Jan Hatzius On Centrally-Planned Goldilocks

Tyler Durden's picture

Ever since his transition from a critical, respected and objective economist to the third coming of A Joseph Cohen, Goldman's Jan Hatzius has become an increasingly irrelevant second fiddle-cum-broken record, and as such his observations have merited less and less attention. His latest spin piece on why the centrally planned US economy will grow within the parameters of "perfection pricing" is merely more confirmation of this sad transition. To wit: "2012 is still a long way off, and the uncertainty surrounding any forecast is large.  But if we are right, the implications of this forecast are reasonably benign for the US Treasury market and very benign for the equity market.  Indeed, our strategists expect only a moderate increase in 10-year Treasury note yields to 3¾% at the end of 2011 and 4¼% at the end of 2012, as well as an increase in the S&P 500 index to 1500 by the end of 2011." In other words: the debt-fueled Frankenstein of a Goldilocks monster, currently rampaging around on government-funded steroids, is really completely under control. It appears that all the gloves have come off in this last attempt to reflate the global ponzi, and sadly credibility once relevant, is now completely out of the window.

Full Hatzius note:

Our Forecast vs. the Consensus: Room to Grow (Hatzius)
 
The January 2011 Blue Chip Economic Indicators survey illustrates just how much “room to grow” our forecast implies relative to the consensus.  Out of all 48 economists that submitted forecasts for 2012, we have the 8th highest forecast for real GDP growth, the 3rd lowest forecast for inflation, and the 3rd lowest forecast for the 3-month Treasury bill rate.   In other words, we have a very out-of-consensus view for how much the economy can grow before this growth generates higher inflation and interest rates.  If we’re right, the likely implication is a decent environment for the Treasury bond market and a very good environment for the equity market.
 
The January 2011 survey by Blue Chip Economic Indicators, Inc., taken just prior to the December employment report and published on January 10, provides a comprehensive look at economists’ forecasts for 2011 and 2012 now that the dust from the December fiscal agreement has settled.  The table below shows Goldman Sachs and consensus forecasts for 2011 for real GDP growth, CPI inflation, the GDP price index, and the 3-month Treasury bill rate.  For each indicator, we also show the highest and lowest entries in the survey.  (Note that the survey covers neither core inflation nor the federal funds rate.)
 
Forecasts for 2011 (GS vs. Consensus)

 

Real GDP Growth

CPI Inflation

GDP Price Index

3-Month T-bill Rate

Goldman Sachs

3.4%

1.7%

1.2%

0.2%

Consensus

3.1%

1.7%

1.5%

0.3%

Minimum

2.3%

0.9%

1.0%

0.1%

Maximum

3.9%

3.1%

2.5%

0.7%

Source: Blue Chip Economic Indicators, Inc.
 
Our forecasts are moderately above consensus for real GDP growth and slightly below consensus for both inflation and short-term interest rates.  In interpreting the relatively small differences, it is important to note that the Blue Chip forecasts are specified in terms of annual averages.  Since the annual average GDP growth rate for 2011 is influenced by the sequential pattern of GDP growth through 2010, this means that the survey results reveal a mixture of known information and a forecaster’s expectations for sequential growth in 2011.  It is also important to note that our close-to-consensus view on headline inflation reflects the combination of a below-consensus view on core inflation and an above-consensus view on oil prices.
 
To sharpen the distinctions, it therefore makes sense to go out another year to 2012, as in the table below.  Now, the pattern becomes very clear—our forecasts are well above consensus on GDP growth and well below on both inflation and interest rates.  Indeed, out of all 48 economists that submitted forecasts for 2012, ours is the 8th highest for real GDP growth, tied for the 3rd lowest for headline CPI inflation and the GDP price index, and the 3rd lowest for the Treasury bill rate.  In other words, we believe the US economy has lots of room to grow before inflation becomes a problem and Fed officials start to increase interest rates.

Forecasts for 2012 (GS vs. Consensus)

 

Real GDP Growth

CPI Inflation

GDP Price Index

3-Month T-bill Rate

Goldman Sachs

3.8%

1.0%

0.5%

0.3%

Consensus

3.2%

1.9%

1.6%

1.2%

Minimum

2.1%

0.5%

0.2%

0.2%

Maximum

4.3%

3.2%

2.8%

3.0%

Source: Blue Chip Economic Indicators, Inc.

Admittedly, 2012 is still a long way off, and the uncertainty surrounding any forecast is large.  But if we are right, the implications of this forecast are reasonably benign for the US Treasury market and very benign for the equity market.  Indeed, our strategists expect only a moderate increase in 10-year Treasury note yields to 3¾% at the end of 2011 and 4¼% at the end of 2012, as well as an increase in the S&P 500 index to 1500 by the end of 2011
 
Jan Hatzius