2009 Economic Forecasts...what will happen, when?

kmguru, January and March don't stand out to me when I look at the chart. Really nothing stands out. If it did the pros would try to make the same moves a few week earlier and we should see a pattern that comes a little earlier each year. But I just see chaos and I am no good at Market timing anyway.

My hunch for no particular reason is that there are a few more business cycles to go before the Markets crash to reflect the fact that the USA does not make as much as it used to and you will lose your global wealth if you store it in dollars. The Market's crash in dollar terms might not be very dramatic due to Dollars being worth less.

Applied basic macro economics would seem to suggest that something almost as bad as a great depression and a collapse in the dollar is in store for the USA but that has been true for almost 20 years now.

The "It is 1955 forever" crowd for whom "America is the greatest country on earth and know serious harm can ever come to America because America and Americans are just so damn great" crowd will never believe that something like a great depression is in the cards for the USA until the USA is several years into the depression. The "It's 1955 forever and America is so damn great" crowd manages a lot more money then the "the economy will and must follow the rules set forth in economics 101" crowd manages and therefore it can take the markets who knows how many decades before the markets reflect what would seem to be an obvious reality to people applying basic laws of economics to predict the markets.

 

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Gold will hit $1,300 per ounce within the next 12 months.

 

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My prediction in post 126 has been fulfilled (100 US banks have now failed):

"...Bank closings for the year have reached 100 as regulators shut down Partners Bank in Florida, and hundreds more are expected to fall under the weight of soured real estate loans and the Great Recession. The failures so far this year are the most since 120 banks collapsed during the savings-and-loan crisis in 1992. ...''

From: http://www.businessweek.com/ap/financialnews/D9BH1O580.htm

With 7+30+31= 68 days still to go in 2009 the question becomes: Can 2009 top the 120 that failed in 1992 saving and loan collapse? I.e. have at least 21 more failure in 68 days? That is 3.238 calandar days between failures. As the "year average" rate* of failures is less than 3 days between failures, I would think it likely.

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* The current failure rate is much higher than the year average failure rate as problem is growing worse because many smaller banks which did not get "bail out money" are now going under. My post 154 estimated the "current failure rate" (most recent 2 months average) as follows:
"280-217 = 63 days in which 26 banks have failed. That is only 2.423 days between bank failures now. ..."

If we assume the current failure rate is one bank every 2.5 days then in the 68 days remaining in 2009 we can expect 27 more banks to fail.

 

Halloween terror story:

"Regulators Friday seized nine U.S. banks -- a record number of failures in a single day during the 2008-2009 banking crisis.

The 2009 tally of failed U.S. banks and thrifts now stands at 115.

The nine failed banks were in four states. All were subsidiaries of FBOP, a privately held banking company headquartered in Chicago.
Together, they had $19.4 billion in assets. ..."
{Billy T overheard this comment by the FDIC: "Ouch! ouch! - OMG: Christmas Congressional recess and the US debt ceiling are fast approaching."}

From: http://www.thestreet.com/story/10619982/1/regulators-seize-nine-banks.html?cm_ven=GOOGLEN

I should have predicted 125 banks would fail in 2009 (not just the 100 I did at mid year -See post 126)

Note in the last fully normal year, 2007 (It did not have the bad last quater that 2008 had.) only 3 banks failed in all of 2007!

 

Halloween was uglier than most understood. Read at least the the red text below:

“… CIT listed $71 billion in assets and $64.9 billion in debt in a Chapter 11 filing in U.S. Bankruptcy Court in Manhattan. The U.S. Treasury Department said the government probably won’t recover much, if any, of the $2.3 billion in taxpayer money that went to CIT. … None of CIT’s operating subsidiaries, including Utah-based CIT Bank, were included in the filing, and operations will proceed as normal, … CIT has $1 billion from investor Carl Icahn to fund operations while it reorganizes. The credit line, to be drawn on until Dec. 31, will be a so-called debtor-in-possession loan. It also expanded its $3 billion credit facility by another $4.5 billion on Oct. 28.

… Debt holders rejected the exchange offer, with 90 percent of holders who voted opting for the company’s prepackaged bankruptcy plan.
The failure of CIT’s bank-holding company is the biggest measured by assets since regulators seized Washington Mutual banking unit in September 2008. Washington Mutual and IndyMac Bancorp Inc. are other banks with unmanageable debt that sought court protection to wind down their holding companies. Both put their retail banking units in the hands of the Federal Deposit Insurance Corp. …

According to the petition, CIT’s largest unsecured claim holders were Bank of America Corp., as collateral agent for a $7.5 billion claim, and Bank of New York Mellon Corp., as a trustee for retail bonds with a claim of $3.2 billion. Canadian senior unsecured notes have a claim for $2.1 billion, and Citigroup Inc. also has a $2.1 billion claim as an administrative agent to bank debt due 2010. {Billy T copmment: May be start of chain of financial dominoes and lack of operating loans will do in many business that used Citi - see next section of red text and final blue text, added next day.}

CIT had said in its Oct. 2 outline of a prepackaged plan that it would give most noteholders new notes at 70 cents on the dollar plus new common stock … The company wasn’t given access to the FDIC’s debt-guarantee program. … with debt holders receiving less than face value of their instruments, recovery to preferred and common equity holders will be minimal.” {I.e. Stock is worthless now.}…

The company tried to stave off bankruptcy with a $3 billion rescue loan from bondholders in July to see it through a cash crunch. Bondholders stepped in after CIT failed to get another U.S. government bailout or enough loans to permit an out-of- court restructuring. …

The lender {Citi} funds about 1 million businesses {with working capital} such as Dunkin’ Brands Inc. in Canton, Massachusetts, and Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington. … CIT has said it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. It also finances trade in Canada, Europe and Asia by lending to small manufacturers that sell to retailers. … CIT accounts for about 70 percent of all short-term U.S. financing known as factoring, worth about $40 billion a year, according to Ray Ecke, president of Credit Management Resource in Oakland, New Jersey. … “Short term, it’s going to cause some difficulties for startups and smaller borrowers,” said Jean Everett, a partner at Hiscock & Barclay focusing on financial institutions and lending. “CIT lent across so many sectors it’s sort of difficult to predict how it’ll affect each sector.” …

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a3.t_GrxbL2U&pos=1

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By edit, a few more details about Cit's lending to stores for working capital etc. released on 2Nov09 (and a Billy T comment):

"... CIT is trying to move its trade and vendor financing businesses into its Salt Lake City-based banking unit after the company emerges from bankruptcy. The shift would allow CIT to use deposits to help fund loans. ..." From: http://www.bloomberg.com/apps/news?pid=20601087&sid=avu.I7hCQbZA&pos=1

Billy T comment: Lots of luck! If I had money depoisted in the Salt Lake City bank, I would be taking it out ASAP. I.e. that branch will be lucky not to fail soon, certainly will not have much in the way of deposits to lend out. I.e. about 1,000,000 businesses will need to find a new lender to avoid shutting their doors for several months while Citi tries to re-open after bankruptcy, and it is by no means certain that the courts will allow the transfer of existing loans to the Salt Lake city bank. - see link for why.

 

I was curious, just how many banks are in the US:

" "Number of U.S. Banks by Size Category"

A bar chart. 4,893 banks or savings institutions have more than $100 million in assets; 3,517 have $100 to $500 million; 859 have $500 million to $5 billion; 150 have $5 to $50 billion; and 22 have more than $50 billion."

Not really clear, but let's say 9459. So 100 banks would be 1.1%, making banking one of the safest business with a less than 2% annual failure rate....

P.S.: Wiki:According to the FDIC, there were 8,430 FDIC-insured commercial banks in the United States as of August 22, 2008.

 

And those are the 22 that shouldnt exist.

Even Ben Bernanke has stated that the 'too big to fail' issue is the number one problem.

 

" Nobel Prize-winning economist Joseph Stiglitz said the world’s biggest economy is suffering because of the U.S. government’s failure to nationalize banks during the financial crisis.

“If we had done the right thing, we would be able to have more influence over the banks,” Stiglitz told reporters ..."

From: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGR4KXaGwxd8

Note their is a "half way" position that Brazil uses: Very strong regulation, including requiring that 50% of all demand deposits be used to buy government bonds. Also several banks are more than 50% owned by the government, including the largest, "Bank of Brazil." Brazil's banks are very solid and profitable. Only a few single-office banks in small towns even needed any assistance as their depositors moved funds to national banks at the peak of the banking crisis.

 

That is not exactly what he said.

“Your second point, that it’s not fair – I agree 100 percent,” Bernanke replied. “If I was a small banker, I would be very upset about this. Small bankers don’t have this protection. The ‘too big to fail’ problem is a serious, serious problem and it should be a top priority to greatly reduce this problem as we go forward with restructuring our financial system.”

Bachus asked if the solution would be for the government not to allow banks or other institutions to grow and become “too big to fail.”

“That would be one strategy,” Bernanke replied. “Other strategies include tougher regulations to provision, or as I had mentioned before – having a tough resolution regime, like the prompt directive action regime already in place for banks that would allow the government to come in at a stage before default and resolve the company in a safe and sound manner.”

Ben Bernanke
http://www.businessandmedia.org/articles/2009/20090211084501.aspx

Bernanke said it was a big problem but not the number one problem. And he points out regulation is a solution.

 

I think Stiglitz is right. But it would be a big sell, maybe even an impossible sell in The United States. Unfortunately, politics in this country have degraded to such and extent that government can no longer be counted on to do the right thing or act in the collective interest of consitituents. There is in my opinion serious political risk in the US. The government last year barely passed the TARP legislation.

 

Two things soon to come (more and longer term TIPs and a new debt ceiling):

"... The Treasury said issuance of its Treasury Inflation- Protected Securities program will rise “gradually” and that it is considering more frequent TIPS auctions to improve liquidity in this market. The department announced it would sell the 30- year TIPS bond in February, with a reopening in August, in a change from its previous TIPS bond auction schedule. {I think the longest term TIPs now are only 10 year ones. Going out to 30 years put the government (read taxpayers) at much greater risk, but that may be the only way China will still finance the US's deficits.}

The Treasury also said it expects to run up against the debt ceiling, which currently stands at $12.1 trillion, by mid- to late-December. The Treasury said it would keep Congress and the markets apprised of debt-limit developments because “the government’s cash flows are volatile” and forecasting a precise date is difficult. ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a6xED25ZGEaU&pos=4


Billy T comment:
Some months ago, I predicted that China's concern about loss of value in it US treasury holdings could be off set by having treasury issue more and longer term TIPs. No one else is yet making this connection, but I am reasonable sure that China will roll maturing Treasury paper into TIPs within a year. It just makes sense - words alone will not reasure China that the US will not just "monetize" its debts away. I expect that the US will do a lot of that too.

 

Anyhow, the point was that one shouldn't shit himself at the 100 US bank failures per year. When that number reaches 3-400 than we can start to put on the diapers...

 

True 117 failed banks is small fraction of the total, but only 3 failed in 2007 - most recent year with four normal quaters (In 4Q08 the crisis was coming to its extreme) I.e. by end of 2009 the number of bank failures will be about 50 times more than normal. Considering how much money has been given to banks, IMHO that is strong indication that the financial system is still very sick.

Banks themselves are too scared to lend. - Most of the money they got from Uncle Sam they immediately return to him by buying Treasury bonds or deposit at the FED - very little lending was done. Don't forget they will soon be hit hard again as commercial real estate mortgages go belly up and credit cards increasingly default, (as the number of un-employed and under- employed grow) not to mention that many ARMs will reset next year with possible increase in the foreclosures.
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Later, by edit: I just read essentially the above at moneyshow.com:

"... Commercial and industrial loans at US banks [are] falling precipitously. Banks have (correctly) tightened lending standards, but that
means that small and medium-sized businesses, which account for over 85% of all jobs, have been cut off from the life blood of growth.

Is it any wonder they are cutting jobs at a prodigious rate? ...

So where do banks put their cash and reserves they are not lending? At the Fed and in Treasury debt. If you can leverage capital at ten to one (as banks can) and if you get 2% (for longer-term debt) and if you only have costs of, say, 50 basis points (or 0.5%), you can make a return on equity of 15% with no risk.*

Bank reserves at the Fed are exploding. And they are likely to continue to do so, since bank balance sheets are still deteriorating, especially at smaller and regional banks exposed to commercial real estate loans. Banks are going to continue to reduce their loan portfolios in order to deal with the massive write-offs they are going to have to make. And my bet is they put those reserves they are not lending into government debt. ..."

From: http://www.moneyshow.com/investing/articles.asp?aid=GURU-18140&iid=GURU&scode=015363

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* I think they are saying the +2% -0.5% = 1.5% net interest gain which leveraged 10 fold is 15% RoE with zero risk government bonds. A bank would need to be crazy (or under govenment control) to lend to Joe American who is already deep in debt and may be among the next bunch to lose his job (or have his small business fail as few are buying now).

 

"...Iberiabank Buys Two {of three just failed} U.S. Banks as Failure Toll Climbs to 123. Iberiabank boosted its number of branches to 204 in 11 U.S. states and added $3.1 billion in assets. It will share losses with the FDIC on about $2.6 billion of assets. … The three failures cost the FDIC’s deposit-insurance fund more than $980 million. ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=adZ_EIN8T_uY&pos=4

Assuming No.123 failed yesterday, not earlier in the week, then end of business week 46 of 2009 was day 322 and the 2009 average delay between bank failures is now only: 2.618 days.

Post 126, made on 9 August 2009, had mean time between failures > 3 days.* I.e. the rate of bank failures is still accelerating.
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*Post 126 reported that 72 banks had failed by day 217. Post 166, made on Halloween (31 Oct 09) had 115 failed banks. Thus in the last 14 days 123-115= 8 banks have failed or only 1.75 days between failures, but post 166 included a record number of failures on a Friday. So current failure rate is approximately one every two calendar days. With ~46 days left in 2009, that rate would add 23 more failures or bring the total to almost 150 banks failing in 2009. - Well above the 100 I predicted in post 126. Some may find it hard to believe, but it appears that I am not pessimistic enough to reflect reality.

P.S.
One should also note that most of the banks than the government has been able to sell, have been sold to foreign firms - that is because for them the dollar is very cheap now. Rather than get its finances in order, the US is "selling the farm" and borrowing in a desperate effort to delay the coming depression.

 

Billy T,

Billy T, the mainstream economists predicted over 100 bank faliures for 2009 at the beginning of the year. There were articles in Bloombergs, in addition to many other financial sites. Your 'prediction' of 100 late in the year is an attempt by you to gain some credibility by getting at least one thing right. You do know that more banks are predicted to fail in 2010 than 2009, don't you? I'm sure you do, but you will attempt to use the failures to try to convince naive readers that the sky is falling. During the Savings & Loan crisis, 2,377 banks failed. In the years 1988 and 1989, a total of 1004 banks failed. The US did not fall into chaos, with rioting in the streets.

This quote is the main reason I responded to your nonsense. No Billy T, your statement is a fantasy that appeared in your mind. Do you have a problem with alcohol abuse or something now? I still read most all your posts, although I rarely respond. I still read some intelligent posts by you, but there are many that could have been written by a semiliterate housekeeper.

 

I never saw even one. Can you support your claim that many existed at start of 2009?

A prediction made on 9 August is not "late in the year." Also that was not my motive nor even possible as I saw no such preditions. Of course I could not make my independently arrived at prediction until about mid year, when about 75 banks had failed and I notice that. (I do not predict without some supporting facts.)

No, I have not seen that either, but can believe it likely to be ture.

No they were saving and loans, not banks, much smaller institutions, quite often only a single small "store front" office. I actually had a few thousand dollars in one like that in Baltimore, but got my funds out in time.

Please give a link to at least one.

 

I do now. Here is the first such report I have seen:

"... More banks are expected to fail as they crumble under the weight of bad real estate loans. “There will be more banks taken down next year than there are this year,” said Craig King, chief executive officer of J.P. King Auction Co., a Gadsden, Alabama-based company that auctions properties for the FDIC. “We’re probably still early in this process.” ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=aIcNcx3Hm80o&pos=6

PS I expect many will be smaller local banks that go under because of non-residential loans. More than half of those properties are underwater, their rents are falling and commercial mortgage defaults are rising. This market is not as big as the residential one but it can still kill a lot of local banks.