Unlike Michael Douglas’ Gordon Gekko character, Goldman Sachs CEO David Solomon thinks greed is not good for Wall Street.
“When I step back and I think about my 40-year career, there have been periods of time when greed has far outpaced fear. We’re in one of those periods,” Solomon said during an interview at the Bloomberg New Economy Forum in Singapore on Wednesday
“Generally speaking, my experience says that those periods are not long-lived. Something will rebalance it and bring a little bit more perspective,” Solomon added.
His comments come at a time when the broader market is near all-time highs, and meme stocks and cryptocurrencies are surging on social media hype. Meanwhile unprofitable electric vehicle makers with little, if any, sales — such as Rivian and Lucid — are worth more than established auto companies.
The Goldman Sachs CEO isn’t the only one who’s worried about excess and froth in the market.
The CNN Business Fear & Greed Index, which measures seven indicators of investor sentiment, has been showing signs of Extreme Greed for much of this month.
Solomon told Bloomberg he’s concerned about how the pandemic-fueled “massive amount” of stimulus from central banks and governments around the world is pushing inflation higher, along with prices of assets like stocks.
That’s why the US Federal Reserve is now looking to pull back some of its crisis-era support by starting to unwind, or taper, the amount of bond purchases that have helped keep long-term rates low.
Market unprepared for more volatility?
Solomon said it’s unclear if the market is prepared for how quickly the Fed is looking to taper, not to mention the possibility of interest rate hikes after the taper is done.
“There is a chance that central banks can unwind this massive stimulus in a way that doesn’t create some sort of a taper tantrum or some sort of real shock to markets, but there’s also a chance that they can’t be done that way,” Solomon said.
He also told Bloomberg that if long-term interest rates continue to move up, “that in and of itself will take some of the exuberance out of certain markets.”
Solomon warned that many investors don’t remember, or weren’t yet around, when inflation skyrocketed during the 1980s and the Fed was forced to drastically raise rates: “It’s been a long time since we operated in an environment where the general trend on interest rates has been higher.”
What’s more, with so many stocks and other assets performing so well, investors may be fooling themselves by thinking that it’s easy to make money in the market, he added.
“Everyone feels quite smart right now because most of the things you invest in are going up. That’s not the way it normally works,” he said. “My experience tells me this is a moment in time that’s not a sustainable moment.”
Of course, Solomon’s own Goldman Sachs has benefited handsomely from this environment. The bank’s stock is up nearly 50% this year, making it one of the top performers in the Dow.
Goldman Sachs said last month that it posted profit of $5.4 billion for the third quarter, topping forecasts. Revenue also surpassed expectations, surging 26% from a year ago to $13.6 billion.
Bonuses are expected to rise sharply at Goldman Sachs and other top investment banks this year as a result.
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