Yesterday was quite a day. The problems in Club Med appear to be worsening, the Goldman Sachs hearings went on longer than I expected (had it on most of the day with only one eye on it), stocks went down a lot and bonds and gold went up.
For purposes of navigating through with a portfolio it doesn't matter whether you can correctly predict what happens with bail outs, austerity, biting of bullets and so on. Euroland and the UK have been unhealthy for a long time now. There was plenty of warning ahead of time for anyone who did some reading. As financial issues were first popping up in the US there were commentaries galore suggesting that it would be bad in the US and worse in Europe.
Before this really started to take shape any foreign investor should have reasonably learned that Europe already had worse unemployment, worse demographics (probably) and visibility for slower growth. We have all since become more knowledgeable about the debt problems.
Whatever the hell is wrong with Euroland it is likely to continue for a while.
As for the Goldman hearings, there was a lot there. Do not take my comments as trying to shed a positive light on GS. I have followed this from the viewpoint of a curious onlooker not as someone interested in trying to solve the caper.
It seemed very obvious to me that most of the Senators don't really understand some very basic things. Carl Levin seemed to not understand being short versus being net short and there is a difference. Goldman could be as evil as some think but getting to what happened, if that is what they actually want, requires that the people asking the questions (or more correctly the people prepping the people asking the questions) have a better understanding of how things work, how one trading desk does not necessarily know what another desk is doing, the general idea of "this is how it is, except when it isn't" and so on.
There was a lot of time wasted when the one Senator who said he is farmer tried to ask Birnbaum about his opinion that the housing market was headed south. The Senator kept including the word "bubble" in his question when Birnbaum never used that word. Birnbaum tried to correct the Senator which resulted in what seemed like a five minute circle.
There was one exchange where the question centered on the quality of the stuff contained within changing. This stuff was always high risk (maybe not disclosed or maybe it was, I don't know) but the reason why buyers wanted it was because it was working which is of course problematic. What changed was not the quality, just that prices started going down--a bit of an understatement.
I don't know how many times I heard the phrase "buy short" or variations on that and candidly I got confused along the way there. The meaning behind the questions was generally whether or not GS was short, whether the buyers of Abacus knew who had shorted the deal, how short they stayed and for how long they stayed short. When I heard "buy short" I had to decipher whether the questioner (the Doctor seemed to be the guiltiest party here) meant closing out a short position which means buying and in some circles is referred to as buying short but I think anyone using this term is being imprecise and potentially causes confusion. The group being questioned seemed to not get too fouled up but we can't know whether they misunderstood a question and gave the wrong answer.
I thought more often than not it looked bad for the people being questioned. Senators Levin and Collins each seemed frustrated with not being able to get direct answers to their questions and while it is clear to me that the people from GS were not really trying to be very helpful many of the questions were being asked in an ineffective way leading to stonewalling and the like.
What I will say is this, based on my couple of years (obviously a short time) spent working at an investment bank (worked at Lehman Brothers but not as an investment banker) I would describe it as follows; despite what you might think these firms are not out to hurt their clients (the occasional 'ripped his face off' story notwithstanding) but, and this important, a hurt client is not the worst possible outcome. The best outcome is that they make a lot of money and the client is not hurt but occasionally the client does get hurt. In this case the market showed signs of cracking but there was still a large audience of people interested in buying and GS continued to package product and sell it and a lot of people got hurt (talking bigger than Abacus and bigger than GS' client roster) just like individual investors in the markets they participate in.
I'm not too focused on GS' guilt or innocence as it is not on my yoga mat, so to speak, but the path to discovery will be slower going than it should be based on what we saw yesterday.
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14 comments:
The senators are by and large idiots on both sides of the aisle.
The bankers are crooks and we need to burn some one at the stake so why not burn the bankers? At least that is what I believe most people think.
Like you Roger, I haven't really followed the GS drama. I don't see a reason. Everyone should know that Wall Street has one mission: move product. This isn't confined to Wall Street, but it reaches down to the local broker at the firms. Conflicts of interest are a cornerstone of the industry, unfortunately.
So I never question for a second that what GS did was unethical. The question now is one of legality.
As far as the Senators, I just get the feeling that after the hearings they were having dinner at the Palm or Old Ebbitt's Grill with some leader of the GS PAC taking a fat contribution. Considering the GS PAC has contributed over $90 Million to politicians, this isn't too crazy of a theory.
It is clear that these instruments were desired by the public, however some GS execs had a premonition that this operation would end up in a bad way. INVESTORS BEWARE!!!
When everyone want's them, sell them. When no one wants time to buy. I allways felt that putting clients ahead of oneself or one's firm is the thing to do for my ethical and moral inner being. But people do not appreciate. The public loves the people that can hose them the most. I know that if I had a client or clients and they lost money due to my judgement I could not live with myself.
Best,
Jeff from Milan, Italy
The problem with Euroland is it is not one place but many places attempting to gain some unity via a single currency w/o sufficient labor mobility: In a number of countries, mostly northern Europe, growth and unemployment are better than the US; in other places demographics are not a problem at all. Unfortunately these are usually different places and the ability of workers to move from one place to the other to find work is very difficult.
In the past countries like Greece facing economic difficulty could depreciate their currency, now they cannot so the only option is economic contraction. The big unknown is what impact this will have on the rest of the Eurozone and the current estimation of the bond market is that it will not be good.
We shall see, over-reaction is the commonplace in the face of uncertainty.
As to the GS hearings: Mostly Kabuki theatre w/ some ignorant comments amid a dose of populist pump priming.
I was disappointed that both CNBC and Bloomberg carried the hearing. I listened for a while, but could not bear it any longer once one of the congresswomen tried to force a GS exec into a childish "bookie" analogy. Those politicians are embarrassingly stupid. This debacle only reinforces my plan to vote 100% non-incumbent for the rest of my life.
Those politicians are good at one thing--raising money and pandering. That's it.
The GS hearing yesterday was mostly political theater; however, there is one point Sen Levin and others made that makes GS look bad. GS is a mortgage products broker; fine, they buy and sell mortgage products from willing sellers and buyers who come to them. However, at some point, GS determined mortgage products were losers and decided to go short; again, fine. However, at the same time GS was going short, per Sen Levin's accusation, GS was also concurrently actively calling clients and trying to sell the products they were shorting (to get them out of their long inventory). I agree with Sen Levin that proactively selling a product that you are concurrently shorting is unethical, if not illegal. GS never directly answered the question/accusation.
I too think this situation will not become clear very soon. If ever. On one side we have some investors with a large amount of capital - and power by the sounds of it - while on the other side is Goldman and all those who profited (and will continue to profit) from Goldman's continuation as a functioning Investment Bank, free from major prosecutions.
I'd add that if the staff at Goldman were aware that some powerful fingers were going to get burnt, they would have done due diligence to make sure they were not going to be caught in the ensuing blowback.
Situations such as these only go to remind me that;
a) if you don't understand a product you probably shouldn't buy it
b) what goes up may go down ... a lot
c) 'high risk' means just that
d) the importance of capital preservation can never be understated
e) no one, especially I, can predict short-term movements in any asset category
f) diversification is key (only into products I understand)
g) anything that looks too good to be true probably is
Not sure where your comments on Europe are coming from, though, Roger. Without a doubt a few of the members are in a pickle (and will have some tough years ahead) but they are only small compared to the EU as a whole. A few examples; Greece has 11m people, Portugal 11m, Latvia 2.3m, Ireland 4.4m, the EU has a labor force of 230m and total population of 500m (many members have comparatively young populations). At $16T (2009) its economy is larger than Asia's or North America's.
Labor is free to move anywhere within its borders and most schoolchildren learn English as their primary second language. Of course that hasn't stopped Spain's dreadful numbers.
This wasn't meant to be an anti Euro-skeptics post, I'm just raising some points which I think have been ignored in the general media frenzy over the last month. I may well be proved wrong in the long-term and that's why I haven't put even 50% of my eggs in a Euro basket. Just wanted to add my thoughts.
And thanks for a wonderfully discrete post today - I was carefully reading and grinning from ear to ear (just my interpretation, of course).
Free labor mobility is an EU policy statement, not a fact on the ground: A number of EU policies are rather passive -- legal arrangements with limited active promotion or agency -- and this is particularly true where conflict with country-specific laws and practices are common; e.g., immigration policy.
Thus some country-specific barriers continue to this day, usually oriented to long-term labor agreements particularly in the original EU-8, but each country still has its own immigration policies regardless. Possibly even more significant however are the barriers of language, culture, family and uncertainty; moving from Portugal to Germany is not like moving from New Mexico to New York.
There is also the problem of brain drain: Highly skilled labor immigration is promoted by wealthier countries but this can have a negative impact on the productivity of the less wealthy source country which must expend wealth to keep that labor at home. Highly productive, wealthier countries such as Germany are a deflationary pressure on weaker member states.
Shorter version: Functional labor mobility in the EU is relatively low and both EU administration and the central bank are aware of it; e.g., http://tinyurl.com/297xjk7 , http://tinyurl.com/26rwkfq
Spain could really stand as the exemplar of the problem: Economic policies were nowhere near as extravagant as Greece's and its debt/GDP ratio is (or was) at reasonable levels, quite a bit better than the US's the last time I looked at least, but the deflation of its real estate bubble promoted in part by Euro's from Germany has left it with too many highly paid construction workers unwilling or unable to find work in other countries and too many suppliers unable to gain export advantage.
Bottom line, low levels of labor mobility and an inability to depreciate currency leave only one avenue for EU countries in economic contraction: Cut. The size of their economies is not the critical factor -- that is a risk that can be assessed -- the strength of the EU agreement and its ability to respond to crisis is the primary source of uncertainty here. JMO
Market seems calmer this morning but it is clear a lot of folks are sitting on hair triggers.
Club Med, very funny. It's easy enough to avoid Euroland, but the problem is that when Greece sneezes, the whole world gets sick. Dubai passed quietly enough, but there weren't a whole lot of places to hide yesterday.
I would pay more attention to avoiding a fundamental link than trying to avoid a quick panic.
Thanks RW, I knew I'd get some great analysis here.
My on-the-ground experience does give some weight to workers moving between the EU members, more so than in the past as workers from the new states find they can earn a better living elsewhere, but I'm only talking in random samplings I've personally taken on visiting many of the newer states, plus various reports I've read through the media.
Not scientific or a basis for any important decision, I grant you.
Personally, being UK-based, I am of the opinion that substantial cuts in government budgets are drastically needed in most of the European budgets - the European Socialist experiment has run its course and been found wanting. Private enterprise must be allowed to tender contracts and provide alternatives for many of the bloated, out-dated, bureaucracy-laden industries still, amazingly, surviving in the post-Cold War environment we live in today.
Not to mention, amongst others, the EU agricultural budget.
As an 'experiment' the EU is too important to relinquish with the appearance of the odd challenge - I'm not convinced it will founder on the rocks of one or more small members' bad debts. Without it what chance Germany, France, Italy, the UK etc etc..
Anon 7:33/11:15,
Agreed, there are a number of EU states who have rather clearly been living beyond their level of their productivity. Some of this was cultural -- e.g., the kind of citizen commitment to a policy direction in a Netherlands or Germany (or a Sweden) for example is not a sociopolitical feature of states such as Greece -- democratic socialism is not for everyone, at least at the level some states practiced it.
But I suspect some of the problem was related to the EU "cohesion" policy which economically supported less productive countries when they joined the EU in the expectation their inflation rates would eventually "converge" with the more stable northern European entities. Support can become habit forming and the EU may have attempted expansion too quickly there.
I suspect labor mobility is better these days too, didn't mean to imply it was restricted so much as currently insufficient to the task of rebalancing regional economic differences and capital flows. Certainly don't think the EU will dissolve even if things become far worse; that would really be jumping from the frying pan into the fire.
But I am focusing on Euribor and Eonia right now (and TED spread as always; I'm US-based) because I think a spike in those rates would suggest that the European system of sovereign guarantees is coming under pressure; e.g., if there is a perception of more credit risk in interbank lending, the ECB could lose control of short-term interest rates.
That could easily lead to a reprise of the kind of credit panic we went through in 2007/08, a reprise whose probability remains in the tail no doubt but I believe the tail is becoming fatter.
Good chat; I'm off.
"Everything I Ever Needed To Know I Learned in Kindergarden"
Goldman are kids running wild in the candy store - always have been.
They need a parent to tell them Right from Wrong and what ethics are. Hence the need for strict regulation.
Perhaps with the free world in economic turmoil, the acceptance of a dictator to "control" things may ring out.
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