Monday, April 27, 2009

The other side of the street

One of the challenges to investing is the matter of asymmetrical knowledge. What makes the concept fascinating to me is the continual pitchmen who talk their book to all of us. In a world in which salesmanship moves faster than accuracy, it is very easy to be caught up and caught out. Every grade school kid knows that when offered something in the cafeteria by a questionable friend the first question asked is, "what did you do to it?" Unfortunately it also seems the first question to ask years later when the tasty investment morsel may have longer term and less benign consequences.

Remember last summer when Goldman Sachs came out and clearly stated its view that oil was heading for $200/bbl? When an investor remembers that Goldman Sachs trades on behalf of itself the vast majority of the time, such advice might be taken with a grain of salt. Just because she knows the street, doesn't mean she's not about to give you more than you bargained for.

In the week before last, GS traded 84% of its program trades on the NSYE on behalf of Goldman Sachs. They also traded over half of the volume on the exchange. So how do we invest in a world that is working the other side of the street? Follow the money, not the advice of those with opposite interests.

The politicians would do well to also pay attention to the source of advice. Bank holding companies continue to put one hand out and another in the taxpayer's pocket but I am beginning to feel the complexity of the problems will not be tolerated for much longer. The simple solutions may well be finally allowed to rise to the surface and bank debt to equity swaps will be allowed to provide the elegant systemic answer to bank undercapitalization. The banking firms would rather keep hands in the deepest pockets in the world but its time to step up and create healthy banks from reluctant bondholders. Sorry Bill Gross, you're smart, you'll adapt.

John Barnyak