Connect with us

Featured

11 Reasons Why America Would Be A Better Place Without Goldman Sachs

Would America be a better place without Goldman Sachs? Of course it would. The “vampire squid” of Wall Street does not care about the future of America. The following are 11 reasons why America would be a better place without Goldman Sachs….

Published

on

Would America be a better place without Goldman Sachs?  Of course it would.  The “vampire squid” of Wall Street does not care about the future of America.  Sadly, Goldman Sachs apparently does not even care much about their own clients.  What Goldman Sachs is all about is making as much money as humanly possible.  In the end, there is nothing wrong with making money, but there are constructive ways to make money and there are destructive ways to make money.  Unfortunately, Goldman Sachs seems to find the destructive path almost irresistible.  Greg Smith, the head of the U.S. equity derivatives business for Goldman Sachs in Europe, the Middle East and Africa made headlines all over the world on Wednesday when he resigned publicly from Goldman Sachs in a scorching editorial in the New York Times.  Smith said that he could “honestly say that the environment now is as toxic and destructive as I have ever seen it”.  Considering what we know has gone on at Goldman over the past decade, that is very frightening to hear.  So could this be the beginning of the end for Goldman Sachs?  And if it is, will America be a better place when Goldman is gone?

You would think that at some point clients of Goldman would become so sick and tired of the stories of corruption coming out of the firm that they would simply walk away.

Unfortunately, corruption is so endemic on Wall Street that Goldman Sachs really does not seem out of place.  The truth is that a lot of the things that are said about Goldman could also be said about JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley.

But in recent years Goldman Sachs has truly become a national symbol of what is wrong with our financial system.  As the American people become fed up with institutions such as Goldman, hopefully we will start to see some of them disappear.

The following are 11 reasons why America would be a better place without Goldman Sachs….

#1 Even after all of the negative publicity we have seen in recent years, Goldman Sachs appears to not have learned any lessons.  The following is how Greg Smith described the three ways to get ahead at Goldman Sachs….

“What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.”

#2 Goldman Sachs is one of the too big to fail banks and those banks just keeping getting bigger than ever.  Back in 2002, the top 10 U.S. banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 U.S. banks control 77 percent of all U.S. banking assets.  So if we couldn’t afford to let them fail back in 2008 because they were so big, why did we allow them to become even larger?

#3 The Federal Reserve shows great favoritism to big Wall Street banks such as Goldman Sachs.  For example, between December 1, 2007 and July 21, 2010 the Federal Reserve made 814 billion dollars in secret loans to Goldman Sachs.

#4 Goldman Sachs is at the heart of the derivatives bubble that threatens to throw the entire global financial system into chaos.  At this point, Goldman Sachs has over 53 trillion dollars of exposure to derivatives.

According to the New York Times, the big Wall Street banks completely control derivatives trading.  In fact, the New York Times says that representatives from JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup hold a secretive meeting each month to coordinate their domination over the derivatives market….

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

#5 Goldman Sachs was at the very heart of the financial crisis of 2008 which plunged the entire global economy into a very deep recession.  In the years leading up to the financial crisis of 2008, Goldman Sachs was putting together mortgage-backed securities that they knew were garbage and they marketed them to investors as AAA-rated investments.  On top of that, Goldman then often made huge bets against those exact same securities which turned out to be extremely profitable when those securities crashed and burned.

The following is how the New York Times described what was going on at the time….

“Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc.”

Sylvain Raynes, an expert in structured finance at R & R Consulting in New York, said at the time that he was absolutely shocked by what Goldman was doing….

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen”

#6 Goldman Sachs played a huge role in getting Greece, Italy and several other European nations into so much debt.  The following is an excerpt from an article by Andrew Gavin Marshall….

In the same way that homeowners take out a second mortgage to pay off their credit card debt, Goldman Sachs and JP Morgan Chase and other U.S. banks helped push government debt far into the future through the derivatives market. This was done in Greece, Italy, and likely several other euro-zone countries as well. In several dozen deals in Europe, “banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books.” Because the deals are not listed as loans, they are not listed as debt (liabilities), and so the true debt of Greece and other euro-zone countries was and likely to a large degree remains hidden. Greece effectively mortgaged its airports and highways to the major banks in order to get cash up-front and keep the loans off the books, classifying them as transactions.

#7 Goldman Sachs is working very hard to help state and local governments sell off our highways, water treatment plants, libraries, parking meters, airports and power plants to the highest bidder.  Much of the time foreigners are the highest bidders for these precious infrastructure assets.

The following is how Dylan Ratigan described what is going on….

On Wall Street, setting up and running “Infrastructure Funds” is big business, with over $140 billion run by such banks as Goldman Sachs, Morgan Stanley, and Australian infrastructure specialist Macquarie. Goldman’s 2010 SEC filing should give you some sense of the scope of the campaign. Goldman says it will be involved with “ownership and operation of public services, such as airports, toll roads and shipping ports, as well as power generation facilities, physical commodities and other commodities infrastructure components, both within and outside the United States.” While the bank sees increased opportunity in “distressed assets” (ie. Cities and states gone broke because of the financial crisis), the bank also recognizes “reputational concerns with the manner in which these assets are being operated or held.”

#8 At the same time that Goldman Sachs is causing all sorts of trouble for everyone else, their employees are making crazy amounts of money.  During 2010, employees of Goldman Sachs brought in more than 15 billion dollars in total compensation.

#9 Goldman Sachs has way too much influence over the federal government.  There is a reason why it is commonly referred to as “Government Sachs”.  No matter who is the White House, people that used to work for Goldman and other big Wall Street banks always seem to be crawling around.

Last year, Michael Brenner wrote the following about the composition of the Obama administration….

Wall Street’s takeover of the Obama administration is now complete. The mega-banks and their corporate allies control every economic policy position of consequence. Mr. Obama has moved rapidly since the November debacle to install business people where it counts most. Mr.William Daley from JP Morgan Chase as White House Chief of Staff. Mr. Gene Sperling from the Goldman Sachs payroll to be director of the National Economic Council. Eileen Rominger from Goldman Sachs named director of the SEC’s Investment Management division. Even the National Security Advisor, Thomas Donilon, was executive vice president for law and policy at the disgraced Fannie Mae after serving as a corporate lobbyist with O’Melveny & Roberts. The keystone of the business friendly team was put in place on Friday. General Electric Chairman and CEO Jeffrey Immelt will serve as chair of the president’s Council on Jobs and Competitiveness.

#10 Employees from Goldman Sachs pour way too much money into our national elections.  In 2008, donations from individuals and organizations affiliated with Goldman Sachs donated more than a million dollars to Barack Obama.  This time around they are pouring huge amounts of cash into Mitt Romney’s campaign.

#11 Goldman Sachs is still a “vampire squid” as Matt Taibbi once so famously proclaimed in Rolling Stone….

“The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.”

Once again, there is nothing wrong with making money.

And there is certainly nothing wrong with working in the financial system.

But there is a right way to do things and there is a wrong way to do things.

Goldman Sachs is doing things very much the wrong way, and America would be a better place without them.

— The Economic Collapse Blog

Print Friendly

Continue Reading
Advertisement

Economy

Today’s Market Looks Like It Did At The Peaks Before Last 13 Bear Markets

The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn’t mean that a bear market is imminent, but it does amount to a stark warning against complacency.

Published

on

h/t ZeroHedge 

The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn’t mean that a bear market is imminent, but it does amount to a stark warning against complacency.

The U.S. stock market today is characterized by a seemingly unusual combination of very high valuations, following a period of strong earnings growth, and very low volatility.

What do these ostensibly conflicting messages imply about the likelihood that the United States is headed toward a bear market in stocks?

To answer that question, we must look to past bear markets. And that requires us to define precisely what a bear market entails. The media nowadays delineate a “classic” or “traditional” bear market as a 20% decline in stock prices.

That definition does not appear in any media outlet before the 1990s, and there has been no indication of who established it. It may be rooted in the experience of Oct. 19, 1987, when the stock market dropped by just over 20% in a single day. Attempts to tie the term to the “Black Monday” story may have resulted in the 20% definition, which journalists and editors probably simply copied from one another.

Origin of the ‘20%’ figure

In any case, that 20% figure is now widely accepted as an indicator of a bear market. Where there seems to be less overt consensus is on the time period for that decline. Indeed, those past newspaper reports often didn’t mention any time period at all in their definitions of a bear market. Journalists writing on the subject apparently did not think it necessary to be precise.

In assessing America’s past experience with bear markets, I used that traditional 20% figure, and added my own timing rubric. The peak before a bear market, per my definition, was the most recent 12-month high, and there should be some month in the subsequent year that is 20% lower. Whenever there was a contiguous sequence of peak months, I took the last one.

Referring to my compilation of monthly S&P Composite and related data, I found that there have been just 13 bear markets in the U.S. since 1871. The peak months before the bear markets occurred in 1892, 1895, 1902, 1906, 1916, 1929, 1934, 1937, 1946, 1961, 1987, 2000 and 2007. A couple of notorious stock-market collapses — in 1968-70 and in 1973-74 — are not on the list, because they were more protracted and gradual.

CAPE ratio

Once the past bear markets were identified, it was time to assess stock valuations prior to them, using an indicator that my Harvard colleague John Y. Campbell and I developed in 1988 to predict long-term stock-market returns. The cyclically adjusted price-to-earnings (CAPE) ratio is found by dividing the real (inflation-adjusted) stock index by the average of 10 years of earnings, with higher-than-average ratios implying lower-than-average returns. Our research showed that the CAPE ratio is somewhat effective at predicting real returns over a 10-year period, though we did not report how well that ratio predicts bear markets.

This month, the CAPE ratio in the U.S. is just above 30. That is a high ratio. Indeed, between 1881 and today, the average CAPE ratio has stood at just 16.8. Moreover, it has exceeded 30 only twice during that period: in 1929 and in 1997-2002.

But that does not mean that high CAPE ratios aren’t associated with bear markets. On the contrary, in the peak months before past bear markets, the average CAPE ratio was higher than average, at 22.1, suggesting that the CAPE does tend to rise before a bear market.

Moreover, the three times when there was a bear market with a below-average CAPE ratio were after 1916 (during World War I), 1934 (during the Great Depression) and 1946 (during the post-World War II recession). A high CAPE ratio thus implies potential vulnerability to a bear market, though it is by no means a perfect predictor.

Earnings to the rescue?

To be sure, there does seem to be some promising news. According to my data, real S&P Composite stock earnings have grown 1.8% per year, on average, since 1881. From the second quarter of 2016 to the second quarter of 2017, by contrast, real earnings growth was 13.2%, well above the historical annual rate.

But this high growth does not reduce the likelihood of a bear market. In fact, peak months before past bear markets also tended to show high real earnings growth: 13.3% per year, on average, for all 13 episodes. Moreover, at the market peak just before the biggest ever stock-market drop, in 1929-32, 12-month real earnings growth stood at 18.3%.

Another piece of ostensibly good news is that average stock-price volatility — measured by finding the standard deviation of monthly percentage changes in real stock prices for the preceding year — is an extremely low 1.2%. Between 1872 and 2017, volatility was nearly three times as high, at 3.5%.

Low volatility

Yet, again, this does not mean that a bear market isn’t approaching. In fact, stock-price volatility was lower than average in the year leading up to the peak month preceding the 13 previous U.S. bear markets, though today’s level is lower than the 3.1% average for those periods. At the peak month for the stock market before the 1929 crash, volatility was only 2.8%.

In short, the U.S. stock market today looks a lot like it did at the peaks before most of the country’s 13 previous bear markets. This is not to say that a bear market is guaranteed: Such episodes are difficult to anticipate, and the next one may still be a long way off. And even if a bear market does arrive, for anyone who does not buy at the market’s peak and sell at the trough, losses tend to be less than 20%.

But my analysis should serve as a warning against complacency. Investors who allow faulty impressions of history to lead them to assume too much stock-market risk today may be inviting considerable losses.

Continue Reading

Featured

You don’t want to miss this new trend

Over the past six years, U.S. stocks have screamed higher…

Published

on

Original Link | The Crux


From Ben Morris, Editor, DailyWealth Trader:

Over the past six years, U.S. stocks have screamed higher…

They’ve doubled the performance of stocks around the rest of the world — a 116% gain compared with a 57% gain (*all numbers in this essay are as of Sept. 12).

But recently, that situation reversed…

Over the past four months, non-U.S. stocks have more than doubled the gains in U.S. stocks (8.5% compared with 4.1%). And yesterday, the market gave us a sign that big gains are likely still to come.

If you’ve been reading DailyWealth Trader (DWT), you know we’ve encouraged readers to own foreign stocks for years…

Mostly, this has been because investors around the world suffer from something called “home-country bias.” Nearly all the businesses they buy are based in their home countries… And they either ignore or fear opportunities outside their countries’ borders.

This hasn’t been a problem for U.S.-based investors lately… But now that foreign stocks are outperforming – and now that U.S. stocks are no longer cheap – it’s an even better idea to put some of your money to work in other markets.

Plus, as I noted above, the market just gave us a sign that the gains in non-U.S. stocks will likely continue…

Yesterday, the MSCI World ex USA Index hit a new one-year high. The index is made up of more than 1,000 businesses based in 22 countries. And in the past, new one-year highs were a great sign.

The table below shows how the index has performed after hitting a one-year high. Over the past 33 years, it has happened more than 600 times.

One year later, the index was higher 76.9% of the time… And the median return was 11.5%. (That means you would have made 11.5% or more exactly half of the occurrences.) You can also see the rate of 10%-plus gains and 5%-plus losses…

dwttable919

These are great odds. Based on history, if you were to buy a basket of non-U.S. stocks today, you would have a 54% chance of making 10% or more over the next year… and just a 14% chance of losing 5% or more.

Compare that with the index’s returns after all periods (essentially, buying the index at random). The average and median returns were lower across all time frames. The chances of a positive return were seven to 10 percentage points lower. The frequency of 10%-plus gains after one year was much lower… And the frequency of 5%-plus losses was much higher.

dwttable2919

History presents a clear picture… Buying non-U.S. stocks after new one-year highs is a good idea.

You can see how a handful of foreign stock funds have performed relative to the U.S. benchmark S&P 500 Index over the past year in the chart below…

0912_spx_globalstocks

All but Greek stocks are at or just shy of new highs.

If you prefer to keep it simple, you can also consider buying a fund like the Vanguard FTSE All-World ex-US Fund (VEU). It is the largest exchange-traded fund dedicated to diversified non-U.S. stocks. It holds stocks from 54 different countries, with larger weightings in developed markets and smaller weightings in emerging markets.

VEU just hit a new high, too.

If you’ve been dragging your feet on buying foreign stocks, you’ve missed out on great gains lately… But you haven’t “missed the boat.”

Non-U.S. stocks have underperformed U.S. stocks for years. And that situation has started to change only recently. Now that these stocks are hitting new highs, it’s even more likely than before that we’ll see double-digit gains in the year to come.

I strongly recommend you participate.

Regards,

Ben Morris

Crux note: Ben has recommended a few great ways to safely invest in foreign stocks today. So far, his readers are up on all of them – 19%, 31%, 16%, and 1%, respectively. And his top open recommendation just hit 150% since February. For a limited time, you can access all of Ben’s top ideas with a risk-free trial subscription. Get the details right here.

Continue Reading

Featured

Today the music stops

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

Published

on


Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money in the financial system than ever before.

Economists have a measure for money supply called “M2”. And M2 is at a record high — nearly $9 trillion higher than at the start of the 2008 crisis.

Now, one might expect that, over time, as the population and economy grow, the amount of money in the system would increase.

But even on a per-capita basis, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

And that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity and artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

That’s what stocks represent– ownership interests in businesses. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow.

Here’s where it gets interesting.

Let’s look at Exxon Mobil…

In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported $365 billion in revenue, profit (net income) of nearly $40 billion and free cash flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.

At the time, the company had $6.6 billion in debt.

Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had an unbelievable debt level of $28.9 billion.

In other words, compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices.

Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.

So what do you think happened to the stock price over this period?

It must have gone down, right? I mean… if investors are essentially paying for a share of the business’ profits, and those profits are 80% less, then the share of the business should also decline.

Except — that’s not what happened. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher.

And it’s not just Exxon. This same curiosity fits to many of the largest companies in the world.

General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was NEGATIVE.

Plus, the company’s book value, i.e. its ‘net worth’, plummeted from $122 billion in 2006 to $77 billion in 2016.

So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has also fallen dramatically.

GE’s stock was actually down slightly in 2016 compared to 2006. But the minor stock decline is nothing compared to the train wreck in the company’s financial statements.

Between 2006 and 2016, McDonalds reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.

McDonalds’ debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to NEGATIVE $2 billion.

So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.

And yet the company’s stock price has TRIPLED.

Coca Cola. IBM. Johnson & Johnson.

Company after company, we can see businesses that are performing marginally better (or in some cases WORSE). They’ve taken on FAR more debt than ever before.

Yet their stock prices are insanely higher.

How is that even possible? Why are investors paying more money for shares of a business that isn’t much better than before?

There’s really only one explanation: there’s way too much money in the system.

All that money the Fed printed over the years has created an enormous bubble, pushing up the prices of assets to record highs even though their fundamental values haven’t really improved.

As the Wall Street Journal reported yesterday, “Financial assets across developed economies are more overvalued than at any other time in recent centuries,” i.e. at least since 1800.

Investors are paying far more than ever for their investments, but receiving only marginally more value in return. And they’re actually excited about it.

This doesn’t make sense. We don’t get excited to pay more and receive less at the grocery store.

But when underperforming assets fetch top dollar, people feel like they’re wealthier. Crazy.

Today the Fed should formally announce that after nearly a decade, it’s going to start vacuuming up a lot of that money it printed in 2008.

Bottom line: they’re going to start cutting the lights and turning off the music.

And given the enormous impact that this policy had on asset prices, it would be foolish to think its reversal will be consequence-free.

Continue Reading
Advertisement

Trending