Goldman Apologizes For Its Horrendous December "US Economic Renaissance" Call, Begins QE3 Discussion

Tyler Durden's picture

Back on December 1, 2010 Goldman announced it was "fundamentally" shifting its "bearish" outlook on the economy, when Jan Hatzius said "This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years" we accused the Goldman economics team, which we had previously respected, of "jumping the shark" and in describing the piece of fluff said it was nothing but "Hopium", concluding that "Jan Hatzius used to have credibility." Ten minutes ago, Hatzius just threw in the towel and apologized for this horrendous call. "Six months ago, we adopted the view that the economy was
transitioning to a more self-sustaining recovery and predicted
sequential real GDP growth of 3½%-4% (annualized) in 2011-2012.
were three reasons for our shift: a) a pickup in “organic” growth—GDP
excluding the estimated impact of fiscal policy and inventories—to more
than 4% in late 2010; b) visible signs of progress in private sector
deleveraging, and c) another round of fiscal and monetary stimulus....It hasn’t happened." Needless to say, this apology has made us regain some confidence in Hatzius. Of course, we fully expect that he and his entire team will relinquish their 2011 bonus (and possibly a 2010 bonus clawback) following this massively wrong call, which only Zero Hedge had the guts to call out. Anyway, we can now move on... to QE3. Just as we predicted in January (but were late by a month, expecting this preliminary discussion would occur in May at the latest), Hatzius has just launched the first shot across Bill Dudley's bow. "So what is the hurdle for QE3?" Hatzius asks... And a very dovish Bill "You can't eat iPads" Dudley will answer very shortly. Next up: QE 3.

Just out from Goldman Sachs

1. Six months ago, we adopted the view that the economy was
transitioning to a more self-sustaining recovery and predicted
sequential real GDP growth of 3½%-4% (annualized) in 2011-2012. There
were three reasons for our shift: a) a pickup in “organic” growth—GDP
excluding the estimated impact of fiscal policy and inventories—to more
than 4% in late 2010; b) visible signs of progress in private sector
deleveraging, and c) another round of fiscal and monetary stimulus.

2. It hasn’t happened. In fact,
organic growth seems to have slowed anew to a below-trend pace in the
first half of 2011. Moreover, our Current Activity Indicator (CAI)—a
statistical summary of 24 weekly and monthly indicators of economic
activity—has slowed from an average of 3.7% in the first quarter to 1.6%
in April and a preliminary 1.1% in May. If we take the CAI at face
value—and it comports quite well with our judgmental sense of how the
data have rolled in—that implies a growth slowdown of about 2½
percentage points in recent months.

3. What accounts for this weakness?
The Japanese supply chain disruptions are clearly responsible for some
of it, but we think that they explain only about 1 percentage point of
the deceleration. (This sounds bigger than the 0.6-point drag on Q2 GDP
growth that we have estimated previously, but note that a 1-point
deceleration in sequential growth in April and May would be consistent
with about a 0.6-percentage point deceleration in Q2 as a whole.) The
oil price shock is also clearly important but at least by our estimates
does not explain the size of the remaining slowdown. The implication is
that we are looking at either a weaker underlying growth pace or a
greater vulnerability to shocks than we had been assuming.

4. We are still reluctant to take the
deceleration entirely at face value, partly because many of the signs
of “healing” in the private sector that encouraged us in late 2010 are
still visible. The household debt service burden has come down sharply,
household credit quality continues to improve, bank lending standards
are easing, and financial conditions remain accommodative. Also, we
disagree somewhat with the negative tone of much of the recent housing
market coverage in the media, including two front-page articles in the
New York Times and the Wall Street Journal last week on the renewed
slide in home prices. It’s true that overall home prices have slipped
to fresh lows. But that wasn’t really a surprise; in fact, we and many
other housing market observers had expected renewed downward pressure on
prices in 2011 given the still-high levels of excess supply. Moreover,
according to the CoreLogic house price index, all of the renewed
weakness has come in distressed transactions, while prices of
non-distressed homes are actually up slightly in 2011 to date on a
seasonally adjusted basis. So it is possible that the recent house
price weakness simply reflects a greater effort by banks and GSEs to
clear out distressed inventory. That would be a sign that the
adjustment process has advanced, and not necessarily a cause for alarm.

5. What would be the policy response
to a sustained slowdown? We do not expect much. On the fiscal side, we
currently assume fiscal restraint of about 1% of GDP in 2012. This is
based on the notion that Congress will implement modest discretionary
spending cuts, and that the remaining provisions of the 2009 stimulus
package as well as part of the late-2010 bipartisan fiscal deal are left
to expire. The most stimulative outcome we can imagine is that all of
the 2010 provisions—the payroll tax cut, the unemployment benefits, and
the depreciation bonus—are extended, but even that assumption would
leave some restraint. And it is also possible that the restraint will
be larger than our baseline assumption, via deeper discretionary
spending cuts and/or a full expiration of the 2010 provisions. Like it
or not, fiscal stimulus no longer has strong advocates in Washington, so
its time has very likely passed at this point.

6. This puts the onus on monetary
policy. And sure enough, markets that not long ago were predicting rate
hikes are now starting to debate QE3. But we believe that the Fed’s
“zone of inactivity” is much wider than these wild swings might suggest.
The hurdle for rate hikes is high, and we feel good about our
long-standing view that the funds rate will remain at its current
near-zero level until 2013. But the hurdle for QE3 is also high, and
indeed much higher than it was for QE2.
First, the perceived cost of
QE3 is higher because inflation has accelerated. This reflects the fact
that at least some of the weakness in growth this year is due to higher
commodity prices, i.e. akin to a supply shock. Second, the perceived
benefit from QE3 is lower
. Fed officials viewed QE1—defined as the
overall balance sheet extension that started in late 2008 and ended in
early 2010—as a resounding success, and that was probably one reason why
they were fairly quick to climb aboard QE2. But they are much less
confident that QE2 made a big difference; while it probably did help
financial conditions ease and the economy grow a bit more quickly than
it otherwise would have done, it’s hard to argue that the effect was
large. That has to color their expectations for what QE3 might deliver.
And third, the backlash against QE2 both domestically and abroad was
greater than Fed officials had anticipated, and they are not keen to
subject themselves to another round of similar criticism.

7. So what is the hurdle for QE3? It
probably requires either a meaningful rise in the unemployment rate or
flat unemployment coupled with a sharp fall in core inflation and
inflation expectations. In contrast, if we just trudge along at a trend
or slightly below-trend growth rate and inflation stays near its
current pace, neither fiscal nor monetary policy are likely to provide
fresh support. Such an outcome might not be so bad from the perspective
of the equity market, which already seems to be discounting a fairly
weak growth pace. But it would be quite bad for the real economy, not
least because it would raise the risk that a significant portion of the
increase in unemployment—which still looks cyclical rather than
structural at this point—will ultimately become “ingrained” via a loss
of skills among the long-term unemployed.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
IdioTsincracY's picture

Geniuses!! That's why they make the big bucks!!

"What accounts for this weakness? The Japanese supply chain.... The oil price shock  ... we are looking at either a weaker underlying growth pace or a greater vulnerability to shocks than we had been assuming."


I think they forgot the weather, didn't they?!

Dolemite's picture

Precious metals to present good buying oppurtunity after a near term correction?

Gold and silver showing signs of weakness, and oil is confirming.

SumSUN's picture

I'm "betting" 500 oz. on the Fed unleashing more digidollars.

samseau's picture

Hear that sound?  It's the CHA-CHING noise going off in my portfolio!


Ohhhhhhhhhhhhhhhh Yeahh!~!!!!!!!!!!!!!



QE3 BABY!  Time to make some SERIOUS money!  Just buy a 6-month call on silver/oil/gold and quadrouple your investment!  And then take half to buy physical.



Subprime JD's picture

Hatzius is the leader of the wall street groupthink cabal. He is also a shill for the industry as he always pumps up the markets and the economy. For example, he still thinks that the employment issue is "cyclical" as opposed to structural. What a douche.

Hedge Jobs's picture

Hatzius is most certainly a "shill", its a prerequisite if you work for GS. There was no sound reasoning for his "bulllish" about face 6 months ago and now his credibility is in tatters but im sure he's been well compensated for that. What a pathetic sellout he is sacrificing his reputation to keep his masters happy.

Anyway, the question now is what is the markets reaction to the inevitbale QE3? Im not sure this will be met with the same enthusiasm as QE2 was. I reckon equity markets need to get a lot worse (go alot lower) before another round of QE will be tolerated.

Careless Whisper's picture

How many subpoenas did Bernie Blankfein get served with last week? anyone?


Hansel's picture

There is no correlation between QE and an increase in employment.  Fucking fucktarded eCONo-fucktards.

Cursive's picture


Word.  I made the same observation.

Problem Is's picture

"Fucking fucktarded eCONo-fucktards."

Fucking-verb, fucktarded-adjective, fucktards-noun...

Nice work..

Double down's picture

Is the first one a gerund?

navy62802's picture

I do believe you're correct, good sir.

Missiondweller's picture

"unemployment—which still looks cyclical rather than structural"


Based on what? its beginning to look pretty structural to me, especially as the number of people unemployed/underployed for over two years continues to grow.

holdbuysell's picture

Bernanke, in a speech just preceding QE2, mentioned that he didn't think the employment issue was structural. It was a simple sentence that seemed out of place, such that I can still recall it.

Cursive's picture

So what is the hurdle for QE3? It probably requires either a meaningful rise in the unemployment rate or flat unemployment coupled with a sharp fall in core inflation and inflation expectations.

Yeah, right.  Really cute how Hatzius left out any drop in asset prices.  Quantitative easing is all about asset prices, not the economy.  This report is disingenious or idiotic or a combination of both.

Superslam's picture

"Third time's the charm!" - The Bernank.

Id fight Gandhi's picture

But I don't want qe3. It doesnt work, didn't work, won't work. What fool does the same failed program over and over?

Problem Is's picture

Wow... I don't even have a PhD in economics from the "right" school and I made a better prediction on 12-1-2010 than Hatzius and his Goldman team... I believe "recovery morons" was my phrase...

Of course so did masturbating chimps and a dart board...

Reese Bobby's picture

"So what is the hurdle for QE3?"  I know this one!  The end of June! 

Hedgetard55's picture



Thanks for the chuckle.

slaughterer's picture

Tyler, thanks for posting this.  It iprovides guidelines for mid-term strategy.  The only thing that could set the stage for QE3 is a temporary commodity sell-off, to create the illusion of a deflationary spiral.  The unemployment numbers will remain steady as the unemployment is structural, not cyclical, as Hatzius pretends, picking up on the "ingrained loss of skills" of the long-term un-employed, Hatzius"s master (BB) trots out from time to time to gain sympathy from the working class.  We saw the beginning of a commodity sell-off last week.  It needs to continue in order for the stage to be set up for any talk of QE3 in the FOMC.  I would expect every PD to make a concerted and sustained effort to knock commodity prices down this summer--as the price of admission to QE3 this fall. 

holdbuysell's picture

I wonder if the bar becomes one sub-par UST auction, when the Fed is out of the way.

Superslam's picture

The inflationary benchmark for the Fed is real estate prices and nothing else. Maybe iPads too. As far as the Fed's concerned, as long as the prices of those two things remain static, there is no threat of inflation because the spikes in gold, oil, corn, etc. are merely "transitory." So I'd say the bar for QE3 is actually continued slumping real estate prices, which is a guarantee. Hence QE3 is a foregone conclusion.

slaughterer's picture

"So what is the hurdle for QE3? ...  a sharp fall in core inflation and inflation expectations."


Get ready for just that.

Reese Bobby's picture

ZH has pointed out that the Bank Cartel can't really drive commodity prices down without killing the carry trade and financial asset prices, especially credit.  After spending trillions to buy credit the Bank Cartel is between the proverbial rock and a hard place.


So I disagree with your view, even though I couldn't find the ZH article that made so much sense to me on this topic within the last 3-6 months.


I would entertain the idea TPTB want to admit to the economic mess temporarily so they don't have to be bothered with stealth QE3, to the extent they even care about having to hide it at this point.


scratch_and_sniff's picture

I bet it kills them.

BlackholeDivestment's picture

...they don't call em GOLDman for nothing.

FoieGras's picture

The guys who got it über-terribly wrong here are not only the macro guys but the company specifiy analysts. Consensus S&P 500 aggregate corporate earings for 2011 are being revised *UPWARDS* in recent weeks.

These guys are likely massively wrong and once the earnings forecasts revisions keep rolling  in weekly say hello to a sweet bear market.

That's what's (IMO) coming up next.

alfred b.'s picture


  QE3 needs to happen and needs to be large, cuz where else will the bankster bonuses come from??

...and oh yeah its trichle-down feature/benfit wil be the talk of the town all over Washington plus, how the horror of doing nothing would have thrown us over the proverbial cliff!!!



css1971's picture

QE 3 is already in place. All the Fed has to do is elimintate the interest rate it is paying on reserves.


Downtoolong's picture

Commission and trading income dropping. Life support from the Fed starting to fade. Quick, someone stir things up so we can bring this market back to life.

Jalaluddin's picture

With English one can verb a noun, noun a verb, and adjective a verb.

overmedicatedundersexed's picture

One item starting to show in MSM is summer layoffs of state and local government "workers"..

if the rest of USA is like my local area..major cuts to schools and county budgets are now planned for yr end July..

.summer of QE 3 just got it's second wind IMO as this unfolds.".unexpected" gov layoffs will shake the MSM like nothing else has.

PM's will move up very quickly if the MSM beats this drum of UE going thru the roof.

jkruffin's picture

So what is the hurdle for QE3?  

Well, lets see............ 


$100 oil - first problem

$1500 gold - second problem

US Markets are a ponzi scheme- third problem

$3 Trillion FED Reserve toxic toilet paper - fourth problem

The list goes on and on...........QE3 is a myth!


Scorpio69er's picture

When have these guys ever been right?


Fri Dec 21, 2007:


Goldman's Cohen tells paper U.S. recession unlikely


Abby Joseph Cohen: Economy to Rebound in 2008





jkruffin's picture

The negative stories just keep hitting the wires this morning.....


Economic Stimulus Runs Dry.....from CNN Money


Congress will not be riding to the rescue.

Economic indicators are pointing to slower growth. More Americans are looking for jobs, and the housing market is in a confirmed double dip.

In another time and place, lawmakers have might responded with economic stimulus measures to get the country back on track.

This time around, it's not in the cards.

Having spent the majority of the current legislative session operating at a truly glacial pace, Congress is sitting on the sidelines, waiting to see how the debate over the debt ceiling pans out.

"I am not sure you could even get the votes [for a stimulus package] if it was clear we were headed for a depression," said Norman Ornstein, a resident scholar at the conservative American Enterprise Institute.

To be fair, lawmakers have tried quite a few tactics to help the economy since 2008. Banks were bailed out, the auto industry was rescued and unemployment benefits were extended. Congress passed a gigantic stimulus package that included tax breaks and money for infrastructure projects.

But now that money has all dried up.