Ep.82: Banker Bonuses And Goldman's Top 4 Buy The Dip Signals

Welcome to the Market Maker podcast hosted by me, Anthony Cheung, where every Friday I talk to a member of the team about what happened in markets this week. From macro themes and single stock news to cryptocurrencies and careers in finance, our aim is simple: to make finance interesting and easy to understand for everyone. So let's get to it. Okay, hello and welcome to episode 82 of The Market Maker. And this week we're going to talk about banker bonuses. I think whenever you see those headlines hit the news sphere, you're always a little bit interested to know what's going on here. And there has been an update from the newly elected UK government, so we're going to delve into that and talk a little bit about banker bonuses. We're also going to talk about US CPI and the midweek collapse of the US stock market. Was that a one-off, or is there something more sinister lurking in that inflation report that came out? And Piers, as ever, is joining me, and he's going to delve into that and give his view. And then it is the 14th anniversary of the collapse of Lehman Brothers this week, on Thursday, so yesterday from when we're recording this. So Both Piers and I are going to give one tale from back then that certainly comes to mind. And I know there's plenty, but hopefully we've picked one good one each. But perhaps before we begin, the biggest news, Roger Federer hanging up the racket.

Yeah.

I mean, greatest of all time.

Well, in my humble opinion, for sure. I think greatest of all time. I know the stats— I mean, I don't know, obviously the stats don't show that. So he's the greatest of all time in some respects. But yeah, it's a bit sad, isn't it? I mean, it's a bit like— it's almost, dare I say, it's a little bit like the Queen passing. It's like we knew it was going to happen. It probably has happened later than we thought. You know, he is 41 after all, right? Um, but yeah, for me, he's my greatest of all time. I know you're— I know, I know you don't agree with that.

Well, look, you're a contrarian. Tim, Tim Henman was an incredible serve and volley player. He was very consistent, you know. But okay, still, I'm gonna fire some numbers at you and then we'll play a guessing game. Okay, so in his career, what do you think was the number of singles titles?

Okay, so not Grand Slams, just any sort of tour event. Uh, God, I've got no idea. I'm gonna go for, um, 241.

Wow. He certainly would be the greatest of all time if that were the case.

Have I got a bit bullish there?

Just a little. 103.

Ah, okay, he's not as good as I thought.

So, so, okay, 2 more.

Is that a record, 103?

No, no, no, I don't think it is. I think it's— I think there's plenty more. I think Djokovic, Nadal, they've all got more than that, I think, right? Yeah. Um, how much did Federer earn all in in his first year as a professional tennis player, do you reckon?

Well, he wasn't very good then, so I'm— and no one knew it.

He wasn't very good. He was a junior world number one.

All right, okay, so let me rephrase that. He wasn't—

maybe not good in your world.

He wasn't winning tournaments, so from a money-earning point of view, he wasn't winning.

You've got to win to earn, right?

That's most of the world hadn't heard of him. He had no media sponsorship deals. So I'm gonna say, I'm gonna say, and this is like early 2000s, I guess, so 20 years ago, probably more, right? So I'm gonna say, I'm gonna say 78,000.

Okay, well, before I give you the number, do you know, I think it was back in '99, possibly, he beat Pete Sampras. And that was on Pete Sampras. There was a really pivotal point when there was a changing of the guard, right? Yeah, beat Sampras at Wimbledon. Do you know who knocked Federer out then in the quarterfinal after Federer had beat Sampras?

Um, Roddick?

Tim Henman.

No, what, beat Federer at Wimbledon?

Yep.

Is that right? God, that is the greatest moment of Tim Henman's life, not, not just his career.

Okay, so you— what was the figure you said? 70—

78,000.

78,000. He earned $28,000.

Wow, amazing. He probably earns that per second last year.

So last year, um, his career earnings grew $129 million in one year.

In the year? Yeah, yeah, he's done all right.

Yeah, pretty good. First tennis player to cross the billionaire mark, right?

Is that right? Is he billionaire?

Wow.

Yeah, yeah, amazing. Well, greatest of all time then, right? Yeah.

So Roger, I know you're a big fan of the pod, so shout out, much love. And, uh, I'm sure you'll be a hedge fund manager or something of the sort.

Exactly, exactly.

This is the, um, the beginning of the next chapter, let's say.

Yeah.

Um, all right, well, look, before we delve into the first topic, which is the banker bonuses, quick reminder: if you're a regular listener to the podcast, or if you're listening for the first time and you enjoy the conversation, please do rate and review the podcast. It really helps to get it out to as many people as possible. I'm going to give you all a target. I just had a quick look, we're on 261 ratings on Spotify. Let's get that up to 300 by the time Piers and I talk next week.

I, I feel it's slowed a bit. We need to— yeah, we need to re-energize the community here.

Come on, guys, because I know that definitely there's a lot more people that listen regularly than there is on that number. So yeah, it'd be amazing if you could convert that into a rating. It really helps. But look, let's talk about the first topic. So the new UK Chancellor has reportedly is planning to scrap the cap on bankers' bonuses in a move to attract more talent to the City of London. Always a delicate issue, of course, because we're in a cost of living crisis. Yeah, people are struggling. And you can imagine, well, even the post I did for social this morning of Leo from Wolf of Wall Street doing the dance, like, that's only gonna rile, um, the Main Street. But for context, that, that what's happened here is the UK has long opposed what were EU bonus caps. And essentially what that meant was it limited year-end payouts to twice a banker's salary.

Oh no, oh, only, only twice my salary as a bonus.

So before we, we kind of discuss this a bit more, so there's a couple of things here. Why is the government doing it firstly? Well, it wants to improve the attractiveness of London as a financial centre. And obviously these are EU-enforced or led rules. The other thing being, it's what they call a Brexit dividend, which is certainly you're trying to take on that, I guess, Boris-led Brexit situation to appease certain camps, if you like. Ending a former EU rule is always seen as a positive thing for the internal politics for a certain pocket of the Conservative Party. That aside though, let's talk a little bit more about the structure of how these bankers get paid. Because one of the headlines that I read in the press only a week ago was that while we're sat here thinking, "Unlimited bonuses.

Wow.

This is like multimillion-dollar bonuses." There was a headline about a week ago, Goldman Sachs are going to cut several hundred jobs as of October. Several hundred.

Yeah.

And a lot of that comes because of the fact that we had a record-breaking year in terms of fees, particularly in the investment banking division from last year. However, analysts now expect Goldman to post a more than 40% drop in earnings this year. So maybe you could explain why such a big drop in their earnings is coming, and then how the bank then takes action to control costs, essentially.

Yeah, so the, you know, a bank like Goldman— look, these banks are all— they're not all different, but like, you can't really compare like for like Goldman Sachs with Bank of America, for example. Um, you got, you got— I'd say, and actually we're going to talk about— this is topical— we're going to talk about Lehman Brothers in a minute in terms of the 14th anniversary and so on. But, um, Goldman Sachs and kind of Morgan Stanley are kind of the, the last two kind of big guns of the what we used to call the broker-dealers. Okay, we'll come on to that when we talk about Lehman's because Lehman was a broker-dealer, but The point being that they're kind of historically, they've come from an investment bank. You know, they are an investment bank. They have sales and trading as well as their IBD divisions. But that's where they were born and that's their bread and butter and that's what they do. They have much less of, although they're trying to address this, much less of the commercial or even retail banking arms. That the big giant banks like Citigroup and Bank of America and HSBC and, you know, and JP Morgan have. So I guess Goldman's are the biggest for IBD revenues, okay, bigger than any other bank, okay. And then their sales and trading division is one of the biggest as well, competing with Morgan Stanley. So they're incredibly dependent as a business on these two revenue streams. Okay, now in 2021, as you said, Goldman's IBD division just smashed it, best year ever. And that's because the deal flow was record, record off-the-scale levels. Deal flow meaning companies raising capital through either issuing shares, so it might be through an IPO, for example, or issuing bonds. So this is their equity and debt capital markets divisions, The volume was the record ever. Um, and then mergers and acquisitions were a record ever level. So there was so many deals, and that's how they make money. Obviously, they're providing a service to facilitate these deals, and they charge a fee, and the fees were through the roof. Okay, fast forward to 2022, literally it's flipped entirely to the opposite end of the spectrum because the macro environment has collapsed. Investor appetite has collapsed, and therefore companies, you know, I've pulled back from raising capital because it's going to be more expensive for them to raise. Okay, so if you can as a business, if you've got enough cash flow to just delay your next capital raise, and they're definitely sitting on the fence. Number of deals sharply, sharply lower. One, perhaps one of the best stats in amongst all of them is the number of IPOs in the US this year so far is the least this century. You've got to go back to 1999 to find the last year with less IPOs. Okay, so that's just one kind of evidence. Um, so fees have collapsed probably 40%, right, on the IBD side. The trading side of Goldman's has done really well in the first half of the year. That, that division does really well when markets are volatile. It doesn't really matter if market's going up or down. It's just volatility and huge volume on the trading side that translates into big fees for Goldman. So they've done really well on that front. I'd say into the end of 2022, you're definitely going to see IBD fees remain incredibly subdued, certainly compared to last year's comp. Will the trading side of the bank, you know, continue to really motor and prop up the overall revenue figure?

I don't know.

Maybe it depends on what your view is. And we're gonna talk about this, bear markets and bear market rallies and, you know, is trading volume flow gonna stay really high or not? I think that's less, that's harder to predict. So that's kind of on the fee side. So Goldman's then, I mean, how'd you cut costs? Well, you know, the best way and certainly for these types of companies especially easily their highest cost is staff. And that's typically the case for most companies as well. But if you're providing a service, right, which is what the IBD division is doing, you're providing a service. Normally, you know, the, uh, you know, looking at your cost base, it's not like, I don't know, a manufacturing company where you've got to pay for a factory, you've got to pay for, you know, um, components to build your products. You, you know, you've got a huge cost base, um, whereas banks or service providers generally have a narrower cost base, and it normally means the salaries are higher. And you're— so the best way to cut costs is to cut people. Um, Goldman's, I would say though, they have a history of this. They have been adding people. I mean, their workforce has risen. What was the stat you were telling me earlier?

Yeah, so they they had 47,000 employees at the end of Q2 this year. That's compared with 39,000 just 2 years ago, and it's been aided predominantly by recent acquisitions increasing their workforce.

Okay, right, yeah, through acquisition. And look, they are trying to spin out, um, like consumer banking kind of platforms and so on, so they are trying to diversify and grow. And as you say, the acquisitions are obviously going to go straight onto the workforce total. But Goldman's historically used to do this thing where at the end of each year they'd cut 5%. Used to do it. They kind of paused on that over the last few years.

Was this one of those cultural things to just try and keep you—

Yes.

In your role?

It was. So at the end of every year, cut the 5% weakest, just cut the fat. Rehire those 5 new people in. And it's kind of— yeah, and as you say, the culture within the bank is, I guess it's kind of ruling by fear in many ways, right? You need to properly deliver, otherwise literally you're out. And I think that kind of culture, I don't know, it's a bit old school and it's a bit cutthroat and perhaps what finance certainly used to be across the whole street. I think things have softened in this day and age on that front. But this is where— this is really the Goldman's culture, um, and it's about hard work ethic, high performance all the time. If you're slightly off it, you're out. And this— and they're bringing it back, basically. I know the headlines seem quite alarming. Oh, they've sacked hundreds of people. And— but, but I think they're just returning to their old model that's really just been on pause for a few years. That, that may be— I don't know.

And that old, that old model might as well be coming back because of the fact that you remember probably 12, 18 months ago they had to increase all of the salaries, particularly of the lower level staff, to compete with reports of working conditions, let's call it. Yeah, um, which were, let's say, challenging on many different levels, but also through the competition, competition with other financial institutions and other sectors, namely technology as well. So their costs— not only have they got more staff, they've got more expensive staff to compete with this current pretty insane labor market conditions that we have at the moment.

But Goldman's can alter their staff costs quite radically by the level of bonuses they pay out. So I mean, this is the original point of this conversation to kick off the pod was like bonuses and what's happening. And like in the US there was no bonus cap, right? And so you could, you know, you last in 2021, I don't know what the bonuses were. But let me tell you, they were very large. OK? What are the bonuses going to be like this year? There aren't going to be any bonuses. Well, I guess this is a slight issue for the bank. Can they literally just go, look, performance has been really bad relative to last year, zero bonuses for everyone? They should do that. OK? Pay no bonuses when it's not going well. Pay bonuses when it is. They should do that, but they can't. Because if you literally go zero, people are just going to leave.

Yeah, I'll be Mr. MS. I'll be like, come, come over here, I've got a nice warm seat for you. So bring your book.

It's not quite as easy as dialing up and down bonuses aggressively, which controls staff costs, which means you don't have to lay people off when times are hard. Um, it's not quite as straightforward as that. But look, bonuses will be way down on last year, of course, which means their staff costs will significantly reduce without them having to go through what maybe a traditional company might need to do, which is lay off, you know, a much bigger chunk of the workforce, you know, 10-20% of the workforce kind of thing. They won't do that. Um, but bonuses in the UK— I mean, well, I should say Europe— I mean, I'm in two minds with this one because I, I fully agree with it's been a real If you take banking and how it's performed in Europe versus banking and how it's performed in the US in the last 20 years, and the US have smashed it, and Europe is a dead, dying dinosaur, right? It's true. And part of the reason— and there's a few reasons, but certainly one of them— we don't help ourselves on an international competitive stage. You know, we've just hampered ourselves by putting in place these caps, which means talent goes away because they're getting better deals elsewhere, which is on the one hand a bit stupid. So I do agree on that respect with this change. Now don't get me wrong, the argument's nowhere near as simple as that. And like, when you're looking down onto politically and looking at Main Street and thinking about the rich-poor divide, then it's disgusting the amount of money that some of these people earn. I mean, it really is. And politically, the timing of this announcement from the UK government— who the hell is in charge over there? What, why, what benefit is there in making this announcement now? I mean, if you were to try and plot, pick a moment in time in the last 20 years, when would be the worst possible time to make this announcement? It's probably now. So the upside, you talk about internally, okay, this appeases the kind of Eurosceptic right-wing side of the Conservative Party. I get that, but who cares? No one cares about—

maybe he So aren't they set to announce a more detailed budget, and perhaps there's some proposals they want to squeeze through that— yes, in that budget, and this is pre-positioning to soften some of the critics, to get what the government wants basically to vote. So it's all— again, yeah, maybe let's disregard the entire national population. Yeah, about appeasing certain pockets of members within the Conservative Party to get a job done.

Yeah, sure. Anyway, look, I, I think it's I think it's the right thing to do from, uh, look, because the UK is so dependent on the financial sector, right? It's like 25% of our economy. We're not messing about here. This is the biggest thing we have. And so, right, let's use Brexit as the opportunity to try and make some changes to make us, you know, competitive to attract talent. That, that makes complete sense to me.

Which, which you've also mentioned before, uh, about technology, right? And the way the tech sector operates.

Yeah.

We're trying to attract fintech talent and so forth.

Exactly. There needs to be way— I think this leadership change within the Conservatives is that kind of fresh start, clean slate, and let's just make some bold decisions to increase our competitiveness and attract talent. It's a no-brainer. So from that regard, I think it's true. But like with the, with the bonus cap though, right, that 2 times salary, this came in years and years ago after the financial crisis. But what the banks did to get around it was, oh well, it's— you can only give a 2 times salary, okay, well, to avoid people going to the US, let's just make their salaries bigger so that then a 2 times bonus actually is still a lot of, a lot of money. And they were kind of forced into raising base salaries, which really then makes it harder for these banks to dial up and down their staff costs in line with the kind of economic cycle. Another reason why Europe's been lagging, they haven't had that agility that maybe the Goldmans in the US have had in terms of dialing things up and down. So they kind of left with high salary bases. So now you lift the cap. The ideal for these banks would be, right, well, let's go back to the old model, lower bases, and then yes, more bonuses, but only if you earn it and you perform well. But of course, you can't lower people's base salaries, because again, they'll just go somewhere else. So they've kind of— it's going to take a few years for this to kind of normalize, I would say, with base salaries not going up. But kind of bonus levels rising if you, if you deserve it. You know, it's a meritocracy after all, right? Big, big bonuses aren't guaranteed.

So let's move on to the next topic, and that is the inflation data we had out the States earlier this week, and what did cause then a big collapse of the US stock market. In fact, the Dow closed down over 1,200 points as the worst day of the year by, by quite some distance. So, Piers, I know you did a post about this to the community talking about, uh, the kind of difference between what mainstream media were latching on to comparative to what you and people in the market evidently were looking at. So perhaps you could explain that.

Yeah, I mean, inflation is a tricky one because there's so many different ways of measuring it. I mean, inflation is just the rate at which the price of goods is changing over time. But lots of different ways. So there's like PCE, CPI, RPI. So lots of different kind of moments in that kind of lifecycle of a product being purchased when you can say, right, what's the price? The preferred, like, from a market point of view, I mean, we're obsessed with the Fed and what are they doing with interest rates. And of course, they're raising rates super fast because of inflation. So what's a really important thing to think is, well, what do the Fed do when they're assessing inflation? What are they most interested in? What are they most closely looking at? And their preferred measure— and they tell us this— their preferred measure of inflation is something called PCE. Um, now this is just looking at the price of goods changing slightly earlier in that kind of purchase cycle, if you like. So they're looking at the price of goods that businesses are selling at. CPI, which is the data we had on Tuesday, that's consumer price inflation, and that's looking at the price of goods that consumers are buying at. Okay, now businesses selling at wholesale prices, right, versus consumers buying kind of retail prices. So anyway, there's this PCE figure, but I'm just going to park that because for September's Fed meeting, which is next, uh, a week. Next week, right? Or is it the week? Yeah. Wow, that's come up fast, right? Um, so the Fed's meeting next week. That— the PCE inflation reading for August doesn't come out until after the Fed's meeting. It's actually next Friday, right? So let's forget that for now, but it's important to understand that is the Fed's preferred measure. But Tuesday's report is like the next most important measure of inflation, which is CPI, Consumer Price Inflation. Now with that one, there's also again several different ways of skinning it. We have the headline inflation, which is just taking everything. And when I say everything, I mean they have a basket of goods, okay? And these are goods that consumers will buy and spend money on typically in an average consumer's life, day to day, what are you spending money on? Let's bung everything in this basket and let's measure the change in price of the total basket each month. And how, how does the total price change compared to the month before and compared to the year before? So we talk about month on month inflation and year on year inflation. Okay. The headline reading came in at 8.3%. That was higher. This, this one was a bit confusing because it's higher than expected but lower than the previous month. So you got a bit from a kind of trading point of view and like a market reaction point of view, that's a tricky middle ground there because, well, all right, it's higher than we were expecting, but at least it's lower than last month and therefore showing that we've had a few months of headline inflation on an annualized basis dropping.

Okay, well, one thing I'd add to that as well— I know you'll talk about the, the core part of this, but one thing just about the headline was that nearly every piece of market-related information I read heading into that report, they were all one-sided talking about this is why you will get a downside surprise today. So I actually think that compounding what you'll discuss on the core side was the fact that the market positioning was highly inappropriate for what was the— as the market thought— going to be a very highly unlikely probability of inflation going up.

And that's a really important point. I'll talk about core in a sec. That's a really important point when you're understanding the massive market reaction we had. Biggest down day for a couple of years, because what people have been thinking for the last 6 weeks As stock markets have been going back up, they've been thinking inflation expectations have peaked. The Fed's, uh, the, the kind of rate of Fed hiking has peaked. The, the, the, the last couple of meetings, 75 basis point hikes, that was the highest, that's the worst. In September, they're going to hike at 50 basis points. November, maybe 25. Who knows, by the end of the year they might have ended their hiking cycle, and maybe they might start cutting because we've got a recession. Wow, right. So stocks have been going up and up and up for 6 weeks. Boy, were they wrong. Okay, this inflation report in one instant just scratched that whole argument out. And, and it's— and let's talk about core. Because this is where it's at. This is why it's really important. So core CPI takes out food and energy. Okay. And historically and traditionally, why do they do that? Because food and energy, typically the price of that stuff is more governed by the supply side factors. You're seeing it in energy at the moment, obviously, with the Russia-Ukraine crisis, that supply side spiking energy prices up. Okay, the point there is interest rates from the central bank have zero effect on supply-side inflation because interest rates are supposed to control demand-side inflation. That's prices going up or down driven by consumers spending money, right? Here, interest rates going up means borrowing is more expensive, consumers spend less, so demand drops, and then you dampen inflation a bit. So core inflation is a better read on whether this inflation problem is entrenched. Is it a broad-based inflation problem where the price of everything's going up? You know, earlier in the year it was really energy and food, right? But now core— and the reading came in at 6.3%, higher than expected, Right? So the same as the headline, higher than expected. But what's really important about this core reading is it'd been trending lower for 5 months. Okay? It went from a peak in March at 6.5, it dropped to 6.2, then 6, then 5.9, 5.9, suddenly bang, popped to 6.3. We're on the way back up. Core CPI was trending down, it's now flipped and it's going back up. And here's the big concern: is this now the beginning of a second wave of sustained upside in core inflation? If it is, then the Fed are definitely not done, and in fact they might even accelerate the rate of hiking. You've got people now talking about a 1%, a 100 basis point hike next week.

Yeah, and the probability of that presently is 24% as far as implied probability is concerned in the short end of rates. And that figure, I think, got up to about 40%. Yeah, um, at one point in the depth of the sell-off that we had earlier in the, in the week.

Yeah, I don't know, I, I can't decide. I, I think they'll probably go— I don't know, that core reading's really concerning. I, I think they'll stick to 75. And they might do then another 75, um, in November. That'll take rates to 4%.

And talking about start to bring in the fours on rates, the hedge fund manager Ray Dalio, which many will be familiar with, of Bridgewater, said that US rates at 4.5% would lead, in his opinion, to a near 20% drop in equity prices if we got to that point. So his rationale was that investors may still be too complacent about long-term inflation. He said that while bond markets suggest traders are expecting an average annual inflation rate of 2.6% over the next decade, his guesstimate is that the increase will be more around 4.5% to 5%. I.e. double over the longer term.

Yeah.

So I mean, 20% doesn't sound that big a figure when you think about— I mean, how much are we off the high that we were trading? I mean, we're— yeah, well beyond that point already. So it's kind of, um, well, he means 20% from here, right? Right. Yeah.

Which I'm just looking at like the S&P. I'll do some super quick math, uh, because we're trading— let's just round it to 39— we're trading at 3,900, right? So that would be a 780-point sell-off, would be another 20% down. Okay, so 780, that would take us to 3,100. And when— then that would be 31—

sorry, when were we last trading 3,100?

Uh, last trading 3,100, uh, in July 2020. Obviously, we— COVID took us down and back. The pre-COVID high was at 3375. Big drop, big banks. So yeah, July 2020 was last time it was 3100. Um, so, and 3100 from a, from a sell-off from top to bottom, because the peak was 4800. Down to 3,100, that's 1,600. What's the maths on that? That's like probably 30, not quite. Yeah, it's about 30%. Now this leads me into an interesting angle that I've just done that quick maths and I'm probably wrong on that. Don't—

So what's the historical precedence? Should I be a buyer at 30%?

Right, so I was listening to a guy called Peter Oppenheimer, who's this dude from Goldman Sachs, very notable macro analyst, um, and he was talking about this stuff, and it was really interesting how he broke it down, um, and I want to talk about two sides of what he was saying. So number one is, what types of bear markets do we have? Because there are different types, and he categorized 3, right? And what, what one are we in now? Okay. And then secondly, what are the typical, um, factors you need to see in place before you can be confident that we've hit the bottom, the bear market's over, and right, the next bull market is going to begin? Okay, so on the bear market types, there's 3: structural bear market, cyclical bear market and event-driven bear market. We're in the cyclical one, in his opinion, and I, I think I agree. Structural is the worst. This is your big giant bubble bursting disasters like the Depression in the 1930s, like the dot-com bubble bursting in 2001. This is typical— the financial crisis in 2008. Typically, from a stock market point of view, you're looking at at least a 60% down, okay, top to bottom. Normally takes about 3 years to unfold. And because the, the drop in value is so great, typically takes on average about a decade to recover, i.e., for the stock market to get back to levels that it was at pre, pre-downturn, okay. Um, so this is typically associated with asset price bubbles and equities and real estate. Rising private sector debt and massive over-leverage, and it all kind of blows up. Okay. Event-driven. Well, that's when you have a shock event. So COVID, perfect example, right? Before COVID actually, the economy was doing pretty well. Certainly in the US, it was gathering momentum. We were thinking about rate hikes and then bang, out of nowhere, massive downturn. Okay, here though, it's short and sharp. Typically, stock markets sell off 30% on average for an event-driven bear market, but then they— because it comes off so quickly, tends to take 6 to 12 months, it rebounds really quickly as well. Okay, so COVID is a perfect example of an event-driven bear market. Finally, it's cyclical, and this is kind of where we're at now, in his opinion, Peter Oppenheimer. And this is just a normal, a more normal economic cycle-driven bear market recession. And this is typically where, you know, in the economic cycle you, you tend to get what, you know, when the economy is growing and growing and growing and you reach full employment. So the unemployment rate's dropping and dropping and dropping, and then what typically happens is consumer consumption is rising and rising, and it leads to inflation going up. and then the central bank have to come in and hike rates to stop inflation going up. Normally the central bank's too late, and so they hike too late and inflation becomes too high, and this leads to a consumer consumption-driven recession because prices are now too expensive and people can't afford to buy as much anymore. Here you typically get a 30% on average. This is, and this is going back decades and decades and decades, going back like 100 years. Of analysis on bear markets, on average you get a 30% drop in stocks on a cyclical bear market. So going back to Ray Dalio at Bridgewater, his point about 20% from here very cleanly ties into that long-term average of stock market downside in a cyclical bear market. Um, now When do we know the bear market's over? When should you start buying? And clearly in the summer, because in bear markets you typically get bear market rallies. And we've just had one, a big one. And these bear market rallies can be really big. And it's not uncommon. You get at least one bear market rally in every bear market. Sometimes it's way more than one. In the dot-com bubble bursting, there were 6 bear market rallies where the bear market rallies at least 15%, and it typically lasts about a month and a half on average. It's exactly what's just happened. 15% rally in a month and a half. Um, but what Oppenheimer was saying in his analysis, the 4 things he looks for to say, right, the bear market's done, this is the worst point, we're buying, he needs 4 things. He needs valuations to become very depressed. He— so that's company valuations, looking at simple things like price-to-earnings ratios and so on. He needs the rate of deterioration of growth and profits, um, to that the rate at which profit levels are dropping, the rate needs to start slowing. Not necessarily profits have declined to their maximum, but the rate at which they're slowing— sorry, the rate at which it's falling starts to decline means we're approaching a bottom on kind of margin squeezes. Number 3, policy rates, so central bank rates and inflation expectations need to peak. So that's kind of what happened in the summer. We thought rate expectations and inflation expectations had peaked. This is the worst. Great, let's start buying. Except this inflation print and Powell's comments at Jackson Hole reversed all of that. So our inflation expectations haven't peaked now. We're now worried it's going to get worse. And then secondly, very depressed negative sentiment and negative positioning. So I guess what we had pre-summer rally, we didn't have all of those four things lining up. Certainly on valuations in the US, the valuations of US companies are still above the long-term average. Above, never mind being very depressed. They're above average. So that's a key factor in this whole thing around, uh, is this bear market rally over or not? Well, from the valuation point of view, no way. Um, and then as I've said, we still— our inflation expectations haven't peaked yet. And also with the rate of recession, I mean, PMIs, we look, we look at Purchasing Managers Index, it's a lead indicator for future economic activity, they haven't certainly— and again, in the US, they haven't declined that much. They haven't declined to levels that are normally conducive for a recession. And it's normally when your PMIs trough, that's again another sign, right? This is the worst moment. Okay, let's start buying.

Yeah, yeah, it's good. I like having a bingo card. And, um, yeah, I like his last point. That was the one I was talking about a few weeks ago where just when everyone is so bearish, market positioning becomes so overtly one-directional, right? Like, that just makes me think, no, I've got to take the other side of that.

Yeah. And so you could say we did have that. That was one of the big—

we almost had like, yeah, yeah, half of those, um, right, exactly. We haven't got the full suite where you can be more confident. And this is about conviction rates then, isn't it? Yeah, um, because, you know, this guy's very good, that doesn't mean he's going to be right. And so as much as these are good signals, um, what's nice is to have some kind of structural way of making that decision, I guess, which is great. Um, cool. Well, look, let's, um, let's just jump to Lehman's. And, you know, if you're watching this on YouTube, you can see I am wearing a green hoodie. And I'll start with my story. There's a reason why I'm wearing a green hoodie, and that's because I remember, uh, so we at the time were working in an office company I worked for in London Wall. London Wall is one of the kind of main streets in the City of London where you've got the Deutsche Bank kind of head office, JP Morgan, I think asset management are just around the corner. There's a few other big banks within that location. And this was right at the peak of the hatred for bankers. Yeah, so this is when every day it was the papers, obviously the, the main thing here was, is the fault of the bankers and the speculative risk-taking has created this impact for everyone. And so I remember, um, there was a Northern Rock outside our, um, our building. And I think the day before, the public, um, being very angry at what had happened, because Northern Rock was one of the ones that collapsed mortgages and so forth, someone threw a brick through the Northern Rock office on London Wall. They stormed the building and started basically looting it at the time. And there was similar type of activities happening in London at the time. I think there was a Barclays retail shop front that a number of them got vandalized, windows smashed. This was literally the public, we've had enough of this, and the anarchy started to pick up. So we got a memo from the building, and the building, and it said, from tomorrow, No one is to come to work in suits, trousers, or shirts. Everyone is to come in nondescript clothing of your choosing, preferably hoodies or anything so that you don't get lynched when you're walking to work. And you were like, really? And so for the period thereafter, for a few weeks until the dust settled, we all had to go into work dressed like I am now so that we wouldn't get lynched. And one of the traders— because back then there are a couple of fruity characters on the trading floor— and I distinctly remember when all of this was at its worst, he got his Ferrari Testarossa and drove it through the city.

I hope someone threw a rock.

Yeah. But yeah, that was a funny, funny time to live in. But yeah, I mean, it was really quite frightening at the time. You thought that, yeah, we're literally gonna—

what was the name? What was the name of that, that kind of movement, that anti-finance? Um, it had a name, and it used to happen on the May Day, isn't it? Like the 1st of May. So anyway, there was a name of, um, Occupy Wall Street. That's right, exactly. Occupy Wall Street. Yeah. And it was, yeah, it was dangerous going to work, like literally. I mean, you gotta say at the time, fair enough from the public's point of view to be seriously pissed off. But I remember my, 'cause I worked in Canary Wharf at that time when I was trading for a US company in Canary Wharf. And it just so happens that the address of my office in Canary Wharf was 50 Bank Street. OK, 50 Bank Street, Canary Wharf. Guess who was at 25 Bank Street, Canary Wharf? Lehman Brothers.

Yeah.

So, well, I was going to say you might remember— I mean, Ant, you'll remember. I don't know whether our listeners are old enough to remember, but one of the iconic images of the crisis was Lehman Brothers staff walking out of the building with their boxes of all their belongings from their desk because the bank had just collapsed and everyone literally, sorry guys, you don't have a job anymore. And there were very iconic photos of Lehman staff tracking out of the building, filing out big queues with their boxes. And I saw it happening. It was on Bank Street in Canary Wharf.

Actually, I think I've seen a photo with someone who looks distinctly like you scoffing down a Greggs Sausage roll in the background in Canary Wharf.

But yeah, so it was very— and it was really, I have to say, what, like working in finance? I don't know, just generally it was really scary. And talking about the different bear markets, that was a structural bear market when it feels like the world is ending. Like, we felt like the banking system globally was going to collapse. I mean, to kind of— to put some— to give you— to, to give a quantitative value on that, go and read up about the Citigroup share price, because that fell. I think pre-financial crisis it was like $600 per— you know, $600 per share, biggest bank in the world. And in, in February or start of March 2009, it dropped below $1. Um, and that's because, that's because we thought everything was going bankrupt. Talking back to Goldman's earlier on, and so Lehman's was a broker-dealer, right? There were big— there were 5 big broker-dealers, okay? You might have heard of some of these: Goldman's and Morgan Stanley, then the infamous Lehman's, Merrill Lynch, and Bear Stearns. And these were the guys that were on the trading side taking aggressive risk, okay? Too much risk, it turns out. They couldn't quantify or measure the risk they were taking until it was too late and it all imploded. Uh, Bear Stearns was going bankrupt. They had to get— the government forced basically JP Morgan to buy Bear Stearns. I think they bought them famously for $1. Okay, so Bear Stearns got absorbed into JPMorgan because it was going down. Um, Merrill Lynch was going bankrupt, and that got— and Bank of America came in and absorbed them. And then Lehman's was next, and Lehman's, um, had done a deal with Barclays in the UK. Barclays were going to basically absorb Lehman Brothers and prevent them from going bankrupt, except then the UK government stepped in And this was over the weekend because the deal was done on Friday with Barclays. Over the weekend, the UK government said nope. The chancellor, the classically named Alistair Darling, vetoed it and said, we are not— we're not allowing you to do this deal. We won't let you import US toxic banking. So Lehman's went bankrupt. The next week, Morgan Stanley were 2 days away from going bankrupt. Goldman's were 5 days away, like measuring it based on their cash, right? Morgan Stanley were 2 days, they were next. And they did a deal with, I think it was the Saudis, the Saudi Sovereign Wealth Fund. Uh, then the Fed came in and basically forced these banks to take on a commercial banking license. Which ended this broker-dealer thing. If you're a broker-dealer, there was much less regulation. They forced them to take a commercial banking license. This gave them access then to the Fed's emergency overnight lending window, which then provided them with the capital to stay alive. Um, and so that's why Morgan Stanley and Goldman Sachs are still here today. They were a— they were 5 days away from death. It was literally that bad. And that's a structural bear market for you.

Yeah, I still— one of the most memorable squawks I can remember of my career was when a— so big part of the value add that we had in our service was the rumor mill. So we'd have the ear of certain people, we'd get wind of things before it hit the, the main kind of street, if you like, and that would be your edge. From an information perspective. And this, this message came through from someone who was a high-quality contact, and he said Barclays cash point is going to be empty nationwide by 4 PM, no more cash. And I was like, oh my God, part of, part of me was like, I need to get down to Barclays right now.

Yeah.

But then I looked, I remember at lunchtime at Barclays there was already a queue of hundreds of people trying to max clip deposit, take it out, which was already collapsing the share price. The monster outflows are happening as the share price is getting killed. But I actually had to say that on the microphone, and I remember Barclays shares just getting hammered along with every bank's shares. Yeah, I'm— but yeah, wow. All right, well, look, fond memories. Happy 14th anniversary. We're still alive and well. So yeah, look, we'll, we'll wrap it up there. Hopefully that was, uh, an interesting episode. As I said before, please do, uh, help us push out the pod to as many people as possible. We're at 261 ratings on Spotify, so let's see if we can hit that 300 marker by the episode next week. And 124 on Apple, that's gone for 150 there as well. So thanks for listening, thank you Piers, and have a great weekend everyone.

Have a good weekend.