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Goldman's Hatzius Launches Pre-Emptive Mea Culpa

Tyler Durden's picture




 

One of our key predictions from early this year has been that Goldman Sachs' formerly crack economic team (and now considered by some to be nothing but a propaganda team on crack) will in the coming weeks and months materially downward revise its dramatic economic upgrade from early December (just coincidentally coinciding with the minute the Fed released previously secret bank bailout records), which ended the firm's skeptical stance on the US economy, and launched it into all out Kool-Aid mode on nothing but one-time adjustments courtesy of a last gasp attempt at fiscal stimulus. While we are still scratching our heads why Hatzius would totally discredit himself by doing nothing more than what momentum traders do at an inflection point, and calling for a paradigm shift in his outlook when the most recent bout of gains is not driven by any recurring fundamental improvements, frankly we don't care. What we do know is when Goldman turns outright bearish again, some time in late March, early April, it will be time to buy QE3 with both hands, following a dinner or two between Hatzius and Bill Dudley at the Pound and Pence. Tonight, Hatzius issued his first and very vague intro to the coming mea culpa: "The increase in oil prices is emerging as a more meaningful downside risk to growth later in the year.  At this point, we emphasize that this is just a risk, not a change in the forecast, as our commodity strategists expect part of the near-term price increase to reverse if the situation in the Middle East stabilizes.  But we are now clearly moving into riskier territory" and "eventually, fiscal policy will need to tighten anyway because the current structural deficit is much too large to be sustained over the longer term.  But if this tightening occurs more quickly than expected, that would likely weigh on near-term growth and, in turn, reduce the likelihood of tighter monetary policy." We are certain that today's note is the first whisper to those who read between the lines on what is coming from Goldman as soon as a few weeks from today, perfectly in line with Zero Hedge expectations. To be certain, it wouldn't be a Goldman report without the now traditional comic interlude: "Going forward, we expect employment to continue growing at a healthy clip, but participation is likely to flatten out and may rebound a bit, as word about the improvement in labor demand gets around more widely." Come again? Goldman is blaming the lack of propaganda media penetration for what will be a rise in unemployment? Frontal lobe hemorrhage to commence in T minus 5...4...3...

Full note from Jan Hatzius. Paragraphs 5 and 6 are key for those who keep an eye out on nuances, instead of BTFD first and asking questions later.

1. The recent numbers show a US economy with a lot of momentum.  Yes, there are some downside risks to our Q1 GDP estimate of 3½%, with weak personal consumption and capital goods orders in January, as well as fairly sluggish growth in hours worked in Q1 so far.  But those are likely to reflect distortions from poor weather (on consumption and payrolls/hours), faulty seasonal adjustment (on durable goods), and tax refunds that were delayed by the December fiscal compromise in Congress.  Indicators that are timelier and/or less susceptible to these distortions—such as the household survey of employment, jobless claims, and the ISM surveys—are looking much sturdier.  So the risk to our Q2 GDP estimate of 4% is if anything on the upside as some of the Q1 distortions unwind.
 
2. All this is basically what we have been expecting since the sharp upgrade to our growth forecast in December.  And by itself, it is not a reason for the Fed to tighten monetary policy.  After all, there is still a ton of slack in the economy and inflation is well below target.  But the decline in the unemployment from 9.8% in November to 8.9% in February, together with the slightly stickier inflation numbers, has increased the risk to our call that Fed officials will wait until early 2013 before lifting the funds rate.
 
3. However, there are several reasons why we are not yet ready to change this call.  For one thing, it would be a mistake to extrapolate the speed of the recent drop in the unemployment rate into the future.  About half of it was due to a pickup in the employment/population ratio, but the other half was due to a drop in labor force participation.  Going forward, we expect employment to continue growing at a healthy clip, but participation is likely to flatten out and may rebound a bit, as word about the improvement in labor demand gets around more widely.  That hasn’t happened yet, with the proportion of households saying that jobs are “plentiful” still stuck below 5% as of February, but we expect it to happen soon.
 
4. Moreover, Fed officials themselves continue to sound quite dovish, and we see no signs that they will follow the apparent move toward tighter policy in Europe, where we now expect a rate hike at the April ECB meeting.  To be sure, Fed officials issue the requisite warnings that second-round effects from higher commodity prices on wages and core inflation will not be tolerated, but we don’t expect significant second-round effects and there is no sign that they are planning to respond to the first-round effects.  We were also struck by Chairman Bernanke’s response to Sen. Toomey’s question about the Taylor rule in the Q&A part of Tuesday’s monetary policy testimony.   He said very clearly that “we should in some sense be way below zero in our interest rate...” which certainly doesn’t sound like someone who is itching to raise rates soon.
 
5. The increase in oil prices is emerging as a more meaningful downside risk to growth later in the year.  Brent crude is now up about 30% from the 2010Q4 average.  (The increase in West Texas Intermediate crude has been somewhat smaller, but this is distorted by local pipeline issues.)  To be sure, our economic forecast has long assumed gradually rising prices, in line with the predictions by our commodity strategists.  But this still leaves us with an unanticipated oil price increase of 20% in a short period, which is at least partly driven by worries about future supply rather than just strong demand in the global economy.  According to our econometric analysis, each 10% increase in prices takes an average of 0.2 percentage point off annualized real GDP growth over the following two years, with a peak impact of 0.5 percentage point after 4 quarters.  This implies that the unexpected price increase could reduce growth by ½ point over the next year, and perhaps by as much as 1 point in late 2011/early 2012.  At this point, we emphasize that this is just a risk, not a change in the forecast, as our commodity strategists expect part of the near-term price increase to reverse if the situation in the Middle East stabilizes.  But we are now clearly moving into riskier territory.
   
6. The other risk is the renewed move toward fiscal restraint.  Our baseline forecast of 4% growth in H2 already assumes that fiscal policy will subtract about 1 percentage point from growth in 2011, due to a combination of federal discretionary spending cuts, the roll-off of various provisions in the 2009 fiscal stimulus package, and state and local restraint.  But a full implementation of the House-passed spending cuts (known as H.R. 1 in congressional jargon) would imply additional downside growth risk in mid- to late 2011.  Again, that’s a risk rather than a change in the forecast because we ultimately still expect a compromise between H.R. 1 and the president’s call for a 5-year freeze in nondefense discretionary spending.  And eventually, fiscal policy will need to tighten anyway because the current structural deficit is much too large to be sustained over the longer term.  But if this tightening occurs more quickly than expected, that would likely weigh on near-term growth and, in turn, reduce the likelihood of tighter monetary policy.

 

 

 

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Mon, 03/07/2011 - 00:05 | 1025227 Careless Whisper
Careless Whisper's picture

when i see goldman and hatzius in the same sentence i don't even read the article

Mon, 03/07/2011 - 00:18 | 1025244 defender
defender's picture

Let me summarize it for you then:

"I am considering getting an new job.  I know that people are more likely to hire me if I actually make correct calls.  This is the first time in months that I have actually talked about reality in a release, so please pretend like you didn't see it, unless you are a prospective employer."

Of course, you can't just walk away from the Kool-Aid when you work at Goldman.

Mon, 03/07/2011 - 01:48 | 1025402 Orly
Orly's picture

Jan Hatzius is the best economist in the world.  What's your track record lately?

Mon, 03/07/2011 - 10:01 | 1025777 thepigman
thepigman's picture

Anybody that puts "3.5% GDP" and

momentum in the same sentence is

an idiot. This is paltry.

Mon, 03/07/2011 - 10:43 | 1025929 freedmon
freedmon's picture

Could you please define "best"? He doesn't seem to be doing so well here, nor as we've seen has he been very accurate recently.

 

Mon, 03/07/2011 - 06:49 | 1025542 Twindrives
Twindrives's picture

Monkey Obama and his pet chimp Bernanke now have the perfect cover for the coming U.S. dollar hyperinflation and NY stock market debacle they have so incompetently induced................it's all MENA and oils' fault. 

Of course the CIA is involved in causing the spontaneous combustion of U.S. backed regimes in MENA and Obama being a ex-CIA operative himself knew he could count on his Langley based buddies to provide the cover that he and chimpster Bernanke needed to exonerate themselves from the coming economic disaster.

 

Obama and Bernanke deserve a banana each. 

 

   

Mon, 03/07/2011 - 08:10 | 1025577 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

"count on his Langley based buddies".

His Reston based buddies own banana farms.

Mon, 03/07/2011 - 00:19 | 1025245 holdbuysell
holdbuysell's picture

Isn't this playbook well-known by those with an historic perspective (the Goldman's).

After reading the "Dying of Money..." book, it seems that this is simply running according to plan.

Mon, 03/07/2011 - 00:25 | 1025250 Misean
Misean's picture

1. The recent numbers show a US economy with a lot of momentum." This is often the case when a train comes of the rails and heads over a cliff.

2. All this is basically what we have been expecting since the sharp upgrade to our growth forecast in December.  And by itself, it is not a reason for the Fed to tighten monetary policy.  After all, there are tons of boxcar still being pulled to the edge of the cliff.

 3. However, there are several reasons why we are not yet ready to change this call.  For one thing, it would be a mistake to extrapolate the speed of the recent drop into the chasm as either terminal velocity or the rocks below the cliff will decrease acceleration. This should flatten out many things.

4. Moreover, Fed officials themselves continue to sound quite dovish, however a few five ounce birds cannot lift a multi-ton locomotive, no matter where thye grip it.

Mon, 03/07/2011 - 00:22 | 1025251 Yardfarmer
Yardfarmer's picture

an exemplary display of gobbledegook

Mon, 03/07/2011 - 00:22 | 1025253 bob_dabolina
bob_dabolina's picture

I don't trust any guy named Jan or Stephanie.

Mon, 03/07/2011 - 08:02 | 1025570 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

What about Shalom?

Mon, 03/07/2011 - 00:29 | 1025267 gwar5
gwar5's picture

"Never trust a banker who wears socks" -- John Dellinger.

Mon, 03/07/2011 - 03:19 | 1025475 StychoKiller
StychoKiller's picture

The understatement of the Century:

"The increase in oil prices is emerging as a more meaningful downside risk to growth later in the year...."

 

Mon, 03/07/2011 - 00:30 | 1025268 Billy Shears
Billy Shears's picture

I especially like the use of the phrase: "as distortions unwind".

Oh yeah, not to mention the biggest distortion of them all, the mother of all distortions: ZIRP AND UNLIMITED FIAT CURRENCY PRINTING. Praise the Lord and pass the ammunition.

Mon, 03/07/2011 - 00:34 | 1025271 Billy Shears
Billy Shears's picture

I especially like the use of the phrase: "as distortions unwind".

Oh yeah, not to mention the biggest distortion of them all, the mother of all distortions: ZIRP AND UNLIMITED FIAT CURRENCY PRINTING. Praise the Lord and pass the ammunition.

So good, I had to post it twice!

Mon, 03/07/2011 - 01:04 | 1025323 Milton Waddams
Milton Waddams's picture

LOL wut? The first phase of monetary tightening, when it eventually never arrives, will be represented by the Term Deposit Facility. That is, ask not what your central bank charges you for short term cash, ask what you can charge the central bank for holding your cash. In other words, lock them dead presidents up lest the trillion in excess reserves leaks into the "real" economy, causing a tailwind to inflation. The Bernank had a bit of a gaffe in one of his recent testimonies - he was like, we are not like Japan, the massive excess reserves aren't going toward broad lending (oh shit, what did I just say, people are (irrationally) upset that banks are not making easy loans to unqualified borrowers like the good old days and this run contrary to the conspiracy of the confidence game), erm, I mean they are making loans but not enough to be inflationary.

Fed Funds Rate is a complete joke when depository institutions are sitting on a trillion-plus LOLars in ill-gotten loot.

Further, TD is spot on. This iConomyth bit the administration's apple. If my memory serves me correctly, the overwhelming majority of iConomyth's pivoted under pressure from the administration.

Fuck jobs, what this country needs is more liars, I mean confidence artists. Cult, anyone?

Mon, 03/07/2011 - 03:20 | 1025477 StychoKiller
Mon, 03/07/2011 - 01:06 | 1025325 Caviar Emptor
Caviar Emptor's picture

Dear customers. Don't blame us cause we told you so but did you listen? No. 

Mon, 03/07/2011 - 01:32 | 1025380 Scottj88
Mon, 03/07/2011 - 07:58 | 1025566 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

Looks like Rosie might be allowed back into the country. Maybe employed by the Squid, maybe not.

Mon, 03/07/2011 - 08:08 | 1025575 nohweh
nohweh's picture

Doubleplusgood Doublespeak

Mon, 03/07/2011 - 08:54 | 1025634 slewie the pi-rat
slewie the pi-rat's picture

tyler, i don't think we should be too picky-picky about para's 5 & 6, above, by the haz-mate...

reflation is working!!!  the "higher" fuel "costs" are re-flatedly transformed by the econometric engines of capital formation into...the sta-puff marshmallow man?

and, the REAL estate market, where most head-wedged sheeple are still waaaay over-invested, may, indeed, recover in 7-10 years, too! ...right after the wealth from the Dow reaching 25,000 is "re-invested" there, of course...

Mon, 03/07/2011 - 10:11 | 1025805 lieutenantjohnchard
lieutenantjohnchard's picture

exactly: cya, and blame it on the oil analysts if his calculus proves ridiculous.

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