Mish's Global Economic Trend Analysis

Executive Director of Goldman Sachs Resigns Over Parasitic Behavior of Goldman to Its Clients; Reflections on Chasing Performance
"Black Swan" author Nassim Taleb Cheers Ron Paul's Economic Platform on CNBC
Treasuries Hammered as "Operation Twist" Unwinds; Another Triumph of the 1% Over the 99%
Ceridian Fuel Index Suggests "Recovery in Home Building has Not Yet Taken Hold"
I Will Gladly Pay You 100 Years From Now, For a Hamburger Today
Santorum Wins Alabama and Mississippi, Romney 3rd in Both; Brokered Convention Math Update; Another "Super Tuesday" on April 24

Executive Director of Goldman Sachs Resigns Over Parasitic Behavior of Goldman to Its Clients; Reflections on Chasing Performance

Posted: 14 Mar 2012 11:35 PM PDT

Greg Smith's op-ed in the New York Times "Why I Am Leaving Goldman Sachs" is precisely the catalyst that will eventually bring reform to the securities industry.

Denial Coming Up

Unfortunately, neither the Fed nor the SEC has any inclination to do anything about industry-wide fraud and corruption, therefore immediate results are not forthcoming.

Moreover, Goldman Sachs will deny the story every step of the way. Furthermore, it is safe to assume the SEC will turn a blind eye to these charges while preparing for the next headline case against another Martha Stewart on another meaningless charge.

With that backdrop, please consider these snips from Greg Smith, former Goldman Sachs executive director and head of the firm's United States equity derivatives business in Europe, the Middle East and Africa.

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm's culture on their watch. I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival.

What are three quick ways to become a leader? a) Execute on the firm's "axes," which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) "Hunt Elephants." In English: get your clients — some of whom are sophisticated, and some of whom aren't — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It's purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client's success or progress was not part of the thought process at all.

Brainwash and Promote

There is much more in the NY Times article, but that is the core of it, and clearly the core is rotten.

There is no fiduciary responsibility in the industry "in general". Of course, you can find a select few fund managers and subordinates that put their clients first but that is the exception, not the rule.

The fact remains, firms brainwash and promote from within those willing to tout the company line "you need to be 100% invested 100% of the time", in whatever garbage the firm wants to unload.

Over time, purposely brainwashed employees move higher and higher up the ranks. A trickle down effect ensures that subordinates believe they are serving clients' interests when they are in reality doing nothing of the sort.

I discussed this before, many times but the best example comes from a conversation I had in January 2009.

Conflicts of Interest in "Stay the Course" Advice

In January of 2009 before the final 20% plunge in the stock market, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like".

I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so during every recession and every boom alike, bad advice permeates the airwaves and internet "Stay The Course".

By the way, that person at Wachovia mentioned above did the right thing. He did not see investment opportunities he liked, so he kept client funds in cash. Such action is not the norm.

Bullishness Sells

The fact that managers do not get paid if clients sit in cash accounts for a great deal of the long-term-buy-and-hold mentality you see. The rest of it comes from analysts who have a vested interest via relationships to broker-dealers to be optimistic.

The allegations of Greg Smith are far more damning. What Smith describes is more along the lines of perpetrated fraud by representatives of JP Morgan against citizens of Jefferson County Alabama.

Please see Jefferson County Alabama Hires Bankruptcy Firm; Record Municipal Bankruptcy Coming; Death Spiral Swaps and JPMorgan Fraud Revisited for details.

Asking Broker for Advice

Unless you have $10 million or more to invest (and perhaps even then), it is a huge mistake to ask a large brokerage firm for an opinion. They will likely sell you GM bonds, bank stocks, or whatever total garbage the firm wants to short or the firm's big clients want to dump.

I made a blanket statement to emphasize a point. However, there are honest dealers and honest advisors out there. You may have one of them. Then again, you may have an honest but "brainwashed" dealer. It is important yet not easy to recognize the difference.

Flat out, if your broker advised you to load up on GM bonds prior to the collapse, or if your broker kept you fully invested in 2008, that person is not someone you can trust.

However, no one is perfect. It is important to look at overall track records and it is equally important to find someone that actually invests according to what they say, and according to a style of investment you desire.

Portfolio fluctuations over months (even years for long-term investors) are inevitable. However, 50% portfolio declines are not.

Question of Style

If you have an advisor, do you really believe what they are saying, and does their long-term track record pan out with what they say? Alternatively, if you are short-term or swing trader, are you getting the advice and picks you need?

Whatever you do, don't trade out of your style. If you a a long-term trader, do not get caught up in short-term noise. If you are a short-term trader, the big macro picture is useless.

Know Your Time Horizon

Know your time horizon, style and the strengths of your advisor. If they do not match up, then find a new one, but don't arbitrarily chase the latest and greatest returns.

John Paulson made a billion dollars betting against the housing bubble, then the Paulson Flagship Fund Lost 50% of Assets Under Management in 2011.

On February 15, Forbes reported John Paulson Dumps Biggest Banks, Doubles-Down on Gold.

Paulson & Co. founder John Paulson wants to put 2011 behind him, given the huge losses his hedge fund amassed. The billionaire investor is seeking to rebound from an atrocious performance with new investments in companies including Delphi Automotive (DLPH) and United Rentals (URI).

After earning a record $5 billion for a hedge fund manager with the help of gold and bank stocks, Paulson is now slashing some of those holdings to reduce exposure. His flagship Advantage Plus Fund plummeted 51% last year, according to several media reports that cite investors in the fund.

Paulson took part in some dramatic sales during the fourth quarter, unloading his entire position in stocks like Citigroup (C), Bank of America (BAC) and Hewlett-Packard (HPQ), among others.

Reflections on Chasing Performance

If you have a reason to change managers then please do so (management philosophy, long-term vs. short-term style is a potential reason).

However, if you are constantly chasing performance, the most probable result is you will perpetually be one step too late, forever chasing your tail.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Black Swan" author Nassim Taleb Cheers Ron Paul's Economic Platform on CNBC

Posted: 14 Mar 2012 08:52 PM PDT

Inquiring minds are listening to a CNBC video interview with Nassim Taleb, author of the book "The Black Swan".

Link if video does not play: Nassim Taleb Cheers Ron Paul's Economic Platform on CNBC

This quote says it all: "Only one candidate, Ron Paul, seems to have grasped the issues and offered the right remedies for the central problems we are facing. From my risk based standpoint, one candidate represents the right policies, at least from the big four, and that candidate is Ron Paul"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Treasuries Hammered as "Operation Twist" Unwinds; Another Triumph of the 1% Over the 99%

Posted: 14 Mar 2012 12:05 PM PDT

On September 21, 2011 in a Federal Reserve Press Release the Fed announced "Operation Twist" purportedly to drive down long-term rates and drive up short-term rates.

The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

Who Knew?

"Curve Watcher's Anonymous" has a report that shows how banks profited by front-running of the trade.

Banks Front Run the Trade

click on chart for sharper image

Time to Cash Out

click on chart for sharper image

"Operation Twist" a Success or Failure?

The stated goal of Operation Twist was to lower long-term rates and drive up short term rates. By that measure, the Fed's policy was a miserable failure. As the above charts show, 5-year, 10-year, and 30-Year yields are all substantially higher than when the program was announced on September 21.

"Operation Pad Bank Profits" a Stunning Success

However, banks knew this operation was coming and played for it in advance. With the program scheduled to end in June, it's time to take huge profits by selling the garbage back to the Fed.

That yields are higher now than when the Fed announced the program is irrelevant. That those on fixed income have been hammered mercilessly by Fed policies is irrelevant as well.

The Fed's real goal was not the stated mission, the real goal was to find still more ways to bail out banks at taxpayer expense. The Fed clearly succeeded in the real mission. This is yet another triumph of the 1% over the 99%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ceridian Fuel Index Suggests "Recovery in Home Building has Not Yet Taken Hold"

Posted: 14 Mar 2012 10:23 AM PDT

The Ceridian-UCLA Pulse of Commerce Index®, a real-time measure of truck fuel usage, is up this month but down in its most recent three month period according to the March Pulse of Commerce Report.

The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation, rose 0.7 percent in February but was not enough to offset the 1.7 percent decline in the previous month. The most recent three-month period from December to February is lower than the previous three months from September to November 2011 by 3.2 percent at an annualized rate.

With the first two months of the quarter known, the PCI must grow by over 4 percent from February to March to allow the PCI to grow positively in the first quarter of 2012 compared with the last quarter of 2011. "The continuing weakness of the PCI is signaling that, perhaps, the recovery in home building has not yet taken hold. The recent improvement in building permits and housing starts may get building going again and therefore, trucking as well, as it has been said that it takes 17 truckloads to build a home. If we get the saws and hammers going again, we will have a real recovery with much healthier job growth," said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and Director of the UCLA Anderson Forecast.

Ceridian Truck Usage vs. All Petroleum Usage

Regular Mish readers are not surprised by this report as gasoline and petroleum demand have collapsed. On March 10, I noted Another Plunge in 3-Month Rolling Average of Petroleum and Gasoline Usage.

The following chart shows U.S. petroleum and gasoline usage for December-February compared with the same three months in prior years. Chart is courtesy of reader Tim Wallace.

Note that petroleum usage is back to December 1995 thru February 1996 levels. Gasoline usage is back to December 2001 thru February 2002 levels.

click on chart for sharper image

Ceridian Index vs. GDP

To help explain this apparent anomaly, note that government spending, no matter how useless, is a direct add to GDP. For example, the more food stamps the government hands out and the more bombs the US drops in Afghanistan, the higher the GDP.

Deficit spending is out of control, and by definition, that adds to GDP.

With trillion dollar deficits coupled with easy money from the Fed and central bankers globally, the best we can say is GDP is hovering at stall speed while those on fixed income are clobbered by rising fuel and food prices.

This mirage won't last. I expect "real" (inflation-adjusted) GDP to take a nose-dive shortly unless home-building picks up sharply.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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I Will Gladly Pay You 100 Years From Now, For a Hamburger Today

Posted: 14 Mar 2012 01:11 AM PDT

UK Chancellor George Osborne proposes 100-year bonds. Essentially his message is "I Will Gladly Pay You 100 Years From Now, For a Hamburger Today". Whether it's Tuesday of next week or Tuesday a hundred years from now, the safe bet is the debt will never be repaid.

The Telegraph reports Britain to offer 100-year gilts

Britain is to offer 100-year gilts, meaning current Government borrowing will not be repaid until the next century, under a radical plan to be unveiled by George Osborne in next week's budget.

The Chancellor hopes that the 100-year gilts will help to "lock in" the benefits of Britain's international "safe haven" status.

Currently, the average duration of the Government's £1 trillion debt is around 14 years – with maturities ranging from months to a 50-year bond issued in 2005. Longer-dated debt is widely thought to offer a country more stability.

A Treasury source said tonight: "This is about locking in for the future the tangible benefits of the safe haven status we have today. The prize is lower debt interest repayments for decades to come.

"It is a chance for our great-grandchildren to pay less than they otherwise would have done because of the government's fiscal credibility."

Fiscal Credibility?

Only a politician could make such a preposterous claim. For another take, please consider The Guardian report George Osborne budget plan could mean never having to pay his debts

George Osborne is to exploit Britain's historically low borrowing rates by making plans to issue "perpetual" government bonds which will never have to be repaid.

In an unprecedented move in the modern era, the chancellor will unveil plans in the budget to relieve the debt burden on future generations by extending the length of bonds to 100 years or into perpetuity.

Britain last issued perpetual gilts in the aftermath of the first world war. These are still being paid at a rate of 3%, which makes it cheaper to carry on paying the loan than pay off the whole debt.

Note that Osborne pledged to eliminate Britain's structural deficit by 2015-16 and to ensure that government debt is falling as a proportion of GDP by 2014-15.

That is clearly not going to happen.

Other Side of the Coin

By the way, if it's such a great deal for the UK Osborne claims, then surely it is not a great deal for fools willing to hold 100-Year bonds for the duration.

Of course, no one will hold 100-year bonds for the duration, except perhaps government pension plans willing or forced to buy the damn things. Rather 100-year bonds will become a plaything of hedge funds speculating on when they will blow up.

A Good Deal for Anyone?

Forget the coin and please explain the need for government to borrow money in the first place. The same question applies to the US, China, Germany, and the rest of the world.

There is no "need", there is only political expediency of vote-buying promises that cannot be met with money that will never be paid back (by inflation or default). This is what happens when there are no fiscal constraints anywhere. This is what happens when currencies are backed by nothing and can be borrowed into existence at will by central banks in response to out-of-control spending by politicians.

At some point, even if there is no default, those 100-year bonds will go for 20 cents on the dollar if not less.

Neither the UK, nor the US, nor anyone else needs 100-year bonds. What we need is sound money, backed by gold, coupled with balanced budget amendments, and an end to fractional reserve lending.

Since that set of needs is highly unlikely barring a global currency crisis, I advise preparing for one. I just cannot tell you when. I can only tell you it's a wise thing to have some gold in your portfolio for when the inevitable happens.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Santorum Wins Alabama and Mississippi, Romney 3rd in Both; Brokered Convention Math Update; Another "Super Tuesday" on April 24

Posted: 14 Mar 2012 12:46 AM PDT

Following a credible albeit nowhere near a knockout performance by Mitt Romney on "Super-Tuesday" pundits came out of the woodwork proclaiming Romney has it locked up.

That message continued all the way through Tuesday morning culminating in Jennifer Rubin's post Time to stop dreaming of a brokered convention.

We're talking about the country's future. And if conservatives really do care about getting rid of Obamacare, disarming the Iranian nuclear threat, restoring funding for defense, avoiding a debt crisis and picking the next couple of Supreme Court justices, isn't it time to cast aside the foolish gamesmanship? Those conservatives, including Santorum, who insist on playing a destructive game that benefits only the president should engage in some introspection and decide if they are in this for their own cockeyed reasons and ambitions or for the good of the conservative movement and the country. And the rest of the party should take note of the GOP version of birthers ("conventioners"?), recognizing just how nonsensical and counterproductive they have become.

This conservative begs to differ with Rubin's opinion that Romney would be good for the country.

Five Points to Consider

Obamacare and Romneycare are essentially the same
The US does not need and cannot afford a war in Iran
Defense spending needs to be cut
There is little practical difference between Romney and Obama except Romney wants a trade war with China
Romney has a Foolish Pledge to Re-Fight the Cold War and is more prone than Obama to start a real war in Iran

That above analysis is not an endorsement of President Obama.
I am writing in Ron Paul.

On Monday February 27, I laid out the Mathematical Case for Brokered Convention. Since then, "Super Tuesday" has come and gone, and this evening some serious cracks in Romney's campaign have developed in the deep South as I expected.

Santorum Wins Alabama and Mississippi, Romney 3rd in Both

This snapshot from Real Clear Politics tells the story.

The Huffington Post adds this commentary.

The possibility that Romney himself won't make the 1,144-delegate threshold to formally wrap-up the nomination became a bit more real on Tuesday.

The strain that this primary has caused on Romney's campaign was evident once again. Romney continued to have trouble winning the GOP base. In Alabama, 67 percent of voters described themselves as conservative. Of those, 36 percent backed Rick Santorum, 35 percent backed Newt Gingrich, while just 24 percent supported Romney. In Mississippi, 72 percent of voters described themselves as conservative. Of those, 35 percent backed Rick Santorum, 32 percent backed Newt Gingrich, and 29 percent supported Romney, according to exit polls.

Faced with those numbers, Romney spokesman Ferhnstrom stuck to a different calculus.

"Our goal was to take out one-third of the delegates and possibly do slight better than that. I think we will exceed that goal," he said. " I don't think anybody expected Mitt to win Alabama or Mississippi. As Mitt said, this was an away game for him, and I think that's absolutely true."

But if defeat in those states was always in the cards, Romney, his aides, and his most deep-pocketed supporters failed to get the memo. The candidate himself boldly declared during his one public appearance in Alabama on Monday: "We're going to win tomorrow." Meanwhile his campaign and an allied super PAC outspent Santorum and Santorum's allied super PAC by a 5.5-to-1 margin in both states combined.

Money, it increasingly appears, can't buy states. More important than the cash, however, may be the continuity of the field. Despite failing once more to notch a win, Gingrich pledged to keep his campaign going -- a vow that will hurt Santorum far more than any super PAC ad.

Brokered Convention Math Update

Totals through March 13 in the table below are from Real Clear Politics 2012 Republican Delegates.

State	Primary	Count	Romney	Santorum	Gingrich	Paul
Total to Date	-	997	476	229	140	64
Iowa	Jan 3	28	6	7	0	0
New Hampshire	Jan 10	12*	7	0	0	3
South Carolina	Jan 21	25	2	0	23	0
Florida	Jan 31	50*	50	0	0	0
Nevada	Feb 4	28	14	3	6	5
Minnesota **	Feb 7	40	2	17	1	4
Colorado **	Feb 7	36	9	17	2	1
Maine **	Feb 11	24	9	3	0	7
Michigan	Feb 28	30*	16	14	0	0
Arizona	Feb 28	29	29	0	0	0
Wyoming **	Feb 29	29	12	7	1	6
Washington **	Mar 3	43	25	7	0	8
Georgia	Mar 6	76	19	3	52	0
Ohio	Mar 6	66	38	21	0	0
Tennessee	Mar 6	58	16	29	10	0
Virginia	Mar 6	49	43	0	0	3
Oklahoma	Mar 6	43	13	14	13	0
Massachusetts	Mar 6	41	38	0	0	0
Idaho	Mar 6	32	32	0	0	0
North Dakota	Mar 6	28	7	11	2	8
Alaska	Mar 6	27	8	7	3	6
Vermont	Mar 6	17	9	4	0	4
Kansas	Mar 10	40	7	33	0	0
Guam	Mar 10	9	9	0	0	0
Northern Marianas	Mar 10	9	9	0	0	0
Virgin Islands **	Mar 10	9	7	0	0	1
Alabama **	Mar 13	50	10	17	12	0
Mississippi **	Mar 13	40	11	13	11	0
Hawaii **	Mar 13	20	0	0	0	0
American Samoa **	Mar 13	9	0	0	0	0

* States penalized half of their delegates.
** Not all delegates assigned, or assigned to candidates who have dropped out

Florida and Arizona Delegates in Dispute

Romney does not quite have half the outstanding delegates so far, but Hawaii and American Samoa results have not yet been posted.

More importantly, Newt Gingrich Will Challenge Winner-Take-All Rules in Florida and Arizona.

I do not know if the challenge will be successful, but Gingrich has a good case. Republican National Committee's rules state that no contest can be winner-take-all prior to April 1, 2012.

"RNC Chairman Reince Priebus warned Florida Republican Party Chairman Lenny Curry of the violation in a December letter quoting the rule, 'winner-take-all' states cannot hold a primary or caucus before April 1, 2012."

Looking Ahead - Dates, Delegates, Current Poll Numbers

Missouri (52) March 17: Romney 32%, Santorum 45%, Paul 19%
Puerto Rico (23) March 18:
Illinois (69) March 20: Romney 35%, Santorum 31%, Gingrich 12%, Paul 7%
Louisiana (46) March 24: Santorum 25%, Romney 21%, Gingrich 20%, Paul 6%

Those numbers do not look good for Mitt Romney to say the least. However, the Missouri poll is stale. It's from February 7. We will find out how stale in a few days.

Another "Super Tuesday"

April 24: New York, Pennsylvania, Connecticut, Rhode Island, Delaware

The fate of a brokered convention may be settled on the next "Super Tuesday" coming up on April 24. However, April 24 is more than a month away, and all the candidates have ample time to stick their feet in their mouths again. Both Romney and Santorum have a tendency to do just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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