I’m often accused of thinking too much in terms of black and white. But sometimes there just aren’t many shades of grey. Take the rich banker question.
It’s clear that a great many people working in finance are about to be paid far too much. George Soros summed it up this week when he pointed out that the apparent profits made by most Western banks this year are merely “hidden gifts from the government”.
With interest rates around zero, banks can borrow for almost nothing, buy government bonds and pocket the yield. That’s hardly the “achievement of risk takers” and shouldn’t be rewarded as such.
But we shouldn’t confine this debate to this year’s profits and bonus payouts. The fact is that some parts of investment banking make extraordinary profits – profits above and beyond those you’d expect a genuinely competitive environment to enable – nearly every year, regardless of how cheap money is.
Edward Hadas of Breakingviews explains why. Investment banks don’t really compete on price. Even where prices for their services are negotiated by clients, they “rarely fall below a level that is high enough to provide fortunes for bank employees and ample shareholder returns”.
This persists partly because the customers are “mostly institutions that are just too close to the banks to rebel” and, of course, because “high pay for workers at the banks generally means high pay levels at the customer institutions which are competing for the same talent” (hedge funds and so on). As long as the eventual clients (the end investors – you and me) keep investing and keep paying the costs of doing so, that won’t change.
So the banks aren’t just profiteering this year. Thanks to their cartel-like pricing abilities, they get to profiteer every year. This is the problem we should be addressing, rather than bonuses, which are merely a symptom of the excess-profit problem.
Finally, a word on the markets. The big question for us is not “is the current rally a huge bounce within a longer-term bear market” (we’re pretty convinced on this one), but “when will it end”?
The answer, says our resident misery-guts James Ferguson, is “very soon indeed”.
Why? Because it is starting to look like Japan in 1993. After a 55% rally the Topix index continued to hit new highs, but only in a very marginal way. By autumn it was falling and by the end of November it was down 22%. James sees a similar pattern in the S&P 500 now. “Failing to make convincing new highs is a warning sign not to be ignored,” he says. “Go cash.”
He’s in good company: US guru Jeremy Grantham – who’s usually right – says in his latest quarterly report that he expects the market to “drop painfully from current levels”.