(Community Matters) I attended the Comerica/Winstead/Bridgepoint luncheon featuring Comerica Bank’s chief economic officer, Dana Johnson. Johnson earned his PhD in economics from Northwestern and served as a Federal Reserve Board analyst under Paul Volcker. Informative luncheon. I’ll bullet my notes now and possibly add a narrative later.
Last week, $320 billion was taken out of institutional money funds (they were scared of collapse). hmm, gives perspective to the $40B emergency protective measure I hear was implemented over the weekend but have read very little about
The situation has been building for 14 – 15 months, as evidenced by elevating spreads between treasuries and euro rates (also LIBOR).
Mortgage foreclosures up from an average of 0.2%, to averaging approximately 0.4% last six years to 1.2% the first quarter of this year.
Since January ’08, housing price decline has been slowing. Had been increasing since Jan ’07.
Building permits: They’d been off the charts (up to 2.2mm annualized), way beyond prudent inventories to replace new households and old stock being retired. Now below 750k annualized, which is below consumption rate so optimistic we’ll work out of overstocked position (but no sense of how long it’ll take).
From Jan ’00 to Jan ’06, housing prices rose 75% more than household incomes. Expect prices stil need to fall but we’ve probably experienced 1/2 to 2/3 of correction.
“The fundamental adjustments that need to happen in housing markets have or are already happening.” Believes the imbalances created by the housing bubble are being corrected.
Since Jan ’08 from 5% to 6% unemployment.
Inflation at 5.5% but doesn’t see any risk. Doesn’t believe we’ll see any inflation during next 6 months. Very dismissive of monetary policy perspective of money supply currently being created by fed in anyway influencing inflation.
$700 billion bailout “absolutely critical.” He believes the right perspective for us to have is the 1930s Great Depression. Then, the Fed failed by not bailing out the banks and ensuring liquidity in the system. Believes the risk today is just as real, though optimistic about this bailout.
Not sure of adequacy of $700B. Believes probably a politically practical number. It’s mostly about confidence of markets.
In response to my question about a bailout as a capital injection rather than purchase of distressed assets, “as a taxpayer” he agrees there should be upside and a floor, an equity kicker. But, he doesn’t know where we’d draw the line in government purchase of distressed assets.
“The investment banking world is essentially gone.”
Discussed mark to market and cited bank holding companies’ relaxed rules (allowed to take a longer term perspective in valuations) as reason for Goldman Sach’s and Morgan’s elections over the weekend to become bank holding companies and under the supervision of the Fed.
Questions the adequacy of accounting practices. Cites required disclosures which allow such complex presentation that no one knows what’s really there.
Assuming the bailout succeeds, expects the economy to recover in 18 to 24 months (economic activity, not institutions). Though, admits there are scenarios for it to get worse. hmm, a bit rosey for me.
He avoided answering an audience question about derivatives. However, afterwards, I spoke with personally and asked how do we know $1 trillion will be adequate when citations of $65 trillion in derivatives outstanding. He admits no one knows the real numbers but that political practicality and confidence building are extremely urgent. He also noted that the $65 trillion is a gross number. Also, maybe, sorta helped me understand the question about leverage to get to the $65 trillion from the underlying transactions. Seems to be about booking the gross of both sides of the swaps as well as compounding of margins.
Community Matters 