I am so removed from Wall Street that this may be an obvious point:

I think it will turn out that Greg Smith did Goldman Sachs a great favor. No amount of purposeful PR could have helped GS so much and turned the tide running against GS so effectively as Smith's pompous, self-serving and unsupported resignation op ed.

Except among the irrational haters of wealth and speculation, Smith's op ed will wind up generating sympathy for GS, and I predict this week will mark the bottom of GS both in reputation and stock price. It will be pretty much all up from here.

The true criticism of GS, of course, would be its corrupt, crony-capitalist relationships with current and prior Presidential Administrations. But that's too subtle and knowledgeable a criticism. Rather the criticism in the popular mind is "greed". Smith's attempt to cloak his resignation in anti-greed will be seen through and will lead to greater acceptance of a beleaguered GS just trying to go about its business of making Wall Street work.

Rocky Humbert writes: 

As a GS alum, I would like to offer a few observations, without directly commenting on Dan's point.

When I left GS as a vice president in 1989, GS was run by Whitehead and Weinberg, successors to the legendary Gus Levy. The firm was a private partnership, and importantly, the investment banking/capital markets side of the company dwarfed the trading side of the company. This is a critical distinction from today. Sure, Bob Rubin's risk arb desk was hugely profitable. Sure, we did some big block trades in equities; but the much higher commissions of that period, and the firm's limited capital, ensured that the focus was on flow and not on principal transactions. By then, Traders were second class citizens versus the hermes-wearing, first-class-flying I-bankers who, at that time, would never ever represent a company in a hostile takeover. Of course there were some guys who pushed the envelope on occasion (I won't name names), but there was a distinct belief that everything flowed from the profitability of the clients. For an analogy of the inherent tensions between Ibanking and trading, revisit the Gluckman/Peterson feud at the ancient Lehman Brothers (pre-Amex deal).

That really was the GS culture back then. Heck, Weinberg drove a crappy Ford sedan because we did the Ford IPO. And few things could get you in trouble faster than talking badly about an important client. It was unthinkable that we would push a client into a security that we thought would turn out badly. We looked down our noses at Bear Stearns and the other bulge bracket firms who were known for that sort of thing. (Aside: I posit that the GS cultural evolution can be gleaned from the type of car the CEO drove.)

The world evolves, and I believe that the evolution of GS into its current form is a reflection of:

1) The end of its being a private partnership — which ensured risk taking with OTHER people's money. I still remember having a particularly bad losing day when Eric Sheinberg walked up to me, whacked me on the head and said with a reassuring smile, "Don't sweat it. It's ONLY money…..and it's MY money."

2) The domination of trading profits versus investment banking revenues. Management realized you can only grow investment banking to a certain size due to its service nature; whereas you can compound capital by investment and trading in a theoretically unlimited way.

3) The growth of trading technology and impersonalization of counterparty relationships. (It's much easier to "screw" someone who you don't know.)

4) The 10 percent rule, where they fire the worst performing 10% of employees every year. Back in the Whitehead/Weinberg day, such a concept would have been unfathomable. It really was a family lifetime employment sort of feel, not dissimilar to GE before Jack Welch and IBM before Lou Gestner.

5) And many other examples that correlate with a 30 year bull market in debt as a pct of GDP.

I am not lamenting here. I am simply saying that Smith is right when he observes that the GS culture has changed.

Too, the world has changed.

And, to be honest, I don't really understand why Smith wrote that piece except as an attempt to be Michael Lewis-esque, but without the chuckle factor.

Jack Tierney writes: 

Notes of interest in the GS "time to buy?" discussion: Goldman's full-year net income hit a record $13.4 billion in 2009, then slipped to $8.4 billion in 2010 before tumbling to $4.4 billion last year. Goldman's share price has plummeted from its 2009 high of $192 to the current quote of $111. During 2009 and 2010, Goldman spent 71% of its net income buying back its stock. But last year, the company spent 264% of net income buying its stock (excluding the repurchase of preferred stock from Warren Buffet, Goldman still spent 140% of its net income buying its own shares last year - double the rate of 2009-10.) Last week, Goldman executives cashed in $20 million worth of stock that had been "locked up" for the last three years. Over the last five years, Goldman's management spent $21 billion of the shareholders' capital buying GS stock in the open market at an average price of $171 a share. Today, the stock sells for $111. On a mark-to-market basis, therefore, Goldman's stock buy-back "investment" has produced a loss of about $7.3 billion for shareholders…. Last week, nine Goldman insiders sold their stock as fast as the law would let them. They cashed out $20 million worth of stock at an average price of $107.44.

Fred Crossman replies: 

Great points, Jack, on buy backs. I noted that American retailers have continually expanded at a much greater rate than the population growth. In addition to declining per store sales and income these retailers have been furiously buying back stock since 2007 to goose earnings. LOW has reduced shares outstanding by 12%, BBY 18%, HD 20%, KSS 11%, WMT, 15% and SHLD 29%. All buybacks above book value (destroying share holder value). Especially HD, now trading at 4.1 times book. 

Bruno Ombreux writes: 

There is a very simple way not to be screwed by GS, or anybody else. I am talking about trading, not corporate finance.

If you are making trades directly with GS, you are presumably a company, not some small private speculator. So you have a tool which is called "Risk management policy" and you make it a sackable offense not to comply with it. In the risk management policy, you list the markets and the instruments people are allowed to trade.

For instance:

- only markets with at least 3 active market makers and x trades/per day
- only vanilla instruments like swaps In addition, you have procedures like "trader must obtain 3 quotes from 3 different counterparties prior to making a trade", and a track record of the consulted counterparties and their quotes must be kept in the trading system, for each trade. In these types of market, you are not trading every 5 minutes, so you have the time to do all this.

There is no way you are getting screwed if you restrict yourself to simple instruments and they have the best bid/ask available among several other market makers.

Rocky Humbert comments: 

Sorry, but I don't understand your distinction between trading and investing. I also don't understand your definition of vanilla. I am however a fan of "rocky road" flavor.

I agree with you that entering trades that you are not sure to be able to exit is risky. But if the market provides you with a sufficient liquidity premium, it's rational and it can be profitable. But only if you do it right of course.

Bruno Ombreux replies: 

Trading vs investing: this could be the beginning of an endless semantic debate.

But let's use a couple of examples:
- trading: I buy a basket of stocks this morning with the intention of reselling before the close
- investing: I build a portfolio of stocks with the intention to keep it a relatively long time, because I think that these stocks value will increase due to whatever reason, growth, value, the economy…

I also like the following classification, which I believe comes from Minsky:
- Profits on the position neither depend on price variation of the asset, nor on cost of carry: I am investing.
- Profits do not depend on price variation, but only on positive carry: I am trading.
- Profit depend on price variation of the asset: I am speculating.

The example and the definition are not equivalent, but they give a rough idea of what trading is and what investing is. The border between both activities can be blurry. But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

Now, to answer your second question, what is vanilla? Vanilla is anything that is simple, easy to understand and commonly traded. In the energy markets, everybody trades swaps and Asian options. These are vanilla. What is not vanilla would be a double-barrier option on Singapore 180 cst Fuel Oil, settled at the average CAD/EUR exchange rate lagged 3 months vs the Fuel oil averaging period. That is not vanilla, and definitely more simple than many equity derivative deals.

Dylan Distasio comments: 

But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

I will let those wiser than myself comment on the rest of your analysis, but the above jumps out at me as a poor definition of investing. Holding a bond to maturity may be a valid example of your argument, but there are plenty of people arguably INVESTING in other instruments who need a market to close their positions. A few off the top of my head include real estate, stocks, bonds not held to maturity but still held as investments, commodities including physical ones held in safes or other venues. Of course you need a market to close out most investments! I may be missing something but this seems obvious. If you cannot find someone else to buy or sell your investment at the time of closing the position, you have zero liquidity and for all intents and purposes zero value if you need that liquidity immediately. Without a secondary market, most investments cannot realize their value.



 Here's an interesting Schilling article that Real Estate has 20% down to go due to unlisted foreclosures, separation from investing/ownership, and 40% underwater with another 20% drop in price.

However, the real estate cycle is notoriously fast when it takes off, so trying to time it is hard to do.

Victor Niederhoffer comments: 

If, if, if. I've seen this reasoning on bonds from a million sources over the last 5 years. If bond yields go up, or go back, it would cause this destruction or that catastrophe. But people in the bond field know as much about the course of the yield curve as anything in the world, indeed they're much more versed than the stock market people. And it just takes a few Grosses or Soroses or DeRosas or dozens of others to set prices exactly where they should be taking account of all future contingencies. In short, the yield curves today provide an extremely accurate forecast of future fixed income yields. The experts, the DeRosas take account of the likely change from easing to tightening and when, and what a impact that will have on everything in their current forecasts. To predicate a trade on the idea that bond yields at 3% or 2% are ridiculously low is to go against the greatest experts in a field the world has ever known, et al.

George Zachar writes:

Unfortunately, the bond mavens today are forced to gauge not the real economic context of the forward curve, but the internal dialogues of Bernanke and Dudley. With the Fed manhandling the yield curve from tip to tip (and TIPS too), the price signaling attribute of the treasury market has vanished.

We are likely years away from private capital allocators fully resuming their role as impartial price setters for money. And there's a real risk the cronies will never be pried loose.

Ken Drees writes:

 I heard one of my mood of real estate indicators loud and clear the other day, ironically on the am radio. The banter back and forth was why renting is better than owning, even though the price may be higher to rent.

radio person a: Why should I tie myself down with a house, if I lose my job I can't move?

person b: Right, its easier to just rent and move.

The job environment needs to bottom and improve before housing can turn–Rocky's 2014 guess is as good as any for a bottom based on soaked up supply.

Fred Crossman writes: 

We are in an unprecedented period where the world central banks, instead of suggesting work and saving as a remedy to excessive debt, offer the effortless remedy of federal programs, massive printing, and more debt. Is it ironic, as we reach new market highs, that the biggest per cent mover today (not SHLD, which is up on worse than expected earnings but a shot at more creative financing) is a diet drug that eschews exercise and dieting but instead offers a pill for the same result?



 John Wooden lived 99 2/3 years and is considered by many to be the greatest coach in history. His teams at UCLA won ten of 12 national championships, 88 games in a row, and he was a 3 time all American in college, once sinking 134 foul shots in a row. His players loved him and he developed several systems for success. After reading his book published shortly before what would have been his 100th birthday on October 14, 2010, I figured I could learn much from him.

Here are some of the things I learned. He kept good records. His father gave him a note card with suggestions. He attributes much of his success to his father. His father gave him 7 suggestions to follow and he has tried to live up to it every day of his life. Be true to yourself. Help others. Make each day your masterpiece. Read good books. Make friendship a fine art. Build for a rainy day. Be thankful for blessings each day. I liked better what his father gave him in three rules: Don't whine. Don't complain, don't make excuses.

He loved teaching. And I like the little fellow poem that guided him in his relations with his 3 kids and his students.

        A careful man I  want to be                                            
        A little fellow follows me                                             
        I dare not go astray                                                 
        for fear he'll go the self same way                                  
        I cannot once escape his eyes                                    
        What he sees me do, he tries.                                     
        Like me he says he's going to be.                                    
        The little chap who follows me.                                   
        He thinks that I am good and fine.                                   
        Believes in every word of mine                                      
        the base in me he must not see                                     
        the little chap who follows me                                    
        I must remember as I go                                            
        Through summer's sun and winter's snow.                              
        I am building for the years to be                                    
        that little chap who follows me.

He was married to his college sweetheart Nellie for 60 years and she came to every game he coached. Apparently he never earned more than 50000 a year, and he often turned down jobs that would have paid him much more because he had given his word and he never wished to tell a lie.

His pyramid of success is famous. It has at the bottom hard work, friendship, loyalty, cooperation, and enthusiasm then goes up to self control alertness action and determination. Then fitness skill term spirit poise confidence personal best.

How would I apply these things to markets? I like the never complaining and never boasting. The hard work, and loyalty and enthusiasm. The attributes of the pyramid of success would seem to be good for any activity.

His humility is a good model for all who wish to achieve success. He didn't have his hand out for money and went beyond the dollar and the clock The fact that he was such a good player must have made him a great coach. Apparently he had every minute of every workout planned. And he insisted on it being a team game rather than a forum for a star. I guess that's a bit easier when you have Alcindor and Walton on your squad.

I would have liked to know more about his day to day life and how that suited him to live to 100 and be loved by so many. Certainly the philosophy of life must and the pyramid of success much have had much to do with it.

He took losing very well, and always felt sorry for the teams that he beat.

I can't find anything that needs much improvement in his life as a model for a teacher, father, or speculator.

Charles Pennington writes: 

I thought the Chair disliked cooperative games like soccer and (I presume) basketball. What's the story there?

Fred Crossman writes: 

Never did I want to call the first time-out during a game. Never. It was almost a fetish with me because I stressed conditioning to such a degree. I wanted UCLA to come out and run our opponents so hard that they would be forced to call the first time-out just to catch their breath. I wanted them to have to stop the running before we did. At that first time-out, the opponent would know, and we would know they knew, who was in better condition.

He never called a time out at the end of the game either. Sat there with his program rolled up most of the game for he believed UCLA was better prepared mentally, too. His players knew exactly what to do. Confusion and pressure at the end of the game was their ally.



BLS data was used for the attached chart, which plots % of population employed 1948-present (Employment population ratio, %, age 16 or older).

From the late 1940's to the late 1970's, % of population employed varied in a tight range between 55% and 58%. Starting in the late 1970's, % employed moved to a higher regime, staying above 60% from 1987 until 2009. The recent decline which began in 2007 dropped % employed to about 58% - a level not seen since 1983.

Major declines corresponded with recessions, as marked: 1980-83, 1990-92, 2000-03, and 2007-present.

The regime change to higher % employment could have occurred for many reasons, including more women entering the workforce, deferred retirement, and less business cycle volatility. Is the recent drop a move back to the lower regime, or simply a temporary recession-decline in the higher regime?

Fred Crossman comments: 

You wrote:

From the late 1940s to the late 1970s, % of population employed varied in a tight range between 55% and 58%. Starting in the late 1970s, % employed moved to a higher regime, staying above 60% from 1987 until 2009. The recent decline which began in 2007 dropped % employed to about 58%– a level not seen since 1983. Major declines corresponded with recessions, as marked: 1980 83, 1990-92, 2000-03, and 2007-present. The regime change to higher % employment could have occurred for many reasons, including more women entering the workforce, deferred retirement, and less business cycle volatility. Is the recent drop a move back to the lower regime, or simply a temporary recession-decline in the higher regime?

Kim, my humble reason for higher employment trend is more consumption and more debt incurred by American since late 70s, early 80s. Americans needed the money for a larger home, second home, second car, etc, basically greater spending and consumption– to pay off more more debt. (top chart). top chart also parallels greater debt incurred by American.

Lower chart of declining GDP (parallels a declining savings rate and wages that have not kept up with inflation). Average American less wealthy (very top class now is wealthier with government help, however, that is another topic). Also, going off gold standard encouraged more central bank money printing to inflate away federal debt. Also now takes more debt for every dollar in GDP gain.



A study shows that round numbers pack a psychological punch, motivating pro baseball players The researchers examined the batting averages of Major League Baseball hitters from 1975 to 2008, looking for evidence that crossing the .300 mark inspired unusual effort in a season's final games (including sitting out a game, or an at-bat). If it didn't, the distribution of averages from .298 to .301 would be more or less random. The researchers, however, found that the proportion of players who hit exactly .300 was nearly four times greater than the proportion who hit ..299 (1.4% versus 0.38%).



 We've all seen too many black swans over the past decade. But why must all the black swans be negative? Why can't we have a black swan on the positive side?

This is NOT my prediction– but it's worth contemplating the following from Jan Hatzius (GS). In a nutshell, he alleges that much of the recent economic sluggishness is attributable to deleveraging in the private sector. And he suggests that this is coming to an end.

As a thought experiment, I'm analyzing how Hatzius' outlier prediction of 6% or 7% growth in 2011 might affect my portfolios. I routinely fret about double dips, and triple dips, European crises, and $30 oil/$200 oil, but I haven't spent much time fretting about 7% growth…but I probably should! Is it possible that we'll look back at QE2 with the same funds that we look back at the final Fed rate cut during the summer of 1993? (It's left as an exercise for the reader to see how stocks, bonds, and commodities behaved in 1994.)

And, why is Hatzius' prediction any wackier than Mr. Roubini's repeated predictions in 2005 and 2006 and 2007?

(Oh, and by the way, the US commercial truck fleet age is now the oldest that it's even been!)

From the FT:

Jan Hatzius, chief US economist of Goldman Sachs, is one who has become more positive. "There's been a clear improvement in underlying final demand," he says. "My explanation is that we're seeing a slowdown in the pace of deleveraging in the private sector." Deleveraging is the fundamental reason why the economic recovery since 2009 has been so slow. It explains why unemployment remains stuck at 9.8 per cent.

The call on consumption is contentious because debt levels in the US remain high by historical levels. Household debt, at about 90 per cent of GDP, is back to levels seen in 2005 but it would take years of deleveraging to return to the 80 per cent seen in 2002-03. Consumers do not need to stop saving, however. They just need to stop increasing the rate at which they save for the economy to grow.

If the US populace really does begin to catch up on consumption after three miserable years then growth could hit 6 per cent or even 7 per cent in 2011. The chances of that remain modest – but if it happens then the boost to confidence may feed on itself and the nastiest US downturn in decades might truly start to feel as if it is over…

Mr. Albert writes:

For what it's worth, Prof Roubini just bought a Manhattan condo…

Kim Zussman writes: 

Which begs the question where did the energy of the housing bubble (and related lending/spending) go, and is it now durably irrelevant?

The attached charts Shiller real home price index, which shows the 2006 bubble dwarfing any prior local maxima/minima for the last 120 years. Real home prices are now near where they were in 2004– which is still above all prior levels.

The FED over-rules the law of post-bubble over correction?

Ken Drees comments: 

1. this is a warm and fuzzy outlook (especially after 2 years of up market)
2. this is good to think about because its the white swan
3. if growth were to hit 6% it must do it in three quarters because it will take 1 quarter to pay off fourth quarter frugal fatique binge
4. if growth hit 6% it would ramp up quickly in a 3rd and 4th quarter burst
5. the ben factor about putting on the breaks would be argued down–can't hurt the president's reelection chances with a rate hike
6. Inflation would be running probably higher than 2% (fed measured) and no doubt inflation factors would be influencing growth–tainting real growth
7. Market would surge–second half after it wakes up to the fact of growth without a fed bummer.
8. banks would start to lend more in second half.
9. Real estate would firm some and so forth–growth begets growth.
10. Fed would leave it alone and overheat in 2012 would be a risk.

Jobs and job outlook in the spring 2011 would be key to overcoming recession inertia. I don't know if we are there yet–3 dollar gas with some predicting 5 next year will not help the prospect of saving less. Gas prices need to be 2.50 or less to give this scenario a fighting chance. 5 dollar gas would be an inflation goose (swan).

Bill Rafter writes:

I would agree that Hatzius is certainly correct in that a lot of the economic malaise can be attributed to deleveraging. It is evident in the Fed series TOTBKCR, CIBOARD and TOTALSL, bank credit, commercial and industrial loans and consumer credit respectively. You can also look at the monetary aggregates (going nowhere) and make calculations of the velocity of money (so low as to be underneath the outhouse).
What I cannot justify is the prediction of a turnaround. Admittedly at some point those who wish to deleverage have nothing else to deleverage. But that only manifests itself in a mean reversion of the rate of decline. It does not necessarily manifest itself in increased leveraging activity, presumably a result of economic growth. Thus we believe that those who see a decline in deleveraging as evidence of upcoming economic growth are extrapolating way beyond what is reasonable.

Many of the indicators we follow are extremely bullish, and yet others scare the daylights out of us. This is a time of mixed signals. The speculator must make certain that he goes into his activity without preconceived ideas, for if he perceives things to be bullish he will certainly find indicators which reflect that belief. But here's the rub: it's the same with the bear.

It may simply be too soon for the unequivocal good things to happen or be evident. I believe there is evidence that decision makers do not act on anticipated tax relief, but wait for it to actually take effect. Also, the recent tax legislation was not a drop in costs, but the suspension of an increase, which is not the same. Other than taxes, entrepreneurs tend to find a way to cope and then a way to eke out profit. No one is sitting around just waiting for the deus ex machina. To some that means outsourcing (perhaps overseas) and being maligned for doing so. There have been some private equity deals lately. All of that repositioning is good eventually. Maybe we just need to wait for the fog to clear a bit.

Fred Crossman writes:

Rocky, there could be a black swan event next year, but probably not in GDP growth. The last time we had over 7% growth was in 1984. This past recovery in 2002-2008 only had one year of GDP growth over 3%. That period had very low rates and benefited from tremendous credit expansion with huge housing growth, a construction boom, massive home equity withdrawal, etc. only 2003 had a GDP over 3%. It was 3.8%.

If hatzius believes in 6%- 7% GDP growth for 2011 or 2102, (basically the 2002-2008 recovery replicated next year at over twice that past period's 3% GDP rate growth) in a current environment of high unemployment, negative home equity and facing city and state layoffs, then he would be worthy of more than the black swan award.



Maybe Fred Thompson's "droopy eyes" are because he is the only candidate with double duty… ever wonder why Bill Clinton was a tireless campaigner?



I have spent one week of my life in an Amish home. I was the guest. That family appeared to me to be wholesome, content, perhaps quite happy, and solidly into their lives. The lifestyle questions you might ask may well require you to be an Amish man to understand. And from the joy in that household, that Amish husband gave me to understand the nature of joy was robust. He knew how to keep an Amish woman happy. She was most loving to all in that home. You need to understand Amish cultural life.

Fred Crossman quips:

How do you keep an Amish woman happy?

Two Mennonite.


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