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What Goldman's Clients Are Most Concerned About
The answer, straight from the horse's (David Kostin) mouth:
US dollar strength dominated every client discussion this week.
Investors are concerned about the impact of the strength of the USD on S&P 500 earnings growth and stock market performance. Historical returns and our earnings model indicate that direct impacts of a stronger dollar on index-level equity performance are small, but indirect impacts could be larger should USD appreciation weigh more heavily on economic growth, particularly in the US.
Which directly contradicts the Fed's conventional narrative ever since the USD surge began in the second half of 2014, namely that a stronger dollar is good for the US economy, something we noted last week in "Goldman's Cohn Slams Fed's Fisher: A Soaring Dollar Is Not Positive For US Jobs, Companies."
The problem, as Goldman notes, and as technicals suggest now that the key 1.05 support has been breached, is that the EUR can keep crashing, dropping as low as 0.84, and in the process leading to an earnings massacre for the S&P:
The euro has collapsed by 12% YTD and by 24% during the past 12 months. Goldman Sachs FX strategists forecast the euro will decline by a further 10% during the next 12 months to reach 0.95 (see Exhibit 1). Data through December show net outflows on a trend basis by Euro zone residents for the first time in many years and this pattern should persist as the implications of QE by the ECB become more apparent. The anticipated normalization of US monetary policy will be another catalyst for a weaker euro. Moreover, we project the euro will keep falling and ultimately experience a 24% drop from current levels to reach 0.80 by the end of 2017.
As for why clients - the same clients who are almost certainly long the biggest bandwagon trade of 2015 - are finally freaking out about the dollar strength, almost a year into this trend, here is Goldman's explanation:
At the index level, the direct impact of currency moves appears small. However, a move in the USD has the potential to influence EPS growth indirectly through economic consequences. To the extent that USD strength weighs on GDP growth, corporate profitability would be affected. Unsurprisingly, US GDP growth is most important. A 100 bp adjustment in US GDP growth changes the S&P 500’s projected EPS by 5%, or $6 per share. At the stock level, FX moves have a large impact on reported results. Our S&P 500 Beige Book noted that firms with the highest international sales faced significant pressure from a strengthening USD. Managements of PG, JNJ, UTX, IBM, GOOGL, DD, and MCD all commented on the negative impact on results from the strengthening USD.
And, as INTC broke the seal last weak, expect many more warnings in the coming weeks as more and more companies realize that i) the dead cat bounce in oil was just that and ii) the long anticipated mean-reversion drop in the USD is just not going to take place until the Fed relents, and either ends any rate hike speculation, or hikes, only to be Jean-Claude Triche'd, and promptly send the US economy into a tailspin recession.
While we wait, Goldman has a suggestion: just ignore companies that have FX exposure:
"US stocks with high domestic sales offer better growth and value and fundamentals than firms with high sales exposure to Western Europe.Currently the 50 stocks in our domestic revenue basket have lower beta (1.0 vs. 1.1), faster sales growth (5% vs. 3%), faster EPS growth (9% and 7%), and the same dividend yield (1.6%) but trade at a lower forward P/E multiple (18.7x vs. 19.1x) than the 50 stocks in our high Europe sales portfolio."
Which is logical, the only issue with that is that it bets the farm on a US consumer who, as the past three months of plunging retail sales and contracting consumer (and mostly credit card debt), and surging savings rate have shown, is once again fully tapped out.
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When there's a currency war going on, you better be shooting.
i thought the clients would be most concerned about ending up like kermit.
i would be.
ahh but times change...
i thought "the clients" would be most concerned about discussing this in March, when it should have come up when the fed first mentioned they may stop the qe. Goldman hardly is helping their clients. Anyone involved in these discussions with goldman should remove their money from goldman. This proves it. They are viewed as "muppets".
What the average American thinks a strong dollar means, "Oh I can travel abroad much cheaper and buy more imported shit."
What it actually means, "Oh, I can buy my neighbor's foreclosed house super cheap and rent it out ... if I still have a job."
No it really does mean that "I can travel to the Eurozone cheaper". I couldn't care less about your grass hut.
By defintion if they worried about such things they wouldn't be Goldman's clients.
Dead right as usual, Dead Fred. You've hit the nailgun on the head. :)
If your a GS customer you're supposed to be immune from reality and don't have to worry about the ranting from Robespierre and his bunch....
Yep. Looks like Goldman just top-ticked the US$ bull run.
If the Muppets go long US$, then it's time to buy Euros...
worried - as well they should be...ha!
Yes and no. The negative rates are predicated on a weakening dollar that allows the bondholders to sell and trade into dollars at a profit. The longer the dollar stays high, the less chance of raking in a profit. I personally don't care since I'm addicted to shiny metals but I would enjoy the dollar floating up for a few months so we could have a really big bond panic.
US did, 4-5 years worth of firing first and only shots, laughing at the" weak" Europeans, who bided their time til US had fully shot their wad, and then primed their bazookas. War is over.
Oh, there's probably going to be some shooting. Strong dollar causes food prices to skyrocket.
The stronger it gets, the less food people take from the supermarket. while spending twice as much as last month.
Strong dollar now also equeals danger for politicians. A perfect cluster fuck.
QE4 QE$ QE$ we want MOAR! It is laughable how similar this is to the pre Great Depression Trade Wars! Watch for a guy with a small mustache!
We read Martin Armsrong and are basically ripping off his forecast and making it look like it's our own.
Bingo. That 80 cent Euro prediction for 2017 is straight out of Armstrong's website.
"the long anticipated mean-reversion drop in the USD is just not going to take place until the Fed relents, and either ends any rate hike speculation, or hikes, only to be Jean-Claude Triche'd,and promptly send the US economy into a tailspin recession."
2 things
1. no interest rate hike and 2. US entering recession now
If the GDP deflator wasn't faked, we would all notice that the real economy never left the recession/depression which began in 2008.
The government's numbers are all 100 percent fraudulent.
Why wouldn't they be? They have the motivation, there is [obviously] no penalty for fraud, malfeasance or lying in this systemically corrupt clusterfuck.
GDP = C + I + G + (X - M)
Where: G = Government (Borrowing and) Spending
[Take out the G and we've been in a depression since 2000...]
Some simple math:
National Debt in 2000: $5.7 Trillion
National Debt Today: $18.2 Trillion
So, over the last 15 years, Federal Government spending (not including State and Local Government Spending) has added nearly a TRILLION DOLLARS A YEAR to the GDP.
US GDP in 2000: $12.68 Trillion
US GDP 2014: $16.16 Trillion
So, we've (borrowed and) spent nearly $13 Trillion, but raised the GDP by only $3.5 Trillion.
ALL GDP GROWTH SINCE AT LEAST 2000 IS COMPLETELY DUE TO GOVERNMENT DEFICIT SPENDING!
Anybody see a problem with this?...
[PS: That $13 Trillion we borrowed still needs to be paid back. Somebody wanna write a check?..]
Hate to break it to ya but that whole equation was financed with Debt
GDP = C + I + G
I know; I was just pointing out the biggest turd in the punchbowl...
Isn't there a saying somewhere about if there's enough booze in the punchbowl nobody noticies the turds floating in it?
We have borrowed the 13 trillion in debt over the space of 14 years, but the increase from 12.7 trillion GDP to 16.16 trillion GDP is a yearly comparison. I'm not saying all is good because I think the whole GDP calculation is flawed, but I think it is misleading to compare a yearly GDP increase with an increase in debt summed over 14 years.
@Fun Facts,
Quit beating around the bush and give it to us straight.
So who's going first to short the stock market? The exit will be fast and furious. I'd say 75% will be to late to sell.
You won't be far wrong. The markets have been so jerky that the first 10% on the way down will go disregarded by many. I get this just from talking to people who have stocks and ask them at what point would they sell? None of them base the sale on substantial information like we see on ZH. It's mostly hocus pocus. I ask if they have set a stop loss number, and most aren't even sure of what I mean. So the sheep will go to the slaughter before they realize the gate has closed behind them. If a lot of money starts moving toward gold and silver (real metal, not paper), the simple answer is that you just won't be able to get it. Witness the recent unavailability of Silver Eagles. And that was no mass panic movement, it was simply people moving to buy at what they thought was a bargain price.
A the time a few weeks ago Keith Weiner placed the fundamental value of silver at around $1.50 lower than the then current price. Just last week that number had shrunk to around fifty cents. Ten years from now you will look at silver prices and wonder why the hell you didn't buy all that you could "back then".
This weekend, 10 oz. bars are going for $164.90. Will they get "cheaper"? Maybe, in the short run, but I'm not buying "for the short run". And I'm not fast enough or "smart enough" to compete with being able to pull the trigger on shorting the coming equities crash. No, I'll just putt along, buy a few bars and take them boating. I'm really clumsy that way. I guess I'll never learn.
At 20% down they'll say, I'll get out when it comes back up. At below 20% they'll say, can't take the loss, it'll come back, it always does. (They've seen it before and now say they're back where they were a decade ago. Of couse that was before the last decade's inflation.
They are either going to have to change their tune on the economy or manufacture an event to QE. I can't see them coming out and saying more QE on dollar strength alone. Or I guess you could crater everyone else, that might work too.
best guess:
The FED will let the market swoon for 10 or 15%, thus giving them an excuse to back off everything they've said and make room for another round of US QE and no rate hike.
It's all a game now, there are no free markets left.
The problem with your assumption is how long will that 10-15% swoon last. 10 to 15 seconds? A few seconds after that will be 20% down. The last few swwons we've had since October have required massive central bank intervention to turn them around. At what point will the desire to run for the exits overwhelm Kevin's ability to hit the buy button for SPY? Unless he has an automated program to match all sell orders no matter the size then he can't keep up with the algos. Does anyone have an estimate of how much he would have to buy in a really bad selloff? I have no clue so I can't counter the argument than the Fed will always be able to prevent a crash.
They would have to let it last long enough for the politico to start sweating.
So since they've talked about june, maybe let it fall from say april fools day until june, at which point they "provide liquidity"[more QE lol] and lower rates to negative "for the people" [lol].
The FED or any western central can buy as many futures as they need to, so long as the currency has value.
So the end game is in defeating the feedback mechanisms and warning indicators until there is nothing left to protect.
These are no longer markets, they're central bank contrivances.
P.S. They're gonna need to warm up Hank the Crank again too.
Depends on his stock of ink and starchless paper for bills.
But really more importantly, his supply of bits.
But we're protected by the Uptick Rule...
Ruh Roh!
Dollar strength...
After almost 4 trillion in money printing, those are words I never thought I would hear. .
It just goes to show you how screwed up things are in this world.
So screwed up that maybe War will come.
It is simply a bowl of shit that, at the moment, smells a little better than the other bowls. When it is no longer the world-recognized reserve bowl of shit (as is beginning to happen) that shit will be flushed.
And the vampire squid squares up for its biggest con yet. Continuously rigging the global Fx markets.
So i should wait until I purchase a 2016 BMW X5
Hell no. Buy two!
<-- being screwed by Goldman
<-- being screwed by Goldman
Can we all agree that the Gold Rubberband is wound so tightly its ready to release hard and fast $2000+
Return on capital for the gold mining sector is at a 40 year low, which is an artifact of CB gold price suppression.
Interest rates are at a 300 year low, excoriating anyone bold enough to attempt to save money for their future.
Stock market valuations are at/near/new an all time high depending on how you measure
and everything is fucking awesome, just ask the retards [mindfuckers] at Bloomberg and CNBC.
what they should be worried about is having a margin account when TSHTF
They should be worried about the boogers in their noses
The US dollar is toast. Don't worry about it. You should be buying bitcoin.
Everyone is getting screwed by Goldman.
20 yrs of ass-pounding jail will fix Wall St
The dollar's nearly vertical rise is a blow off top in the making. Look for the collapse to be nearly vertical once the upward momentum begins to wane...
http://www.globaldeflationnews.com/u-s-dollar-indexelliott-wave-update-f...
so goldman is calling the top in the dollar. happy days are here again!
Muppets