Goldman's Clients Are Skeptical About The Effectiveness Of QEtc., Worried About Inflation

Tyler Durden's picture

While it is just as perplexing that Goldman still has clients, what is most surprising in this week's David Kostin "weekly kickstart" is that Goldman's clients have shown a surprising lack of stupidity (this time around) when it comes to the impact of QEtc. Shockingly, and quite accurately, said clients appear to be far more worried about the inflationary shock that endless easing may bring (picture that), than what level the S&P closes for the year. Incidentally with Q3 now over, and just 3 months left until the end of the year, Goldman's chief equity strategist refuses to budge on his year end S&P forecast, which has been at 1250 since the beginning of the year, and remains firmly there.

From Goldman's "Conversations we are having with clients: QE has equity investors asking about inflation"

QE has succeeded in increasing asset prices and inflation expectations but has not convinced investors to raise their US growth expectations. Instead, equity investors have expressed concern about inflation risks while both gold prices and implied inflation rates show similar shifts. During the 1970s, US core inflation averaged 6.5% and impacted equity performance: the S&P 500 rose in 7 of 10 years by an average of 8% per annum, Energy and high yield sectors outperformed, and consumer sectors lagged.

The response to open-ended QE has been mixed. While asset prices have risen, so have inflation expectations and the performance of growth-sensitive assets shows skepticism about QE’s effectiveness.

Asset markets are giving the Fed credit for being able to reduce risk premium and inflate asset prices but have been unwilling to increase growth expectations. Equity investors have benefitted from higher asset prices, are concerned about slow growth, and are beginning to fret about inflation risk. A 1970s case study of equities and inflation is generally intuitive: equity prices rise in nominal terms, Energy and high yield sectors outperform, and consumer sectors lag the market.

Declining risk premium has driven the S&P 500 rally as negative earnings revisions continue and growth expectations have not improved. We estimate the S&P 500 Equity Risk Premium (ERP) has declined 20 bp to 7.2% this month (Exhibit 4). All else equal, that move equates to a 5%  move in the index. Not surprisingly the Europe ERP has also fallen significantly. Investment Grade Credit Risk Premium (CRP) has also declined to 1.5% from 1.7% in June with a much larger 80 bp move in Financials.

Implied volatility is down sharply, including longer-dated maturities. The VIX fell below 14 in September, a level it has not sustained since pre-2007. In addition the relative demand and price of put options has fallen sharply with 3-month skew reaching a two-year low and the put-call ratio continues to show high demand for upside call exposure relative to put hedge positions. Perhaps most telling, long-term implied volatility has moved lower suggesting investors view recent global Central Bank actions credibly over the medium- to long-term.

Retail mutual fund flows show nascent signs of investor confidence. Our Rotation Index measures whether retail fund flows favor more or less “risky” fund types relative to choices such as money market or Treasury bond funds. The past four weeks show some early signs that individual investors may be comfortable with more risk even though equity flows in general have been negative (Exhibit 3).

Growth expectations have not risen this month. The equity market’s view on US GDP growth is at similar levels as during the middle of August despite an increase in inflation expectations and a rally in equity markets. Understandably, the primary cause of flat growth expectations has been weak US economic data that has also remained below consensus forecasts (Exhibit 2). A positive note on the growth side is that higher equity prices and lower corporate bond yields have helped ease financial condition that would spur GDP growth in the future if sustained.

Oil prices have declined in September after a 10% move over the summer. Lower prices are somewhat surprising given the large rally during QE2 (oil futures rose 50% from Aug-2010 through Apr-2011) but are consistent with the muted change in equity growth expectations. Our Commodity Strategists credit some of the recent move to soft growth data and market concerns over the potential for a release of strategic petroleum reserves.

Measures of inflation have moved higher. The spread between 10-year US Treasury bond yields and TIPS has widened by about 20 bp in September and nearly 100 bp over the past year (Exhibit 4). Evidence of rising inflation concerns are also visible in inflation swaps and the University of Michigan surveys, which are up over the past few months and accelerate recently.

Recent inflation data does not support a rise in expectations as core inflation dipped below 2% in August and has averaged just 1.6% since  2008. However, gold prices have soared 10% since the end of June and have marched steadily higher since mid-August as QE expectations intensified. Equity investors are looking back to the 1970s for a guide to equity performance in high inflation environments. Our US Economists do not expect inflation to rise markedly in the near term and forecast core PCE inflation of 1.4% in 2013. However, our conversations with equity investors show a shift in attention to previous periods of high inflation.

During the 1970s the S&P 500 had an average annual return of 8% during a period when core inflation averaged 6.5%. At the sector level performance was also impacted by rising prices. Consumer Staples and Consumer Discretionary shares consistently underperformed the S&P 500 while Energy, Utilities and Industrials reliably outperformed the market (Exhibit 1).

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The trend is your friend's picture

oil& gas, gold and food

Fukushima Sam's picture

QEternity can't last forever; the Fed's charter is up in a year.  Right now an extension of that charter does not look inevitable.  Either we are in the end game or something dramatic will have to happen to continue the charade. 

bigdumbnugly's picture

While it is just as perplexing that Goldman still has clients, what is most surprising in this week's David Kostin "weekly kickstart" is that Goldman's clients have shown a surprising lack of stupidity (this time around) when it comes to the impact of QEtc.

could this be the great muppet awakening?


DeadFred's picture

This time is different? I doubt it. I think what we're seeing is evidence of a correction. If the market dumps it will take commodities down a notch or two. Ultimately they'll go back up but the Muppet Trade is now indicating a short term (end of year) downturn in prices and the only way I see that happening is a sharp uptick in fear. The dollar goes up while the rout is happening. I know this wouldn't make all you (us) gold bugs happy but worry not, it will only correct for a short time. In 2008-9 gold stopped its slide long before the S&P did. If Israel precipitates the slide through its adventures don't expect oil to track with the rest of the commodities.

DoChenRollingBearing's picture

Barron's this weekend has Goldman Sachs as its Cover Story!  Michael Santoli is big-time bullish on this much hated bankster here at ZH.  Review of Barron's -- Dated 1 October 2012:


I would be VERY INTERESTED in any comments, here at at ZH, by email or comment at my blog about Goldman Sachs!  I know very little about this niche of our financial system (investment banking) and would be welcome being educated, as I am sure many others here would as well.

So!  People who know Goldman Sachs well please fire away!  I am really curious at how Michael Santoli arrives at his bullish conclusions re GS and WHAT YOU GUYS THINK!  Thanks!


While there, check out my NOT typical tourist photos from Italy (not the gold buying article).

slaughterer's picture

QE3 will work, but not for awhile, and by then, you could say it was a lot of other things that accounted for the same effects.  


FreedomGuy's picture

"While it is just as perplexing that Goldman still has clients, what is most surprising in this week's David Kostin "weekly kickstart" is that Goldman's clients have shown a surprising lack of stupidity (this time around) when it comes to the impact of QEtc."

Goldman clients are inherently geniuses. They work with the best crony-connected firm in the world. Goldman tax cheats can rise to become head of the U.S. Treasury, European central banks, etc. They are probably on the speed dial of every major leader in the world. Membership has it's advantages.

JR's picture

Those Goldman worry warts! Oh my, what shall we do!


CPL's picture

Goldman's clients are quickly understanding that they will be "equal" to a fry cook soon in terms of cash and carry.


Mean while food, silver, gold and oil are dong just fine.  In two years a guy like Bill Gates will be eating dog food out of a tin with the rest of us IT hobo's.

ThisIsBob's picture

Tinned dog food?  Fucking one percenter.

bigkahuna's picture

GS gives a steamy turd for their clients.

CPL's picture

Alpo with gravy bits...just like Mom used to serve us.  Grab a stick and a sharp rock and it's a meal ready to eat.  MRE.


Random the 1970's someone came up with the idea of putting neutering drugs into pet food until someone did the product consumer review and it was determined 40% of wet cat and dog food was eaten by people.   Can't find a source online though so it's all hearsay, I recall the discussion of unintended consequences when Ethics used to be taught as a compulsory course in Engineering along with Sadistics; Math and Modeling.  

KickIce's picture

Uh oh, the muppets are coming to life.

A Lunatic's picture

This is nothing the release of the iphone6 won't fix...............

q99x2's picture

Children are the primary cause of inflation.

CPL's picture

Japan doesn't have a inflation problem anymore I suppose.


Most of it kids will be dead in the next four years.  Over 10% is awful.  60% is criminal.

knukles's picture

Their clients are the ones worried...
Surprise surprise.

Goldman has no clients, by their own words.
They're all counterparties

Whoda thunk Goldman'd be all in it for themselves?

The Alarmist's picture

"Goldman's Clients Are Skeptical About The Effectiveness of Goldman Sachs to help them Profit from QEtc., Worried About Inflation"

There, fixed it for ya.

orangegeek's picture

Inflation?  How about deflation? 


Personal debt is high.  Social mood says limited spending and limited desire for more debt.


CRB Index is at 309, well below the 370 May 2011 mark.  Commodity prices are going down, not up.  US Dollar is getting stronger, not weaker.


Salaries are going down, not up.  Ask a friend in Japan what the last 20 years have been like - massive government debt - massive government intervention that fails over and over again and 20 years of going nowhere.


Deflation folks.



Mr. Magniloquent's picture

Are you defining deflation as the removal and/or absence of artificial credit?

Poor Grogman's picture

Are you saying that food, fuel, gold, silver, and just about everything else except R/E is cheaper now than 20 years ago in Japan?

If so could you get me a truckload of silver at 1995 prices please?

Lord Drek's picture

Might this actually have an affect on futures tomorrow? Nothing like a good Monday morning selloff.

DR's picture

"Asset markets are giving the Fed credit for being able to reduce risk premium and inflate asset prices but have been unwilling to increase growth expectations"



Asset prices are in bubble mode and not supported by real economic growth.



lailapa's picture

The end of the world is near... The ten plagues of Pharaoh “have been brought upon” the USA.



Dre4dwolf's picture

So what if the plague comes, WTF ARE YOU GONA DO ABOUT IT, stop complaining and provide solutions, I suggest you start with rubber gloves and go clean up the pharaohs tomb, maybe that will appease your gods and lift the cursed plague from the earth.


Freaking crazy man, we gota deal with these obama phone people, these " o the plague is coming people" i mean whats next?


LoCicero's picture

"While it is just as perplexing that Goldman still has clients ..."

"While it is just as perplexing that Goldman still has muppets ..."

Fixed it.

Whiner's picture

Muppets! Wake up! No, it's deflation and S&P 520! Short The Squid!

giovanni_f's picture

When GS downplays the effect of QE_inf on asset prices it does this for one reason: To get hold of their muppets holdings (and to sell them back at the peak). The "QE_inf won't come" rah-rah-crowd has now changed its anal-retentive tune to "QE_inf won't work". Madness.

resurger's picture

Fuck goldman and their analysis

Dre4dwolf's picture

After a certain point inflation gets too high for people to have any money left-over to invest with, people will then start to withdraw from investments to pay for rising costs.


I mean, its only logical that eventually you can have too much of a "good thing" aka QE and you eventually get sick of the candy, QE's dimishing returns are just a hint that we are approaching the point where inflation actually harms equitys more than it helps, afterall when your paying 200$ to fill the gas tank and 600$ at costco, the last thing you care about is the stock market.

Drachma's picture

"QEtc." - Love it Tyler, keep them coming.

jjsilver's picture

Bend over and grab your ankles muppets!

sbenard's picture

In other words, STAGFLATION is here!

Thank you, ObamaNanke!

Poor Grogman's picture

Soon to be released popcorn thriller.


"The day the Muppets went crazy"