Goldman Sachs' Latest Puff Piece On GDP Growth Contradicts The View Of... Goldman Sachs?
Another day ending in "y", another reason for Goldman to try to get the marginal mom and pop into melt-up markets. Indeed, the attached Top Trades pamphlet distributed earlier, is precisely the kind of puff piece we have all grown to love and expect out of Goldman: Jim O'Neill apparently has not been reading Hatzius' increasingly more bearish take on the economy in 2010 (let alone 2011, but of course, Goldman has a crystal ball that lets them extrapolate hockeysticks into perpetuity) which lets him conclude that "Our projections suggest that both 2010 and 2011 will be rather strong years—we now expect 4.4% GDP growth for 2010, and a higher 4.5% for 2011. We are above consensus for next year and, while there is no consensus as such for 2011, we suspect we are significantly higher than consensus for 2011 also. With respect to inflation, we are below consensus, despite our relative optimism on GDP." No consensus, no matter- Goldman will define what the market is. And with Government Sachs making sure that the administration keeps spending taxpayer money to make sure 2010 is another record bonus year at 85 Broad, little can go wrong, right? While we won't spend any time digesting this puff piece, we would like to point out one thing.
Mr. O'Neill, with traditional bluster, claims: Our index of systemic financial stress, our so-called GSF-SI, shows an extremely comforting picture, as it has done for many months. Readers are hopefully reasonably familiar with its construction, but it is designed to measure the risks to the financial system. If you believe that the significant increase in systemic financial risk in 2008 was a major source of the global recession, then the move in the index for much of 2009 should have made
you more optimistic. It certainly made us more optimistic. [no shit] Looking at the generous level where it currently stands, the only issue might be at what stage policymakers may be tempted to consider being less generous in their support."
The chart in question is presented below:
We would like to ask an ever so rosy Jim how he extrapolates that the near-record complacency in financial conditions, compared only to the record lows of March 2008, is indicative of anything? After all, the period just after the previous such "easy conditions" resulted in the biggest market implosion since the Great Depression. And yet, a read of this chart has "certainly made [Goldman] more optimistic." Why of course it has - the firm after all has billions in accumulated positions it needs to offload before the next systemic crisis appears.
Much more relevantly, however, could Mr. O'Neill please reconcile his 4.4% GDP growth expectation with that present by Goldman chief economist Jan Hatzius who not three weeks ago stated that, "although we expect a moderate recovery of around 2% by the second half
of 2010, such a 3-percentage-point improvement would be insufficient to
offset the loss of 4-5 percentage points of stimulus from fiscal policy
and the inventory cycle. Hence, real GDP growth is likely to slow anew
to a below-trend pace."
So GDP growth is both 2% and 4.4%? Can Goldman at least reconcile their external research so it kinda sorta matches up please? Furthermore, can Mr. O'Neill provide some answers to the following points posed by none other than his colleague Hatzius:
In order to see the significantly strong recovery that is now
anticipated by a number of forecasters, we would need to see a much
sharper acceleration in underlying final demand. The main argument for
such an outcome is that deep recessions have historically been followed
by strong recoveries.
But we believe that such an extrapolation
is too simplistic. It ignores far too many differences between the
recent recession and the deep downturns of the past, e.g. those of
1973-1975 and 1981-1982. The following differences seem particularly
1. Bank credit is tighter.
Although the deep recessions of the past often did feature significant
financial distress, this was usually directly related to high
short-term interest rates. Once the Fed cut rates and the yield curve
started to steepen, banks’ willingness to lend rebounded sharply. This
is visible in the Fed’s Senior Loan Officers’ survey, which showed that
the net percentage of banks increasing their willingness to lend to
consumer stood at +28% in 1975Q2 and +53% in 1983Q1, the quarters
immediately following the end of the recession. In contrast, the same
indicator stands at -1.9% now.
2. The personal saving rate is much lower.
At the end of the 1973-75 and 1981-1982 recessions, the personal saving
rate stood at 10% or more. Now, it stands at 3.3%. Thus, consumers
have less wherewithal to support sharp pickup in consumer spending
growth of the kind that often occurred following prior deep recessions.
3. The labor market is less cyclical.
This may sound like an odd statement at a time when the Great Recession
has just pushed the unemployment rate from below 5% to over 10%. But
what we mean is simply that the labor market looks less primed for a
sharp rebound than it did in 1975 or 1982, largely because of the
changes in industrial structure and corporate behavior documented in
our Brave New Business Cycle research of the 1990s. One quantitative
measure of this is the share of workers on “temporary layoff,” which
currently stands at 1.1% of the labor force compared with more than 2%
in both 1975 and 1982.
4. There is much more excess housing supply.
Although the 1973-75 and 1981-82 recessions also featured severe
declines in housing starts and residential construction, the reason for
these declines was mainly a tight monetary policy. This time, it is
mainly the massive excess supply of housing, as illustrated by the 2.6%
homeowner vacancy rate compared with respective rates of 1.3% and 1.6%
at the end of the 1973-75 and 1981-82 recessions. Rental vacancy rates
are also much higher now. Reversing a tight monetary policy is a much
faster process than unwinding a large-scale housing supply overhang.
5. State and local budgets are in worse shape.
State and local governments are seeing the biggest drop in tax receipts
in postwar history. As of the second quarter of 2009, real receipts
were down 7.9% on a year earlier, compared with peak declines of 4.9%
in 1973-1975 and just 0.2% in 1981-1982. The decline is unlikely to
end next year, so states and municipalities will probably need to
continue tightening their belts.
Again, we do expect final
demand to recover gradually in 2010 as noted above. But “gradually” is
the watchword, and a V-shaped recovery remains unlikely.
Thank you Goldman Sachs for proving once again beyond a reasonable doubt that all you do its goal seek your results to however any given dominant trader axis tells you to formulate your research output. Your immense conflicts of interest and lack of any research integrity will not go unnoticed.
And in fact, in a research piece from Hatzius just released, the chief economist provides this outlook for GDP:
Thus Goldman claims GDP is 2010 GDP growth 4.4% or 2.1%? Not a bad way to hedge your bets. Goldman, please get your propaganda house in order. You make CNBC look like champions.
And speaking of propaganda, here is how Goldman is trying to lure marginal buyers into the biggest bubble 2.0 stock:
Goldman's strategists told clients to buy Amazon's January $140 calls. This is essentially a leveraged, momentum trade on a high-flying stock. Amazon's stock was recently trading at about $138 so the recommendation essentially entails using options to cost-effectively establish exposure to a stock whose price has increased 165% year-to-date, and gained 72% in just the past three months.
Update: it appears Mr. O'Neill is in fact referencing world GDP, whereby the divergence in GDPs of course makes sense. Nonetheless, we would still like a swig of his Kool Aid, and we still would expect him to present a counterpoint to the numerous bearish points highlighted by Mr. Hatzius previously. We believe it is only fair if one is presenting top picks in an overly optimistic environment, while Goldman's head economist has recently been refuting just these ebullient observations.