by Calculated Risk on 5/11/2009 06:52:00 PM

UPDATE: Speech Text: The Supervisory Capital Assessment Program

My remarks this evening will focus on the Supervisory Capital Assessment Program, popularly known as the banking stress test. ...

It is important to note that this was not a solvency test. After including capital previously provided by the Treasury, all of these banking organizations currently have capital well in excess of the minimum stated capital requirements of the supervisors. Instead, the purpose of the exercise was to determine the size of the capital cushion that each organization would need to remain well capitalized and still be able to lend--even in an economic scenario more severe than expected.
...
Conclusion
In summary, the Supervisory Capital Assessment Program is an important element of broader and ongoing efforts by the Federal Reserve, other federal bank regulators, and the Treasury to ensure that our banking system has sufficient resources to navigate a challenging economic downturn. A collateral benefit is that many lessons of the exercise can be used to improve our supervisory processes. In particular, the supervisory capital assessment has demonstrated the benefits of using cross-firm, cross-portfolio information and the simultaneous review of a number of major firms to develop a more complete and fine-grained view of the health of the banking system.

Whether the objectives of the assessment program were achieved will only be known over time. We hope that in two or three years we will be able to reflect on the banking system's return to health with a sharply diminished reliance on government capital. More immediately, we hope and expect that the public and investors will take considerable comfort from the fact that our largest financial institutions have been evaluated in a comprehensive and rigorous fashion; and that they will, as a consequence, be required to have a capital buffer adequate to weather future losses and to supply needed credit to our economy--even if the economic downturn is more severe than is currently anticipated.

Fed Chairman Ben Bernanke will speak tonight at the Atlanta Fed's Financial Markets Conference in Jekyll Island, Georgia.

I believe Bernanke will be talking about the stress tests.

I'll post a link and excerpts from the prepared text when available ...

Here is the CNBC feed (maybe they will cover the speech).

by Calculated Risk on 5/11/2009 04:52:00 PM

Here is Meredith Whitney on banks and stress tests today ...

On the stress test leaks:

"I couldn't believe how poorly the impressions leaked, how effectively people say it was leaked, if it was any other company leaking that information there would be SEC investigations all over the place."

by Calculated Risk on 5/11/2009 04:19:00 PM

By popular demand, the 2nd graph is Doug's "Mega-Bear Quartet" that includes the Nikkei and NASDAQ bear markets.

Click on graph for larger image in new window.

The first graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

This is the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The second graph compares four significant bear markets: the Dow during the Great Depression, the NASDAQ, the Nikkei, and the current S&P 500.

See Doug's: "The Mega-Bear Quartet and L-Shaped Recoveries".

by Calculated Risk on 5/11/2009 03:09:00 PM

"We are, as far as growth is concerned, around the inflection point in the cycle"
European Central Bank President Jean-Claude Trichet, May 11, 2009

From The Times: Britain may be on road to recovery, says OECD

The worst of Britain's recession may now be over, according to the Organisation for Economic Co-operation and Development (OECD).

The OECD, the umbrella group for the top 30 developed nations, said its indicators, which are considered to be a bellwether for the global economic outlook, pointed to a strong slowdown in the OECD area, but said that Britain, France and Italy were showing “tentative signs” of a pause in the slowdown.

Canada, Japan, Germany and the US, are still in the midst of a "strong slowdown".
...
“However, with the exception of China, where signs of a pause have also emerged, major non-OECD economies still face deteriorating conditions,” the OECD said.
...
“We are, as far as growth is concerned, around the inflection point in the (economic) cycle,” said Jean-Claude Trichet, head of the European Central Bank, at a G10 meeting in Switzerland.

More from Bloomberg: Trichet Says Global Economy Is Near Turning Point

Once global growth starts to pick up, central banks will have to scale back their support for the economy, Trichet said.

“Insistence is put on the exit strategy, on the medium- term path that permits us to go back to a normal situation, a sound and sustainable situation,” he said. At the same time, central banks will “do what is necessary in terms of extraordinary measures, as long as necessary,” he added.

It took just a couple of months to go from Great Depression II to "green shoots". Now Trichet is talking about an "inflection point" and central bankers scaling back their support - this seems a little premature.

by Calculated Risk on 5/11/2009 01:44:00 PM

On Saturday I excerpted from a NY Times article Shift to Saving May Be Downturn’s Lasting Impact. I argued:

The saving rate will probably continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but ... this will also keep pressure on personal consumption.

First, here is a graph of the annual saving rate back to 1929.

Click on graph for large image.

Notice that the saving rate went negative during the Depression as household used savings to supplement income. And the saving rate rose to over 25% during WWII.

There is a long period of a rising saving rate (from after WWII to 1974) and a long period of a declining saving rate (from 1975 to 2008).

Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less), however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late '90s). This didn't happen.

Perhaps the twin bubbles - stock market and housing - deluded the boomers into thinking they had saved more than they actually had. Perhaps the boomers were deluded by bad economic analysis (see David Malpass: Running on Empty?)

Whatever the reason, I expect the saving rate to continue to rise over the next year or two. And that raises a question: what will be the impact on PCE of a rising saving rate?

I created the following scatter graph for the period from 1955 through Q1 2009. This compares the annual change in PCE with the annual change in the saving rate.

Note that R-squared is only .125, so there are other factors impacting PCE (like changes in income!).

But a rising saving rate does seem to suppress PCE (as expected). If the saving rate rises to 8% by the end of 2010, this suggests that real PCE growth will be about 1% below trend per year.

So with wages barely rising, and a rising saving rate suppressing PCE, I'd expect PCE growth to be sluggish for some time. And since PCE is usually one of the engines of recovery (along with residential investment), I expect the recovery to be very sluggish too (no Immaculate recovery).