Friday, March 13, 2009

Is Warren Buffett Wrong? Four Reasons the Recession May Be Easing

Nouriel Roubini is known as Dr. Doom, but Warren Buffett is giving the dour economist a run for his money. President Obama’s favorite deal maker has offered more morose pronouncements on the recession. You might recall that in April 2008, after the fall of Bear Stearns, Buffett predicted the recession would be worse than feared.

This week, he upped the ante, calling the recession “an economic Pearl Harbor,” and suggesting it would last for five more years, or longer than World War II. (Of course, Buffett may be going by the old saw that a recession is when your neighbor loses your job and a depression is when you lose yours; the Oracle lost over $5 billion last year in the worst performance in his 44 long years in the business.)

We haven’t seen any shantytowns spring up or people pushing wheelbarrows full of money to buy bread, so, feeling in a generous mood, Deal Journal brainstormed four reasons why Buffett could be, this time, entirely too bearish.

The Pain Already Feels Deep:

The market is always looking for something called “capitulation.” Even though Dow 5,000 isn’t out of the question, Doug Kass, founder of Seabreeze Capital Management, thinks a market bottom was hit March 2, writing, “My contention…is that the serious problems have been more than fully discounted in the world’s equity markets. Moreover, while many have grown increasingly impatient with the new Administration’s piecemeal strategy toward addressing the banking industry’s toxic assets, a cohesive deal, under the leadership of Lawrence Summers, will soon be forthcoming and will be effective.”

The Administration Knows What the Problem Is:

In the Great Depression and in Japan in the 1990s, economies suffered when leaders tried different tacks to solve their problems but committed too little capital to solving the underlying causes. But to judge from Treasury Secretary Timothy Geithner’s appearance on Charlie Rose last night, the administration knows the depth and causes of the issue: “What typically happens is people understate the severity of it. They wait too late to act.

When they act, they do too little. And that makes the crisis deeper, causes more damage, makes fiscal problems worst, deficits larger in the longer term, causing more damage than necessary, and ultimately, costs more to fix it. So the basic strategy underlying what the president is doing is to move as quickly, with as much force as comprehensibly as possible.” More importantly, the run of disasters seems to have slowed down, which means solutions don’t have to take just 48 hours.

The Tide Is Turning Against the Biggest Bugaboo in Finance:

Mark-to-market accounting has lost its last friend on Wall Street in James Dimon. Many Wall Streeters have blamed their woes on accounting rules that require banks to take new hits on troubled assets every quarter–and, in the words of Shakespeare’s Macbeth, the line of such assets stretches out to the crack of doom. Proponents of such accounting dismiss such complaints, believing they are the equivalent of, say, thinking that it is in looking in mirrors that causes pimples.

In a speech today, Dimon said the accounting rule had been taken “to a ridiculous point.” His compatriots running banks would agree: Wall Street has argued that it is meaningless to take troubled assets and “mark to market” if there’s no market. In October, Congress eased the rules by giving banks some leeway in determining the values of these assets, but no bank wants to be in a gray area. The drumbeat for a repeal started last fall. Dimon, the CEO of a bank that has suffered less than others, has an opinion that carries weight. In addition, Ben Bernanke suggested easing accounting rules yesterday.

The Bond Markets Are Healthier:

Looking at every major bond index, “in every case the credit markets are in better shape than five months ago when the S&P was 30% higher,” Kass says. The TED spread, a key indicator of the bond markets that compares three-month Libor yields to three-month T-bills, has shrunk to 1.10 percentage point from 4.63 in October.

The High-Yield Spread — which compares the yields on 10-year junk bonds to 10-year Treasurys–has pulled back to 16.25 points from 19.08 points in October. The corporate bond markets saw record issuance in January and near-record in February, marking the most active months for investment-grade corporate bond issuance among American companies since 1995, according to Dealogic data, with a total of around $300 billion raised.

Dimon, too, sees a recovery on the way. What’s behind Dimon’s optimism? The bond markets, for one thing. Deal Journal has chronicled the resurgence of the bond markets in January and February, and our Dow Jones Newswires colleagues Joe Bel Bruno has this update. “There are modest signs of recovery and healing out there,” Dimon said. It makes sense: if the crash was based on the loss of credit lines, the fact that some, at least, are being extended should be an encouraging sign.

Article from The Wall Street Journal

No comments:

Post a Comment