While Wall Street combs through Wells Fargo's numbers (which unlike the rest of US banks is not just a glorified hedge fund and actually still lends out deposits, primarily to fund home loans) to find some glimmer of good news (judging by the stock price it hasn't succeeded yet and won't), there is just one number that is of particular significance: that would be $176.5 billion, or the amount of excess total deposits ($976.1 billion) over loans ($799.6 billion) as of Q4. This is an all time record delta (as is to be expected since the entire US financial system now has a $2 trillion excess in deposits over loans), and a dramatic inversion from the excess loans over deposits that marked the bank's "Old Normal" balance sheet.
Back in December 2011, we previewed the rotation in the FOMC's voting block with "When Doves Laugh: 4 Weeks Until The Quiet Coup In The Fed Gives QE3 A Green Light", a post whose summary was that as a bevy of new voting doves came in, it made QE3, then very much a taboo topic - because, you see, "the economy was improving on its own" - virtually inevitable (despite some angry comments from even our own readers). Naturally, as 2012 played out, we got not only QE3 but QE4EVA. So now what? Well, with the new year comes the now traditional new roster of voting regional Fed president members. And while the supremacy of the Bernanke core supermajority group of 8 permanent voters (especially with the three new hires) will never be in jeopardy, 4 new regional presidents join the core group of Bernanke doves. The new voting FOMC members: Evans, Rosengren, Bullard and George. They replace Pianalto, Lockhart, Williams and consummate critic and sole voice of reason and opposition at the Fed in 2011, Lacker. So how does the layout of the 2013 FOMC nest of hawks and doves look like? SocGen summarizes.
Earlier today, Bill Frezza of the Competitive Enterprise Institute and CNBC's Steve Liesman got into a heated exchange over a recent Frezza article, based on some of the key points we made in a prior post "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed" in which, as the title implies, we showed how it was that the Fed was indirectly intervening in the stock market by way of banks using excess deposits to chase risky returns and generally push the market higher. We urge readers to spend the few minutes of this clip to familiarize themselves with Frezza's point which is essentially what Zero Hedge suggested, and Liesman's objection that "this is something the banks don't do and can't do." Liesman's naive view, as is to be expected for anyone who does not understand money creation under a fractional reserve system, was simple: the Fed does not create reserves to boost bank profits, and thus shareholder returns, and certainly is not using the fungible cash, which at the end of the day is what reserves amount to once dispersed among the US banks, to gun risk assets higher.
Alas, Steve is very much wrong.
Perhaps one of the most startling and telling charts of the New Normal, one which few talk about, is the soaring difference between bank loans - traditionally the source of growth for banks, at least in their Old Normal business model which did not envision all of them becoming glorified, Too Big To Fail hedge funds, ala the Goldman Sachs "Bank Holding Company" model; and deposits - traditionally the source of capital banks use to fund said loans. Historically, and logically, the relationship between the two time series has been virtually one to one. However, ever since the advent of actively managed Central Planning by the Fed, as a result of which Ben Bernanke dumped nearly $2 trillion in excess deposits on banks to facilitate their risk taking even more, the traditional correlation between loans and deposits has broken down. It is time to once again start talking about this chart as for the first time ever the difference between deposits and loans has hit a record $2 trillion! But that's just the beginning - the rabbit hole goes so much deeper...
For those who want to imitate what is once again the world's largest hedge fund (reclaiming the spot from Apple's own prop trading vehicle, Braeburn, first exposed here), Ray Dalio's Bridgewater, which at last check had $138 billion in AUM ($76 billion Pure Alpha, $63 billion All Weather), the path is simple: just recreate the performance shown on the chart below over a period of two decades. (Oh and stop "trading" on Twitter and do some real trading).
Greg Smith's 15 minutes of fame has come and gone, but the muppet crushing at Goldman is only starting to ramp up, courtesy of the man who singlehandedly has made sure Goldman's FX prop trading team should be the most profitable one in the entire universe by simply doing the opposite of what Goldman's clients do. As a reminder, sent out at 5 pm yesterday, as we alerted our Twitter followers: "Go long EUR/CAD on further risk premium compression in the EUR and a more dovish BoC... We recommend going long EUR/CAD at a current level of 1.296 with an initial target of 1.37 and a stop on a London close below 1.26." Big Oops (see chart). Then again, after Stolper epic failure to Impala the muppets on his last EURUSD trade reco, it is great to see him back to 0.000 batting form.
From 1987: How much time do I have to liquidate? Answer: We need you to do this by Monday night.
Goldman is back. After the market beating hedge fund, which unlike its peers needs no DVA/CVA or loan loss releases to pad its numbers, was forced to exist in the scandalous shadow of its larger peers (coughjamiedimoncough), the tentacled one is back to making waves on its own, following a Q3 EPS beat of $2.85 on expectations of a $2.28 print, and revenues of $8.35 billion on expectations of $7.18 billion. The reason for the beat? A surge in Investing and Lending (aka Prop trading) revenues, which is the biggest quarterly variable, and which soared to $1.8 billion in Q3 from a paltry $203 million in Q2, and from a major loss of $2.5 billion in Q3 of 2011. All other business segments were in line, with IB down modestly from Q2, Client Flow in FICC in line sequentially, Client Flow in equities rising modestly due to a jump in Equities Client Execution, and a sequential drop in Investment Management. And that's it: no balance sheet or accounting gimmicks, which one has to at least give GS credit for. The bottom line for GS employees as a result of its hedge fund once again performing as expected? With compensation margin fixed firmly at 44% of net revenues, this means employee comp provisioning soared to $3.675 billion, far above the $2.9 billion in Q2 and $1.6 billion in Q3 2011. It also meant that the average comp for the firm's 32,600 in total staff at period end (up from 32,300 in Q2 and 32,400 in Q1) is now an average $404,172, the most since Q2 2011. It just may be a great bonus year for Goldman after all.
- RBA Cuts Rate to 3.25% as Mining-Driven Growth Wanes (Reuters)
- Republicans Not Buying Bernanke’s QE3 Defense (WSJ)
- Spain ready for bailout, Germany signals "wait" (Reuters)
- EU says prop trading and investment banking should be separated from deposit taking (Reuters)
- Call for bank bonuses to be paid in debt (FT)
- Spanish Banks Need More Capital Than Tests Find, Moody’s Says (Bloomberg) ... as we explained on Friday
- "Fiscal cliff" to hit 90% of US families (FT)
- The casualties of Chesapeake's "land grab" across America (Reuters)
- U.K. Government Needs to Do More to Boost Weak Economy, BCC Says (Bloomberg)
- World Bank Sees Long Crisis Effect (WSJ)
- UBS Co-Worker Says He Used Adoboli’s Umbrella Account (Bloomberg)
- And more easing: South Korea central bank switches tack to encourage growth (Reuters)
You put Jim Grant on TV and someone mentions the Fed and the result every single time is the equivalent of waving a red curtain in front of a rabid bull. This time was no different, as the Interest Rate Observer once again let Bernanke, with whom he clarified is no longer on speaking terms, have it. The ensuing central-planner bashing was in line with expectations, and just as we presented yesterday in "The Experiment Economy", so too does Grant believe that the Fed is "learning by doing" and follows up by clarifying that this is an experiment, "and we are lab rats in the financial markets." He then proceeds to lament that the credit markets, clueless NYT econopundits notwithstanding, have now lost all informational value as every rate instrument is purely in the manipulated domain of the Fed. "We are all living in a land of speculation and manipulation" is Grant's summary of the current predicament of anyone who wishes to trade these "markets" and it may as well be the best synopsis of the New (ab)normal. And aside from an odd detour into Government Motors, Grant once again hones in on the only true antidote to central planner idiocy, gold: "the best thing about gold is that it's got no P/E multiple. Gold is a speculation on an anticipated macroeconomic outcome, the systematic debasement of currencies by central banks. Why wouldn't they do QE4? What intellectual argument do they have against doing it again, and again, and again." Well...none.
There was a time when retail stock outflows were considered a bullish catalyst: after all, retail was always considered the dumb money (not "two and twenty" hedge funds which continue to underperform the stock market, and have done so for the past five years), and would pull money at the bottom and add money at the top. This is no longer the case for the simple reason that while persistent outflows from domestic equity funds continue (and as the recent shuttering of levered ETFs by Direxion shows the infatuation with synthetic mutual fund replacements is now over), for the inverse to be true there have to be inflows, which are now non-existent. In the past two years, or 106 weeks of market data, there here been 17 weeks of inflows, or 16% of the total, amounting to $31 billion. The remainder? Outflows for a total of $300 billion. In the 32 weeks of YTD 2012 money flows, there have been 5 weeks of inflows for a total of $3.6 billion (which was also equal to the outflow in the last week alone) none of which coincided with market tops, and in fact the biggest outflows occurred just as the market hit interim highs. The most recent inflow, as tiny as it may have been, curious occurred during the May lows, proving retail is if anything, the smart money now. In other words, those looking for hints about the market based on retail flows are advised to look elsewhere. What this data does show is that no matter what happens in the stock market, the outflows will persist and are unlikely to reverse direction. Because if the S&P at fresh 2012 (and multi-year) highs is unable to draw retail out of hibernation, nothing will. Where is the money flowing? Why into fixed income of course, proving that as far as the now extinct investor class is concerned, return of capital is the only thing that matters, while HFTs and prop trading desks can fight over all the return on capital scraps provided courtesy of the Chairman. Curious where the volume has gone? Now you know.
Maybe this is a naive question, but as Goldman clients get skinned again and again and again and again and again by Goldman’s failed calls — while Goldman itself continues to rack up prop trading profits — I keep wondering just why anyone would take investment advice from a trading firm? And beyond that, why is it even legal for trading firms to advise clients? Isn’t this the biggest conflict of interest possible? We know firms including Goldman have advised clients to buy junk that the trading arm wants to get off its books.
- Greece now in "Great Depression", PM says (Reuters)
- Geithner "Washington must act to avoid damaging economy" (Reuters)
- Moody’s warns eurozone core (FT)
- Germany Pushes Back After Moody’s Lowers Rating Outlook (Bloomberg)
- Austria's Fekter says Greek euro exit not discussed (Reuters)
- In Greek crisis, lessons in a shrimp farm's travails (Reuters)
- Fed's Raskin: No government backstop for banks that do prop trading (Reuters)
- Campbell Chases Millennials With Lentils Madras Curry (Bloomberg)
Goldman Beats Modest Estimates As Prop Trading Revenue Plunges; Avg Employee Comp Slides 16% From Year Ago To $343,003Submitted by Tyler Durden on 07/17/2012 07:56 -0400
On the surface, Goldman's results, which unlike JPM and Citi do not break out the contribution of DVA, aka the top and bottom line contribution from Goldman's CDS blowing out in Q2, were good because they beat expectations of $6.26 billion in revenue and $1.18 in EPS, printing at $6.63 billion and $1.78/share. Of course, going back 3 weeks and the bottom line estimate would have missed then consensus EPS, but who cares: after tall the firm guided down and all the algos know is that GS beat. The problems arise when one spreads the various top line segments which portend nothing new: Client Flow, a proxy for general credit trading, dropped from $3.5 billion to $2.2 billion in Q2, but better than Q2 2012 when it was just $1.6 billion. However, client flow in equities was an abysmal $1.7 billion, down from $2.3 billion in Q2 and $1.9 billion last year as increasingly less people opt to use Goldman's REDi platform or its equity sales team. But most troubling was the epic collapse in the firm's Investing and Lending group, aka its highest margin, Prop Trading operation, which in the aftermath of the JPM fiasco mysteriously saw its revenue collapse from $1.9 billion to a mere $203 million, down from $1 billion a year earlier, and only the second lowest number in the past 3 years. Did the JPM CIO CDS repricing scandal force all banks to suddenly reevaluate their books and mark mid-market? We don't know, but there were no reason why Goldman's prop traders should have generated only $200 million in a quarter in which the bulk of the heat was focused on JPM and others. And finally, in terms of employee retention, Goldman employees can not be happy: in Q2 average comp to the firm's 32,300 total staff also declined to a multi-year low of $343,003, down from $350,864 last quarter, and down 16% from $408,958 a year earlier.
While JPM may or may not have succeeded in burying its deeply humiliating CIO fiasco at the expense of two things: i) a loss of up to 25% in recurring net income and ii) Jamie Dimon proudly throwing numerous of his key traders under the regulatory bus as scapegoats because it took the firm until July 12 to realize that its entire CDS book was criminally mismarked, thus confirming a "weakness in internal controls" (a statement not only we, but Bloomberg's Jonathan Weil vomits all over), the truth is that one way or another, Jamie Dimon will find a way to reposition his prop trading book somewhere else, even if it means far smaller and less obtrusive profits for the next several years. Yet there is a way to virtually make sure that Jamie Dimon is never allowed to trade as a hedge fund ever again, and in the process risk insolvency and yet another taxpayer bailout. Ironically, it is JPMorgan itself that tells everyone precisely what it is.