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Why Goldman Sachs is investment banking's valuation Cinderella.

Summary: Fixed income, currencies and commodities was a money machine

Matein Khalid Global Investing

Goldman Sachs, unlike Morgan Stanley and Citicorp, did not slash its fixed income trading and sales franchise.

I still remember my visits to the Death Star, Goldman Sachs's Wall Street glass tower on 80 Whitehall and to its vast Peterborough Court cathedral of money in London's Strand. As a Wharton wannabe Master of the Universe, I even met Bob Mnuchin, partner at Wall Street's last Our Crowd investment banking partnership and father of the current US Treasury Secretary. In the past decade, I was fortunate to do business with Goldman London and loved my global macro musings with Jim O'Neill, its chief economist and Ahmet Akarli, then Mena economist.

It is surely symbolic that Goldman's new office tower commands sweeping views of the Statue of Liberty, because if any bank both captures and mocks both the American Dream and Emma Lazarus's words, it has to be this one, dissed as the "vampire squid of humanity" by its critics. If the Medici Bank defined the Florentine Renaissance, Barings and Hambors the apogee of Victorian Pax Brittanica, Morgan Guaranty Trust, Chase Manhattan and Citicorp the postwar New York money centre banking thrust, Goldman Sachs defines twenty first century global capitalism, the epic nexus of money and power. Goldman Sachs is Wall Street's ultimate prize.

Right Matt, cut the rhapsodies and get to the investment case with Goldman at 260 as I write. The US 10-year Treasury note has surged from 2.20 per cent last September to 2.84 per cent now as the capital markets brace for at least eight more Fed rate hikes in 2018 and 2019. The Chicago Volatility Index has begun to creep higher as the Known Universe is short gamma risk and short vega. The US dollar's free-fall ("our currency, your problem", duckies, as Nixon's Texan Treasury honcho John Connolly boasted) makes emerging markets forex and equities white-hot. Chinese equities were up 50 per cent in 2017. The commodities bull run means Goldman's J. Aron unit will print money. A steeper yield curve, higher bond trading flows, emerging markets going ballistic, China and Silicon Valley on fire - these are the ballasts for Goldman Sachs's bottom line.

In the pre-Lehman Stone Age of Wall Street, folklore contended that "Goldman Sachs is a global hedge fund that just happens to be listed on the New York Stock Exchange". Fixed income, currencies and commodities was a money machine, often contributing 65 per cent of the bank's bottom line, with mergers/advisory making up the rest. No more. That world of leveraged gunslingers died with Lehman, Dodd Frank, the Volcker Rule and Pocahontas as a power in the Senate Banking Committee, the latest gift from the People's Republic of Massachusetts to Wall Street.

Yet Goldman Sachs, unlike Morgan Stanley and Citicorp, did not slash its fixed income trading and sales franchise. This proved prescient when Trump became President, promised to "do a number" on Dodd Frank and named an ex-Goldman partner Treasury Secretary and an ex-Carlyle partner Dr Yellen's successor as chairman of the Federal Reserve. True, the glorified wire house (Charlie Merrill's churn and burn Thundering Herd of Bank Street, Bur Dubai - how I miss you!) that is now Jamie Gorman's Morgan Stanley commands a higher market cap then Goldman Sachs. Wall Street wants boring, predictable wealth management EPS growth, not go-go trading, underwriting and macro crystal ball gazing, my obsession de jour . The world has changed. True. But it will change again.

Goldman has built global scale in mergers and acquisitions, principal finance, merchant banking, real estate, commercial banking (ugh!) technology underwriting and private equity. In its Hank Paulson golden age, Goldman's return on equity was 25 per cent at securities cycle peaks. It is now barely 11 per cent. This is precisely my point. A valuation rerating is imminent, in fact happening in real time. Just chart GS on Google/Yahoo finance as I watch its green phosphorescent flicker on my Bloomberg terminal. Money don't talk here, money shouts! JPMorgan's got the flash, Goldie has the cash!

Like Uncle Adolf and FDR, Lloyd Blankfein has had a 12-year reign at the pinnacle of Mount Olympus. Two RoE ballasts are overseas tax repatriation and higher Brent/West Texas crude prices and vol linked hedging strategies. This is the reason Goldman Sachs has returned almost 100 per cent since summer 2016. What next? The rerating is not over. In fact, it has just begun as King Lloyd passes the baton to Prince Harvey.

The writer is a global equities strategist and fund manager. He can be contacted at

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Date:Feb 4, 2018
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