Economy: The Bank Tests - Janet Yellen`s Torture Chamber

(Drivebycuriosity) - The US banks have to pass a stress test (federalreserve). The Federal Reserve asks them, whether they are able to survive if some evil scenarios occur. These stress tests include a "severely adverse scenario" that contains following assumptions:

 - the level of U.S. real GDP begins to decline in the first quarter of 2016 and reaches a trough in the first quarter of 2017 that is 6¼ percent below the pre-recession peak
- The unemployment rate increases by 5 percentage points, to 10 percent, by the middle of  2017
- stock prices fall approximately 50 percent through the end of 2016.

Holly cow. I think that this test is overdone and based on unrealistic assumptions. Maybe the test is a tribute to the negative zeitgeist and follows the current fashion of crash-calling.

It is highly unlikely that the U.S. real GDP started a decline in this quarter and will fall more than 6% through the first quarter 2017: Retail sales are growing - and they are gaining speed -, average hour wages are climbing faster and the weekly jobless claims fell recently to a historical low level (calculatedrisk). And there are a lot of tailwinds from interest rates close to zero, cheap gasoline, heating oil & natural gas.

For the same reason it is also highly unlikely that the unemployment rate, which is currently in a downward trend, will jump to 10% by the middle of 2017. The assumption, that stock prices will fall 50% through end of 2016 is also overblown. In 2008 the S&P 500, the gauge for the US stock market, plunged 38%. The Dow Jones needed 17 months to drop 54% from its peak on October 2007 to its trough in March 2009.

I think that these assumptions are counterproductive. The stress tests might spoke investors and undermine the already tattered trust into the banks further. Maybe the stress test partly caused the sharp losses US bank stock suffered year-to-date in spite of climbing house prices and a solid labor market. The stress test even might impede the banks giving loans and so slow the whole economy. Janet Yellen & Co. should stop to scar the markets.