The IMF and FDIC were out with conflicting statements this week regarding the banks and bank capital. Sheila Bair of the FDIC said:
“I think we are past the crisis stage,” she said in a speech to the Bretton Woods Committee in Washington. “I think we are in the clean up stage now.”
“Despite some red lights and green lights … our belief is the crisis is far from over,” Strauss-Kahn told a press conference on the eve of a regular spring meeting of the International Monetary Fund.
Readers know I agree with the IMF head. I just keep coming back to one question: what is so different today than 8 weeks ago when everyone thought the world was ending and we were saying to buy stocks? What has changed regarding the banks’ capital position that makes them so much better off today? In my opinion, the only thing that has changed is investor psychology. 8 weeks ago it was horribly negative. Today it is wildly positive.
What do we know today? We all know the PPIP will not work because the banks have no incentive to sell (especially now that the world is convinced they can earn their way out of this crisis). We all know that TALF isn’t the savior it was hailed to be. We all know the stress tests are entirely bogus because the assumptions are ridiculously positive. We all know the M2M accounting change does nothing but hide assets and delay the inevitable. We all know that the credit markets have barely budged over the past 8 weeks. We all know consumer credit is getting worse. We all know commercial real estate is getting worse. We all know there is a mountain of Alt-A resets coming in the next 12 months. We all know the foreclosure moritirium is over and foreclosures are soaring to new highs.
So what has changed? Stocks are more expensive and sentiment has improved. The underlying problems all still exist, however. Who do you believe?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.