Tag Archives: Middle East

I’m Hungry. How About You?

You probably haven’t noticed, but the world is on the verge of a horrific global food crisis. The World Bank and the U.N. are not very good at getting anything done, but they are great at record keeping and statistics. Here are a few items that should give you some alarm.

At some point, this crisis will affect you and your family.

Crazy weather and horrifying natural disasters have played havoc with agricultural production in many areas of the globe over the past couple of years. Meanwhile, the price of oil has begun to skyrocket. The entire global economy is predicated on the ability to use massive amounts of inexpensive oil to cheaply produce food and other goods and transport them over vast distances. Without cheap oil the whole game changes. Topsoil is being depleted at a staggering rate and key aquifers all over the world are being drained at an alarming pace. Global food prices are already at an all-time high and they continue to move up aggressively. So what is going to happen to our world when hundreds of millions more people cannot afford to feed themselves? I don’t know, but I bet it will be interesting.

Most Americans are so accustomed to supermarkets that are absolutely packed to the gills with massive amounts of really inexpensive food that they cannot even imagine that life could be any other way. Unfortunately, that era is ending. There are all kinds of indications that we are now entering a time when there will not be nearly enough food for everyone in the world. As competition for food supplies increases, food prices are going to go up. In fact, at some point they are going to go way up.

Let’s look at some of the key reasons why an increasing number of people believe that a massive food crisis is on the horizon. The following are 20 signs that a horrific global food crisis is coming:

#1 According to the World Bank, 44 million people around the globe have been pushed into extreme poverty since last June because of rising food prices.

#2 The world is losing topsoil at an astounding rate. In fact, according to Lester Brown, “one third of the world’s cropland is losing topsoil faster than new soil is forming through natural processes”.

#3 Due to U.S. ethanol subsidies, almost a third of all corn grown in the United States is now used for fuel. This is putting a lot of stress on the price of corn.

#4 Due to a lack of water, some countries in the Middle East find themselves forced to almost totally rely on other nations for basic food staples. For example, it is being projected that there will be no more wheat production in Saudi Arabia by the year 2012.

#5 Water tables all over the globe are being depleted at an alarming rate due to “overpumping”. According to the World Bank, there are 130 million people in China and 175 million people in India that are being fed with grain with water that is being pumped out of aquifers faster than it can be replaced. So what happens once all of that water is gone?

#6 In the United States, the systematic depletion of the Ogallala Aquifer could eventually turn “America’s Breadbasket” back into the “Dust Bowl“.

#7 Diseases such as UG99 wheat rust are wiping out increasingly large segments of the world food supply.

#8 The tsunami and subsequent nuclear crisis in Japan have rendered vast agricultural areas in that nation unusable. In fact, there are many that believe that eventually a significant portion of northern Japan will be considered to be uninhabitable. Not only that, many are now convinced that the Japanese economy, the third largest economy in the world, is likely to totally collapse as a result of all this.

#9 The price of oil may be the biggest factor on this list. The way that we produce our food is very heavily dependent on oil. The way that we transport our food is very heavily dependent on oil. When you have skyrocketing oil prices, our entire food production system becomes much more expensive. If the price of oil continues to stay high, we are going to see much higher food prices and some forms of food production will no longer make economic sense at all.

#10 At some point the world could experience a very serious fertilizer shortage. According to scientists with the Global Phosphorus Research Initiative, the world is not going to have enough phosphorous to meet agricultural demand in just 30 to 40 years.

#11 Food inflation is already devastating many economies around the globe. For example, India is dealing with an annual food inflation rate of 18 percent.

#12 According to the United Nations, the global price of food reached a new all-time high in February.

#13 According to the World Bank, the global price of food has risen 36% over the past 12 months.

#14 The commodity price of wheat has approximately doubled since last summer.

#15 The commodity price of corn has also about doubled since last summer.

#16 The commodity price of soybeans is up about 50% since last June.

#17 The commodity price of orange juice has doubled since 2009.

#18 There are about 3 billion people around the globe that live on the equivalent of 2 dollars a day or less and the world was already on the verge of economic disaster before this year even began.

#19 2011 has already been one of the craziest years since World War 2. Revolutions have swept across the Middle East, the United States has gotten involved in the civil war in Libya, Europe is on the verge of a financial meltdown and the U.S. dollar is dying. None of this is good news for global food production.

#20 There have been persistent rumors of shortages at some of the biggest suppliers of emergency food in the United States. The following is an excerpt from a recent “special alert” posted on Raiders News Network: “Look around you. Read the headlines. See the largest factories of food, potassium iodide, and other emergency product manufacturers literally closing their online stores and putting up signs like those on Mountain House’s Official Website and Thyrosafe’s Factory Webpage that explain, due to overwhelming demand, they are shutting down sales for the time being and hope to reopen someday.

Not good signs.


Investors: Are You Kidding Me?

I don’t have a clue as to why the Dow is still trading above 12,000. The global economy in 2013 looks awful.

The Eurozone crisis is worsening, heavy-handed, almost emotionally-driven fiscal austerity measures are deepening recessions in most member countries, continuing high oil prices and a severe credit crunch are completely undermining any prospects for recovery.

And, I am an OPTIMIST!

The Eurozone banking system is turning into isolated stovepipes as cross-border and interbank credit lines are cut off and capital flight continues. Greece’s upcoming disorderly exit from the Eurozone will create a huge, apocalyptic bank run. I have only used “apocalyptic” once once in 370 posts.

Spanish and Italian interest rate spreads are back to their ridiculous and unsustainable levels, and the Eurozone appears to need not just an international banking bailout (as happened recently in Spain) but a sovereign bailout as well. Smart money says the Eurozone goes full bore into a disorderly exit from itself in 2013.

Back at home, the US economic performance is weakening, with first-quarter growth a ridiculous 1.9%. Job creation stalled in April and May, and it is probable that the rate could completely stall out by year end. We have talked about why jobs aren’t coming back before. There is the real risk of a double-dip recession next year, as tax increases and a continuing housing market disaster will reduce growth in disposable income, consumption and confidence. Doesn’t matter who gets elected in November.

Political gridlock will continue. There will be fights over the debt ceiling, student loans, the JOBS act, fiscal policy and taxes. There will be new rating downgrades and this time, a real risk of a government shutdown, which will further depress consumer and business confidence, reduce spending and accelerate a flight to safety that should knock the Dow down to below 8,000.

China, is actually a mess. Their growth model is totally unsustainable, their leadership is way too slow in accelerating structural reforms, and its investments are heading underwater. Leadership must reduce national saving and increase consumption, but politics and a difficult leadership transition will result in policy that does too little, and does it way too late. And, how many women do you see here?

We are all tied together now on this little planet. The Global economic slowdown will create a massive drag on growth in emerging markets, given their trade and financial links with the US, China and the European Union. At the same time, government intractability in emerging markets, and a collective surge towards greater state capitalism, will slow the pace of growth and will reduce their resiliency.

If all of that isn’t freaky enough, consider the long-simmering tensions in the Middle East between Israel and the US on one side, and Iran on the other, on the issue of nuclear proliferation. The current negotiations are likely to fail, and as we have pointed out on this blog a couple of months ago, tightened sanctions will not stop Iran from building nuclear weapons. The US and Israel will not accept negotiations, so even if the rest of the world were rosy, a military confrontation in 2013 would lead to a massive oil price spike and a global recession.

If you are a Global economic leader, you’re first response should be to shy away from risk, especially when no matter in which direction you turn, you see more and more.  So, most leaders are adopting a wait-and-see position which exasperates the slowdown and makes a Global recession largely self-fulfilling.

And, if you think that we have already seen this movie in 2009-2009, and think, so … how bad can it be? Think again. Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of, or have already run out of policy bullets. Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. And, “Twist” is a cruel joke. Cruel, because it creates a sense that Congress is actually doing something to fix the economy when the time for fixing has come and gone.

Economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited any possibilities for further fiscal stimulus.

Sovereign risk has now become bank risk. In the Eurozone, sovereigns are dumping a larger fraction of their public debt onto their banks’ balance sheet.

To try and prevent a disorderly outcome in the Eurozone is futile because of the first law of cat-herding. The current fiscal austerity needs to be implemented much more gradually, a growth contract should complement the EU’s new fiscal contract, and a fiscal union with debt mutualization (Eurobonds) should be implemented.  In addition, a full banking union, starting with Eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the Eurozone. But, of course none of that is possible. Look no further than Germany for the answer.

Germany, understandably, resists all of these key policy measures, as it is obsessed with the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration. Why on earth, should Germany carry the weight for countries who have irresponsibly led themselves into fiscal and economic policy disaster?

The Eurozone bubble may be the largest to burst, but it is not the only one threatening the global economy in 2013. Stay tuned. Sell all your equities. Stock up on canned goods and booze, and batten down the hatches.

Toothpaste Tube Economics.

Mr. Lebowski: “The bums will always lose…”


The Big Lebowski, 1998

Posted here with permission by the author, our CEO, Tim Handley. Enjoy!

It is no surprise that there has been and continues to be a populist uprising in the Middle East known as the ‘Arab Spring’.  In the United States, we have a similar uprising on scales not seen since the Viet Nam war, and this is known as the ‘Occupy’ movement. The ‘Arab Spring’ and the ‘Occupy’ movement are quite analogous.  In both regions where revolution is either percolating or has boiled over, political and economic power is concentrated in the hands of a very few, and large numbers of people think that this isn’t just, but the few that hold the power are loathe for it to be relinquished.  You say you want a revolution?  Well, you know…  get ready because when on an unsustainable path, often there are shifts, sometimes seismic in nature.  As with plate tectonics, as pressure builds when one mass wants to move one way and another mass stands in opposition, there will be a rupture, and how cool is it that this is one letter away from rapture?  The next thing you know, there are people on the streets, tear gas canisters hitting and injuring veterans, and a bloodthirsty extreme right wing cheers as rotund police officers spray defenseless Sonoma State students point blank with mace.

This is quite predictable and should be expected to intensify.  None other than Alan Greenspan himself in his book, The Age of Turbulence, wrote that the only problem with unchecked capitalism is the tendency for a growing wealth divide – to which he offered no functional remedy – but did forecast that the logical outcome of this, historically, was a populist revolution.   And a populist revolution would likely be a substantial impedance to continued economic prosperity for our country, and unfortunately, one that could not be remedied by lowering some interest rates.  So, he thought toothpaste tube economics  (squeezing from the bottom to keep the top fat with the end result being the very top receiving the reward from the effort), could ultimately disprove the perfect nature of the capitalistic model.  I think Greenspan’s attempt at a solution had something to do with shareholder empowerment as a more viable alternative to government regulations as a way to ward off revolutions and other seismic shifts.  And since his book came out, he has testified before Congress how mystified he was at how little accountability to which the average shareholder held the average board of directors.  Oh how I used to hang on his every word!

About the wealth gap:  According to Robert Reich, the top 1 percent of income earners went from 8% of the total annual income in the mid 1970’s to 23% in 2007.  So today, 15+% of the country’s income now goes to a place where it doesn’t get circulated back into the economy with any scale.  In a best case, the rich guy stuffs his excess cash in his mattress (metaphorically speaking, of course, we’ll call the mattress ‘The Caymans’), but more typically, purchases assets which fuel asset bubbles, such as real estate, oil futures, etc.  Conversely, the middle class circulates its income back into the economy via rent, food, braces, shoes for their kids, etc., thereby sustaining merchants, vendors, contractors, restauranteurs, etc, and creating the multiplier effect that marks a robust economy.  As the middle class goes, so goes the whole economy.

So if the siphoning of wealth away from the middle class – the segment of the economy which provides the greatest multiplier effect – meant simply draining money from the economy, it would cost about $2.5 trillion dollars per year.   But, asset bubbles also impacts the cost of living for the middle class (gas and housing expenses, for example).  Combine lower income (15%) with higher cost of living, and you have  … downward pressure on the middle class.  At some point, as the middle class continues to shrink and the number of those that are living in poverty grows, they are going to call Bullshit! (revolution), just as has always happened in nearly every society where wealth gets concentrated in such a fashion.

Interestingly enough, the last time that income was as concentrated as it is today was … wait for it … 1928.  2007 and 1928 both saw the richest 1% earning 23% of the total income pie for the country.  In 1928, it didn’t end so well for the economy…  And in 2008, it didn’t either.

Sadly, it is the outsourcing of our jobs to other countries that helped create this wealth gap.  If you can hire for $10 offshore what you were paying $100 for domestically, you get to put $90 in your pocket, if you are the corporation.  Often this discount is enabled because in impoverished countries, you don’t have to spend money on things like, say, worker safety (I’m talking to you Tommy Hilfiger, Kohls, and The Gap… no sprinklers nor fire exits?  Really?) or environmental controls.  There is a win-win potential in this, especially if destitute countries get to enjoy an increased standard of living in the deal, which as a global citizen, I consider a good thing, especially if they use some of their profits for things like smoke alarms.  And of course our corporations win by making more profit.   But much like the impoverished country’s gains are tainted if they do not buy smoke alarms and increase worker safety, our gains are tainted when we fail to retrain the workforce that no longer has marketable skill.   And we are not.  Profits that are enhanced by global outsourcing should be levied, with the proceeds going directly into education.

Sadly, our country is moving in the opposite direction.  Taxes on the top earners and corporations is at a 60 year low, and education spending per capita is not far behind.  And our ranking amidst other industrialized countries reflects this trend, 14th in reading, 17th in science, and 25th in math out of the 34 countries measured by the Organization for Economic Co-operation and Development (OECD).  As the world economy becomes more seamless, we will have to compete for jobs from a larger pool of candidates, and the smartest will get the best jobs.  Further, as education gets squeezed, and teachers get furloughed, which among many other trends increases the chasm between the ‘haves’ and the ‘have not’.  Rich folks educate their kids outside of schools, poor folks can’t, they are too busy holding down two jobs.  Rich folks put their kids in sports and arts that used to be in public schools, poor folks do not, as these programs cost money.  Sadly, they even cost money inside public schools nowadays.  This vicious cycle shows no signs of abating anytime soon.   Extrapolating the trend puts is in a world where only the rich will be able to afford quality education, leaving the rest of the masses to populate the reality TV shows that keep the wealthiest prejudiced against the poor.  Boom times for Jerry Springer and Dr. Phil…

This runaway concentration of wealth is self defeating for the rich.  If they don’t get pinched by a revolution, lynch mobs in their gated communities, or a radical political swing in the other direction away from capitalism, there won’t be firefighters to rescue their cleaning lady, or teachers to teach their pilots’ kids how to do math, or people to police the streets of their chefs, or state services to provide licenses to their masseurs.  Inconvenient!

There is irony in the fact that a well informed electorate is the key to policy changes that would help this situation, and perhaps increment it toward solutions.  But thanks to a web of interrelated schemes that game the system to favor incumbent wealth, many of those that would be fervent supporters of the changes necessary to avoid revolution are channeling their rage at the very policies that would save the country.  (Why do I suddenly want to wear a sun hat with tea bags hanging from the brim?)    Fox news and Citizens United alone are probably enough to keep any meaningful economic reform from happening, but duping the dup-able.  “Those same hippies that want to fix this also want to give gay folks the right to adopt and marry, and want to take away our second amendment rights!  So we can’t have those kinds of people in office, just ask Hannity.  And why do I feel like I am in the bottom of a tube and being squeezed?  Keep the government’s hands off my medicare!”

Oh Fox, do you ever choke on the stench of all the red herrings you toss around?  You can only squeeze a toothpaste tube from the bottom for so long before it is spent.

Three Dangerous Myths.

I think someone said this a long time ago, but for some reason Andy Rooney gets credit for it, “People will generally accept facts as truth only if the facts agree with what they already believe.”

Somehow, the American public has gotten three “facts” into their brains and they have become the bedrock on which way too many decisions, fear, paranoia, political beliefs and prejudices are based.

Those “facts” are:

1)      Most of America’s oil comes from the Middle East. Therefore, we are held hostage by rich Arabs.

2)      Most of what consumers buy is made in China. We buy nothing made in America anymore.

3)      China owns most of America’s debt. They bought it on purpose to control us.

Now, I know the following actual facts are going to surprise those who are reasonable, anger those who are not, and confound and confuse those who distrust government statistics, but nonetheless, here they are:

1)      Only 9.2% of oil consumed in America comes from the Middle East.

Fact: The U.S. consumes 19.2 million barrels of petroleum products per day (USEIA). 49% of those 19.2 million barrels (9.4 million) is produced domestically. The rest is imported. Where from? The Persian Gulf region has created and imported 9.2% of the total petroleum supplied to the U.S. in 2011. Back in 2001, that number was 14.1%. So, we are less dependent on Middle Eastern oil every year.

The U.S. imports more than twice as much petroleum from Canada and Mexico than it does from the Middle East. But, this is still not good – it means we are dependent on other countries for over half our oil. Just not the Arabs, whom everyone seems to think controls our oil supply. But, I have never heard anyone curse the damned Mexicans or Canadians for holding us hostage to their oil.

Second inconvenient, yet actual fact:

2)      Only 2.7% of what we personally consume are goods made in China. Almost 90% of US Consumer spending goes to goods made in America.

Fact: Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services. Now, of course, no one believes this as they can plainly see that almost everything in Wal-Mart is made in China. Remember that Wal-Mart generates $260 Billion in US revenue annually, but our total spending is close to $14.5 Trillion.

The Bureau of Labor Statistics tracks average American consumer spending in an annual report called the Consumer Expenditure Survey. In 2010, the average American spent 34% of their income on housing, 13% on food, 11% on insurance and pensions, 7% on health care, and 2% on education. Those categories make up nearly 70% of total spending, and are comprised almost entirely of American-made goods and services (only 7% of food is imported, according to the USDA). Want more proof? The U.S. is on track to import $340 Billion worth of goods from China in 2012, which is 2.3% of our $14.5 trillion economy.  That’s it.

And while we are on the subject, most of the skeptics will point to this equally wrong-headed notion that America’s manufacturing sector has been in steep decline. Another inconvenient fact is that America’s real manufacturing output is at an all-time high. What IS in decline is the number of manufacturing jobs required to create that output. Because we have figured out how to use technology, we now produce far more stuff with far fewer workers than we have done in the past. Sixty years ago, it took 30,000 people to produce 6 million tons of steel. It now takes 5,000 to produce 7.5 million.

All those jobs that have disappeared overseas? It seems they have disappeared in the exhaust of technology instead.

Third inconvenient actual fact:

3)      China only owns 7.8% of U.S. government debt. We own almost all the rest.

Fact: As of August of 2011, China owned $1.14 trillion of Treasuries. Government debt stood at $14.6 trillion that month. That’s 7.8%.

The largest holder of U.S. debt is the federal government itself. Various government trusts like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion. Both are unique owners: Interest paid on debt held by federal trust funds is used to cover a portion of federal spending, and the vast majority of interest earned by the Federal Reserve is remitted back to the U.S. Treasury. In other words it is free debt.

The rest is owned by state and local governments ($700 billion), private domestic investors ($3.1 trillion), and other non-Chinese foreign investors ($3.5 trillion). In fact, the combined holdings of Japan and the UK are bigger than China’s holdings. I have never heard anyone say that we are owned by Japan or the UK, have you?

Euro Banks Running Scared.

Not a good signal.

Europe‘s troubled banks accelerated efforts to pull loans from countries around the world, including Australia, towards the end of last year as the euro-zone debt crisis intensified. Figures released by the Swiss-based Bank of International settlements show Europe’s banks cut more than $8 billion (USD)  from the Australian economy as they began to feel the funding squeeze at home. During the second half of last year, most European banks began selling down their international loan portfolio or simply turned off the lending tap, the Swiss-based Bank of International Settlements (BIS) said.

This coincided with a period in which many large Australian companies were attempting to refinance loans they had locked-in during the global financial crisis.

“Pressures on European banks to de-leverage increased towards the end of 2011 as funding strains intensified and regulators imposed new (capital) targets,” BIS said in its March quarterly review released Friday morning.

The report found it was largely an orderly exit by European banks, with other global banks and bond markets able to step in to replace financing. This helped local businesses avoid a credit squeeze. Senior Australian bankers told Business Day that Asian banks have become more active in terms of financing large corporates in the Australian market. At the same time, US banks have started lending again.

“Come the second half and with all the problems that were going on, you started to see a lot of European banks pull back and repatriating capital, whether it was to France or other parts of the region,” one institutional banker with a major Australian lender said. “European names just aren’t in the transactions that traditionally they’ve been in.

Towards the end of last year, European banks had been unable to raise funds on wholesale markets and for those banks rolling over short-term loans, costs surged back to levels last seen at the height of the financial crisis. While Australian banks were still able to raise funds through the year, it was these same pressures on global money markets that have seen financing costs run up, which have forced some to hike interest rates for borrowers.

Still, a massive injection of funds by the European Central Bank into the region’s banking system has helped ease strains on financial markets and economic activity. The offer of more than 1 trillion worth of cheap loans to Europe’s banks since December has helped improve funding conditions, the BIS said.

The BIS figures, which cover the period from June to the end of September, show French banks pulled more than $4.5 billion (USD) worth of loans from the Australian economy.

Italian, Irish and Spanish banks each cut their exposure by hundreds of millions of dollars.

At the same time, Australian banks aggressively cut their exposure to some of Europe’s troubled economies, pulling billions of dollars in funds from Belgium, France and Spain. Global banks also sharply reduced their exposure to Europe and the Middle East, the report found. What this tells us is that the European banks are pulling back to contain their exposures Internationally, while repatriating capital around the European Central Bank, a sure sign that the European Banks sense trouble at home. And, soon. 

Why I Am Leaving Goldman Sachs.

This is an article written by GREG SMITH in today’s New York Times.
goldman sachs logo

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.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. 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.

Blankfein     Gary Cohn

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.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

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.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus,God’s work, Carl LevinVampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.


And these children that you spit on

As they try to change their worlds

Are immune to your consultations

They’re quite aware of what they’re going through

Nude Calendar Protests Muslim Oppression of Women

The word revolutionary is likely to bring to mind faded khakis, bandanas — just about anything, in fact. But, a woman in the buff? But, Aliaa Magdy Elmahdy, a young Egyptian student and activist, really did spark a small revolution in October when she posted a nude photo of herself (along with several artistic nudes) on her blog, and tweeted about the post using the hashtag #NudePhotoRevolutionary. Soon others were following suit, using the hashtag to announce their own nudity, in a show of support for a very brave woman in a historically uncompromising Middle Eastern country.

The original post is here (warning: definitely not safe for work). In that post, Elmahdy wrote the following; dare I call it a manifesto?

Put on trial the artists’ models who posed nude for art schools until the early 70s, hide the art books and destroy the nude statues of antiquity, then undress and stand before a mirror and burn your bodies that you despise to forever rid yourselves of your sexual hangups before you direct your humiliation and chauvinism and dare to try to deny me my freedom of expression.

The message was written in Arabic and then in English, like most of her posts. After a few months of Twitter activity on the #NudePhotoRevolutionary hashtag, the movement has coalesced into a calendar. Maryam Namazie, whom I believe is an Iranian immigrant to Britain, and another outspoken advocate of women’s rights in Muslim countries (especially those practicing Sharia Law), put it all together. She describes the calendar and its goals here (warning: mildly unsafe for work), where she also includes links to donate or download the calendar (neither of which action requires the other).

Namazie says: ‘What with Islamism and the religious right being obsessed with women’s bodies and demanding that we be veiled, bound, and gagged, nudity breaks taboos and is an important form of resistance.’

The calendar is designed by SlutWalk Co-founder Toronto, Sonya JF Barnett who says: ‘I felt that women needed to stand in solidarity with Aliaa. It takes a lot of guts to do what she did, and the backlash is always expected and can be quite hurtful. She needed to know that there are others like her, willing to push the envelope to express outrage.’

Both Elmahdy and the movement she started have provoked outrage amongst Egyptian officials, not to mention elsewhere in the Middle East. Asserting the right not to be censored was important enough for some of these women to risk definite social – and possible political – pushback.

One might well ask, how does getting naked empower women? In the West, isn’t it quite the opposite? That may well be, but neither nudity nor modesty is automatically exploitational. It’s the idea of having the decision of how women may behave, dress, or express themselves taken away by men. Reasserting this right is, I think, the point. Thus, the reason the calendar was released on Thursday, March 8th, which is International Women’s Day. Maybe we should send a copy along with a vaginal probe to Bob McDonnell in Virginia.

Proceeds from the calendar go towards women’s right and freedom of expression.

Gas Prices Have Doubled Since Obama Took Office. Really?

Higher gas prices are an easy target. Newt Gingrich has been asking people to tweet “Newt = $2.50 gas.” Not that any president can do anything about gas prices, but politicians don’t care and assume that we are as stupid as we usually are, and that we don’t understand the first thing about economics or commodity speculation.

Where does the new wave of gas price anger come from? Well, it comes from higher gas prices. But we should be used to those. They were high one year ago, spiking because of new uncertainty in the Middle East (which hasn’t really ended) and because of seasonal demands. Commodities economists could take politicians into a nice, air-conditioned room and explain this stuff to them, but they wouldn’t listen. High prices are proof, for Republicans, that the Keystone Pipeline should have been approved yesterday and built at double-size. They are proof, for Democrats, that the Koch Brothers are truly heinous, “keeping oil off the market, storing it in offshore tankers and waiting to cash in when the cost of oil rises.”

But most of the carping is coming from Republicans. They have a killer line: Gas prices have doubled since Obama was inaugurated. The first indication that this might be misleading is that Michele Bachmann coined it. The second indication: Actual data. Look at a chart of gas prices since 2008:

Screen shot 2012-02-29 at 10.35.53 AM

This is a true statement: At the end of 2008, gas prices were half of what they are now. The twist is that the end of 2008 was also the financial apocalypse. The day that Obama was sworn in, the Dow plunged to 7,949. It’s now above 13,000 again. The month that Obama was sworn in, the economy shed around 600,000 jobs — the third consecutive month with a loss that size.

Three years ago, if you wanted to point to data and say “See? This is how Obama is failing us,” you had a lot to choose from, but you couldn’t choose gas prices. Today, you can’t really attack Obama on stock prices; the argument about unemployment is complicated, and involves discussion of the “real unemployment rate.” Instead, you have to argue that commodities of all kinds — gas prices especially — are more expensive because of Obama’s screw-ups. Maybe we should invade Iraq again. That worked out pretty good the last time.

Four Reasons To Stay Gloomy About The Global Economy.

Austerity. China. The Housing Market. The Middle East.


Mario Draghi and the European Central Bank are doing what they can, but the eurozone is still having economic problems

Since late last year, a series of positive developments has boosted investor confidence and led to a sharp rally in risky assets, starting with global equities and commodities. Macroeconomic data from the United States improved; blue-chip companies in advanced economies remained highly profitable; China and emerging markets slowed only moderately; and the risk of a disorderly default and/or exit by some members of the eurozone declined.

Moreover, the European Central Bank, under its new president, Mario Draghi, appears willing to do anything necessary to reduce stress on the eurozone’s banking system and governments, as well as to lower interest rates. Central banks in both advanced and emerging economies have provided massive injections of liquidity. Volatility is down, confidence is up, and risk aversion is much lower—for now.

But at least four downside risks are likely to materialize this year, undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets.

First, the Eurozone is in deep recession, especially in the periphery, but now also in the core economies, as the latest data show an output contraction in Germany and France. The credit crunch in the banking system is becoming more severe as banks de-leverage by selling assets and rationing credit, exacerbating the downturn.

Meanwhile, not only is fiscal austerity pushing the eurozone periphery into economic free-fall, but the loss of competitiveness there will persist as relief at the waning prospect of disorderly defaults strengthens the euro’s value. To restore competitiveness and growth in these countries, the euro needs to fall toward parity with the U.S. dollar. And, while the risk of a disorderly Greek collapse is now receding, it will re-emerge this year as political instability, civil unrest, and more fiscal austerity turn the Greek recession into a depression.

Second, there is now evidence of weakening performance in China and the rest of Asia. In China, the economic slowdown under way is unmistakable. Export growth is down sharply, turning negative vis-à-vis the eurozone’s periphery. Import growth, a sign of future exports, has also fallen.

Similarly, Chinese residential investment and commercial real-estate activity are slowing sharply as home prices start to fall. Infrastructure investment is down as well, with many high-speed railway projects on hold and local governments and special-purpose vehicles struggling to obtain financing amid tightening credit conditions and lower revenues from land sales.

Elsewhere in Asia, Singapore’s economy shrank for the second time in three quarters at the end of 2011. India’s government predicts 6.9 percent annual GDP growth in 2012, which would be the lowest rate since 2009. Taiwan’s economy fell into a technical recession in the fourth quarter of 2011. South Korea’s economy grew at a mere 0.4 percent in the same period—the slowest pace in two years—while Japan’s GDP contracted at a larger-than-expected 2.3 percent, as the yen’s strength weighed down exports.

Third, while U.S. data have been surprisingly encouraging, America’s growth momentum appears to be peaking. Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011. Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; indeed, two percentage points of the 2.8 percent expansion in the last quarter of 2011 reflected rising inventories rather than final sales. And, as for external demand, the generally strong dollar, together with the global and eurozone slowdown, will weaken U.S. exports, while still-elevated oil prices will increase the energy import bill, further impeding growth.

Finally, geopolitical risks in the Middle East are rising, owing to the possibility of an Israeli military response to Iran’s nuclear ambitions. While the risk of armed conflict remains low, the current war of words is escalating, as is the covert war in which Israel and the U.S. are engaged with Iran; and now Iran is lashing back with terrorist attacks against Israeli diplomats. With its back to the wall as sanctions bite,  Iran could also react by sinking a few ships to block the Strait of Hormuz, or by unleashing its proxies in the region—the pro-Iranian Shiites in Iraq, Bahrain, Kuwait, and Saudi Arabia, as well as Hezbollah in Lebanon and Hamas in Gaza.

Moreover, there are broader geopolitical tensions in the Middle East that will not ease—and that might intensify. The Arab Spring has produced a relatively favorable outcome in Tunisia, where it started, but developments in Egypt, Libya, and Yemen remain far more uncertain, while Syria is on the brink of civil war. In addition, there are substantial concerns about political stability in Bahrain and Saudi Arabia’s oil-rich Eastern Province, and potentially even in Kuwait and Jordan—all areas with substantial Shia or other restless populations.

Beyond the countries affected by the Arab Spring, rising tensions between Shiite, Kurdish, and Sunni factions in Iraq since the U.S. withdrawal do not bode well for a boost in oil production. There is also the ongoing conflict between the Israelis and the Palestinians, as well as strains between Israel and Turkey.

In other words, there are many things that could go wrong in the Middle East, any combination of which might stoke fear in markets and lead to much higher oil prices. Despite weak economic growth in advanced economies and a slowdown in many emerging markets, oil is already at around $100 per barrel. But the fear premium could push it significantly higher, with predictably negative effects on the global economy.

With so many risks in so many places, investors, not surprisingly, will eventually prize liquidity in their portfolios, while shunning riskier fixed assets again when these tail risks materialize. That is yet another reason to believe that the global economy remains far from achieving a balanced and sustainable recovery. 

Why Most Economists Are Just Plain Wrong!

Nouriel Roubini and me. Hard to argue the facts.

Good stuff Mimi – thanks.

Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up, though most all of it is minimum-wage jobs. Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life, though as I point out in the previous post a close examination of the 5% increase suggests it is closer to a real 1% increase. And consumption growth has been relatively resilient though far from strong.

But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012. Why is all the recent economic good news not to be believed?

First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes will be raised to reduce the fiscal deficit. Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.

At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate. More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job. Indeed, firms are still trying to find ways to slash labor costs.

Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).

Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as foreclosures come to the market in earnest, tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holds down capacity-utilization rates. And most capital spending will continue to be devoted to labor-saving technologies, again implying limited job creation. The professional jobs that have been lost are not coming back.

At the same time, even after six years of a housing recession, the sector is comatose. With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand. Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes. Thus, the vicious cycle of foreclosures and lower prices is likely to continue – and, with so many households severely credit-constrained, consumer confidence, while improving, will remain weak.

Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth rate would be to reduce its large trade deficit. But net exports will be a drag on growth in 2012, for several reasons:

  • The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast.
  • Slower growth in many advanced economies, China, and other emerging markets will mean lower demand for US exports.
  • Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high.

It is unlikely that US policy will come to the rescue. On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.

Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy cannot address liquidity problems – and banks are flush with excess reserves.

Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.

Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the Eurozone, where debt restructurings – or worse, breakup (which is my bet) – are risks of systemic consequence; the outcome of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with Iran, Israel,  instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in China; and the consequences of a global economic slowdown.

Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little. The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.

2012 is probably going to be worse than 2008-2011. Batten down the hatches.