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Goldman Sachs: The Forest and the Tree


Financials are increasingly a Main Street story, not a Wall Street story.

Goldman Sachs (GS) stock is off a little more than 2% today as rumors of a "large write down" circulate around the Street. As unlikely as the rumor may be-and it's very unlikely-the real story is that the stock's decline illustrates how fragile the financials remain despite assurances from Federal Reserve Chairman Ben Bernanke's as recently as Monday night that the credit markets have seen "further progress" in the ongoing "repair" and that the risk of a "substantial downturn" has diminished.

While Bernanke's speech would seem to have hammered a sizable nail into the recession coffin, the continuing deterioration in the financials and increasing stress on Main Street paints a different picture.

Last week the Federal Reserve's Flow of Funds report showed household net worth deteriorated by $1.7 trillion in the first quarter. Meanwhile, debt payments currently eat up about 15% of the average U.S. family's income. With inflation isolated to just two categories, food and energy, we are seeing ongoing deflation in just about every other spending category, which is being exacerbated by consumer cutbacks as spending is redirected toward necessities over discretionary purchases.

Last year at this time markets began experiencing the initial cracks in this finance-based economy as financials begin to buckle under the stress of an unsustainable business model; financing their expanding appetite for risk by lending to consumers with ever weaker balance sheets and an expanding appetite for risk.

We are now seeing a shift in consumer behavior toward savings and thrift that mirrors the risk aversion on Wall Street. That's bad news for financials going forward, from Goldman Sachs to Merrill Lynch (MER) to JP Morgan (JPM) to Wachovia (WB) and so on and so on.

The former money-making business model that created the bull market in financials is now broken. Bernanke may be right. The credit market repairs are progressing and Act I is over.

But Act Two is only beginning. This act is about Main Street, not Wall Street. And anyone looking for answers in the financials is missing the forest for the trees.
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