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Goldman Sachs: "V-Shaped Recovery Unlikely"
We have gotten to a point where each country is trying to talk down its own economy in a pursuit of having the worst (DXY constituent) currency. Yesterday it was Bernanke warning about future growth prospects, last night it was Japan, and today it is Goldman Sachs, which is claiming that the economy is really worse than expected. What is the point of all this rhetoric: simple. In the current stock market bubble where the only driving force is the strength, or rather, weakness, of any given underlying currency (read- dollar), and where inflation and deflation pressures are inverted, such that a weak dollar would cause a market melt up, and thus, inflation spillover from overpriced stocks into commodities and other products, the only way to stimulate inflation is to posture having the weakest economy. Whether that is in fact "weakest" or merely most debt-laden, with worthless CRE, housing and other 'assets' serving as collateral on bank balance sheets, we leave to much smarter analysts such as Dick Bove and Meredith Whitney.
In less than one year Barack Obama has managed to convert America into a full fledged banana republic, simply with the goal of continuing to bail out the financial system.
Goldman's point, not that it matters, is that all of a sudden, economic prospects are getting much bleaker. Mr. Hatzius will emit whatever winds of change you can believe in, as suits Goldman's weekly prop exposure. Goldman should have just come out with a Conviction Sell rating on the US Dollar, and Conviction Inflation rating on BofA, JPM's and WFC's trillions of worthless assets and debt.
As even CNBC finally realizes the bait and switch currently in progress, expect propaganda central to radically shift their perspective and to gradually commence bashing the economic recovery. In a world where only the DXY matters, the weakest economy wins.
The Arithmetic of Recovery
Despite the sharp pickup in real GDP growth since the dark days of early 2009, we estimate that real final demand—net of the boost from fiscal policy—is still contracting at an annual rate of around 1% in the second half of 2009. 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.
The significantly stronger recovery that is now anticipated by a number of forecasters would require a much sharper acceleration in underlying final demand, along the lines of prior recoveries from deep recessions. But this ignores some key differences between the current situation and the aftermath of prior slumps. In particular, bank credit is tighter, the personal saving rate is much lower, the labor market is less cyclical, there is much more excess housing supply, and state and local budget gaps are deeper.
In Friday’s US Economics Analyst, we noted that several key indicators of final demand—including retail sales, capital goods orders, and exports—continue to look “L-shaped with a slight upward tilt,” to use the expression of San Francisco Fed President Janet Yellen. This remains true after today’s retail sales report. While “core” sales excluding autos, building materials, and gasoline rose a stronger-than-expected 0.5% in October, this was offset by a cumulative 0.3% downward revision to the prior two months.
Indeed, net of the fiscal policy boost from fiscal policy, we estimate that final demand is still declining at about a 1% (annualized) pace in the second half of 2009. This is shown in the chart below, which plots final demand both including and excluding the estimated impact of fiscal policy on real GDP growth.
Going forward, we do expect underlying final demand to improve gradually to a growth rate of around 2% in the second half of 2010. There are several reasons for this. The household financial adjustment will likely be further advanced as the saving rate rises and equity prices have recovered part of their earlier losses; business investment should stabilize as the commercial real estate downturn bottoms out and some firms replace worn-out equipment; and net exports should return to a gradually improving path, in lagged response to the renewed dollar depreciation.
But the key reason why our growth forecast is below consensus is that we expect the 3-percentage-point improvement in underlying final demand growth to fall short of the loss of the fiscal and inventory stimulus of 4-5 percentage points. Our projections for the latter are illustrated in the chart below.
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 important:
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.
Jan Hatzius
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Is this the same Goldman Sachs that put all 10,000 US publicly traded company's stock on its super duper absolutely convicted buy list because of the coming V-shaped recovery that will do magical things to every company's bottom line and profit margin?
Just askin.
Don't be ridiculous, it's just a minor readjustment of forecasting..
It's still going to be a V shaped recover. The V just looks like this now: ^
In the immortal words of Maverick:
"It's because I was inverted."
Let's see...from V to square root to W to L. Half way home.
Looks like GS is about to blow the whistle.
They must be out of the pool
Today looks like if no movement in the dollar, the market does nothing.
A market that is based purely on what that does is not a 'stock' market at all
And if GS comes out with remarks like that, looks like they want to push the market back down so they can close off the shorts they opened before they said it
Vampire never reveal their hand beforehand; but you can be sure that the intent is not contained within the message.
This same Hatzius leaked a NFP number accurate to the second last digit and caused massive short-covering pains to bears; the next month, same Hatzius let slipped a totally faux GDP wide off the mark to suck the shorts, only to wipe them out the next day. Got it now pal? No? Ok, dig your ears - this is to suck in more bears after November Opex, so vampire squid can wipe them out in mother of all genocides in Dec Opex. Market will come down when stimulus 2 is ready, which means next spring. Before that, SPX will say hello to 1200. See you in Mar 2010.
Quick investing question: Is a PE ratio in the triple digits a good thing or a bad thing? It's hard to tell from some of the action I see out there?
Uh, according to Bernanke and Yellin, there is no problem with stock market valuations. Greenspan was just as evil as Bernanke, but at least his conscience led him to warn of "irrational exuberance" even as he was propping up markets after LTCM and blowing the Y2k Nasdaq bubble.
Valuation - What the hell is that? Is that even part of normal discourse these days? Someone call Webster and tell him to drop this irrelevant word from the dictionary.
"there is no problem with stock market valuations"
That's Zimbabwe Ben trying to get out of debt hole by lowering the cost of repayment via artificial inflation (depreciation of debt).
Now, higher and higher P/E is a sign that it's not working. The revenue and earnings are not inflating despite the trillions of newly printed money.
High unemployment, lower imports/exports/trade and lack of confidence in the near future has something to do with it, despite the "jobless recovery" BS we still hear around. BS, nothing but BS.
Deflation it is even if the price tag nominal value is higher.
"Zimbabwe Ben"
Now there is a winner. Much better than Heliocopter Ben.
new paradigm , so it is a great thing. when it hits 4 digits think about doubling down. make sure you visit the VIP room and enjoy your drinks.
My dear friend, you must be more diligent in your practice of faith based investing. Close your eyes, open your mouth and let GS push you backwards into the warm waters of triple digit P/E ratios and HFT trading as you are baptized into the mysterious and glorious ways of our God, Lloyd Blankfein.
As your life slips away and you slowly drown (you didn't think GS was letting you back up, did you fool?) to the soft background music of "buy buy buy" sung by various hedge fund managers and prop desk geniuses, just remember that the promised land is for those who deserve it, which obviously doesn't include your sorry ass.
I'd wait until double digits and BUY, BUY!
GS: "Aha ha, aha ha, Aha ha, you've been punk'd bitches! Aha ha, aha ha, aha ha...."
HAHAAH Yeah: "MERRY CHRISTMAS SUCKERS!"
Nobody wanna hold dollaz, Fed has to give them away to get ppl to take them.
50 BK states, a BK federal gov't...yes, I see this ending rosy with Deus ex Machina.
It's all very self-evident to bankers that money causes commerce, right? Lord knows there was no commerce without credit money and fiat paper...e.v.e.r
Fuck the Squid. Yesterday I was reading in the comments that Tarzan was on-board for taking the DOW to 16,000.
Something about the freight train won't be stopped. No Dowus Interruptus and stuff like that.
When I imagine a V shaped recovery at stall speed the first image that comes to mind is an upside down V.
I conceptualize it more as a Gibson Flying V onboard with Randy Rhoads
"...In less than one year Barack Obama has managed to convert America into a full fledged banana republic, simply with the goal of continuing to bail out the financial system."
Really?
Looks more like an overabundance of sugar for Jamie and Lord Blankfein, payoffs to the Autoworkers, and assorted other members of his constituency than a bail out of the system.
Uh... where are the "triple digit PE ratios"?
Most of my names are 10-15x next year's earnings with lots of excess cash on bs. Sure some name are 50x trailing, but those names are showing eps growth in the 40-150% range. If you're earnings were $0.01 last 12M, yet will probably be $0.10 in 2010, then a 100x PE... might just be a 10x PE. Right?
Live by the earnings growth estimate, die by the earnings growth estimate.
How are you determining "next year's earnings?" How'd that next year's earnings estimate turnout over the last couple years? I seem to remember, subprime is contained.
F shaped recovery
Oh dear....this must mean the squid has already distributed
and is now short? Heck, they wouldn't do that to the
sheeple, would they, after putting out the first and
highest 2010 estimates on the street? Does anybody realize
what a 2% GDP forecast means, we really suck?
GS, okay, we've covered our asses on this bubble thing, now bid em up boys
GS, okay, we've covered our asses on this bubble thing, now bid em up boys
...I see a forward slash shaped recovery.
> where each *country*...last night it was Japan, and today it is Goldman Sachs
a (perhaps intentional) freudian slip with regard to Go(ldman)vernment Sachs ?
I thought one does the opposite of what GS states
in order to perform....
When they talk it down.....they buy....
They sell into confidence...media building to the
young mfund managers....
What else is there for them to do ?????
Unfortunately it's the same Goldman Sachs who said that we would reach 1100 before the year end and have now said 1060 as target downwards. I didn't make a note of their names, but I do remember the values.
DavidC
This is interesting...
Graham Summers
http://seekingalpha.com/article/173592-the-financial-crisis-nowhere-near-over?source=email
Goldman Sachs (GS) recently published its 13F, a quarterly filing in which all asset managers reveal their largest holdings. In it, Goldman’s asset management group reveals their largest long positions and their largest short positions.
Now, Goldie is widely held to be the “smartest” guys on Wall Street (not my opinion) so its net shorts (the stocks or companies they’re betting against) were particularly interesting to me:
For starters, four of the top 10 are financial companies. The largest financial short is Wells Fargo (WFC), which Goldman has committed $289 million to betting against. After that it’s Mastercard (MA) ($266 million), then PNC (PNC) ($202 million) and finally AIG (AIG) ($152 million).
On a final note, I wanted to point out Goldman is also shorting a Euro index (betting against that currency) as well as two gold mining companies (Barrick (ABX) and Agnico Eagle Mines(AEM)). This indicates that Goldie is bearish on both the euro and gold. which hints that Wall Street’s finest are likely betting on a US Dollar rally (that would, after all, be the most obvious catalyst for a correction in gold and the euro).
the timing makes sense. They offloaded most of their holdings at 3-10x from the lows of last NOV and MAR. Not bad for a one year return. And now they probably came up with this analysis and deflationary figures for the PPI,in an effort to drive the markets down so they can load up a new in another round. Strangely though,the market is not plunging deep,so may be they will come up with another crisis??!!
GS teaming up with warren buffet to "aid" 10k U.S. Small Businesses..wow, talk about desperate moves; it will either be loans w/ derivatives that are guaranteed to screw the little guy....or a paltry, stingy, half baked "gesture" ...is my guess.
Jan Hatzius. Global Investment Research, Goldman Sachs.
Interesting light bed time reading, but devoid of any real insight. A lot of explanation about what the economy is not, but nothing about what it has become. I think the most remarkable thing about the report is how Jan steered clear of any real meaningful events. It is cast in the uninformative style of Alan Greenspan.
Jan joined Goldman in 1997, she has been with the company more than 10 years and knows the fundamental difficulties toward any sustainable US economic recovery. Especially, relative to GS derivative risk, balance sheet, and efforts to unwind leveraged exposure to SIVs subject to future asset price erosion.
Quoting Jan's conclusion;
"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."
Did you really get paid for this unactionable and vague "research", I wish I could.
NOW these f'ers are saying this?? How convenient.
Bottom line....i'm tired and don't give a crap how
it's gamed anymore. We're trading by appointment so it's
all meaningless unless your number comes up today.
Nothing but a complete Japan-type sham now. Who cares?
Where Goldman Sachs goes, shouldn't our nation?
Good Bless them!
Jeez how pathetic. Now they can only move the Dow.
Nobody gives a goddamn. Welcome to Japan.
Where is all the good news, anyway?
Commenters on this site are so irredeemably cynical of a noble firm dedicated to doing God's work. Impugning its divine motives as self-serving propaganda is to risk wrathful fire from on high.
Does anyone know what the fiscal stim in Q4 and Q1-2 of 2010 are in the GS chart. Has GS already written the bills for the Prez to sign?
This report sucks.