Themes: Goldman Sachs, Us Banks, Bonuses
As we all know, the depression is over.
The stock market seems to think so... with the Dow up 32 more points on Friday... and apparently eager to go higher. Oil rose above $64. And gold is trading at $937 this morning.
Friday, two more banks – the Bank of America and Citigroup – announced impressive results. Between them, they made $5.4 billion in the last quarter.
These follow announcements earlier in the week from JPMorgan and Goldman. As reported in this space, Goldman set the pace by reporting that it has managed to earn more than $1 billion per month in the 2 nd quarter of this year. It said it did so by helping clients raise money... refinance... and restructure.
Goldman made so much money that it has set aside more than $11 billion so far this year in compensation for its executives – or about half of its revenues, according to the Economist. During the same period, shareholders got $4.4 billion, barely a third as much.
This, by the way, is the same firm that suffered a near-death experience along with the rest of Wall Street about 6 months ago. In order to save itself, it turned to Washington for cash. It was at that point that we at the Daily Reckoning noticed the appalling state of modern American capitalism – the capitalists didn’t have any capital.
What happened to the money? They had paid it out to the managers and proles. Lehman Bros., for example, ran out of cash in 2008 and had to be put down. It was a very profitable firm during the bubble years; but $55 billion was paid out to employees in the 10 prior years.
When it was flush, Lehman should have given more money to the politicians. The feds had cash; heck, they make the stuff. Its competitor Goldman only had to whistle and the United States government – dominated by former and future Wall Street pros – rolled over. The feds put up the money, lickety split.
And now that Goldman is rolling in dough again, does it carefully husband its resources, restocking its shelves and refilling its vaults, so it will no longer be a burden on the taxpayer if things go bad? Nooooo... like a welfare queen in a pink Cadillac, it spends every penny, confident that it can lean on the feds next month as well as the last.
But now look. After all our whining and complaining about the bailouts – they must be working, right? The big banks are making money again... big money. And that must mean the economy is on the mend. They’re lending... they’re speculating... they’re rolling the dice and... hallelujah... a pair of boxcars!
But wait. Ken Lewis of Bank of America says “Profitability in the second half of the year will be much tougher than the first half…''
How come?
Because the banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back – out of earnings. If the borrower is counting on higher house prices... or higher stock prices... to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up... or they may go down. And if they go down, down goes the lender’s collateral too... and his hope of getting repaid.
The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Sub-prime loans started going bad two years ago. Then, people began losing their jobs... and loans of all sorts were in trouble.
There is no sign that this process is over. Instead, it is merely proceeding in good order... just as you’d expect.
California lost another 65,000 jobs in June. And in Pennsylvania, 17,800 people are running out of jobless benefits. This group is on the cutting edge of a huge new trend – people not only unemployed, but out of unemployment benefits. One estimate says there will be more than half a million of them nationwide by the end of September. You think they were cutting back on spending last month? Let’s see what they do in October. And let’s see what happens to their debt... those Alt-A, jumbo, and prime mortgage loan...
... and let’s see what happens to credit card debt... and to commercial loans too. There’s a report that New York commercial properties are running up towards a 23% vacancy rate... Shoppers not shopping... stores and restaurants closing their doors... unemployment going up – sounds like the depression might not be over yet...
More news from Andrew Vaughan...
“ I’m sceptical of brokers. They tend to look at near term earnings, rather than anything longer term. The quality of a company isn’t always taken into account in their forecasts. And they ignore the crucial element of sustainability and strength of a business to navigate its way through the current economic storm.
“The construction sector is currently seeing some very bad times. So brokers expect a slump in this company’s earnings this year. But this is an ill-judged view and I’ll soon tell you why. To lump this reputable company in with the rest of its sector is throwing the baby out with the bathwater.
“I’m about to show you a prime example of brokers’ short-sightedness – and how you could profit from it...”
Editor’s note: Andrew Vaughan is the investment director of a discreet circle of investors called The Zurich Club . The latest issue contains an incredible opportunity on a company that will play a key role in making a success of the London 2012 games. Crucially, Andrew believes this is a way to profit from “brokers' ignorance”. To find out more about this unique service, click here.
And now more thoughts from Bill...
*** A milestone: Harry Allingham, the world’s oldest man, died on Saturday at the age of 112. He was a veteran of WWI . To what did he attribute his longevity? “Cigarettes, whisky and wild, wild women... ”
*** In addition to the banks’ profit reports, something else happened last week that convinced investors that not only is the worst over, the economy worldwide is actually getting better. China announced that its economy was growing at almost 8% annually.
If China can grow at 8% -- even in a depression – our troubles are over, said investors. China is not so much a green shoot; it is a whole rain forest of growth. And if it is growing, it needs stuff. So the people who supply stuff think they are sitting pretty. And the economists who watch the flow of stuff think they see the end of the depression. China has “decoupled” from the rest of the depression-ridden globe... they believe. It is on a planet of its own, where the collapse of demand here on Earth means nothing.
“ China’s got plenty of demand right at home,” says the cheerful crowd.
Of course, we’re cheerful too. We make a point of it. Recession is no problema for us here at the Daily Reckoning. We take what nature gives us without complaint. Depression? Credit crisis? Hyper-inflation? As George W. Bush so eloquently put it: ‘Bring ‘em on.’
We feral economists have never had it so good...
We won’t be disappointed, no matter what happens. It’s all good, as far as we’re concerned. Except for the parts that ain’t so good.
And as we were saying last week, there’s something fishy about the end of the depression... at least as proclaimed thus far. Looked at more closely, the banks’ earnings don’t seem plugged into prosperity at all; instead, they’re drawing juice from the crisis itself. Their profits come from refinancing... playing the rebound... and the feds’ bailouts – not normal banking activities.
And as for China, we will have to wait to find out. But if China has managed to shift its production from export to the domestic market in just 6 months it will be a triumph equal to Custer’s victory over the Sioux at Little Big Horn.
Details to follow...
*** In the meantime, the Economist magazine, that august font of accepted wisdom, tells us “what went wrong with economics.”
Nobel Prize winner Paul Krugman remarked that the learning of the past 30 years in macro-economics was “spectacularly useless at best, and positively harmful at worst.”
The Economist responds: ‘What went wrong with economics,’ it asks. Not much, it concludes.
Except that its most precious theories are claptrap. And its most prominent experts are nincompoops. And it helped cause the biggest economic crisis in perhaps half a century... failed to see it coming... failed to understand it... and then made it worse by offering to fix it.
Apart from that... macro economics is fine.
*** We went to Madrid on Friday... The only convenient flight was a discount carrier – Easy Jet. But it turned out, there was nothing easy about Easy Jet.
The flight was meant to be about 9pm... so we went to Plaza Mayor and sat down for a drink. In front of us was a man with an enormous stomach, dressed in a Spiderman costume.
If you lose your job, dear reader, you might want to try this. People came up to the misshapen Spiderman to have their photos taken with him. They all seemed to know the pose they wanted... a bit as if they were flying through the air. When the photo was taken, the tourists left Spiderman a tip. By our calculation, he was taking in 20-40 euros per hour.
Then, at the airport, we waited in line for half an hour – there was no one at the counter -- only to discover that the flight was delayed. Then, it got later and later... as one delay followed another... Each time, an airline representative approached the crowd with an announcement, the passengers became more hostile.
“Why didn’t you tell us this before?”
“I want a refund!”
“I could have gone back into town and had dinner... ”
We waited and waited... tantalized by the arrival of an Easy Jet plane... then disappointed when it was destined for another city. We were trapped. There were no other options. Finally, it was about midnight when the representative came back... flanked by two Spanish policemen. Finally, the plane was on its way.
Finally, we got home again... after 4am.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
