The Joy of Sachs

Goldman Sachs created history on 14th of July with record breaking profits of more than $3bn in the second quarter. The wall street took this very very positively and the already on a roar Dow Jones sneaked even greater heights.

Goldman claims that most of its profit came not from “proprietary” trading, or punting its own money, but by acting as a middleman, making markets for clients in everything from bonds and shares to currencies and commodities. Such business, were barely profitable in the bull market however has become a gold mine as competition has evaporated and bid-ask spreads (the money dealers pocket on trades) have ballooned. This is because there aren't any big player into market making after the demise of the Lehmans and the Bear sterns of the world.

For a firm that probably would have collapsed without government capital, debt guarantees and generosity of Mr. Buffet and fast-track approval to turn itself into a commercial bank such large profits sounds a little fishy. Moreover the hand out huge bonuses,comparable to what it was paying before the crisis.

However simple economics say that in any business if a single firm is making super normal profits, will attract new players and will ultimately bring down the profits to the normal levels and I believe that this precisely will be case with the US financial services industry. Thus the profit figures on which the US and the global markets are rallying today will abate gradually.

As Mr. Paul Krugman Says "Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong. The huge bonuses Goldman will soon hand out show that financial-industry high fliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand. The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to pre crisis levels. But it’s bad news for almost everyone else.

Hence the true recovery, at least for the Indian context will not happen if Goldman reports higher profit, but will occur when the basic macroeconomic data like the commercial vehicles sales, steel and cement production will start showing positive signals. These are the sectors one should invest because whenever the economic will take place they will definitely gain for sure.