Experts Predict Hard Times for the U.S. Economy
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After the job losses in August, things are starting to look bad for the U.S. economy and also for the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics.
Whalen says most observers are drawing the wrong economic conclusions from the stock market’s robust rally.
“Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment,” Whalen says. “That’s not a good sign.”
The banking sector’s assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy is shrinking because of a lack of credit.”
Whalen also predicts that the shrinkage will continue into 2010, suggesting the banking sector hasn’t yet seen the peak in loan losses.
Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses from its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)
“Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath,” says Whalen.
He also believes smaller and regional banks like Hudson City Bancorp may come into favor versus larger peers, which have dramatically outperformed since the March lows.
“When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring,” Whalen says.
In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros, and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red flags in recent days.
Federal Reserve Bank
Whalen´s opinion comes just at the time that New York Fed President Bill Dudley also expressed concerns about several areas of the U.S. economy, including commercial real estate. Financial markets are performing better, but on the negative side, and unemployment is way too high.
Dudley, who spoke earlier this week at Fordham University, said that the recovery will turn out to be “moderate by historical standards,” an outcome he calls “disappointing” and which will not bring the unemployment rate (currently 9.8 percent) down quickly.
Dudley also said that three restraining factors are at play: “The shock to household net worth seems likely to have several important implications for household behavior; the fiscal outlook, as the stimulus is a temporary fix – ‘it’s no fix at all, actually,’- and banks’ ’still-in-the-dumps’ balance sheets, which makes them capital constrained and hesitant to expand their lending.”
Meanwhile, unemployment in the United States is expected to rise well into next year and probably pass the psychological mark of 10 percent.
The Americano / Agencies
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