Sunday, July 19, 2009

How Do You Profit from the Growing U.S. Debt?

The answer is easy in this market, Goldman Sachs.

Terry Keenan explains:

Goldman gets the most attention for its deft handling of its own account, but a big chunk of its trading pie also involves the selling and trading of US government debt -- federal, state and local. Indeed, as one of the biggest primary dealers of US Treasuries, Goldman Sachs has a huge vested interest in the United States digging a deeper and deeper hole.

These days, trading Uncle Sam's IOUs is big business. It's also one of the few growth markets on Wall Street. The IPO business, private equity and mergers and acquisitions have yet to recover from the credit crash.

By Goldman's own estimates, the US will borrow a record $3.25 trillion in the current fiscal year -- almost four times as much as in 2008.

With its biggest competitors in this market (Lehman Brothers and Bear Stearns) out of business, Goldman is a major toll collector on Washington's red-ink railroad. Whitney labels it a "debt tsunami" that will lift Goldman's fortunes going forward.

To put it bluntly, Goldman Sachs is a play on the bankrupting of America -- the more we borrow, the more they make.

It should be noted that as in its equity program trading operations, Goldman benefits from trading information that few others get to see. As a primary dealer they benefit from "seeing" the "inside market". Primary dealers are the exclusive group that get to see the inside market because they are the only dealers the Federal Reserve trades with when it is buying or selling securities. Thus, primary dealers, on a real time basis, get to see what the Fed is doing before anyone else.

This is very powerful information. It can make you billions in more ways than one. Michael Bloomberg founder of Bloomberg succeeded with his information service for one reason and one reason only. When he first launched his quote machines, he some how managed to get the exclusive right to supply the inside interest rate of the primary dealers, on his machines. If you were a bond trader, the inside quote was the most important quote. You had to have a Bloomberg machine. No other machines made sense because they couldn't deliver the inside rate. All the ancillary services that Bloomberg provides came later. It was a tiny peek into an interest rate market made by Goldman and the other primary dealers, that made Bloomberg. And make him, it did. Forbes ranks Bloomberg the fourth richest man in America.

The same peek into inside primary trading that made Bloomberg is information that is created by market activities of the government where Goldman gets to play and thus they see ten times the inside information that Bloomberg provides on its machines.

1 comment:

  1. It's all about the guaranteed trade, part of which is being the only primary dealer.