Economies deterioration poised to increase momentum

The warning of JPM, using the "might" word is a polite way that the job-market turns it into a "must". That is the big problem for banks - their balance sheets are imploding on all ends, which will make them even more rigid to lend money as they will be by covering their losses respectively funding them. All of these bailout programs are just a beginning of the spiral. Basically the banks can not afford to lend out new money to anyone. Keep in mind that every bank is basically leveraged as they use a multiply of their own capital to lend money to third parties.

As the amount of credits not paying increase, their capital ratios shrink, which they can not afford. The real reason central banks are cutting rates so aggressively is not to get the end users cheaper loans - the real reason is to create a steep yield curve. That means short-end borrowing is substantially lower than the yields you earn by investing in longer-term bonds. The simple trick is that banks use all their possible leverage to borrow short-term and invest long-term. The result is easy to see. If you have a spread of 2% and do that let's say with 10 times your capital - as the central bank will lend you money against their own bonds - you make a 20% return on your capital.

If you can do that for 3 years let's say you can substantially recover your balance sheet under normal circumstances. That's how they saved the bankrupt banks in the early 90's - and that's why they changed the accounting rules for the toxic stuff, so they can carry it out is the hope. The balance is very fragile though as the recovery speed has to be bigger than the deterioration of assets on the balance sheet. The massive containment with toxic stuff plus additional pressure on regular loan losses will very likely make this remedy not work as wished. The retailer is a loser in any case, since the banks will refrain from lending money as they need any leverage for doing this yield-curve play.

Excerpt from CNBC:

http://www.cnbc.com/id/27591407

Unemployment Climbs to 6.5%, Higher Than Feared

U.S. employers cut payrolls by 240,000 in October, much more severely than expected, while September registered the biggest monthly loss in jobs in nearly seven years, according to a government report on Friday that showed U.S. labor markets were sharply deteriorating.

AP

The Labor Department said the national unemployment rate shot up to 6.5 percent from 6.1 percent in September, the highest since March 1994.

October's job cuts were much worse than anticipated by Wall Street economists who had forecast 200,000 would be lost.

Even more strikingly, the department revised September's losses to 284,000 - the highest since November 2001 just after the Sept. 11 terror attacks - and also revised August losses higher to 127,000.

Excerpt from WSJ

IMF Slashes World Growth Forecasts Again

WASHINGTON -- The International Monetary Fund slashed its growth forecasts for the world economy again Thursday, while calling for more broad-based action to mitigate the financial crisis and boost growth.

The IMF now sees the global economy's growth slowing to 3.7% this year and 2.2% in 2009; next year's growth forecast is well below the 3% level the fund traditionally considers the threshold for a world recession.

...

Advanced economies are now expected to suffer a contraction during all of 2009, declining 0.3%, which would be the first full year of negative growth since World War II.

The U.S. forecast was cut to 1.4% growth this year and a 0.7% contraction in 2009, down from last month's estimates for growth rates of 1.6% in 2008 and 0.1% in 2009.

The euro zone is expected to grow 1.2% this year and contract 0.5% next, compared with the previous forecast for growth of 1.3% in 2008 and 0.2% in 2009.

Japan's estimate was trimmed to 0.5% growth this year and a 0.2% contraction next, compared with the previous estimate for growth of 0.7% in 2008 and 0.5% in 2009.

Excerpt from CNBC

JPMorgan Warns Consumer Debt Charge-Offs May Rise