Goldman Sees "Disturbing Signs" If Government Does Not Bow Down To Krugman, Reflate Monetary And Fiscal Bubbles

Tyler Durden's picture

Last week, Goldman, in a piece unambiguously titled The Second Half Slowdown has Begun, made it all too clear that unless the US government were to succumb to yet another, and another, and another round of drunken sailor spending, the gratuitous ability of its sellside analyst to place crap companies on Conviction Buy lists may suddenly become mysteriously impaired as reality seeps through the gaps, thereby infuriating CEOs of worthless and overlevered widget makers, who know all too well their corporate earnings are about to be taxed through the nose by the Obama crack economic team, as their stock is about to plunge. Today, just in case the threat may have been missed by the cheap seats the first time around, here comes Jan Hatzius with the ominously titled "Disturbing Signs" which reads like Paul Krugman's induction essay into the Useless Economists' Society.

1. Friday’s jobs numbers were disturbing.  At best, they show an economy that is growing only quickly enough to keep the unemployment rate flat near 10%.  At worst, they suggest that the labor market is once again turning down.  Both the manufacturing workweek (the only part of the employment report included in the index of leading indicators) and the employment/population ratio (the broadest job market measure in the household survey) dropped significantly in June.  Given the noise in these series and—in the case of the workweek—the potential for substantial revisions, both fortunately fall short of a clear-cut signal that another labor market downturn has begun.  But we will need to see at least a partial reversal of these declines next month.

2. This comes at a time when the end of the inventory cycle has triggered the inevitable slowdown in the manufacturing sector.  With inventory investment now again close to a normal rate, GDP growth is likely to converge to final demand growth, which has averaged only 1½% since mid-2009 and is unlikely to accelerate given the various headwinds facing the economy.  The resulting slowdown in GDP growth is likely to be concentrated in the goods-producing sector, which previously received the largest boost from the inventory cycle.  Hence, further declines in the ISM index following last Thursday’s drop to 56.2 are likely; our GDP forecast implies a decline to around 50 by early 2011.
3. The weak labor market implies not only a great deal of hardship for workers, but also a growing risk of deflation.  Although the last couple of core CPI/PCE releases were a bit higher than those earlier in 2010, the trend still seems to be downward and other measures such as wage growth and inflation expectations have been declining.  In particular, the 5-year 5-year forward breakeven inflation rate in the TIPS market has fallen 75bp since April and now stands at 2% for on-the-run securities, the lowest level since mid-2009.

4. Our recently released Global Economics Paper No. 200 entitled “No Rush for the Exit” argues that policymakers should react to the combination of a sluggish recovery and declining inflation with additional policy easing, either via a return to unconventional monetary policy or via further fiscal stimulus.  The obvious counterargument is that monetary and fiscal easing carries long-term costs in the form of, respectively, a risk of a renewed asset bubble and a higher public debt burden.  But our study shows that these costs look far from prohibitive at present.  On the monetary side, US financial markets are nowhere close to bubble territory.  On the fiscal side, it is difficult to argue that the US government has reached the limits of its debt capacity when long-term bond yields are low and falling, and when federal interest payments stand at just 1½% of GDP.  When compared with the risk of a renewed economic downturn and/or a descent into deflation, the cost of additional stimulus seems to be well worth paying.

5. So what is to be done?  On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed.  Whether these will happen anytime soon is another matter.  Additional purchases of Treasuries and/or MBS mortgages do not yet seem to command a sufficient majority on the FOMC.  This might change if growth and/or inflation ease further.  But even then it is unclear just how effective they would be.  After all, Treasury purchases did not seem to have much impact in 2009, and MBS spreads are already quite compressed, limiting the potential for further narrowing.  A TALF-like structure could be more powerful, but it would need the Treasury’s cooperation and the Fed’s authorization under article 13.3 of the Federal Reserve Act, i.e. the Fed would need to invoke “unusual and exigent circumstances.”  This is a very high hurdle. [TD: please Jan, have you met the criminals who run this country? The "very high hurdle" is about $100,000 per fat, bald and corrupt politician]

6. On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010.  If some of the tax cuts are left to expire, then this should be offset by temporary fiscal easing elsewhere.  The point is that a tightening of the overall fiscal stance at a time when the economy is already struggling to maintain the current, unacceptably low level of resource utilization is a bad idea.  In fact, we favor additional deficit-financed stimulus, coupled with a commitment to cut the longer-term deficit more aggressively than currently envisaged in the administration’s 10-year plan.  The consolidation could include cuts in discretionary expenditures, slower growth in entitlement spending, and gradual hikes in both direct and indirect taxes.  The precise mix is a matter of political preferences, and reasonable people can disagree about the pros and cons of different measures.  But the need for long-term budget restraint should not stand in the way of a near-term boost when the economy clearly needs it.

7. A failure to enact additional stimulus—at a minimum, extended unemployment benefits, state fiscal assistance, and extension of the bulk of the 2001/2003 tax cuts—would imply a downside risk to our GDP and employment forecasts, specifically for 2011.  Right now, we are showing a gradual reacceleration to 3% on a Q4/Q4 basis in 2011, but we worry that this might end up being too optimistic.  We will evaluate developments both on the policy front and in the US economic data closely over the next few weeks to see whether any adjustments are warranted.

And what is unsaid: should GDP downside risk materialize, you can kiss all those Buy Rated companies goodbye, as Goldman moves to a conviction sell on everything that moves, thus wiping out about $5 trillion in stock market value. Obama: you have been warned - how will your corporate sponsors feel that for once you did what is in the interest of the people of this country, instead of the 100,000 richest folks, who just happen to pay 80% of all taxes, and proceeded to destroy the bulk of their equity values. Oh yes, and that whole thing about the Fed buying up your debt via the Goldman/JPM-led group of Primary Dealers... you can kiss that goodbye too.

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Rusty_Shackleford's picture

Seems the full court press is on for QE2.0 (?3.0).

Mr Lennon Hendrix's picture

They are locked and loaded....and so am I.

Careless Whisper's picture

and just to show you they really really care, goldie will wave their fees on all those bonds that will be financing the deficit spending.

B9K9's picture

Think big, people. If QE X.0 fails to be engaged, the country is going down. (Of course, if QE succeeds in being implemented, the country still fails, but perhaps a bit further out.)

Now, by my estimate, around 50% of the citizens of this great land are just about ready for a reset, and everything that entails.

Once the meme that !QE = !USA reaches a broad audience, people just may vote in November to see & experience such an outcome.

Al Huxley's picture

Next QE will just speed up the failure - negative return on debt now.

UncleFester's picture

At least it will finally resemble reality.

Kegfreak's picture

There has to be a velocity to QE.  Every additional round of lube has to do less then the last, and if this is the case, when QE 2 and 3 ease there way in to the economy, the feeling will not be as good as the first time, and we all know that the first QE saved us from the "greatest depression since the Great depression."

Assetman's picture

If Goldman is pushing QE for public consumption, the jig is in to compress this market.  One more short squeeze and internal GS reposition, and the Fed will wait until the hapless populous is begging for more stimulus.

Of course, the machinations of buying more assets will only help the banking system, and that won't go unnoticed.  Fiscal spending is a tricky issue politically as well.

Make no mistake about this-- while the Treasury is promoting "growth policies" by issuing more debt, they are desperate to keep those new issue coupons as low as possible.  That becomes more difficult to pull of under QE 2.0 and a Europe under the 12-step austerity programme.

Gwynplaine's picture
Gwynplaine (not verified) B9K9 Jul 7, 2010 10:20 AM

So the vote in November will be in favor of free spending Democrats?  If the economy deteriorates materially from now to October, that's a big win for the opposition.  The Democrats only hope is to push through an unemployment extension and another Cash for Suckers program.   They have the votes for it, and it will be pushed through - despite the protests of savers and fiscal conservatives.

If it's successful, it's the beginning of your reset.  The Dems will be re-elected by the grateful unemployed.  They can alleviate each downturn by spending and selling debt/QE.   That will deteriorate the value of the dollar, requiring more of the same medicine at each downturn.  Historical inflation cycles took up to 10 years to complete.  This one could happen much faster.

If the unemployment bill is thwarted, the Republicans can win in November by default.  That will leave the country to float until the next big crisis.  The timeline of this second scenario is harder to predict.  


Assetman's picture

So the vote in November will be in favor of free spending Democrats? 

From what corner of the galaxy did you come up with THAT conclusion?

Regardless of what the Democrats give to the "grateful" unemployed, they are toast in November.  Sure, they will do their very best to spin a good story to get re-elected... but did you see the primary results just 6 weeks ago?  Again, this was BEFORE we saw a turn in the leading economic indicators.  There will be very few incumbents re-elected, given the course that was chosen.

The issue in November isn't if the Democrats will lose, it's how much will they lose-- and who they lose to.  I wouldn't be surprised to see a handful of 3rd party candidates actually taking Congressional seats-- especially in the western states.  But a chronic lack of alternative party organization will likely keep the D/R duopoly strongly entrenched for years to come.

Still, an unemployment bill ain't going to do squat for the Dems, I'm afraid.  If the Dems had done some real thinking and addressed the country's structural problems in the 1st stimulus package, we might be telling a different story.  I doubt it, though, because we still let Uncle Ben waste $2 trillion trying to save a banking system not worth saving. 

SDRII's picture

That should be good for a nother $25 takedown in Au. QE 2.0 appetizer: AIG plane leasing unit talking about buying more planes today just in time to boost fledgling durables per Bloomberg article today (because of course they want to leverage their cost of capital advantage)...laugh or cry

Mr Lennon Hendrix's picture

If these fools think they can play the PM market the way they always have during this capitulation, they better be careful.  I could definitely see gold making unpredictable moves to the upside while they try to game it.  The biggest mistakes are always made by those who are over confident, and GS and Co look way over confident right now.  PMs will not be bullied much longer, I know it.

Kegfreak's picture

If they could just bully them sub $1000.00, I would for once be grateful.  I'm more of a silver bug though so I will take $15 and below to totally blow my saved rounds.

Scooby Dooby Doo's picture

Obama is being schooled by the Hebrew Mafia. Do what you're told and things will run smooth for you.

Resist and every media outlet in this country will eat you alive.


Did you see a media image of Obama and Benjamin Netanyahoo today? Reassuring everyone of their chumminess?

MountainHawk's picture

NPR this morning did a piece on Isreal's economy. They were untouched by the financial crisis. They came out much stronger.

Scooby Dooby Doo's picture

A bill sponsored by Lieberman was passed in Oct 2008 and approved by a non contested silent head nod vote.

The bill gave $265 Billion to israel and an apology for causing any type of apocalyptic impression that the US would not be sending more free money in the future.

Brought to you by your friends at AIPAC.

pan-the-ist's picture

NPR is the mouthpiece of the "Hebrew Mafia."

TuesdayBen's picture

NPR is in the business of generating Leftist propaganda.

Kegfreak's picture

They have quality gardening programing, not something you find where competition is involved!

jeff montanye's picture

not when viewed from palestine, in most cases.

NOTW777's picture

obamas overtures to israel were as reassuring as his promise not to prosecute the CIA, shortly before he, prosecuted the CIA

jeff montanye's picture

details?  who, other than whistle blowers, has he prosecuted at security agencies?

RockyRacoon's picture

You'll excuse me for saying so (maybe) but you seem to be a one-trick pony.

One guess as to what that trick is.

zevulon's picture

lets face it, this is all the jews fault. rich non-jews are responsible and non greedy, all rich jews comprise all greedy influential persons out there. they control everything.

dogbreath's picture

Samizdat; 200 years together. 


What do you think?

Al Huxley's picture

Full court press for QE2 is like having a full court press on the Titanic to crank the engines after the iceberg ripped a hole in the hull.  All that will happen is we'll sink faster.

Rusty_Shackleford's picture

Check out this corpse that CNBC trotted out to sell QE2 today.

It reminded me of Weekend at Bernie's.

Al Huxley's picture

I'd really like all these guys to come back and justify their actions and recommendations when the US finally gets its credit pulled.

Sudden Debt's picture

The boilers of the Titanic where one of the first rooms to be flooded. The only thing keeping the lights on where the bateries untill they also where under water. That caused the lights to go out, but never the less, even the bateries wouldn't have taken much longuer as the powersource was already long gone.

Like now, the lights are still burning but the engines of our economie are under water already a long time ago. Long live the battery!

lawton's picture

Anything to keep those billions in bonuses rolling in...

King_of_simpletons's picture

Let's admit it. QE2.0 is going to happen. The HFTs have to stay employed. Satans minions must be paid the billion dollar bonuses.

TexasAggie's picture

I and many other members of the armed forces take umbridge with teh term "drunken sailor" or "drunken soldier", or "drunken airman." They don't spend money they don't have. They may borrow a little from their mates, but they pay it back at the next payday.

Let's use the correct terminology, "Like a drunken congress critter, because they don't know where they are, where they're going, or how to get there."


Kegfreak's picture

I prefer drunken Marine personally!  When I joined, I wanted to drink, fight, and get tattoos.  Fighting is bad apparently, no tattoos that show in a short sleeve shirt, and drinking is frowned on now.  That's why I got out.  Also, drunken airmen do not exist, they sip drinks with their pinky sticking out.

SecretGoldfish's picture

drunken paratrooper?  i can testify to that label being accurate more often than not.  there wasn't a single 'social drinker' in the company i can remember.  there was oliphant, who didn't drink a drop, and then EVERYONE else.

and i remember most guys being broke a week before payday in my platoon.

ah, good times. 

bugs_'s picture

Could Goldman be right this time?

Mr Lennon Hendrix's picture

He who convincingly does G-d's work is always right!  Duh.....

Eternal Student's picture

Not a chance. The only thing QE 2 will do is to kick the can down the road, at best.

The alternative is, to them, unthinkable. Unfortunately at this point, it is also unavoidable, QE or not. It's all just a matter of time now.


Careless Whisper's picture


wake up you fukin moron. goldman doesn't give a shit about anything but it's profits, and if it can wreck the u.s. economy while making profits on those newly issued bonds -- icing on the cake.

pan-the-ist's picture

I've said it before, the public is cold and sour on QE, so it will not happen overtly.  Even the uninformed knuckle draggers I know (AKA the Goy) know that giving more money to wall street is a bad thing. The government cannot do QE 2 in a pallitable way and keep their jobs.

Kegfreak's picture

and congress is constitutionaly bound to pass a budget.  Whats your point?  The new Iphone is fucked up, didn't you read?  Lindsay Lohan is going to jail, and we will support Isreal's bombing of Iran and "need" the money to contain those evil Persians.  QE 2?  What the hell is a couple trillion when the fate of the free world is on the line?

Pondmaster's picture

I find the Jew bashing and Gentile ( Goy?) bashing amusing on this blog . Absolutely amazing . Do you hear yourself ? Funny though , the Goy are the Head , and Jews are still the tail . To provoke to jealousy . Knuckle draggers indeed !   

nmewn's picture

Maybe, like Goldman, they think they're doing God's work ;-)

Fritz's picture

It seems like only yesterday that Goldman's in-house narcoleptic head of strategy was publishing a weekly memo promising S&P 1300.


AccreditedEYE's picture

Seriously. It's like one tentacle doesn't know what the other is doing... their reputation as master of the universe continues to get tarnished by their own. I love it.

Reese Bobby's picture

This is at least a triple switch by The Squid.  My worker bee head is spinning.  Help me Lloyd!


Serious comment...this crap will deliver a chance to get into hard assets (gold) at nice prices.  As ZH readers know...

kennard's picture

The only reason that Congress and the Executive won't do what Jan Hatzius suggests is that it is not in their short-term interests: (1) the "stimulus" will not be felt prior to the November elections, and (2) the voters are watching them. The best interests of the country are not a consideration.

Sancho Ponzi's picture

...unless the 'stimulus' winds up being a 5-10k check sent to each and every taxpayer. 

When you can no longer keep your House or Senate seat by means of graft, bribe your constituency.