Stress Test --> 10.3% Unemployment in Adverse Scenario

Posted by urbandigs

Fri Apr 24th, 2009 02:15 PM

A: Just wanted to throw out that the fed released the Bank Stress Test White Paper moments ago. The ADVERSE Scenario, which 'was designed to characterize a recession that is longer and more severe than the consensus expectation', anticipates a peak U3 unemployment rate of 10.3% or so by 4th quarter of 2010; we are at 8.5% currently. The BASELINE scenario, which 'reflected the consensus expectation in February 2009 among professional forecasters on the depth and duration of the recession', has unemployment peaking at 8.8% for this cycle. Clearly we can throw out the baseline scenario right away, because it is highly likely that unemployment will jump by more than 0.3% at some point by the end of 2009. Reading through the paper now.

Here are the charts showing you BASELINE SCENARIO & ADVERSE SCENARIO assumed by this test on the banks for GDP, UNEMPLOYMENT, & HOUSE PRICES:


Equity markets are clearly in an uptrend, a likely bear market rally that could last longer than expected. Program trades, momentum trades, quant trades, short squeezes, etc.. all control the markets now - making the markets a bit more irrational than they might otherwise be. I would use caution when interpreting stock market movements to mean all is well again.

You are going to start hearing major criticisms about the ADVERSE scenarios assumed over the next few days, and rightfully so. In meantime, expect the unexpected from stocks for a while longer as any news is reacted to positively.