the US Homeowner.
Unemployment may or may have not bottomed. But jobs are not coming back on line for the next year at best.
David Rosenberg from Gluskin Sheff states the following:
"What does all this mean? It means that when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labor input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labor market every month. They won't have it so easy because employers are going to tap their existing under-utilized resources first since that is common sense. Also keep in mind that there are at least four million jobs in retail, financial, construction and manufacturing jobs lost this cycle that are likely not coming back. In fact, the number of unemployed who were let go for permanent reasons as opposed to temporary layoff rose by more than five million this cycle."
We as a country are ignoring the mistakes of the past. This will only lead to a twenty year bear market starting sometime in mid 2010.
Hell or high water we are in a deleveraging cycle. This is the same cycle we saw with the Great Depression and in Japan in the 90's. Although we are in much better shape then we were in the 30's, the similarities with Japan is staggering.
Japan had the following:
-Collapse of a massive asset bubble
-Banking and credit crisis
-Zero Interest Rate Policy
-Central Bank Balance Sheet Expansion
-Massive Fiscal Stimulus
-Governmental Deficits
What ensued was a legacy of deflationary conditions that destroyed real asset values.
Some say that Japan Real Estate was in much worse shape, this is true, but there was no ARM, CDO, CDS, CDL, or other exotic derivatives that were packaged into that economy.
Enjoy the run up and mark up of equity prices.....
.....Ignoring the bill that comes to your mailbox doesn't make it go away.
Sooner or later we will all have to pay for the sins of our leaders.
Just like Japan.
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