After tanking again on news of further bank bailouts in Europe the week before, bank stocks have rebounded on reports that the US is studying the creation of a so-called "bad bank" to offload the toxic assets depleting the capital of many financial institutions. US stocks were also apparently boosted by the building political momentum for a passage of the Obama Administration's $816 billion economic stimulus plans.
On the other hand, the prognosis for the economy and the financial system has never been bleaker. As we mentioned yesterday, the IMF has slashed world GDP growth forecasts but (in our view) still is too optimistic about emergency market growth (seeing 6.7% growth in China for 2009, for example). More importantly, they substantially increased their forecast for financial sector credit losses from $1.4 trillion only last October to $2.2 trillion, and stated that European and US banks would need at least $500 billion in additional capital to meet expected write-offs and losses in 2009 and 2010.
The rapid deterioration in the global economy and the continued balance sheet duress in the banking system has analysts at least two mainstream financial institutions openly describing the situation as "a depression".
In a January 15 note, Societe Generale strategist Albert Edwards said that the economic data flowing from developed economies reflects depression rather than a deep recession, and moreover warned of a risk of implosion (sharp contraction) in China's economy, social chaos and the possibility of a devaluation in China's Yuan.
Merrill Lynch's North American economist David Rosenberg also said in a note called "Some Inconvenient Truths" that we are very likely enduring a depression that could take years to redress. Some factoids include;
- Some 40% of corporate profits in the 2002~2007 debt-driven expansion were derived from financial activities, or what the Japanese referred to a "Zai tech" during their credit bubble.
- $6 trillion of US private sector debt needs to be eliminated.
- there is $1 trillion of excess capacity in the US economy.
- households have lost some $13 trillion of wealth in stocks and real estate.
- US consumption accounts for 70% of global consumer spending, versus a l-t average of 64%.
Regarding the current debate about whether the Obama Administration's stimulus package will "fix" the US economy, our take on Japan's massive JPY130 trillion economic stimulus during their Heisei Malaise in the 1990s was that it did prevent Japan from falling into depression and a debt deflation spiral, while it did leave a legacy of an enfeebled, heavily indebted economy in its wake because Japan waited to fix its banking system last instead of first.
