“If you are not fearful, you’re crazy.”
That’s what JPMorgan chief Jamie Dimon said last night during his third quarter results conference call. Investors took it to heart and, despite the most intense coordinated government rescue in history, Wall Street sank more than 5 per cent again.
Dimon, whom many expect to be the next US Treasury Secretary (in an Obama Administration), had just finished saying that what the governments were doing around the world was “pretty powerful medicine” and that “I think you will start to see some beneficial effect of that in the next couple weeks”.
The follow up question was: “If you really believed that you’d be buying credit card lines, right?”
Dimon: “We are buying slightly more risky assets and we’re growing our businesses everywhere so we’re not panicking. Credit card receivables are up. We are not pulling out of California. We’re still marketing. Obviously we try and modify what’s going on, but we are not going to say, yahoo this is over and extend credit like we did, without fear. If you are not fearful, you’re crazy.”
Yes … “extend credit like we did, without fear”. That kind of sums up the problem.
What made markets fearful rather than crazy last night was a flurry of scary data: retail sales for September, down 1.2 per cent, the Empire State manufacturing survey, virtually in free fall to a record low, and the Federal Reserve’s Beige Book showed consumer spending down across the board.
Also the Morgan Stanley Business Conditions index plunged to 11 per cent — exactly half the previous month’s level, and the lowest since they started producing the index six years ago.
The US economy now has tremendous downward momentum.
Federal Reserve chairman Ben Bernanke acknowledged as much in his speech last night to the Economic Club of New York: “We have seen marked slowdowns in consumer spending, business investment, and the labor market.” He also said inflation was not a problem any more, or words to that effect.
And although Bernanke tried to soothe markets by saying that the authorities stood by, ready to do what it takes, the last couple of weeks has provided a stark contrast between the ammunition and attitude of the authorities in Australia and the US.
The Reserve Bank cut rates by 1 per cent; the Fed cut by 0.5 per cent. The Rudd government is putting $10.4 billion directly into the hands of pensioners and first homebuyers who will spend it; the Bush Administration is putting $US700 billion into the banks just to keep them alive. The Australian federal budget is still in surplus after the latest stimulus package; the US budget deficit has now blown out to a record $US455 billion – before any new fiscal stimulus efforts.
When Bill Clinton left office, the budget was showing a $US127 billion surplus.
According to the Wall Street Journal this morning, Congressional Democrats are considering a new $US300 billion stimulus, but whoever wins the US election will inherit an empty Treasury.
The bond issuance task will be immense which is likely to drive long term interest rates higher and counteract any cuts in the Fed funds rate, which is only 1.5 per cent above zero anyway.
And speaking of stimulus packages, the $US168 billion Bush stimulus one that was passed by Congress in February, resulting in $US600 checks to people in June, did not touch the sides.
As Marc Faber wrote in his June 2008 Boom, Gloom and Doom Report (repeating something he had picked up elsewhere, I’m sure, since he lives in Thailand):
The federal government is sending each of us a $US600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs.
If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy.
The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I’ve been doing my part.