Uh-Oh...More Talk Of The W

Not the President, the recovery:

Not everyone is enthusiastic about the recovery. New York Fed President Bill Dudley is concerned about several things, including commercial real estate.

Yes, financial markets are performing better, but on the negative side, unemployment is way too high.

Dudley, who spoke last night at Fordham University said that the recovery will turn out to be "moderate by historical standards," an outcome he calls "disappointing" and which will not to bring the unemployment rate—currently 9.8% —down quickly.

He said three restraining factors are into play: The shock to household net worth seems likely to have several important implications for household behavior; the fiscal outlook, as the stimulus is a temporary fix; and banks' still-in-the-dumps' balance sheets, which makes them capital constrained and hesitant to expand their lending.

While Dudley addressed the 800-pound gorilla - commercial real estate -- which is "under particular pressure," and laid out the reasons of the sector's sorry state, he falls short from offering any solutions or saying that banks might want to start cleaning up their balance sheets.

Christopher Whalen, managing director at Institutional Risk Analytics, agrees (emphasis mine):

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.

But all is not right in either the economy or the banking sector ... In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.

"Why is liquidity going into the financial sector? It's because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."

The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit."

WHAT?!  I thought that a 'lack of credit' what the precise reason for passing TARP!  Yes, in fact, it was.  It was all about loosening up the credit freeze.  So...what happened?  Quite simply, the whole notion of bailing out the credit markets was an abject failure.  More:

The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn't yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)

"Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath," says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.

"When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring," Whalen says.

In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other "prophets of the apocalypse" who've once again been raising red flags in recent days.

So, this whole 'recovery' is going to look more like a 'W' or a 'u' with an extremely long tail than a 'V'.  Buckle up, because it's not over yet.

The bottom line here is that all of the policies Obama and the Dem-controlled Congress have hysteria'ed into place have, at best, failed, and are more likely to have made things much, much worse than they would have been otherwise.  Thank you, Mr. President, for your 're-making' project.

There's my two cents.