财经观察 1962 --- How Will the U.S. Stress Tests Impact Asia?

How Will the U.S. Stress Tests Impact Asia? by Enzio von Pfeil

This week should see preliminary results on the US Stress tests for 19 banks. What is the view from Asia?

(I have taken some of my views below from today's Bloomberg ("U.S. Officials Signal No Need for More TARP Funds From Congress", by Timothy Homan and Robert Schmidt.)

• Release dates of the stress tests:
  • The methodology behind the stress tests are scheduled for release on Friday, 24th April, in the form of a white paper by the Fed,
  • The 19 companies may get the results of their own stress tests already on 24th April, and
  • The results themselves are to be released publicly on Monday, 4th May.
    
• The aim of these stress tests is: do banks and other financial companies have enough capital to weather a deeper storm?
• But, fog prevails:
  • According to today's Bloomberg there is no set plan for
    • what information will be released
    • how to categorize the results, and
    • who will announce the results.
    • All of this suggests that there will be deliberate obfuscation so that nobody really knows what is going on. This will be akin to Prof. Bernanke telling a Congressional sub-committee that he could not reveal the collateral that individual banks had pledged when they received government loans.
  • Also, disclosing the results has morphed into a political issue in Washington. Treasury is fighting more disclosure of the results, while the Comptroller of the Currency wants less disclosure.
    • The reason for this tug of war is that the Comptroller is more concerned about what happens when the weakest institutions release their results. This lends credence to the old saying that "a chain is as strong as its weakest link."
    • Another reason is that Dr. Geithner is in a lose-lose situation:
      • If all banks pass the stress test, then the credibility of the test will be questioned, and
      • if some companies do not pass, they will need more government aid - and that will fuel even more "T parties". They will need more government aid if they cannot raise capital in the markets within the next six months, i.e. between May and November of this year
• Thus, what we see is hypocrisy at its best: American politicians are yelling at China for her perceived "fog", but then are creating very thick fog in Washington!
  • Indeed, the banks have not been told exactly what information concerning the stress tests may be released.
  • Meanwhile, it seems to me as if many banks do not want too much revealed about the "true" state of their balance sheets.

According to US earnings announcements so far, what are implications for Asian corporate outlook?

• Do you trust any of these announcements?

There are tentative signs of recovery in the global economy - do you think they are sustainable?

• Back to the stress tests: Under the Treasury's more "averse" economic scenario, unemployment could rise to 10.3% next year; that would be 36% above the original 7.6% unemployment rate that prevailed when the Treasury initially created these forecasts!
• One test in logic is that if what is stated is true, so must its opposite be.
• So, imagine a world in which politicians and (well paid) official economists from the IMF and OECD started saying that things really were NOT improving?
• Indeed, if politicians keep talking about stimulus packages, what does that reveal?
• It seems to me as if the governments have done what they can. Now prayer time starts: what else can governments do? Excesses have to be removed from the system, and no set of government bailouts can achieve this.

What does the Q1 Asia economic data tell you the state of health of Asia economies and the outlook going forth?

• Broadly speaking, it seems as if the Asian economies are holding on to growth with their fingernails.
• What this suggests is that there is too much exporting going on, and too little consumption. That is virtuous in that Asians are prudent savers - but is not so virtuous in that the sustainability of growth is out of the control of domestic policy makers.
• The bottom line is that more policy thinking has to be devoted to creating more domestic demand AND keeping the domestic banking system safer than in the US, where anyone could borrow and spend.

What is your outlook for the Asian markets in the next 2 quarters, and what investment strategy would you recommend?

• "Sell in May and go away."
• It seems like the policy makers have run out of ammunition. Now it is time for prayers and for crossed fingers....