JPMorgan and Goldman Sachs Making Billions in Profits
Two important headlines this morning, both of them fraudulent:
"Chinese economy bounces back," says one headline in the International Herald Tribune.
"JPMorgan profit soars despite downturn," says another.
The average reader or TV viewer will go no further. "Ah," he says to himself, "good news; the worst is over. China is a green shoot as big as the Amazon. And JPMorgan is a leader in the financial sector. If the financial sector is doing well, the whole world economy must be doing well."
But here at The Daily Reckoning, we can't help ourselves. If we see a silver lining, we look for the cloud. We see garbage...we look for the rat... We begin with the JPMorgan profit announcement, because it is the most intriguing. Let us set the stage:
In the last half century, credit has expanded faster even than dress sizes. Naturally, this has made the business of hawking credit extremely profitable. Profits in the financial sector soared to 40% of the U.S. total. And every momma wanted her baby to grow up to be an investment banker.
But then, in 2007 & 2008, the bubble in the financial sector popped. Many banks and financial institutions went broke...or had to be bailed out by the government. Instead of being the world's highest-flying industry...finance became the scene of its biggest crash.
And now, from all we've been able to detect, a fundamental shift has occurred. People are no longer eager to go deeper and deeper into debt. Instead, they are eager to pay off debt...that is, to rid themselves of finance...and to get as far away from the financial sector as possible. Savings rates, for example, have gone from zero to 7% in just the last 12 months.
But in the midst of this remarkable and historic change, we get news that at least a couple of the biggest firms in the financial sector - JPMorgan and Goldman Sachs - are making billions in profits:
"Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results."
This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way -- by lending to worthy projects; they made their dough by "trading" and "investment banking." In other words, they made billions from speculation.
Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: whom were they trading against?
Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?
There is also something fishy about the whole thing. Trading is not only a zero-sum game, it's a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?
Our guess: the fix is in. They are taking advantage of the feds' stimulus programs...and trading against the biggest patsy in the world, the U.S. taxpayer. How? We'll find out how, later...
Meanwhile, there is the news that China is back in business.
"Government spending pushes GDP growth to 7.9% for 2nd quarter," reports the IHT, "...fueled by a large economic stimulus package and aggressive bank lending...a surprisingly strong showing during the global economic downturn...
"...while most other major economies are contracting and suffering from the worst economic crisis in decades, China appears to have turned a corner...
"Growth in the second quarter was driven by strong auto and property sales, a rebound in manufacturing and huge infrastructure spending, which was propping up global commodity prices."
Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today's essay, below...) And stocks in Shanghai are up 75% so far this year.
Now, let's try to get this straight. The world is in a slump. China sells stuff to the world. And yet, China is booming.
How could it be? Again, there's something fishy about it...as if the government were jiving the figures...as if the speculators had taken leave of their senses...and as if the whole thing were just the result of the same kind of misguided 'stimulus' that got us into trouble in the first place...
The Richebacher Letter's Rob Parenteau agrees that something isn't quite right. "Ask anyone who's done business there. Keeping a double set of books in China isn't just common, it's considered 'good strategy.' You've also got under-regulated Chinese banks hiding as much as $500 billion in bad debts - China's own version of 'subprime' loans to small businesses and Asian property speculators.
"On top of that, you've got a $40 billion tab left over from the Beijing Olympics... and a $140 billion tab for rebuilding Sichuan after their 2008 earthquake."
Boom...boom...ka-booooom!
Regards,
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by GaryB on 21 July 2009:
How does China get its quarterly GDP growth stat out in 2 weeks, compared to 2 months for other countries? Alan Kohler on ABC news last week explained that the Chinese GDP growth is based on provincial leaders phoning in their guesses. Rubbery figures don't get much more rubbery than that.
Comment by Coffee Addict on 21 July 2009:
Anyone who has ever had anything to do with the Chinese ministries knows its all based on guestimate which are then reworked to look good. Think back to the USSR and the 5 year plans for the underlying system.
IMPORTANTLY the world (and indeed China) can thank Stern Hu for determining more accurate information on Chinese steel output and demand WHICH was solid enough to support a less reduced iron ore price in the near term.
I'm becoming a bit of a bear on China. Not withstanding China's clear ability to pay the tab in USD and a very solid steel production indicator (courtesy of Mr Hu), politics, perpetual commercial eavesdropping and disorderly government interventions may well diminish business prospects.
Mismanagement of the Hu case may also be symptomatic of an underlying strategic conflicts and disagreement between ministries. I hope for all our sakes (including China) that the pro-business ministries win this particular battle.
Comment by Pete on 21 July 2009:
CA: I generally agree with your posts.
There is a good article on the web called
"How does China ’save?’ Story of the circuitous journey of a US$"
I think you may find it quite interesting.
Comment by Greg Atkinson on 21 July 2009:
The question is, are the Chinese forecasts any less accurate than the ones we put together in Western economies? After all, most forecasts are guestimates to some degree and the further you try and look ahead the more guesses you have to make.
Comment by Michael on 21 July 2009:
Is that our Dan D. over at MoneyMatters admitting that a bull market may be developing?
Comment by Andrew on 21 July 2009:
"Inflation not a Worry"
from MP at the Age today
Malcolm Turnbull won't like the Reserve Bank board minutes released today: they sound very much like a ringing endorsement for the Government's stimulus packages, or ''fiscal transfers'', to use RBA-speak.
And the headline-seeking forecasters trying to talk up an interest rate rise this year also won't like them: there's nothing to justify that view.
Indeed, the RBA is rather plainly saying that monetary policy is on hold for as far as the eye can see, but it's ready to cut rates again if it would help. Inflation's not a worry and there's simply no suggestion of any need to tighten.
Comment by Andrew S on 21 July 2009:
Unfortunately, or is that fortunately, most people don’t get too far past the headlines. So they can be a more powerful tool that anything the gov or RBA can come up with. ‘How’ Goldman is making the money will not matter to most. Just that THEY ARE MAKING MONEY, so we will go and buy Goldman stock. Then when we are feeling good that our stock/s, Goldman / JP, are going up we might go and buy something at the shops…that wealth effect. And so the circle starts again. No matter that it is on a poor foundation, just as long as it starts! So while the Gov’ is bumbling around looking for the ‘answer’ it may have already started…this might buy the US gov’ some time to think. Maybe they will realise that the only answer is to sell Alaska to the Chinese…who knows the US may then be in surplus. Australia has been doing this for years, piece by little piece, why not a big slam-dunk from the Americans, that’s the way they do most things! They might sell it off in the quiet of night while all the happy shoppers are sleeping…. then they can wake to another happy headline…
May the headlines go forth and prosper….
p.s.
Within the article you mention that there is an essay expanding on the theme….”Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today's essay, below...)”…is this posted elsewhere, another post?
Comment by mike on 23 July 2009:
...it wouldn't surprise me to know that all the latrines in the mens' rooms at goldman sachs were 24k solid gold with a faux porcelain finish...those goldmans!!...they may put the taxpayers' money where their mouths are...but when push comes to shove...they know what a real money feels like...those goldmans!!...
Comment by Don on 23 July 2009:
There seems to be a correlation between flash bathrooms and questionable practices - Storm Financial in Townsville were bragging of their dunnies being all marble and gold and then squish like grape!