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Goldman Admits It Was Wrong Forecasting 3% Yields For 2015 As It Forecasts A 3% Yield For 2016

Tyler Durden's picture




 

If at first you don't succeed, try, try, keep trying again and again.

That appears to be the mantra of Goldman's credit strategists, who one year ago when the 10Y was trading right around current levels, predicted that the yield on the benchmark bond would rise to 3% by the end of 2015. It was just a little off.

First, here is Goldman's apology for being so wrong in what may be the most important forecast a bank makes (as it involves everything from the economy to the equity risk premium): where the 10 Year will trade:

We are ending the year with the benchmark 10-year Treasury yield at around 2.3%. We started 2015 expecting yields to close the year at 3.0%, or 50bp above the forwards prevailing at the time. Over the course of 2015, we progressively lowered our year-end projection to incorporate incoming information, specifically: in March, we shaved our forecast by 50bp to 2.5% (with the year-end forwards prevailing at the time at 2.1%). By June, yields had bounced back to 2.5%. In October, following developments in China and oil markets, we brought our forecast down further to 2.3% (when the forwards were at 2.1%).

Why was Goldman wrong: "These forecast revisions mainly reflected three developments:"

  • US real GDP expanded at a considerably slower pace than we expected at the beginning of 2015 (our latest growth forecasts are 2.5% for 2015 and 2.3% for 2016; the corresponding numbers at the start of 2015 were 3.3% and 3.0%).
  • We forecast that the Fed would hike rates twice this year (in Q3 and Q4), a view we subsequently changed to only one hike in December.
  • The decline in crude oil prices - resulting from supply-side factors and anomalous weather patterns - proved to be a larger and more persistent drag on headline inflation (and more broadly, a source of asset price turbulence) than we thought at the start of this year. This acted to depress the term premium globally (particularly in the Euro area and Japan, where inflation targeting central banks are conducting QE) and raise credit risk.

In other words, Goldman got virtually everything wrong, except where the S&P would close: they had been steadfastly predicting 2,100 for most of the year, and then lowered it to 2,000. There is still time for the S&P to tumble 70 points and hit Goldman's forecast. Indicatively, Goldman also expects the S&P to be at 2,100 on December 31, 2016 and 2,200 at the end of 2017.

* * *

Ok fine, everyone makes mistakes when predicting the future (about pretty much everything). Where things get comic is that instead of admitting it needs to shift its forecasting process, Goldman - which is expecting a dramatic drop in one-year forward GDP from 3.6% to 2.3% - is expecting that on December 31, 2016 the 10Y will yield exactly the same 3.00%.

In other words, an identical forecast from last year. Here's why according to text that may have been lifted from a year ago:

Looking ahead, we forecast 10-yr benchmark Treasury yields to rise to 3% by end 2016 - or 50bp above the forwards. This expectation is built on the following set of assumptions.

  • An ongoing above-trend economic expansion: US 10-year Treasury yields currently compare with a 'fair value' estimate of 2.7% (i.e., are around 1 standard deviation too low) based on our Bond Sudoku model. Factoring in our economists' macro forecasts for above-trend GDP growth, an acceleration of inflation and higher policy rates in the US alongside macro developments abroad, our model 'fair value' estimate increases to 3.4% by end-2016. In forecasting a 3% yield by next December, we presently assume the 'valuation gap' to remain the same as today's, to reflect the ongoing QE in the Euro area and Japan.
  • Fed hiking more than priced into the forwards: An important ingredient in our estimates is our US Economics team forecast of the Fed hiking four times this year, or by a cumulative 100bp to 1.30%. The market instead sees rates at 90bp after the 14 Dec 2016 FOMC meeting, with two-thirds of the probability mass in a 60-110bp range. Using the market pricing for the effective Fed Funds rate, our measure of 'fair value' for Treasuries would be around 10-15bp lower (or 3.25%), all else equal.
  • An upward shift in medium-term inflation expectations: We see CPI inflation picking up during 2016, led by the services categories. Although this is already reflected in the fair value estimates discussed above, an increase in service inflation (ex-energy) from the trailing 2.9% towards 3.5% (levels last seen in 2007-08) may well act to lift medium term inflation expectations, and thus the term premium. Such an outcome underpins our view on that the 2-10-year nominal term structure will steepen over the next couple of quarters. To be sure, the high volatility and downward pressures in crude oil prices continues to keep the term premium depressed. But we expect these effects to wane and reverse during the course of 2016, as crude oil prices increase towards our 12-month forecast of US$ 50 per barrel on WTI, from US$ 37 per barrel at the time of writing.
  • A higher expected terminal rate and an increase in term premium: An historical analysis of the behaviour of the US yield curve during previous four Fed tightening cycles reveals that the market has always progressively revised upwards its view on the 'neutral' level of rates as the Fed pushed policy rates upwards (see 'How Will Bond Yields Move in the 100 Days After the First Hike ', 11 Sep 2015). In other words, expectations on the degree of monetary tightening the economy could withstand have in the past tended to be adaptive. We judge the current market-implied level of neutral rates (around 50bp in real terms) as too low. By contrast, as the hiking cycle extends, the norm is for the 'term premium' to decline from relatively high levels in proportion to terminal rate expectations (on the average of the past 4 cycles, around 75%), a phenomenon particularly evident in the 2004 cycle (here we use the NY Fed's ACM estimate of the term premium). Presently, the term premium is zero. Although there have been periods, like in the 1960s, when the term premium was very low, it has not been negative outside short periods of time.

Since we expect all of these predictions to be wrong again (check back in a year's time to find out why), it is more prudent to read Goldman's own hedging risk factors:

Outside changes in macro developments, we see two main big risks to our Treasury yield forecasts: A further decline in oil and commodity prices, leading to broader asset price turbulence, would most likely lead to lower bond yields than we presently forecast by amplifying deflationary expectations. At the other end of the spectrum, an increase in yields (and their volatility) in the Euro area and Japan, spilling over into the US market. Our analytics indicate that the decline in both JGBs and Bunds has contributed to keeping US Treasury yields lower than they would otherwise have been this year.

As for the punchline, recall that Goldman's top trade for 2016 is to be long the USD vs the EUR and JPY:

Top Trade #1: Long USD vs short EUR and JPY

 

Go long USD against an equally-weighted basket of EUR and JPY at 100, with a spot target of 110 and a stop loss of 95. Annual carry is positive at around 1%.

Well, it is not even 2016 yet, and Goldman, according to its latest trade update, is already half way to being stopped out.

Stay long USD against an equally weighted basket of EUR and JPY, opened on 19 November 2015 at 100, with a spot target of 110 and a stop loss of 95, currently trading at 97.68.

Good luck to all.

 

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Wed, 12/30/2015 - 12:13 | 6978300 kliguy38
kliguy38's picture

Hey WTF.....we put it out last year and they bot it....let's throw it out to the chumps again

Wed, 12/30/2015 - 12:14 | 6978305 gafgroocK
gafgroocK's picture

 

 

Aren't Muppets are STUFFED with something?

Wed, 12/30/2015 - 12:22 | 6978346 Jtrillian
Jtrillian's picture

Economic forces in motion tend to stay in motion.

All the Western economy can do now is KICK THE CAN.  And that is exactly what they will continue to do, while racking up huge debts on their respective balance sheets, hoping that no one notices until they are safely in their bunkers in NEW ZEALAND. 

Wed, 12/30/2015 - 13:43 | 6978713 Babaloo
Babaloo's picture

Time for my obligatory, "stopped clocks are right twice a day!"

Wed, 12/30/2015 - 20:41 | 6980203 TheAntiProgressive
TheAntiProgressive's picture

When you don't win, try, try, try again.  I think they use drunken monkeys and a dart board on these predictions.  Or they are directed at the drunken monkeys.....  I am so confused.

Wed, 12/30/2015 - 12:20 | 6978336 Insurrexion
Insurrexion's picture

 

This guy nails it...

"What happens when the government bond markets drive the U.S. 10Y back up to a paltry 5% norm, or the 34 year (7%) median?

My risk recommendation: stay away from the sidewalks and watch for falling bodies of stock brokers, bond traders, and Keynesian economists on Wall Street.

When the bodies start to fall, then we will know that financial Armageddon is truly near."

Ref:

https://www.linkedin.com/pulse/truly-big-shorts-john-m-cunningham?trk=pr...

Wed, 12/30/2015 - 12:34 | 6978399 Enceladus
Enceladus's picture

This won't happen before the 10Y goes below 1%. As the dominoes fall the illusory wealth will attempt to convert to reality to "lock in gains" This means USD, UST, PMs, Commodities

Wed, 12/30/2015 - 14:45 | 6979003 lasvegaspersona
lasvegaspersona's picture

Ultimately the problem is with the dollar. Yes it acts as the 'best' while it still breathes but one day it will go. On that day USD, UST and other paper representations of wealth may not be the very best. Commodidty hoarding is wrong. Don't do it (I know most mean buying paper commodities but some do go out and fill warehouses with copper). That leaves us with PMs. Both gold and silver are treated as commodities for now. Both have their price determined in a derivative market. Gold will soon find itself bacck in the money business. Silver will not make the leap. Ask any central banker. They own only gold. If you think the future does not involve central bankers stop reading now.

To take advantage of the change, hold gold. Sorry silver will probably fall in price as half of the demand for silver is industrial. In a depression industrial demand falls. Hate me if you like but I don't make the rules I just try to figure them out. Silver was dismissed as a monetary metal almost a century ago. If you are hoping that it will make a comeback...well I wish you the best. I just think it is a bad bet gold silver ratios and all considered.

Wed, 12/30/2015 - 12:22 | 6978349 Martin T
Martin T's picture

If at first you don't succeed...

Wed, 12/30/2015 - 12:25 | 6978360 SpanishGoop
SpanishGoop's picture

"Give me your money, i will die (or get rich) trying to make more of it,"

If that doesn't work i can have somebody jump from a building for you.

Satisfaction guaranteed.

 

Wed, 12/30/2015 - 12:28 | 6978380 Dan The Man
Dan The Man's picture

Guns & Gold, baby.

Wed, 12/30/2015 - 14:46 | 6979011 lasvegaspersona
lasvegaspersona's picture

Let me fix that.

Gold and Guns, baby, lots of both....and big freaking guns too.

Wed, 12/30/2015 - 12:34 | 6978398 aliki
aliki's picture

remember "the great rotation out of bonds and into stocks"

remember "we will soon be approaching 4% GDP"

remember "treasuries will approach 3.00-3.50%"

remember "escape velocity"

remember "falling deficits"

remember "obamacare is going to reduce the price of healthcare"

remember "MLPs are like toll collectors; they aren't impacted by things such as a fall in the price of oil and will  be able to maintain their dividends

there has been so much bullshit sprayed on CNBC this past year i can't even keep up with it

Wed, 12/30/2015 - 12:39 | 6978423 Seasmoke
Seasmoke's picture

You seem to be doing a great job keeping up with it. Funny how they were "correct" about Gold though.

Wed, 12/30/2015 - 13:38 | 6978681 aliki
aliki's picture

you are correct, they were right about gold ... for now, until reality sets-in that countries around the world are not going to stop printing $$$ & in-fact the real $$$-printing has yet to begin.

perhaps you missed the big-momma, queen-bee of $$$-printing's comments this morning, here' a little "help" for you:

Global growth will be disappointing in 2016 says IMF's Lagarde
http://www.reuters.com/article/us-imf-lagarde-idUSKBN0UD0JB20151230

Wed, 12/30/2015 - 14:59 | 6979038 lasvegaspersona
lasvegaspersona's picture

and green shoots too...how could we forget those?

Wed, 12/30/2015 - 12:35 | 6978406 Forced Fed Said
Forced Fed Said's picture

Only in a perfect world, undisturbed by geopolitics, China, refugees, commodity/capex/high yield disruption.  In a world where FOMC modal forecasts are realized, markets would have to squeeze out the negative risk premium (difference of dots-forwards) As forwards implied by dots are realized or possibly exceeded then yields are likely to undergo upward pressure. A second part of the argument is higher term premium which is stuck at intergallactic lows.  The problem is that nothing ever goes to plan and markets are uber short Treasuries already.  Goldman, nor anyone else can possibly know what is going to happen. Without self sustaining credit growth from the private sector, taking over from Fed, this recovery is doomed to fail and a return to QE is more likely than delivering modal forecasts. That makes me sceptical of Goldmans view

Wed, 12/30/2015 - 12:36 | 6978407 Forced Fed Said
Forced Fed Said's picture

Only in a perfect world, undisturbed by geopolitics, China, refugees, commodity/capex/high yield disruption.  In a world where FOMC modal forecasts are realized, markets would have to squeeze out the negative risk premium (difference of dots-forwards) As forwards implied by dots are realized or possibly exceeded then yields are likely to undergo upward pressure. A second part of the argument is higher term premium which is stuck at intergallactic lows.  The problem is that nothing ever goes to plan and markets are uber short Treasuries already.  Goldman, nor anyone else can possibly know what is going to happen. Without self sustaining credit growth from the private sector, taking over from Fed, this recovery is doomed to fail and a return to QE is more likely than delivering modal forecasts. That makes me sceptical of Goldmans view

Wed, 12/30/2015 - 12:37 | 6978412 Seasmoke
Seasmoke's picture

Hey give Goldman a break. If you read their 10 corrections they eventually got it exactly right by December 30.

Wed, 12/30/2015 - 12:39 | 6978420 wisebastard
wisebastard's picture

pppssssstttttt..................i got an apple would you like a bite

Wed, 12/30/2015 - 12:48 | 6978468 gaoptimize
gaoptimize's picture

So with a real estimate of inflation for real costs of living for middle class families, Americans will end the year 5% poorer than they started it.  This will be reflected in home sales, and the inevitable effects of peak sub-prime autos, a further lowering food and clothing quality, etc.  The slow motion train wreck will be reaching key vulnerable engine components in 2016.

Wed, 12/30/2015 - 12:51 | 6978481 madbraz
madbraz's picture

if you look at Barron's annual forecast of interest rates by the biggest banks, you will see that they were very wrong over 80% of the time.  nothing new here, banks always say that interest rates will rise - what do you expect from the corrupts?

Wed, 12/30/2015 - 12:54 | 6978494 arbwhore
arbwhore's picture

Their gold forecast was spot on. Whose the muppet there?

Wed, 12/30/2015 - 14:14 | 6978886 GRDguy
GRDguy's picture

That was something GS could easily manipulate, being a small market.  

The rest is somewhat more difficult.

Wed, 12/30/2015 - 13:28 | 6978622 bamawatson
bamawatson's picture

spot on, spot price, run spot run

Wed, 12/30/2015 - 13:58 | 6978801 Grandad Grumps
Grandad Grumps's picture

I wonder if they will ever change their strategy to "telling the truth", as it becomes increasingly clear that people expect them to tell only lies.

Mixing in the truth would be totally unexpected and not believed.

Wed, 12/30/2015 - 14:33 | 6978967 lasvegaspersona
lasvegaspersona's picture

Stuff that Muppetâ„¢

Wed, 12/30/2015 - 15:33 | 6979149 Baby Eating Dingo22
Baby Eating Dingo22's picture

Take their advice if you want, but don't ever buy a clock from Goldman

Wed, 12/30/2015 - 15:41 | 6979182 Hohum
Hohum's picture

Not filed under "Wednesday Humor?"  So Goldman says 3.0% and NO collapse?  That would be something.

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