How close is the US economy to the bottom? Kohler

This week should go down as a minor milestone in the transition of the US economy from being powered by financial services, as it has been for the last eight years, to being powered by clicks on the internet.

The rest of the world is being powered by China and India, but at least the United States has Google.

Last night Google reported that paid clicks rose 20% in the latest quarter and that profit went up 31 per cent on revenue growth of 42%, confounding the predictions that its explosive growth was slowing. Google’s share price jumped 11% to $US500.

Meanwhile it has been a week of forced, unconvincing, optimism from American bankers, but Merrill Lynch’s John Thain was the least cheerful of them last night when he released the firm’s latest quarterly loss of $US2 billion.

Thain made the point that so far the downturn has been finance-driven and that the US hasn’t yet seen the impact on consumers of lower house prices, higher unemployment, higher energy prices and higher food prices.

Yesterday the CEO of JPMorgan Chase, Jamie Dimon, said he thought the credit crisis was 75% or 80% over, and the CEO of Lehman Brothers, Richard Fuld, declared: “The worst is behind us.” Last week Morgan Stanley chief John Mack said the crisis has “a couple of quarters to go” and Goldman Sachs CEO Lloyd Blankfein said “we’re closer to the end than the beginning”.

Perhaps it’s like that song from the King and I that goes: “Whenever I feel afraid, I whistle a happy tune…”

But John Thain was whistling a dirge last night, saying the downturn is not near its bottom and that a consumer-led second phase is around the corner.

Meanwhile, according to the Wall Street Journal, the banks are all under-reporting on their interbank rates. The Journal reported yesterday in a story titled Bankers cast doubt on key rate crisis that the London inter-bank offered rate, or Libor, is becoming unreliable.

It’s calculated every morning in London from information supplied by banks all over the world, and is a measure of the average rate at which the banks are lending to one another. It is the most widely used benchmark interest rate in the world.

Apparently some banks are not reporting the high rates they are paying for short-term loans because they don’t want to tip off the markets that they are desperate for cash.

Doubts about the veracity of Libor come at a time when the so-called TED spread – the difference between 90-day Libor and the three month US Treasury bill rate – is blowing out again, indicating that banks are beginning to lose confidence in each other again.

In other words, don’t listen to what the bankers are saying, watch what they are doing (pushing up spreads again sometimes fibbing about it).

John Thain’s comment overnight came as he reported a quarterly loss of just under $US2 billion, after asset value adjustments of $US6.5 billion.

This time Merrill’s sacrificial offering to placate the market gods is 2900 job cuts, on top of the 1100 announced last quarter. In truth, this just cuts Merrill’s establishment back to what it was a year ago, and in any case last night’s profit report creates an extra $US50 million in “restructure” (redundancy) costs, which suggests that the 2900 who get cut this time will walk out with $US120,000 each on average.

But Merrill’s share price bounced 4.8%, so the gods must have been placated.

Merrill’s market capitalisation has fallen by a little more than $US30 billion, which happens to be the same amount the firm has written off its lending assets over the past three quarters.

In total, about $US500 billion has been wiped off the value of the top 10 global banks over the past 12 months, which is a fall of 42%. The largest losses in value are Citigroup and UBS, $US130 billion and $US82 billion respectively.

Have bank losses, and the markets, bottomed? Depends whom you listen to and what you watch.


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