‘Our industry has a long history of letting too many people go at the bottom of the cycle and hiring too many at the top.’ – Lloyd Blankfein, Chief Executive, Goldman Sachs
Mr Blankfein is a guilty man.
Not that we’re accusing him of breaking the law.
And we most certainly wouldn’t question the business practices of Wall Street investment banks like Goldman Sachs.
Rather, we’re saying Mr Blankfein is simply guilty of a common mistake. A mistake made by the CEO’s of big-end-of-town firms, mainstream commentators, most economists, and dare we say it…most investors.
It’s a mistake that guarantees these people and many more will be completely unprepared for the coming decade of economic and financial heartbreak…
In yesterday’s issue of Pursuit of Happiness (your editor’s new free twice-weekly email covering subjects to do with life, liberty and the pursuit of happiness), we mentioned how naïve property investors still didn’t get that things have changed.
They still don’t get it that they aren’t geniuses. They were just lucky to buy a house in the 1960′s or 1970′s and then hold on to it during the biggest and longest credit boom in living memory.
They think Australian housing is just in a bit of a funk. That soon the market will recover, and (laughably) that it will help drive the Aussie economy to more growth.
After all, they still think house prices double every seven years. That’s despite the numbers from the Australian Bureau of Statistics (ABS) that show Aussie house prices in the eight capital cities have gained just 41.2% since 2005. Pathetic.
(To read the full article in full click the following link on buying a house)
But the point of this letter isn’t to take a pop at housing chumps. The point of this letter is to take a pop at banking and business chumps…
Enjoy Those Bonuses While They Last
Like the housing investors, Mr Blankfein is guilty of not getting it. Like most CEO’s who ran businesses leading up to 2008, they thought they were superstars.
They thought only they could possibly succeed by borrowing lots of money, and then using the money to pay exorbitant takeover prices and expand their businesses.
Of course, for the most part it worked…because everyone else did it. Businesses and consumers borrowed and bought, and borrowed more and bought more. How could anything possibly upset this genius strategy?
But something did upset it. Since then things have gone badly wrong. Even so, CEO’s got to keep their seven-figure pay-cheques. And even though things are still bad, the big guys are getting their bread. As the Sydney Morning Herald reported this week:
‘Bank of Queensland’s chief executive was paid $1.8 million, including a half million dollar bonus, in the same year the company made a loss.‘BoQ posted a loss of $17 million in the year to August 31, the first by a local bank in two decades.
‘The result was caused by $401 million in costs from unrecoverable loans due to BoQ’s exposure to the struggling property market in Queensland, where 60 per cent of its loans are written.’
We suggest Bank of Queensland’s CEO make the most of it. Shareholders may give a CEO their bonus for one year, even though the owners don’t make a bean…but we can’t see that continuing.
At the moment, the financial sector is living in denial. They know how the game works. They even think they know how business cycles work.
Trouble is they’ve never seen a business cycle like this one. They saw mini booms and mini busts within the longer-term bull market. But the busts didn’t last long. And every time the busts turned to booms, investors, businessmen and CEO’s felt smart.
They learned not to panic. They learned to love booms and busts…because busts soon turned to booms.
Not Any Old Recession
That’s why housing investors think the housing market is about to recover (it isn’t). And it’s why Lloyd Blankfein has warned investment banks not to fire too many staff, because he believes the world economy is about to recover (it isn’t).
As our colleagues and we have correctly pointed out over the past four years, this bust is different to anything in recent living memory.
This isn’t a common garden-variety slowdown or recession. You can tell by the scale of the meddling by governments and central banks that this is something different.
In our view, the current problems show that the world economy is going through nothing less than a full-scale depression.
Government bailouts and central bank money printing just give investors the illusion that things are getting better. But the newly printed money is piling up at central banks, because businesses and consumers have already maxed out their borrowing.
And with asset prices staying low, you don’t get the compounding effect of higher debt. In other words, when asset prices rise, investors can borrow more against higher valued assets.
But when asset prices are low, investors can’t use higher valuations to increase the value of their collateral…this means they can’t borrow more money. (Think about how you can increase the value of your home loan if the house price rises. If house prices don’t go up, banks can’t lend more money.)
But that’s only half the story. The other half of the story is how the intentional lowering of interest rates is having exactly the opposite effect to that intended by central banks.
This is a subject we’ll cover in more detail tomorrow…
Cheers,
Kris
From the Port Phillip Publishing Library
Special Report:
Retire Rich, Happy and Free From Money Worries
Daily Reckoning:
Australian LNG Projects Get Pricey
Money Morning:
Avoid the Slaughter: Watch This Key Stock Market Pointer
Pursuit of Happiness:
Thinking of Buying a House? If I Could Give You One Piece of Advice…
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks
