As usual, US investors concentrated on the short term and missed the significant news as Wall Street powered to a solid bounce overnight from its 12-year low on Monday. The markets jumped sharply after Fed chairman Ben Bernanke ruled out nationalising weak US banks after the so-called “stress tests” (which start tomorrow) are finished on the 19 banks to be tested. The Fed chairman also said a recovery was expected to start later this year. Hallelujah said the markets, up we go, ignoring the Fed chairman’s numerous qualifications and the worst reading on consumer confidence on record. That got rid of all that pesky talk about the US Government being forced to take control of troubled zombies like Citicorp and Bank of America — as a result Citi will shortly strike a deal to make it almost half pregnant and the US Treasury will convert enough of its preferred shares to give it 40% and inject billions of dollars in fresh capital in the third move of its kind. While investors were focusing on this, they missed the significance of several other reports and statements. While Bernanke said the Fed Reserve expects a recovery to start later this year, consumer confidence figures for February were showing the lowest ever reading since it was started in 1967. The reading of 25 was lower than any of the 72 economists surveyed by Bloomberg had tipped. Every sub measure of the index was down, especially for future expectations. But Mr Bernanke qualified his recovery forecast by saying that even when it arrives, it will be slow, so slow that high unemployment will still be a drag on growth in 2011. Bernanke told Congress that the US economy is in the midst of a “severe contraction” that has continued into the first quarter of 2009. He said he’s hoping the recession could end later this year, but he cautioned that a full economic recovery will take “more than two or three years”. In his opening statement, Mr Bernanke said an economic turnaround will only occur “if actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability — and only if that is the case, in my view — there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.” He also acknowledged the recovery might not go as well as hoped. “This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside,” he said. The Standard & Poor’s Case Shiller house price index recorded the biggest ever fall in its 21-year history in December: down 18.2% overall and 18.5% for its 20 city survey, with house price falls starting to accelerate in New York City and Charlotte, North Carolina where major banks, including Bank of America is located. The house prices in New York City and Charlotte are now falling faster than in the sub-prime flashpoints around in Florida, Arizona, southern California and Las Vegas. December was the 29th consecutive month that the index declined. “The broad downturn in the residential real estate market continues,” said David Blitzer, chairman of the index committee at S&P. “Most of the nation appears to remain on a downward path.” Since the US housing market peaked in July 2006, the home price index has fallen 26.7%. The US Conference Board’s confidence index dropped more than anticipated to 25, the lowest level since data began in 1967. The average of the market forecast was for a reading of 35. The fall came despite President Obama and his Administration revealing the huge $US787 billion economic stimulus plan. They have had no immediate impact on consumer confidence, which is vital seeing they account for a majority of annual US economic activity. The Confidence survey showed there was growing pessimism over employment prospects with the share of consumers who said jobs are hard to get increased to 47.8%, the highest level since 1992; Americans also grew more concerned about their financial well-being in future months. The index of the outlook for the next six months slumped to 27.5, also the lowest on record, from 42.5 in January.
US economy fails the “stress test”
As usual, US investors concentrated on the short term and missed the significant news overnight, writes Glenn Dyer.