On Monday, Goldman Sachs senior investment strategist Abby Joseph Cohen appeared on CNBC and lied about the S&P 500 price/earnings ratio index. She said that it was “dramatically below average,” when in fact any WSJ reader could check and see that it was really dramatically ABOVE average. But no one is talking about sending her to jail for that.
On the same day, Iceland’s Parliament voted to bring criminal charges against former Prime Minister Geir H. Haarde, according to Ice News. It’s not surprising that Iceland’s politicians needed a scapegoat, since as many as 8,000 Icelanders were protesting and throwing eggs, tomatoes and paint at the Parliament building, according to Bloomberg. They were protesting the severe financial hardships that Icelanders are undergoing from foreclosures and bankruptcies.
And in France on Tuesday, a court sentenced a young trader, Jerome Kerviel, to three years in prison for causing the financial crisis at Sociéte Générale. He didn’t make a penny from the trades that he placed, according to CS Monitor, and he says that his management tacitly approved of what he was doing, as long as he was making money for the bank.
The contrast is absolutely incredible.
The two people facing criminal action did not make any money at all from their (in)actions, while the global financial crisis was caused by massive fraud perpetrated by almost every major financial institution in the world, led by Goldman Sachs. Abby Joseph Cohen herself has undoubtedly made millions of dollars in bonuses and commissions for her part in this world wide fraud.
Here’s my transcription of what Cohen said on Monday:
“It looks to us as if the economy is growing more slowly than it was at the beginnning of the year, but we just don’t see the preconditions for a double dip. So our judgment is real GDP growth of about 1.5% for the next several months, but then re-acceleration. …
If you agree, for example, that a recession will be avoided, we think that the S&P 500 is underpriced, not just based on 2010, but also the 2011 outlook. We tend to use very sophisticated mathematical models for valuation, but if you look at some of the very simplistic models as well, things like price/earnings ratios, they are dramatically below average — currently 13 times earnings on 2010 versus a historical average of 17 or 18 times.
First she brags that Goldman Sachs uses “very sophisticated mathematical models for valuation,” something I’ll come back to below, and then she tells a double lie about the “simplistic” S&P 500 price/earnings ratios.
Here’s the current P/E ratio chart from WSJ Online:
The current S&P 500 P/E ratio is circled in red – 17.56, not 13 as Cohen claimed. The historical average is 14, not 18. So Cohen essentially reversed the two numbers.
In fact, the P/E ratio has been above average, sometimes way above average, continuously since 1995. By the Law of Mean Reversion, stocks will fall sharply, and remain at low prices for a roughly equivalent period, 15 years. (See “The ‘real value’ of the stock market.”)
Perhaps she’s using the P/E ratio based on “operating earnings,” a purposely misleading value that ignores so-called “one time expenses,” which often include most expenses. If she is, then perhaps the P/E ratio = 12-13 is correct, but the historic average for P/E based on operating earnings is much lower, probably around 7-8. Please see the above article for a lot more details about this.
Cohen undoubtedly makes millions of dollars in salaries, bonuses, fees and commissions each year, but if she ever said, “The P/E ratio is 17.56 and the historical average is 14,” then she’d probably be fired. Lying is the norm on CNBC and Bloomberg TV these days, and among financial executives and politicians.
There’s another explanation for Cohen’s behavior that I’d like to explore here.
Let’s go back to the original causes of the financial crisis. I’ve been writing about this stuff for years while it was going on, and today, in hindsight, what happened is almost universally agreed to be true.
It took years for Wall Street to admit it, but you’ll recall that there was a real estate bubble, and investment banks created a market for collections of mortgage loans called RMBS — residential mortgage backed securities.
But investment bankers weren’t satified with already huge profits from selling RMBSs, so they found a way to slice and dice RMBSs to create Collaterized Debt Obligations (CDOs). These could be sliced and diced further into “CDOs-squared.” All of these securities are now called by the catchy name, “toxic assets.”
(See “A primer on financial engineering and structured finance” for how these securities were created, and see “Financial Crisis Inquiry hearings provide ‘smoking gun’ evidence of widespread criminal fraud” for how they were used to massively defraud investors.)
Today there’s no doubt how massive this fraud was. It wasn’t done by one or two “bad apples.” Practically every financial firm in the world participated in the fraud, and Goldman Sachs was one of the leaders in perpetrating the fraud.
Within these organizations, the management structure allowed the fraud because of the unique relationship between people in the Boomer generation and Generation-X.
The financial engineers in Generation-X created the complex models and the complex securities that turned into toxic assets, and sold the toxic assets to investors. The Generation-Xers received the blessings of their incompetent Boomer bosses, who also stood to gain from fat fees and commissions. Everyone made money, except for the defrauded investors, who were totally screwed.
Now let’s return to Abby Joseph Cohen of Goldman Sachs. I can’t prove this, but what I suggest to you, Dear Reader, is that we’re seeing a repeat of the scenario that led to the creation of toxic assets.
Cohen says that “we use very sophisticated mathematical models for valuation.” Well, does she understand those very sophisticated mathematical models? Obviously not. She’s too incompetent even to compute the “simplistic” price/earnings ratio correctly.
No, those sophisticated mathematical models are undoubtedly being created by the Generation-X financial engineers who report to her. And these financial engineers aren’t just similar to the ones who created the toxic assets; these are undoubtedly EXACTLY THE SAME PEOPLE.
So my suggestion is that, right before our eyes, we’re seeing a repeat of the same kind of scenario that defrauded millions of investors — and the same people are doing it to us again.
I’d like to quote an additional excerpt from Cohen’s interview because it’s so funny. She was asked to estimate the growth in the S&P 500 index (currently at about 1160) by the end of the year:
“In the S&P 500, we think fair value by year end is something on the order of 1200. And of course this is a market because investors are so risk-averse – lose a little confidence – they’re not willing to look out as much into the future as they normally would.
So we think that when investors finally get to the point that they’re willing to price in the outlook for 2011, prices will move higher still for the S&P 500.
By the way, this low confidence level and risk aversion is seen not just in the US equity market, but in the developed markets around the world, including Europe.
Cohen is whining that investors are too risk-averse, which makes them unwilling to buy stocks from her. She can’t figure out why investors aren’t listening to her.
Well, for one thing, the Wall Street Journal prints the current S&P 500 price/earnings index every day, and so anyone who bothers to do even the most basic due diligence research will discover that she’s lying. So why shouldn’t they be risk-averse?
(A reader of my web site has pointed out that Goldman Sachs always trots out Cohen whenever the market is down, because she consistently predicts high stock prices; in the year 2000, she predicted a rebound in the S&P 500 index to 1700. Why shouldn’t investors be risk-averse, listening to that kind of record?)
What I always like to point out in articles of this type is that perhaps I shouldn’t be picking on poor, poor Abby Cohen. After all, about 70% of what you hear on CNBC is nonsense, with “experts” who simply “quote their book,” and Cohen is just doing what everyone else does. It’s true that she’s a liar, but whether it’s Wall Street, Washington, Brussels or Beijing, the whole world is being run by liars and crooks.
Meanwhile, in all the lands of the world, it’s nice to know that it’s finally safe to walk the streets at night, now that Haarde and Kerviel will be behind bars.