We had a hunch back in July 2012 that negative rates, as and when they would surely manifest, would create all sorts of perverse incentives for banks and capital owners.
Notably, our point was, that banks would prefer to lend money to monopoly-minded corporates focused on artificially constraining supply — rather than those focused on improving competition rather or pursuing capex policies. Failing that, a negative rate environment would otherwise create a plethora of zombie corporates propped up with cheap financing, producing output that isn’t necessarily valued much by anyone in the wider world. Read more
It’s common to hear that central banks have “distorted” markets with low interest rates and asset purchases, especially from people who think that stocks will do better than bonds once the Fed begins to “normalise” policy. Even economists at the New York Fed seem to sympathise with this view. In 2013, they estimated that the equity risk premium — the amount that shareholders get compensated for buying stock rather than bonds — hit all time highs, mainly because interest rates were so low:
The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.
As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more
From Goldman’s economics team, a half-century of debt buildups and Japanese domination:
Basically, a chart to launch a thousand arguments (comparing Italy, Greece and Japan being a good starting point) which you should definitely click and enlarge. Read more
In case anyone wanted a closer look at Goldman’s trolling of JP Morgan…
A news story lands, from Bloomberg, entitled “Goldman Sachs outdoes itself…”
Like Meryl Streep at the Oscars, Goldman Sachs Group Inc. isn’t lacking acclaim for its merger and acquisition advisory business. It’s finished first in deal volume for five consecutive years and in nine of the last 10.
Even so, Goldman Sachs outdid itself this year. No top firm has had a larger market-share spread over its nearest competitor since 1998…
Unless we’re mistaken, Goldman has come up with its own “This is nuts” top ten. Decent effort:
1. Since the low in the global equity market on March 9, 2009, the MSCI The World index has risen roughly 180% in total return terms, generating an annualised return of a remarkable 20%.
2. 2013 was one of the strongest years on record for the equity markets. The US managed a price return of 30% and the Sharpe Ratio of the S&P 500 ranked in the 98th percentile since 1962.
3. Perhaps even more striking is that bond markets have continued to perform strongly. Since the 2009 low in equities, the JP Morgan GBI global bond index has risen 24%.
The strange story that Tibco Software and their adviser Goldman Sachs had not used an accurate share count in their financial analysis, which evaluated a $24 per share buyout offer from Vista Equity Partners, will awaken unpleasant memories for the Financial Times’ parent company, Pearson PLC.
In May 2010, the publicly-traded securities pricing company Interactive Data Corporation (IDC), which was then 60 per cent owned by Pearson, was in final discussions to sell itself to private equity firms Silver Lake Partners and Warburg Pincus. A price of $34.00/share had been agreed to but, at literally the last minute, some previously undisclosed IDC shares were discovered. Read more
Ever the market-moving contrarians, Jeff Currie and team at Goldman came out with a note on Thursday doing for oil markets what Bullard and Haldane have been doing for markets in general.
When it comes to the oil price decline it is, they say, too much too soon. And, critically, the issue is on the expectations side NOT on the current market supply side:
The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longer- term bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out.
Study this chart carefully. It’s the first day of dealings in Zalander, the Frankfurt-listed online frock shop that claims to be Europe’s biggest.
The American Life radio show and the Pro Publica investigative journalism service set an interesting debate a-blaze last week, detailing the 46 hours of secret recordings undertaken by Carmen Segarra, a specialist hired (and subsequently fired) by the New York Fed.
The recordings have painted a vivid picture of regulatory dithering in the face of a rapacious Goldman Sachs as the bank sought to gain clearance for a share warehousing operation that would allow Spain’s Santander to sidestep European capital requirements.
Subsequent criticism has centred on the NY Fed’s apparent impotence in the face of Wall Street muscle. But is it more the case that Matt Taibbi has been right all along? Does the bank actively help clients dodge (if not break) the rules?
Let’s examine a largely forgotten example of Goldman’s past behaviour in London… Read more
Some drivetime financial radio for Friday. Click to download or stream:
This is not new, but bears revisiting, given recent events.
Between 2009 and 2013, as part of its sale and leaseback plan, Tesco used a series of six special purpose vehicles to issue close to £4bn worth of property bonds. Structured with the help of Goldman Sachs, the programme even won Tesco an award — Risk Magazine’s 2010 Corporate risk manager of the year.
But Nigel Stevenson, a former M&A banker at Kleinworts who now runs his own research shop, reckons the effect of this off-balance sheet financing has been to artificially reduce Tesco’s net debt by around £2bn. Read more
Securitisation has gotten a bad rap thanks to its association with dodgy underwriting during the bubble. Yet bundling loans originated by banks and selling them to investors in the capital markets could be just what is needed to boost the flagging euro area economy.
This helps explains the European Central Bank’s recent announcement that it will be shopping for asset-backed securities (including mortgage bonds) and covered bonds starting in October. Read more
From Goldman on the state of European corporate investment… or what happens when a yield hunt meets corporates who are running out of investment ideas:
That uneasy feeling when everything is going well. Is it deserved? Can it last? Should you cash in and go paint watercolours in that studio on the Pembrokeshire coast?
Strategists are not immune, with a summer bout of the temporaries upon us. Goldman is the latest, downgrading its view of stocks over the weekend but without really committing to it:
We also downgrade equities to neutral over 3 months. We are concerned that a sell-off in government bonds will lead to a temporary sell-off in equities in line with what we saw last summer, though the magnitude is likely to be smaller as the need for bond yields to correct is lower than it was back then.
One day, maybe, companies in Europe will stun those paid to forecast these sort of things with an explosion of profitability. The gusher of earnings will arrive to justify the steady rise in the valuations of companies expected to produce them.
For now though, the story is the same as it has been since 2010: negative revisions. According to the strategy team at Goldman Sachs, what had been hoped for this year was 13 per cent growth in profits, but six months in that has dropped to 7 per cent with the cuts broad based. Actual growth in reported earnings was 1.5 per cent in the first quarter, compared to that which preceded it.
There is hope, or at least explanation, however. It was ever thus: Read more
Goldman Sachs has had a look attempts to lean against house price cycles by central banks, in 20 OECD countries from 1990 to 2012, to see what effect they have had.
More on that below, but first a striking chart of post-Great Recession house price trends (from the first quarter of 2009 to now):
Here’s the Ocado mission statement:
To revolutionise the way people shop forever, by giving them a uniquely innovative and greener alternative to traditional grocery shopping.
At the 13-year mark, the revolution has not yet found room for profits, however.
With a torrent of new stock on the way this year attached to the latest round of hot initial public offerings (DFS, Zalando, Game, B&M Bargains…) with ebullient forecasts, it might be helpful to go back over Ocado’s history, and compare and contrast the hope with reality. Read more
No, we hadn’t heard of this remuneration consultant either. But Sarah Butcher over at eFinancial Careers alerts us to the fact that Cook & Co advised on designated “risk takers” at Citibank Global Markets trousering an average basic salary of £507k in 2012.
Stock and cash bonuses took average total remuneration for these staff to £2.34m in this particular Citi division. Read more
Bored with zero interest in the bank? Why don’t you check out the latest in aluminium-backed deposit accounts? You take the excess aluminium off our hands, we sell it forward, and hey presto you get interest rates conventional banks just can’t beat!
(It’s the way the gold market has been compensating for its oversupply for generations.) (Terms and conditions apply.)
All of which is another way of saying the world’s aluminium oversupply burden has created some excellent carry opportunities in the off-market storage space over the last few years. Read more
Alternate title – Did Goldman Sachs lose $1.3bn in currency trades in the third quarter, or not? Read more
A few charts and some commentary plucked from a rather bullish note on India from Goldman’s Asia Pacific team:
We should welcome TCS Group Holding to London — the latest Russian firm to take advantage of our attractive Global Depository Receipts regime, which allows a company to describe itself as “London listed” without adhering to all those tiresome governance codes and disclosures that come with a regular full listing.
TCS — better known as Tinkoff Credit Systems or simply TCS Bank — is the creation of Oleg Tinkov, who sounds like a lively chap. He made his first fortune by taking Russian brewing upmarket, before selling out to Inbev in 2005 and then moving into retail financial services in earnest. Read more
Midnight Madness, that Goldman Sachs-led all-night lavish scavenger hunt/puzzle-solving competition/performance art so wonderfully described by Quartz earlier this year, is back and expanding. This year the charitable event will include Citigroup, Credit Suisse, BlueMountain, and Secor Asset Management all fielding teams to compete against Goldman.
Below you can see the pitchbook that was sent to potential participants (in typical banking style) earlier this year: Read more
Okay, don’t just think ‘Oh, Goldman are trying to wring a few last drops of revenue from the EM story…”
Instead, click to enlarge. Read more
Rio Tinto’s problems with its aluminium business are well documented.
But things could have been worse without all that warehousing shenanigans from Goldman et al. Read more