A Consensus on Wall Street?

For decades, 23 Wall Street – right across the street from the stock exchange – was the most important address in American finance. It’s a condo development now, but for most of the 20th century, it was J.P. Morgan’s headquarters.

The building was so well known, J.P. didn’t consider it necessary to mark it with his name. He preferred shrapnel welts. In 1920, terrorists detonated a bomb on the bank’s doorstep. Thirty-three people died. Morgan ordered his staff to leave the pockmarks alone. You can still see them today.

The building stands out from the skyscrapers around it – because it’s only three stories high. The bank vault is still there, one story below street level, except they’ve turned it into a swanky restaurant called Bobby Van’s. On Friday I had lunch in the vault with two Wall Street macroanalysts after my tour of the stock exchange.

We ate lobster wraps, drank Coke and chatted about markets.

After lunch, I headed over to the Goldman Sachs building on Water Street. In a corner office on the 49th floor – with a magnificent sweeping view of the Statue of Liberty – I met with one of Goldman’s economists.

Economists tend to be wishy-washy with their ideas, so I tried to pin him down with direct questions, like: “Say I gave you $10,000 and told you to make a speculation right now; what would you do?” The meeting lasted an hour and a half.

After a brief tour of Goldman’s trading floor, I headed over to Merrill Lynch. At Merrill Lynch, I met with an emerging market ‘strategist.’ Strategists are like economists except they apply their predictions to the markets. His office was cramped and research reports covered every inch of his desk. “I’m protecting it from dust,” he joked.

After I’d finished with the strategist, they took me down to Merrill’s cavernous equity trading floor and introduced me to the traders and salespeople on the emerging market desk. We talked about Chinese stocks. “Can’t believe I missed China Mobile,” said one. “I’ve traded this stuff ten years. It’s such an obvious play in retrospect.”

China Mobile is up 300% since April 2003.

When I’d finished on the trading floor, they loaded me up with research reports and sent me back to my hotel in a black limousine. I pondered the day’s events as we cruised up the Westside Highway. One thing struck me in particular:

The economics teams at Merrill Lynch and Goldman Sachs both predict a slowdown in the U.S. economy next year. Even more interesting, when I asked them, of all their research, which idea fell furthest from Wall Street’s consensus expectation, they both pointed to their weak U.S. growth forecasts.

In other words, both economists were bearish on the U.S. economy, and both economists thought they were being contrarian.

From within my cocoon of tinted glass and black leather, I wondered, “is this a consensus on Wall Street?” Every day, you read somewhere how the housing market is slowing down and it’s going to pull the economy into recession. Last week it was the Journal’s survey. Today it’s President Bush’s Council of Economic Advisers.

When Wall Street reaches a consensus, the smart money bets the other way. As we pulled into 59th street and up to my hotel, NPR’s financial report came through the Bose speakers behind me.

“The Dow closed today at a new all-time high,” the newscaster began...

Good investing,

Tom