From the monthly archives:

August 2015

In the past few weeks, investment bankers, and investors overall, have experienced what “downside risk” means for equity markets. As of writing, for the 2015 year so far, European equity markets are about flat for the year, while the S&P 500 is is the red. In the East, incredibly, the Shanghai composite is still positive for the years, although the Index is down a good deal from where it was in June 2015 at +60%.

The weakness in equity markets around the world is on policymakers’ minds, chief among them central bankers. Central bankers have various tools at their disposal to address the global weakness, one of which is printing money.

Here is an inspection of what the European Central Bank (ECB), the Bank of Japan (BoJ), the People’s Bank of China (PBoC), and the Federal Reserve (Fed) have been doing with their balance sheets and how it connects with equity market performance.

Stock Market Performance in 2015, U.S., Europe, and China 

The Europeans

First off, here’s the ECB experience. The ECB took a break from money printing in 2012 through most of 2014. Unsurprisingly, that wasn’t a great experiment for European financial markets, including the one shown below, the German DAX.

The ECB saw what a shut off of the printing presses meant, and reversed course, restarting the printing presses in October 2014. This move, again unsurprisingly, was met positively with equity markets, as is shown with the German DAX and the ECB balance sheet in the following graphic.


European Central Bank and EU Equity Performance


The next graphic inspects the relationship between the Nikkei and the balance sheet of the Bank of Japan. As with the DAX-ECB correlation, the relationship between the performance of the Nikkei and the BoJ balance sheet is readily transparent.

Bank of Japan Balance Sheet and the Nikkei


Here’s the China experience. The relationship is somewhat less clear than with the Europeans and Japanese.

PBoC and the Shanghai Index

The Federal Reserve

Lastly, here is the Federal Reserve. It’s somewhat more difficult to see, but if you look closely, the S&P 500 generally jumps during periods of the Fed printing money and weakens when the Fed turns off the printing presses. The weakness is most pronounced when the Fed first turns off the printing presses.

Federal Reserve Balance Sheet and the Performance of the S&P 500

The Broad Picture

With the experience of the ECB, the BoJ, the PBoC, and the Fed straight forward, it’s not far of a step to argue that if the Fed and the PBoC wanted to boost equity markets, they could simply rev up the money printing presses again. Although such a move would set a terrible precedent, it’s certainly an easy way to boost confidence in the global financial markets.


Overall, it’s fairly clear to see a relationship between central bank money printing operations and the performance of equity markets. With this observation as the backdrop, one way for the Fed and the PBoC to stop the deterioration of global equity markets is for the Fed and the PBoC to start printing money again.

Although a terrible precedent, it, in all likelihood, would certainly work at boosting confidence in global financial markets.

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If you’re an investment banker, you’re well aware that productivity is the lifeblood of long-term economic growth. Yet just how important is productivity?

Rewind 100 years and compare the standard of living in Argentina to that of the United States. Surprisingly, the two countries are fairly close. Fast forward to today, and the standard of living is drastically different. What happened over the past 100 years that improved the lot of Americans so much more than the lot of the Argentinians?

The answer – productivity.  Overall, economic growth (productivity growth) expanded by, on average, 2% per year more in the United States than in Argentina. Granted it is only 2% per year, but when that is compounded over 100 years it makes a remarkable difference.

That’s why productivity growth is so important.

Shifting now to a comparison of productivity growth by U.S. president. Which president would you guess comes in first place – who is the president whose administration saw the largest expansion in American worker productivity?  Which president would you guess is the worst?

Productivity Growth by U.S. President

Here’s a look at productivity growth by American president. The vertical axis is the percentage growth in productivity since the start of the given president’s administration. The horizontal axis is the number of months the president was in office (thus for Obama, it’s the number of months he’s been in office so far).

Each line represents the experience of a given president. Before looking, take one last guess on which president is the best and which is the best.

The Best

Fascinatingly, the “productivity king” of the American productivity experience is George W. Bush (Bush II).  Over Bush’s tenure, productivity expanded by almost 20%. The next closest is Bill Clinton at about 18%.

The Worst

One the other end of the productivity spectrum is probably much less surprising.  The worst president for productivity growth was Jimmy Carter, at an amazingly low 2%.  The next worst president for productivity growth is Barack Obama, at an almost similar amazingly low figure of just 8% over his almost 7 years.

Productivity by U.S. President

Thinking About the Broader Picture

The surprisingly broad differences in productivity growth among the American presidents suggests that perhaps Americans presidents might be able to influence, but certainly not control, productivity growth. George W. Bush was certainly a free market president, as was Bill Clinton, Eisenhower, and Reagan.

On the other end, perhaps the least favorable presidents towards free market competition are Barack Obama and Jimmy Carter.

Hmmm.  Interesting.


In looking at productivity growth by U.S. president, some surprising figures show up.  Lots of factors, of course, influence productivity performance, almost all of which are not in control of the American president.  With that said, it is somewhat surprising to see how productivity has varied through the years and the various administrations.

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The importance of corporate profits is a forgone conclusion in the investment banking world. One might think that because corporate profits are so important, investment banking employment responds to corporate profit conditions.

Is this presumed conclusion correct?  The following is a look at the historical connection between employment in the investment banking business and the state of corporate profits. Perhaps unsurprising, the relationship ebbs and flows through time.  It’s certainly true that, at times, corporate profits affect investment banking employment, but the connection is only weak.

Employment in the Investment Banking Industry

The following two graphics look at employment in the investment banking industry since 1990. The first figure looks at actual, estimated employment in the investment banking industry. The second figure is a year-over-year percentage growth look at investment banking employment.

Overall, since 1990, there’s only been one large investment banking slowdown.  It occurred from August 2008 to September 2009. The other periods of employment weakness in the investment banking sector were short-lived.  The short weaknesses occurred in such short time frames as September 2003 to April 2004 and August 2010 to January 2011.

The weaknesses, of course, stem from economy-wide weakness and/or regulation.  The 2008/2009 deterioration occurred as a result of the housing market-induced global financial crisis.  The 2003/2004 weakness stemmed partly from the aftermath of the bursting of the technology bubble.  The 2010/2011 weakness likely stemmed from concerns about regulation related to Dodd-Frank, commodities trading, and other regulatory issues.

Investment Banking Employment

Shifting to a look at the year-over-year growth picture, there’s really only been a few years when year-over-year growth in the investment banking sector went negative.  The worst of the months occurred in August 2009, when year-over-year growth dropped to -9%.

Interestingly, prior to the 2008 financial crisis, investment banking employment was almost always on an upward trajectory.  The only question was – how fast would employment grow?  The range in positive growth during the 1990s goes from a high of 16% in August 1997 to a low of 0% in March 1992.

YY Investment Banking Employment

Corporate Profits

The second component of the question is corporate profits.  The top section of the following graphic is actual corporate profits.  The bottom portion is year-over-year growth in corporate profits.

Overall, corporate profits have been through 2 long periods of weakness. The first was a very slow downturn, from 1998 to 2002. The second came as a result of the recent global financial crisis, with corporate profits weakening from 2006 to 2009.

Dashboard 1

Connecting the Two

So, in looking at the visuals, does it look like investment banking employment is connected with economy-wide corporate profits? The following is the overlaid relationship. Overall, investment banking employment is, at times, connected with economy-wide corporate profits.

Even more interesting than the ebb and flow in the relationship is the question of which indicator – investment banking employment or corporate profits – is the leader.

Conventional wisdom would indicate that investment banking employment is the laggard on this question.  After all, why would investment banking employment weaken when corporate profits are strong? As shown, this is sometimes right, and sometimes wrong.

For instance, growth in corporate profits peaked in November 1994 at 23%.  Growth in corporate profits slowly decelerated until bottoming in February 1999 at -13%.  In this same time frame, investment banking employment peaked in June 1994 at 16%, then weakened to 1% in June 1995, then accelerated again until February 1997 at 16%, and then growth slowed again to 8% in September 2001.

Fascinatingly, in this experience, investment banking employment was the leader, with corporate profits as the follower.

YY Growth in Investment Banking Employment and YY Corporate Profits


Overall, investment banking employment and corporate profits appear to be connected.  The connection, though, is complicated.  At times, corporate profits provide a leading indication of where the economy is heading, whereas at other times, investment banking provided the leading indicator.

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