What's Good For Goldman?
Goldman Sachs Group Inc. cut investment banking jobs in the last few weeks, joining securities firms that are adjusting to a slowdown in deal activity, according to people familiar with the matter.Looks like I have to rewrite my memo to Mark Machin: "Hire more Goldman alumni like yourself as they become available, just make sure their first name isn't the same as yours and Wiseman's". -:)
The bank eliminated dozens of managing directors, executive directors and vice presidents across the mergers and debt and equity capital markets teams, the people said, asking not to be named as the details aren’t public. The cuts affected bankers in cities including London, New York and Hong Kong and are in addition to the bank’s annual 5 percent cull of employees deemed underperformers, the people said.
Goldman Sachs Chief Executive Officer Lloyd Blankfein is embarking on his biggest cost-cutting push in years as the bank tries to weather a slump in trading and dealmaking, people familiar with the matter told Bloomberg in April. The job reductions follow a similar move in the firm’s trading division this year, driven in part by a 60 percent drop in first-quarter profit.
A spokesman for Goldman Sachs declined to comment.
The investment-banking cuts represent a reversal from 2015 for a unit that was the top-ranked merger adviser during that near-record year and produced the most profit among Goldman Sachs’s four operating segments. Completed mergers worldwide have plunged more than 80 percent so far this year, while equity offerings have dropped about 65 percent.
Goldman Sachs President Gary Cohn said Tuesday that the same forces that helped fuel mergers and acquisitions in 2015, such as low interest rates and sluggish growth, remain in place today and that the outlook for the business remains bright.
Goldman Sachs’s cost-cutting hasn’t prevented pressure from investors. At the bank’s annual meeting in May, its compensation plan, including a pay package that made Blankfein the highest-paid chief executive officer of a Wall Street bank for his work last year, drew the most opposition since shareholders began voting on the matter in 2009.
There used to be an old expression, "What's good for GM is good for America", but I think nowadays it goes like this "What's good for Goldman is good for America".
The financialization of the American economy has produced vast wealth on Wall Street, and even though that wealth is concentrated in fewer and fewer hands, fueling rising inequality, it still adds to overall GDP and that's why the Federal Reserve will always put bankers' interests first.
But something is terribly wrong in America. Alan Greenspan thinks the problem is entitlements run amok, hurting aggregate savings and productivity. He's not alone. There are plenty of hedge fund "gurus" who agree with him (mostly because they're worried about redistributive policies which will jeopardize their rankings on the Forbes list of rich and famous).
Then there's Michael Hudson. He's a former Wall Street economist who is an expert on financial diversion. He thinks there is no savings problem in America but rather a debt deflation problem which will roil the FIRE sector (finance, insurance, real estate sector).
In a recent interview with Gordon T. Long of the Financial Repression Authority, Michael Hudson had this to say:
LONG: I don’t know if you know Richard Duncan. He was with the IMF, etc, and lives in Thailand. He argues right now that capitalism is no longer functioning, and really what he refers to what we have now is “creditism.” Because in capitalism we have savings that are reinvested into productive assets that create productivity, which leads to a higher level of living. We’re not doing that. We have no savings and investments. Credit is high in the financial sector, but it’s not being applied to productive assets. Is he valid in that thinking?I don't agree with everything Michael Hudson says, especially on the Greek Surrender (he's been hanging out too much with Yanis Varoufakis, the master of half truths), but when it comes to exposing myths in modern finance, Michael has no equal. You should read his books to deprogram your minds from a lot of the garbage academics like Greenspan are peddling.
HUDSON: Not as in your statement. It’s confused.
(post-interview clarification): What I object to was the characterization of today’s situation as “financialization.” I explained that financialization is the FIRST stage — when finance WORKS. We are now in the BREAKDOWN of financialization — toward the “barter” stage.
Treating “finance” as an end stage rather than as a beginning stage overlooks the dynamics of breakdown. It is debt deflation. First profits fall, and asthat occurs, rents on commercial property decline. This is already widespread here in New York, from Manhattan (8th St. near NYU is half empty) to Queens (Austin St. in Forest Hills.).
LONG: Okay.
HUDSON: There’s an enormous amount of savings. Gross savings. The savings we have that are mounting up are just about as large as they’ve ever been – about, 18-19% of the US economy. They’re counterpart is debt. Most savings are lent out to borrowers se debt. Basically, you have savers at the top of the pyramid, the 1% lending out their savings to the 99%. The overall net savings may be zero, and that’s what your stupid person from the IMF meant. But gross savings are much higher. Now, the person, Mr. Duncan, obviously—I don’t know what to say when I hear this nonsense. Every economy is a credit economy.
Let’s start in Ancient Mesopotamia. The group that I organized out of Harvard has done a 20-study of the origins of economic structuring in the Bronze Age, even the Neolithic, and the Bronze Age economy – 3200 BC going back to about 1200 BC. Suppose you’re a Babylonian in the time of Hammurabi, about 1750 BC, and you’re a cultivator. How do you buy things during the year? Well, if you go to the bar, to an ale woman, what she’d do is write down the debt that you owe. It was to be paid on the threshing floor. The debts were basically paid basically once a year when the income was there, on the threshing floor when the harvest was in. If the palace or the temples would advance animals or inputs or other public services, this would be as a debt. It was all paid in grain, which was monetized for paying debts to the palace, temples and other creditors.
The IMF has this Austrian theory that pretends that money began as barter and that capitalism basically operates on barter. This always is a disinformation campaign. Nobody believed this in times past, and it is a very modern theory that basically is used to say, “Oh, debt is bad.” What they really mean is that public debt is bad. The government shouldn’t create money, the government shouldn’t run budget deficits but should leave the economy to rely on the banks. So the banks should run and indebt the economy.
You’re dealing with a public relations mythology that’s used as a means of deception for most people. You can usually ignore just about everything the IMF says. If you understand money you’re not going to be hired by the IMF. The precondition for being hired by the IMF is not to understand finance. If you do understand finance, you’re fired and blacklisted. That’s why they impose austerity programs that they call “stabilization programs” that actually are destabilization programs almost wherever they’re imposed.
Memo to Alan Greenspan: America doesn't have a savings problem, it has an inequality and debt deflation problem, and attacking entitlements will only exacerbate this problem. And that's not good for Goldman or any of the other big US banks.
I know, some strategists claim deflation is dead but they're so far off the mark, it's scary. Greenspan thinks the bond market is going to blow up but he fails to understand that ultra low rates and the new negative normal are here to stay and good old US nominal government bonds are the ultimate diversifier in a deflationary world. Institutional investors will keep flocking to them no matter what, especially if deflation comes to America.
My views haven't changed much since I wrote my outlook 2016 on the deflation tsunami. Sure, we had a big pop in oil from the lows and cyclical sectors surged from their lows, but all that is just a giant sucker's trade for idiots who think the global recovery is back on track.
It's not the case. The US dollar will start appreciating in the second half of the year as the rest of the world desperately tries to tackle its deflation nightmare. And this will sink commodity and energy stocks right back down to new lows.
Still, there's a lot of money out there "chasing alpha" and plenty of liquidity to keep propelling risk assets higher. Just make sure you pick your stocks and sectors carefully.
Given my views on global deflation and the greenback in the second half of the year, I continue to recommend steering clear of emerging markets (EEM), energy (XLE), metal and mining shares (XME) and even gold (GLD) which some hedge fund gurus are publicly touting.
In fact, my macro trade for the second half of the year is to short metal and mining shares (XME) and go long biotech shares (IBB and XBI). There's a reason why a bunch of elite hedge funds cashed in big on the Celator drug deal, they're in the know and are reading the macro environment right.
What about financials (XLF) like Goldman? It's very hard getting excited about banks and insurance companies in an ultra low rate or negative rate environment. The regular cheerleaders are parading on CNBC saying "the Fed is going to raise rates and that's great for banks" but when you see Goldman and others making drastic cuts, you know things are far from certain on the US economy and any Fed rate hike.
You should all read Gerard MacDonell's comment on inflation, Kocherlakota is like Ponnuru. Gerard is a former colleague of mine from BCA Research who went on to bigger and better things like managing a bond fund at JP Morgan and his last gig was working as Steve Cohen's economist at SAC Capital.
Gerard is a smart cookie but he's blogging way too much on US politics these days. This morning we had an exchange on Trump vs Clinton which led to him to writing this post on reading everything. I told him after I was being sarcastic on Dinesh D'Souza and his new documentary on Stealing America but guess he took it seriously. Oh well, at least we agree on Francois Trahan over at Cornerstone Macro, another BCA alumni and one of the best strategists on the Street. We also agree on Brian Romanchuk, yet another BCA alumni, it's scary how smart he is (read his latest on QE).
[Memo to Gerard: Blog less on US politics and more on finance but just blog less, period. You should be enjoying your life post-SAC! Maybe this memo was less for Gerard and more for me.]
As far as all those Goldman people who are going to get canned, it sucks, it's all part of the industry, don't take it personally and try to see it as an opportunity to carefully reflect on what you want to do after Goldman (yes, believe it or not, there is life after Goldman!).
I highly recommend you follow the steps of Mark Machin and Mark Jenkins over at CPPIB and work at a large Canadian pension fund. You won't get paid as well as Goldman but you'll get paid extremely well and won't suffer the stress of performing under the gun to meet some short-term target (that long investment horizon Canadian pensions enjoy will add years to your life).
Generally speaking, the banking industry is changing for the worse in the United States and elsewhere. Post-2008, banks have become heavily regulated, they can't take the risks they used to and in many cases are actively derisking and deleveraging in a deflationary world. There may be some interesting trading outfits here and there but real talent is leaving banks to go work at elite hedge funds or they're opening up their own shop.
Below, former Federal Reserve Chairman Alan Greenspan has a dire warning about the economy. During an exclusive interview on The FOX Business Network’s Cavuto: Coast to Coast he told Neil Cavuto the U.S. has “a global problem of a shortage in productivity growth” and is headed for a state of disaster.
Greenspan is right, the population is aging, but cutting entitlements as he argues for will only exacerbate America's deflation problem because it will exacerbate inequality as more people retire in poverty.
Second, Michael Hudson talks about financial diversion with Gordon Long. If you think America has a savings problem, take the time to watch this clip and learn the truth about America's real problem: debt deflation.
Michael recently took part in a panel discussion on Marx's Laws of Motion at the highly-regarded Left Forum of NY with Michael Perelman, California State Uni, Chico, Bertell Ollman, NYU. His time begins at minute 46.30 (doubt Gerard or Steve Cohen will view this, too leftist for their taste).
Lastly, Tom Barrack, American private equity real estate investor and the founder, chairman and CEO of Colony Capital, discusses how Donald Trump negotiated for New York's Plaza Hotel and why he endorsed Trump for president earlier this year. Barrack talks with Bloomberg's Erik Schatzker at his Happy Canyon Vineyard ranch in Santa Barbara.
I like Tom Barrack a lot but I'm skeptical about President Donald Trump or President Hillary Clinton. In a deflationary world, Trump's protectionist policies might make more sense as they will definitely appeal to the masses but they will spell disaster for global trade. Clinton is a shark who basically represents the status quo. Nothing meaningful will change under her watch.
I don't feel good about either of these presidential candidates and I'm glad I can't vote. Then again, what do I know, I still like Bernie even if he's a bit kooky. Is that "man enough" for you Gerard? -:)
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