“Bank of America Announces 2009 Net Income of $6.3 Billion”
“Wells Fargo Reports Record Full Year Net Income”
“JP Morgan Chase Reports Full Year Net Income of $11.7 Billion”
“Goldman Sachs Reports Net Earnings of $13.3 Billion”
Just a few of the headlines from the past week.
In his 2003 book, Deep Survival: Who Lives, Who Dies and Why, Laurence Gonzales dedicates a chapter to an orienteering term called “bending the map”. He describes it as “trying to make reality conform to your expectations rather than seeing what’s there.” Used in the context of someone who is lost, he articulates how one can persist to follow their mental map even though their surroundings are telling them it’s wrong.
Since its 52-week low (666.79) on March 6, 2009, we have seen the S&P 500 increase by an amazing 72% when it hit its 52-week high (1,150.45) on January 19, 2010. Although it has given back 3% in the last two days, it has still had an impressive ride since last March. Is economic recovery at hand?
I think there are a number of factors that should compel us to stop and consider if the performance of financial markets is “bending the economic map”.
First, while we have seen improved performance in corporate earnings, including the larger financial institutions, we should be cautious as to what this really means.
In yesterday’s 4th quarter earnings release, Bank of America CEO Brian Moynihan reported, “As we look at 2010, we are encouraged by signs the economy is improving, as we have seen in the stabilization of our credit costs, particularly in the consumer businesses. That said, economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth.”
As unemployment continues at high levels this will have a trickle down effect on the fiscal health of federal and state budgets.
Second, despite last week’s comment by JP Morgan CEO Jamie Dimon that “Commercial real estate is a train wreck, but it’s already happened”, I find it still uncertain as to the ultimate fallout of lower valuations and the appetite for banks and investors to re-capitalize these assets. If the current banks are being too optimistic we may see another wave of writeoffs coming in the first half of 2010. More pain to come from commercial lending will certainly impact an already tightened credit market further de-stabilising growth and stability of small and medium businesses. Keep in mind that it is with certainty that we have not seen a major chunk of the problems that will still come from community and regional banks.
Finally, the past few quarters have undoubtedly reflected some benefit from federal stimulus monies that have been used to defer layoffs and shore up a portion of state budgets. It is less clear that these efforts can be extended beyond the first half of 2010 which will result in further pressure on consumer spending in the second half of the year.
Layoffs and cost cutting may drive capital markets, but they don’t pave main street. Unemployment will continue as a significant issue in 2010 – both economically and socially. Hopefully Congress and the current administration can keep their eye on the ball during this mid-term election year dealing substantively with reality and not wasting time (ours) “bending the map.”
BA
