Funny thing about Goldman.
Over the course of last decade, the public has had it beaten into their heads that the folks at 200 West are engaged in some kind of vast, global conspiracy straight out of an Austin Powers sequel aimed at perpetuating regulatory capture and installing former employees in positions of power across the world in an effort to influence policy at the highest possible levels.
And you know what? That narrative isn’t entirely false. In fact, there’s a lot of truth to it. The problem with that narrative is the part where it’s spun as a conspiracy. It’s not a conspiracy anymore than McDonald’s is engaging in a “conspiracy” by force-feeding people food that will (literally) kill them, or anymore than Coca-Cola is engaging in a “conspiracy” by selling delicious bottled diabetes, or anymore than Apple is engaging in a “conspiracy” by selling people the same phone over and over again with a different number stamped on it, or anymore than Twitter is engaging in a “conspiracy” by profiting from their (rather large) role in killing off civil discourse and replacing it with 280-character bursts of hate speech.
McDonald’s sells hamburgers. That’s the business. Coca-Cola sells soft drinks. That’s the business. Apple sells you the same product over and over again. That’s the business. Twitter provides a platform for virtual shouting matches. That’s the business. Goldman is an investment bank and guess what? Big, powerful banks do big powerful bank stuff. That’s the business. It’s not a “conspiracy”, it’s just what they do. That doesn’t mean it’s “good” and that certainly doesn’t mean it’s “God’s work”, but they’re not “out to get you” anymore than Ronald McDonald and Grimace are hoping you have a coronary.
Self-interest and greed are not the same thing as outright malice. The profit motive comes first and if it turns out that in the course of maximizing profits or some other desirable end (e.g. influence), some folks get the shaft along the way, so be it. If later on down the line that gets exposed, well then they’ll be some explaining to do, and that will be a PR nightmare, but even in the most egregious cases of corporate malfeasance, it’s not that people got up one day and decided to fuck people over and as a happy coincidence, that turned out to be profitable. Rather, people got up one day and decided to make some money and as an unhappy consequence, some people got fucked over. Depending on the predisposition of the folks involved, there will be varying degrees of sympathy and/or apathy expressed towards the people who are getting screwed in the process of the money being made and in the worst cases, you get people literally “laughing all the way to the bank”. But again, it’s the “bank” part that matters. The guilty parties might not care one way or another that they’re screwing other people (they might even laugh while they’re doing it) and that’s unfortunate, but were it not for the profit motive, they wouldn’t have been doing whatever it was they were doing in the first place because that wouldn’t make any sense from a self-interest perspective unless they’re psychopaths.
Ok, so what’s the point? Well, the point on Sunday evening is that FT got ahold of an e-mail Goldman’s co-head of global equities trading Brian Levine sent to what FT describes as “the bank’s bigger clients” and (of course), that characterization of the recipients has led some folks to compare the e-mail to Goldman’s Friday note (more here) which found the bank saying this:
Most equity market corrections recover without developing into bear markets or presaging recessions. There have been 16 drawdowns of 10%+ since 1976. Of the 16 corrections, only five occurred around a recession. Of the remaining 11 non-recession episodes, 1987 was the only one that turned into a bear market (i.e., a decline of 20%).
I’m sure FT didn’t mean to spark a debate about the “disparity” between that Friday note and the e-mail in question, but they accidentally did because now what’s happening is that some people are trying to compare the two on the way to doing their best Greg Smith impression by asserting that the above-mentioned Levine is telling “bigger clients” to avoid buying dips while the equities team is telling the rest of the clients that normally, “most equity market corrections recover without developing into bear markets.”
And see, this is the kind of shit that’s regrettable and that’s why I started this post with that lengthy introduction. This thing where the public is being made to believe that everything that comes out of Wall Street has some hidden meaning or is otherwise designed to benefit the prop desk or play one group of clients against another group of clients is absurd and it actually undercuts the effort to restore trust with Main Street by conjuring conspiracies that don’t exist.
Levine’s letter can be found below and what I would encourage you to do is read it for what it is. Just a guy writing an e-mail to clients and musing about recent market moves.
Via Goldman’s Brian Levine
Thought I’d consolidate a bunch of thoughts and themes gathered throughout the week and try to make some sense out of the 10% correction we’ve seen the past two weeks from a market that had gone a record period of time without even a 5% drawdown!
- Trigger? I’ve heard many “write-off’ this correction as being technical in nature. Well, yes, that was the trigger, but if you’re hanging your hat on that, you’re missing the bigger picture. The market had effectively quadrupled over the past 9 years. Why? Obviously numerous variables contribute, but it would be hard to dispute that unprecedented, globally coordinated easy monetary policy was your primary driver to force investors out on the risk curve. Sure, rates have been gradually rising the past few years, which the stock market has easily digested, but there’s always a threshold that sparks a seminal change. And I don’t think it was a coincidence that the S&P topped out on the very same day 10-year yields made 4-year highs (a week ago Monday the 29th)….and rates have backed up a further 15 bps to 2.8% currently. The fact that bonds couldn’t rally in the equity selloff is evidence of a regime change in the multi-year equity bull market.
- “Bulletproof Psychology” is punctured — It’s generally a late-stage bull market when the greatest justification for buying equities is “there’s nowhere else to put my money” and conformist performance-chasing. Hence, we’ve recently witnessed countless red-flashing warning signals about positional complacency — just in the past few weeks, we saw:
- GS Risk Appetite indicator hit record highs
- Both the Conference Board AND the University of Michigan surveys showed a record percentage of investors expected the stock market to be up this year
- Investors Intelligence weekly survey of 130 market newsletters showed bullishness hit 32-year highs (that’s over 1000 datapoints)
- AAII Sentiment weekly survey of investors’ bullishness hit 8-year highs
- Historically, a high Sharpe return in S&P (steady rises with minimal vol) often presages a major correction, and two weeks ago the 1-month trailing Sharpe of the S&P 500 was over 6!
My response to common justifications for a rebound back:
- “It’s been a non-panicky selloff’ — True, but historically shocks of this magnitude find their troughs in panicky selling. I’ve been amazed at how little “capitulation selling” we’ve seen on the desk, despite outsized market share. The “buy on the dip” mentality needs to be thoroughly punished before we find the bottom.
- “The corporate bid will stabilize the market” — corporates make up —8% of market volume, and —2/3 of buybacks are now bought systematically via 10b5-1 programs. Historically they were far more discretionary in buying sharp declines (not that down 5-10% from all-time highs would really qualify), so although we are seeing increased volumes in corporates this week, generally they haven’t matched the increase in market volume. Longer-term, I believe buybacks increase significantly over the course of the year, but don’t think that’s a major factor over next week or two’s action.
- “This is technical to equities — credit is hanging in” — Well, that was earlier in the week. High yield is really starting to break down vs. equities today (not to mention that HY didn’t participate in the equity rally last month to begin with).
- VIX E’TN post-mortem — Well, it worked as structured…..obviously a +100% daily move drives a short fund to zero — was unfortunate how many didn’t seem to understand that risk (as $3B+ of assets virtually disappeared on Monday)……but it also serves as a cautionary anecdote for market tops. Any short or levered product can go to zero in a day. Ironically, the strategy of selling vol can ALSO work for a long period of time until it knocks you out…..both ultimately proved true. In regards to the stock market, the vol-selling strategy has provided quite a bid to the equity market in recent years —remains to be seen what happens to this trend, but I would expect VIX to ultimately settle back closer to its historical range in the high teens.
- Systematic Flows: per our resident expert Paul Leyzerovich (who has nailed this, btw), the supply baton is currently being passed from Vol-control funds to Risk Parity, and CTA supply has been heavier in EMEA and moving to the US. Overall, he believes we are in the “sweet spot” of supply over the next 1-2 weeks, with about $20b/day of supply
- expected globally. About 3/4 of this supply you should see via futures. It is also important to note that the longer we’ve stayed at these levels, the more supply becomes “irrevocable” — ie. the supply will come even if we rally back.
- Fundamental Flows: Just two weeks after the largest Global Equities INFLOWS ever (+$33B), we get the largest weekly OUTFLOWS ever (- $30B….over half was SPY). Again, this appears to be a flashing sentiment shift, but a week doesn’t make a trend. That said, the above does make a mean sound bite though.
- Client positioning: As of yesterday, client gross positioning ROSE 5% to new highs (and we heard similar at a top competitor). Nets came down, but to find a floor in a 10% 2-week-long correction, you need to see some real portfolio reduction ie adhering to the words of Colonel William Prescott, don’t fire until you see the whites of their eyes.
Other datapoints that are relevant:
- SPY call open interest at all-time high (bearish)
- Are you glass half-full or half-empty? I’ve heard bearish arguments driven by “the S&P still trades at 21 times earnings!” and bullish arguments driven by “the S&P is trading at only 16 times NEXT YEAR’S earnings!”
- Technically, the 100-day moving average has proved critical support for the past couple of years, but we sliced through it yesterday. SPX 2540 is the 200-day, which we haven’t breached in 20 months.
- SPX currently down 3% YTD. Through yesterday client performance is hanging in, with both Equity Long/Short and Quant performance in range of flat to down 1%.
Bottom line, we haven’t reached the short-term bottom, but you’ll know it when you see it (or at least 5 minutes later!). But longer-term, I do believe this is a genuine regime change, one where you sell-the-rallies rather than buy-the-dips.