Morning Coffee: Goldman Sachs’ new strategy might not be working out. And the “Millennial Lifestyle Subsidy” is ending

It seems like a long while since the second quarter in which Goldman Sachs was able to claim bragging rights over the rest of Wall Street (and in particular, JP Morgan).  In the third quarter difficult capital markets and writedowns on investments, coupled with continued start-up costs for Marcus, sent profits down 26% on the same quarter of last year.  Although this was a fairly tough basis for comparison, it’s hard not to see it as a disappointment.

What might be considered a little embarrassing for CEO David Solomon, though, is that while the “durable, recurring and fee based revenues” that he’s aiming to invest in had a mediocre quarter, the bad old risky and volatile sales & trading franchise saved the day.  If it weren’t for a 6% increase in overall Institutional Clients Services revenues, the quarter would have looked even worse.  Might he have to admit that the senior partners who, in the words of his podcast, “opted out” of Goldman’s new direction had a point?

Well, probably not.  Even though the strategic review isn’t scheduled to be formally launched until early next year, the CEO is hardly going to do a 180 degree turn on the basis of a single quarter’s numbers.  The fact that trading had a better quarter doesn’t necessarily mean that advisory, direct investing and Marcus aren’t better quality business lines, it just means that there’s not such thing as a sure thing in the world of investment banking.  And when judged against the benchmark that was originally set for Goldman’s trading franchises – the three year target to raise FICC trading revenue by $1bn even in weak markets – the trading businesses are currently well behind schedule.

In any case, schadenfreude from recently departed Goldman traders is certainly inappropriate because however strong the performance was, it was generated without them.  The year since Solomon’s accession to the top job has been one in which there’s been quite a bit of turnover in the top ranks of the trading business (although the company claims no higher than in some previous years), and that sort of uncertainty is often damaging to revenue generation.  The quarter just finished might be a reflection of the fact that the Game of Thrones is over, David Solomon has the sales & trading management team that he wants, and that all the guns are finally pointing in the same direction.

That said, there are strategic questions from these results that can’t be ignored.  One of David Solomon’s key initiatives is the merger of two of Goldman’s most prestigious teams to form a “mini-Blackstone” investing the firm’s and outside capital in private equity and debt deals.  Another is the Principal Strategic Investments team, a kind of internal VC fund.  After marking down its investments in WeWork and Uber, along with losses on its Avantor stake and a reversal of some of last quarter’s Tradeweb gains, there has to be room to question whether the taking of large equity positions in other people’s companies really fits into the vision of durable and recurring earnings.  The central question of any strategic review is always something like “what kind of company do we want to be?” and in Goldman’s case, Mr Solomon needs to come up with a convincing statement of why some risky businesses are more equal than others.

Speaking of those Goldman writedowns, WeWork and Uber are by no means the only venture capital funded startups currently in the stage of losing money on every sale and trying to make it up on volume.  As Derek Thompson of the Atlantic puts it, “If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year.”

There’s a strong sense in the market at present that this can’t last, and that investors like Softbank may be more reluctant going forward to see their money spent on disruptive growth models with negative unit cost economics.  Not only does this mean that some other basis will need to be found to finance the production of podcasts, it also means that urban millennials will be deprived of many quite valuable perks which have made the lifestyle almost bearable even now that you need to be earning six figures to buy a house almost everywhere.

Meanwhile ...

More cloud projects, underlining its status as the hottest skill in banking IT.  CME Group is teaming up with Google Cloud to bring its market data to clients anywhere in the world at any time. (TheTrade)

It turns out that the most fun thing about being one of the world’s biggest investors is the opportunity it gives you to write freewheeling market commentaries.  Bill Gross doesn’t even manage money any more, but he still writes the updates on his blog. (Institutional Investor)

What’s the idea here? Unicredit, led by larger-than-life CEO Jean-Pierre Mustier, has decided to move some more of its businesses into a German subsidiary.  There’s not much information to speculate on as to why, but big banks don’t make moves like this for fun – might they be thinking of bidding for something? (Bloomberg)

The free beer taps may be turning off for as many as 2,000 WeWork employees this week, as the pivot to cost control begins (Guardian)

Equally bad news for the team at Woodford Fund Management, as all the remaining funds close down and the Oracle of Oxford (did anyone ever really call him that) finally gives up. (BBC)

Retail brokerage eToro has launched a product which allows anyone with too much spare money to trade cryptocurrencies based on systematic sentiment indicators drawn from Twitter. This might not be the place to find the next Warren Buffet (Bloomberg)

The concept of “three times more likely to win the Nobel Prize” feels like it has something fundamentally wrong with it from a statistical point of view, but apparently that’s how much difference it makes to have an existing Nobelist as a mentor (The Economist)

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