Animal spirits, schmanimal spirits
March 16th, 2009By David Goldman
Patriotism is the last refuge of a scoundrel, Dr. Johnson said, and market sentiment is the last refuge of a confused analyst. Take for example this nugget of something from Bloomberg News today:
March 16 (Bloomberg) — One day last week, Mr. Market stumbled out of bed, downed a double espresso and learned that Vikram Pandit had said that his bank, Citigroup Inc., was having its best quarter since 2007.
“Right,” said Mr. Market, reaching into his mattress. “It’s time to buy stock.”
And buy he did. Not just Citigroup, and not just battered bank shares, either. No, Mr. Market got an adrenaline rush of confidence and bought everything from AT&T Inc. to Office Depot Inc. The Standard & Poor’s 500 Index snapped back from a 12-year low, jumping 6.4 percent in its best gain since November. The MSCI World rallied the most since December.
That burst of returning confidence — it grew as the week wore on — offers a fine example of what John Maynard Keynes called “Animal Spirits,” the title of a lively new financial crisis book by George A. Akerlof and Robert J. Shiller.
This account ignores the fact that Warren Buffett, a substantial investor in banks, had stood at the foot of Mr. Market’s bed for a full day singing, “Mr. Market, won’t you get up, won’t you get up….” The market said, “No, I don’t want to get up!” It rolled back under the sheets and stayed there for a day, until Vikrim Pandit said that Buffett and the various lesser lights saying the same thing all were correct and that Citigroup was making money. At that point Mr. Market became interested.
Mr Market couldn’t imagine that the banking system was busted in July 2007 when I first warned a national television audience that this was the case. He kept on believing in bank stocks until Lehman went down. At that point he became despondent and refused to come out of bed even in the face of a reasoned case that banks were worth a bit more than liquidation value. After all, Citigroup as a $5 stock still is a miserable outcome, but it is not the same outcome as $1 or $0.
A number of venues including this blog had made a reasoned case for bank profitability on an income-statement basis (ignoring mark to market effects on the balance sheet). Buffett explained
March 16th, 2009 at 7:56 am
Citigroup´s making money. Yes. Isn´t accounting really amazing? It´s like a modern-era alchemy. Turning junk into gold.
March 16th, 2009 at 8:50 am
When Q1 earnings are released in a few weeks it will be embarrassing [to the Feds] about how large a cash profit C, BAC and JPM will have made YTD. What effect will this have of regulatory forbearance, compensation limits, the anticipated strong-armed purge of not-so-toxic assets one can only wonder.
March 16th, 2009 at 11:14 am
If the so-called toxic assets are still paying and banks are earning their way out, what is Treasury Secretary Geithner referring to when he says (http://www.bloomberg.com/apps/news?pid=20601087&sid=aRbv2vbl70Wg&refer=home), “We’re going to move quickly to lay out a new financing program to deal with these legacy assets.”?
It seems rather odd to do it at this point, or is the stage being set to deal with other assets that are deteriorating such as credit card debt and more prime mortgage loans?
Sorry for asking so many questions.
March 16th, 2009 at 11:40 am
If anything, regulatory forbearance will take the “toxic” out of the assets, so why even remove them in the first place? Could this be a hint that the ultimate goal is to break up bank conglomerates?
March 16th, 2009 at 1:09 pm
That’s Buffett’s point — why remove them? And Volcker’s argument is that the conglomerates should be broken up. I agree on both counts. Geithner wants to move the legacy assets out so that banks can finance economic recovery. My point is that no-one wants the banks to finance economic recovery because no-one wants to borrow. “Zombie is as good as it gets.”
March 16th, 2009 at 5:30 pm
Thank you so much.