Is The Bloom Coming Off The Rose?

Citibank and Goldman reported this morning and both put up what looked at first blush to be better-than-expected numbers.

But both sold off in the premarket.  Why?

The bulls were expecting not just beats, but stunning blowouts.

But what we are not hearing from the banking industry is "we have enough loss reserves allocated and will not have to allocate more as loss rates are and will continue to come down."

That's the problem at the end of the day - where is the end of the line?  Asset quality continues to deteriorate pretty significantly and this deterioration is driven by unemployment and over-leveraged consumers and businesses - trading revenues are great but in a fractional system loan losses always sink you because of the multiplier effect.

Harley Davidson (HOG) reported a miss on slightly-higher revenue.  The key here is that once again sales (units) declined although they said that the rate of decline "moderated".  So how does revenue go up?  Driving prices higher?  Not sure at first blush, but the firm is also talking about divesting or winding up Buell and Augusta.  Neither of those actions are going to be revenue positive going forward.  The money quote on operating results is here:

Worldwide retail sales of new Harley-Davidson® motorcycles declined 21.3 percent in the third quarter compared to last year's third quarter, an improvement from the 30.1 percent decline in this year's second quarter.

That's not a good sign, especially when one looks at the US picture:

Retail Motorcycle Sales. During the third quarter, retail sales of Harley-Davidson motorcycles decreased 21.3 percent worldwide, 24.3 percent in the U.S. and 13.1 percent in international markets, compared to the prior-year quarter.

Ah, US weaker than rest-of-world. 

Again, as with J&J yesterday.

This is the problem that with so-called "stimulus" and similar games; it leaves an overhang.  Yes, last year's "stimulus" (and this spring's) contributed to reported GDP but it leaves an overhang and debt that has to be repaid, which in turn translates to deterioration in our home market compared to abroad. 

Put more generally, "there ain't no such thing as a free lunch", or TANSTAAFL.  The "stimulus" of today comes with a depression of potential expansion in the future.

The "magic" of so-called "stimulus" is that if you can kick private-activity borrowing in the rear and get people off their duff in that regard then "government stimulus" acts as if you're priming a pump, and the return is several times the original "investment."  This is the the boiled-down reality of Keynesian thought and the attraction of it as an economic theory - you get leverage for your actions as a government.

But when private credit-market capacity has been reached (on a carrying basis) this "kicking" fails - the default rates are not a consequence of inventory overhang but rather are a consequence of too much credit outstanding compared with income.  "Stimulus" that goes toward debt paydown prevents some defaults but fails to spur private economic activity and that activity which does occur turns out to be a false signal as private credit expansion fails to take hold.

Firms that respond to this "signal" with inventory builds get destroyed further down the line as the so-called "economic activity" turns out to be false and unsustainable as now you add inventory overhang to credit distress. 

This was the error of trying to "manage" the Depression in this fashion.  Note that coming off the 1921 economic contraction Warren Harding (then-President) along with The Fed took a hands-off approach and the market forced the malinvestment from the system; the consequence was that in less than two years unemployment fell from 12% to 3.2% and the economy roared back. 

Contrast this "hands off" approach to that of just a decade later when instead of forcing the bubble credit expansion of the late 1920s out of the system The Government instead undertook to "manage" the problem - and turned a speculative bubble bust into a decade-long economic mess.

FDR and The Fed wasn't the solution to The Depression - they were in fact the cause of it, turning a necessary credit contraction into an economic disaster, and we're now doing our level best to repeat those mistakes.