AND WHAT THE STRESS TEST CONTINUES TO REVEAL
“It took many years to inflate the enormous debt bubble that popped in 2007. The deleveraging process, which is nobody’s idea of fun, will take a long time, too.” Gretchen Morgenstern wrote this in the Busness Section of Sunday’s New York Times (See “What the Stress Tests Didn’t Predict.”)
She wrote this as a warning to investors who have been recently inflating the value of banking stocks. Based on a new report by Christopher Whalen, analyzing data from the “stress test” that banks are now required to submit, she noted that “the number of financially sound banks is declining and that the ranks of troubled institutions are growing. Indeed, Mr. Whalen said his figures show more stress in the banking industry in the second quarter of 2009 than in the immediately previous periods.”
This is “under the radar,” to put it mildly, something most investor don’t seem to want to know they know. As Morgenstern makes clear, the information is out there, but investor “confidence” is outstripping reality. Perhaps even more important, just plain common sense is being ignored in the assumption that there can be a quick fix to the credit bubble.
Mark Gongloff made a similar point in today’s Wall Street Journal. (See “Bulls of March Look Set to Trade In Their Horns.”) He quotes one of the few traders who correctly called the bottom of the market in March: Jeremy Grantham “sees ‘seven lean years’ of a sluggish market ahead, to atone for what the firm believes was a long era of overpriced stocks.”
Morgenstern calls this false optimism a “relief rally.” That is, investors value stocks on the belief that things are not as bad as they could have been, not on what they are likely to be actually worth.