Every recession has a cause, usually seen only in retrospect. The Great Recession was caused by the mortgage insurance crisis. The 2001 recession was the result of the Dot-Com bubble crashing. The 1991 recession was a hangover from dislocations around the Gulf War. The next recession may already be in sight, and if it is, the cause will likely be a fall in global trade.
The World Trade Organization says 2016 will be the worst year for global trade since the Great Recession. The Trans-Pacific Partnership trade agreement looks dead. So does the Trans-Atlantic Trade and Investment Partnership. The global trade slowdown is already having an impact on big trading banks like Goldman Sachs Group Inc (NYSE:GS) and Bank of America Corp (NYSE:BAC).
GS is cutting one-quarter of its Asian staff, blaming a lack of deals. The bank is reportedly looking to hire someone who will cut headcount in its London office. BAC is also cutting its Asia staff and Bank of America stock is falling in price.
Goldman Sachs shares are down about 12% for the year so far and down 3.7% in the last four trading sessions, although prices are rising early on Sept. 30. BAC is down 9% for the year, 1.4% over the last four trading sessions.
What’s Going On With BAC and GS?
When nationalism takes over a country’s politics, protectionism often takes hold. Politicians need the votes of workers to win power, and a nationalist will often focus on trade as the reason for “lost jobs.”
American voters saw that in the first Presidential debate, where Republican candidate Donald Trump called the North American Free Trade Agreement (NAFTA) “one of the worst things that ever happened,” citing the move of Ford Motor Company‘s (NYSE:F) small car production to Mexico and that of United Technologies Corporation’s (NYSE:UTX) Carrier division.
Never mind that the U.S. unemployment rate has been falling since 2010, or that wage pressures are starting to build. Nationalists see old jobs lost, not the new jobs found, even if the old work is uneconomic and the working conditions miserable. Do you really want your kids working in a coal mine? It’s a popular cause right now.
Global trade grows when companies move operations to locations with the best comparative advantage, provide the best deals for final consumers and lift economic activity. Low-skill jobs move to low-wage locations. High-skill jobs move to places where those skills are in the greatest supply. Costs of commodities and capital goods are constantly arbitraged, and the world economy grows as a result.
In an era of growing nationalism, however, that case becomes hard to make. This means less trade, fewer deals and less work for bankers. The classic case cited by free trade advocates is the disastrous Smoot-Hawley Tariff of 1930. But very few people are alive who remember that.
Goldman Sachs Weakness Signals Trouble Ahead
The asset base of Goldman Sachs has actually been falling for years, from $938.555 billion at the end of 2012 to $861.395 billion at the end of last year, recovering to $896.843 billion at the end of June.
The price-to-book value on GS stock’s assets is .872, meaning the market cap of $64.57 billion is less than the value of its assets, $896 billion, less liabilities. This figure has been falling since June, 2015, when it was at 1.12.
As the value of commodities like crude oil remains low, there is less money in trading them. As nationalists work to protect existing jobs, there is less incentive for companies to do deals. Thus GS stock, like that of rivals like JPMorgan Chase & Co. (NYSE:JPM) and BAC, should remain under pressure.
All this, however, could be just a prelude to more trouble ahead. Protectionism does not work for long, as an economic policy: doing less business to protect workers means doing less business.
The weakness of Goldman Sachs is signaling trouble ahead, especially for companies heavily involved in export.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this story.
