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Author: Bill Bonner in London
As we all know, the
depression is over.
The stock market seems to think so...with the Dow up
32 more points on Friday...and apparently eager to go higher. Oil rose above
$64. And gold is trading at $937 this morning.
Friday, two more
banks - the Bank of America and Citigroup - announced impressive
results. Between them, they made $5.4 billion in the last
quarter.
These follow announcements earlier in the week from JPMorgan and
Goldman. As reported in this space, Goldman set the pace by reporting that it
has managed to earn more than $1 billion per month, in the 2nd quarter of this
year. It said it did so by helping clients raise money...refinance...and
restructure. Deals. Deals. Deals.
Goldman made so much money that it has
set aside more than $11 billion so far this year in compensation for its
executives - or about half of its revenues, according to The Economist.
During the same period, shareholders got $4.4 billion, barely a third as
much.
This, by the way, is the same firm that suffered a near-death
experience along with the rest of Wall Street about six months ago. In
order to save itself, it turned to Washington for cash. It was at that
point that we at The Daily Reckoning noticed the appalling state of
modern American capitalism - the capitalists didn't have any capital. What
happened to the money? They had paid it out to the managers and proles. Lehman
Bros., for example, ran out of cash in 2008 and had to be put down. It was a
very profitable firm during the bubble years; but $55 billion was paid out to
employees in the 10 prior years.
When it was flush, Lehman should have
given more money to the politicians. The feds had cash; heck, they make the
stuff. Its competitor, Goldman, only had to whistle and the United States
government - dominated by former and future Wall Street pros - rolled over. The
feds put up the money, lickety split. And now that Goldman is rolling in dough
again, does it carefully husband its resources, restocking its shelves and
refilling its vaults, so it will no longer be a burden on the taxpayer if things
go bad?
Nooooo...like a welfare queen in a pink Cadillac, it spends every
penny, confident that it can lean on the feds next month as well as the
last.
But now, look. After all our whining and complaining about the
bailouts - they must be working, right? The big banks are making money
again...big money. And that must mean the economy is on the mend.
They're lending...they're speculating...they're rolling the dice
and...hallelujah...a pair of boxcars!
But wait. Ken Lewis of Bank of
America says, "Profitability in the second half of the year will be much tougher
than the first half..."
How come?
Because the banks' core
business is actually getting worse! The core business of banking is
lending to people who are capable of paying it back - out of earnings. If the
borrower is counting on higher house prices...or higher stock prices...to allow
him to refinance on better terms, the lender is asking for trouble. Prices may
go up...or they may go down. And if they go down, down goes the lender's
collateral too...and his hope of getting repaid.
The banks made big
mistakes in the bubble years. And now they're paying the price. But so far,
they've only made the first installment payment. Subprime loans started going
bad two years ago. Then, people began losing their jobs...and loans of all sorts
were in trouble.
There is no sign that this process is over. Instead, it
is merely proceeding in good order...just as you'd
expect.
California lost another 65,000 jobs in June. And
in Pennsylvania, 17,800 people are running out of jobless benefits. This group
is on the cutting edge of a huge new trend - people not only unemployed, but out
of unemployment benefits. One estimate says there will be more than half a
million of them nationwide by the end of September. You think they were cutting
back on spending last month? Let's see what they do in October. And let's see
what happens to their debt...those Alt-A, jumbo, and prime mortgage
loan...
..and let's see what happens to credit card debt...and to
commercial loans too. There's a report that New York commercial properties are
running up towards a 23% vacancy rate... Shoppers not shopping...stores and
restaurants closing their doors...unemployment going up - sounds like the
depression might not be over yet... From the Daily Reckoning Australia
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