Crash course in how finance works
Two brilliant distillations of the inner workings of banking and economics stupefy and enlighten in equal measure.
Mentioned: The Goldman Sachs Group Inc (GS)
“The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
If you can’t name the author of that scathing assessment, you can probably guess the investment bank in question. Goldman Sachs was in the news this week, telling The Australian that companies are taking into account ESG when considering merger and acquisition opportunities.
The timing of Goldman’s intervention was somewhat curious for me as only days before I had devoted part of Good Friday to reading Matt Taaibi’s infamous 2009 Rolling Stone profile of Goldman entitled The Great American Bubble Machine. If you want to know how modern banking and the economy work, and have only, say, an hour up your sleeve, it’s not a bad place to start. Over 10,000 informative and occasionally colourful words, Taaibi examines several bubbles—from The Great Depression to the climate crisis—to advance the case Goldman had a pivotal hand in each of them. Goldman declined to speak to Taibbi for the story; and the caustic polemic has not aged well, notes Jonathan Guthrie, head of the Financial Times’ Lex column.
“The piece implied that Goldman was special in its ardour for networking and skimming rents from asset bubbles, the common pursuits of bankers for centuries,” Guthrie wrote in February 2020. “Moreover, Taibbi’s fear that nothing would change has been proved wrong. Regulated lenders, which was what Goldman became in 2008, have since paid a penalty for any bailouts they received. Ever-rising balance sheet buffers are the reason Goldman’s securities trading business now drags on returns. Goldman has the smallest market worth of its peers.”
For the record, Goldman Sachs (GS) carries a narrow-moat rating, and is trading at 20 per cent premium, according to the valuation of Morningstar sector strategist Michael Wong, who recently increased his fair value estimate to $US269 from US$238. “Given the general industry headwinds facing much of Goldman Sachs' business lines and the probability of success of its new initiatives, we assign a high uncertainty rating to our fair value estimate,” Wong writes.
Regardless of your views on Goldman, Taibbi’s essay is as informative about finance and economics as it is entertaining. Not unlike that other brilliant overview that I revisited over Easter, How the Economic Machine Works, a 30-minute animated documentary by Ray Dalio (currently at 21 million views on YouTube).
Goldman Sachs - growth of $10,000
Source: Morningstar Premium; data as of 9 April 2021
In Firstlinks this week, Graham Hand examines the origins and purpose of superannuation and how you can make it work beyond the grave. Jon Kalkman, a former director of the Australian Investors Association, contributes to the discussion by showing how long your money will last based on differences in spending and earning rates.
Elsewhere, Morningstar equity analysts Adam Fleck and Gareth James survey the Australian share market and identify the rare pockets of value.
The everyday investor is changing stock-markets, argues Morningstar columnist John Rekenthaler.
The a2 Milk Co is significantly undervalued. Despite the covid disruptions the speciality dairy producer is set to leverage its strong brand and pricing power, says Adam Fleck.
Lewis Jackson discusses the motives behind AGL’s separation with Morningstar equity Adrian Atkins.
The economic recovery is expected to deliver dividend upgrades. Nicki Bourlioufas reveals which companies will lead the way.
Can you owe $800,000 tax on a profit of $45,000? Alexandra McQueen looks at how one novice trader got himself entangled with the taxman.
And finally, in Your Money Weekly, Peter Warnes explains why the RBA's loose monetary policy promise suggests uncertainty not confidence. Australian household and business balance sheets aren’t as robust as you might think, Warnes writes.