By contrast, says Nouriel Roubini, an economist who heads RGE Monitor, a financial- and economic-forecasting service, the U.S. financial system has adjusted only to the losses on mortgage loans. He predicts that a wave of defaults on industrial loans, municipal bonds and consumer credit is coming, which will trigger another wave of financial-system distress.
Fed Chairman Ben Bernanke believes such feedback effects are what made the Great Depression great. Mr. Bernanke’s awareness of such risks is why he cut rates last week and, despite signaling a pause, is still focused on the risks that the U.S. economy may deteriorate further.
Buffett sees clearing skies
Warren Buffett became the latest—and most credible—expert to suggest that the worst threats of the financial crisis are largely past, crediting the Fed for preventing a widespread meltdown, the WSJ says on C1.
Bank losses “aren’t over by a long shot, but a lot of it has already been recognized,” he said, adding that the depth of the housing crisis, unemployment and other economic factors would help determine how long the write-downs continue.
“The idea of financial panic—that has been pretty much taken care of,” he said.
Bloomberg and the Journal report that Buffett blamed credit-rating firms like Moody’s and Standard & Poor’s for inflating ratings of subprime securities and bond insurers. He also said there’s no way the bond insurers like MBIA and Ambac Financial should still be rated AAA “if they borrow money at 14 percent or if their stock has dropped 95 percent.”
The Chicago Tribune quotes Buffett as saying “I don’t know of any CEO that wouldn’t do the job for half the pay they get, maybe a quarter.”
I believe in fourth-quarter earnings
The Journal on C1 says the market may be “setting itself up for failure” by betting too high on earnings later this year. It says expectations for the fourth quarter would make it the most profitable in history and dryly notes that:
Brian Belski, U.S. sector strategist at Merrill Lynch, says Wall Street stock analysts have a track record of being overly bullish about earnings rebounds amid economic downturns (and too bearish when earnings fall.)
Following the periods of declining earnings in 1991 and 2001, results four quarters after the trough of the downturn came in 50% below what had been expected when the economy was bottoming out, Mr. Belski notes.
Its Ahead of the Tape column, also on C1, sounds a similarly downbeat note. It calls the stock market’s performance of late into question, noting that the “economy’s performance hardly seems to justify such ebullience.”
You can’t eat the core index
The Tribune looks at the inflation game and how the government underestimates it by low-balling the impact of food and energy prices. Its headline neatly summarizes the cognitive dissonance: “Food, fuel costs climb, and key inflation measure drops.”
Here’s the Quote of the Day:
“It is reassuring to have the core index tame, but you can’t eat on the core index. You can’t drive on the core index,” said Bill Hummer, chief economist at Wayne Hummer Investments in Chicago. “You can’t ignore what’s going on in food and energy.”
The paper quotes an analyst who says inflation is running at an annual rate of more like 10 percent, rather than the 4 percent the government says, primarily because of increases in “consumer essentials.” Why would they do that? The Trib doesn’t attempt to answer, but this may help.