Goldman On The Five Key Questions For 2012

Tyler Durden's picture

As US markets remain in hibernation for a few more hours, Goldman picks out the five critical questions that need to be considered in the context of 2012's economic outlook. Jan Hatzius and his team ask and answer a veritable chart-fest of crucial items from whether US growth will pick up to above-trend (and remain 'decoupled' from Europe's downside drag), whether inflation will find its Goldilocks moment this year and if the US housing market will bottom in 2012 (this one is a stretch). Summarizing all of these in a final question, whether the Fed will ease further, the erudite economist continues to expect an expansion of LSAP (focused on Agency MBS) and an official re-adjustment to an inflation targeting environment. Their view remains that a nominal GDP target combined with more (larger) QE improves the chances of the Fed meeting its dual mandates (unemployment target?) over time but expectations for this radical shift remain predicated on considerably worse economic performance in the economy first (as they expect growth to disappoint). We feel the same way (worse is needed) and recall our recent (firstly here, then here and here) focus on the shift in the balance of power between the Fed and ECB balance sheets (forced Fed QE retaliation soon?).


Goldman Sachs: 5 Questions For 2012.

Today’s focus article discusses what we see as the 5 most important questions facing the US economy in the coming year.

First, will US growth pick up to an abovetrend pace? We think not. Underlying growth is probably considerably weaker than implied by our 3.3% tracking estimate for Q4 GDP growth; tight oil supplies act as a “speed limit” for global growth; fiscal policy remains a drag on growth; and the spillovers from the European recession are likely to increase.

Second, how much will the European crisis - the biggest downside risk - subtract from US growth? Our baseline estimate is 1 percentage point, but the uncertainty is large. On the one hand, we have not seen much impact yet...

On the other hand, a failure of peripheral European economies to stabilize due to a “paradox of thrift” situation in both the public and private sectors poses a downside risk for Europe and ultimately also the United States.

Third, will the US housing market bottom in 2012? We think yes. With excess supply diminishing gradually...

...and valuations back to “equilibrium,” we expect the house price decline to end in 2012H2, although the recovery is likely to look very U-shaped.

Fourth, will inflation be too high or too low by late 2012, relative to the Fed’s target? Too low, in our view. The commodity price impulse is waning and there is still plenty of excess capacity. We expect core inflation to fall back to 1¼% by yearend, clearly below the Fed’s implicit target.

Fifth, will Fed officials ease further? We think yes, probably via purchases of agency MBS (and perhaps Treasuries) announced in the first half of the year. We also expect Fed officials to provide a forecast path for the funds rate and adopt an official inflation target at the January 24-25 FOMC meeting.

We expect Fed officials to ease anew in the first half of 2012 via purchases of agency mortgage-backed securities, either on their own or combined with Treasuries. This forecast is based on our expectation that real GDP growth will slow to a below-trend pace and inflation will fall to a below-target rate in the course of 2012. With the level of output still far below potential, we believe that this would be a sufficient signal for Fed officials to decide to ease further. At a minimum, we believe Fed officials would be loath to end their securities purchases at the conclusion of “operation twist” in mid-2012, and additional purchases essentially require a balance sheet expansion.

In addition, we also expect the FOMC to provide forecasts for the federal funds rate in the Summary of Economic Projections (SEP) published four times per year, starting at the January 24-25 meeting. More likely than not, the FOMC will also move from its current all-but-official inflation target of “2% or a bit less” to an outright inflation target of 2%. These moves are somewhat independent of the shift to renewed QE.

We view the funds rate forecasts as a sensible step, because they are likely to enhance the communication of the Fed’s reaction function to incoming information. We are less sure about the inflation target because it might be misinterpreted as a shift away from the employment part of the dual mandate.

To counteract this impression, Fed officials are likely to emphasize that the inflation target is “flexible” and applies to the medium term, and also that unemployment remains far above their estimate of the structural rate. Although they are unlikely to go as far as to complement the official inflation target with an outright target for the unemployment rate, they might decide to state even more clearly that they aim for an unemployment rate in line with their estimate of the structural rate over the medium term.

Our own view remains that a move to a nominal GDP level target, complemented with potentially large amounts of QE, would provide a greater chance to achieve the Fed’s dual mandate over time. But while we would not rule out such a move if the economy performs significantly worse than our forecast, we do not expect Fed officials to embrace such a seemingly radical option anytime soon.

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achmachat's picture

exhibit 7.... home prices back up in hopium land?

Snakeeyes's picture

Yup. That chart is not correct.

Azannoth's picture

You honestly expected Truth from *cough*Goldman Sachs*cough* lol

knukles's picture

The only fucking thing gonna remain decoupled is Goldman's forecasts opposite reality.

Bicycle Repairman's picture

"Third, will the US housing market bottom in 2012?"

No and its not even close.


FED easing and low inflation?  I doubt it.  Particularly when the FED needs 5% to 7% inflation for a decade.

Ned Zeppelin's picture

Lots of nonsense, including the "matter of fact" QE round that for these crooks is like the finest Chinese heroin. They can't keep it going with QE and are desperate to see it happen.  With a election year coming and the consequent need for the Fed to "lay low," I agree with those who say, absent some epci fail or Euro-collapse, it is unlikely we will see a robust QE annocement after the first quarter, and right now, there's no obvious reason reason to QE other than to enrich bankers, which I agree for Ben is sufficient in and of itself, but it's nice to have some political cover.  Maybe this Iran things gets legs and off we go ala 9/11.  Learn to goosestep if that war starts anytime soon.  Party's over for the dysfunctional Republic, and the efficient Empire will be running things from here on out.  

The Deleuzian's picture

Aside from the late 80's-early 90's pause ...Housing prices were in a bull market all the way to 08'...No way a 4-year bear market has 'cleansed' anything...The 02'-08' blowout was 'generational'...

We still have at minimum 3 years until an uptick...Assuming they actually let it fall and not mingle with it...Gold has yet to top out against housing as well...

MiddleageThinninghair's picture

I find it interesting that this is the 2nd insider that I have heard recently speak of "targeted nomial GDP".  I recenlty listened to a  Jim Rickards interview on kingworldnews where he talks of the Fed setting a targeted nomial GDP level with much less importance placed on inflation.  I'm suspecting that this is the consensus in the inner financial circle.


MiddleageThinninghair's picture

I'd like to add that I read an article by Martin Armstrong

Which I think explains why we are having simultaneous inflation and deflation and that hyperinflation is not a significant risk in the near future.

I wonder if "target nominal GDP" put into practice will pretty much guarantee that the full destruction of the economy and hyper-inflation.  The GDP input of gov't spending to me is ridiculous which makes this indicator useless.  If you put gov't spending on one side of the equation and everything else all the other side all they have to do is have gov't spend greater than the destruction of the real economy.  I see this as a long term process certain to ensure ongoing increasingly higher unemployment due to the damaging effects of inflation.

Manthong's picture

"Targeted Nominal GDP"

Krispy Kreme diet for the morbidly obese.

The Deleuzian's picture

Centralized...Compartmentalized...Coordinated...Jesus X...What's next....

GOSPLAN HERO's picture

Go long gold and silver, beotchezoids.

DumFarmer's picture

Oh how I wish I knew then.........I just lost a job as a public tax sucking firefighter/paramedic so I went back to the only job I ever had that paid as delivery. I was shocked. In 1994 when I last did the gig, you could buy an ounce of gold with less than 2 nights tips. Today it takes over 12 nights. It is the middle and low end that gets screwed. You are working the same for 6 times less pay and gas is 3 times more expensive. This can't last. We are gonna be down to buying food and that's it. Glad I did get my stash secured before loosing fat tax sucking job. 

vast-dom's picture

Key Q: When will GS get off the planet?

slewie the pi-rat's picture

actually, snakeeyes, i think chart #7 may be "correct" in that it shows prices declining to the "estimated equilibrium" norm~~a (too?) picture-perfect 'reversion to the mean'

but, as far as predictive ability as to prices (or volume), we might also consider the standard chart-watchers' cautionary observation that the "reversion" often overshoots while completing the oscillations to regain the norm or mean

the chart shows this estimated overshoot as the dotted line, so the "future" = profits after 2016 if you "invest" now, and i think those would be "nominal" profits [prob. not adjusted for negative ownership costs and/or inflation/deflation]

however, the fact that the lines are close, here, may lead to more optimism

sell the sizzle, as they say!

The Deleuzian's picture

Slewie...Sell the Sleeze...............

Barometer's picture

The "estimated equilibrium" curve is fairly steep wouldn't you say?

slewie the pi-rat's picture

hard to tell who is responsible for that.  they have an invention

somebody is modelling "equilibrium" pricing, and the how isn't there, either

case-shiller?  the US dept0'commerce?  the FED?

i s'pose if you did it in gold or wheaties instead of FRNs it might look different.  maybe alan greenspan designed the modelling index as a study in irrational exuberance  or maybe it was for ETF gamblers?  or to sell bundled hoooey-pie as "safe"?  steep as it is, the "actual" prices went parabolic offa it from about the time mama got pregnant till the time junior graduated from kindergarten...

PulauHantu29's picture

From Dr Housing Bubble:

"As we look into 2012 we have much to be hopeful for but real estate is not a sector to pry into if you are expecting a rosy and sunny projection.

The days of a household making $70,000 a year and purchasing a $600,000 home are now long gone.  Yet some want to resurrect the housing bubble.  With shadow inventory at peak levels, baby boomers retiring in mass, and the growth of lower paying jobs there is little reason to believe that real estate values will soar in 2012."

I'm hoping for a QE sooner rather then later.

Conrad Murray's picture

Another wonderful consequence of the financial terrorist's housing bubble that has yet to be fully felt is the adjustment of property valuations for the purposes of taxation and the subsequent decline in revenue.

Municipal Finance in the Face of Falling Property Values -

chubbar's picture

Did you read that joke of an article Conrad? Typical bullshit about how stable housing is good for the community then they show the chart which looks like the start of a parabola beginning in 1997 and ending in 05. Did they give a shit about the geometric rise in property taxes while that shit was happening?

The article then goes on to describe how they are going to use every fucking trick in the book to make sure that they don't realize the decline in the next assessment cycle, unbelieveable. I can tell you just from the few conversations I've had in my small town that this is the plan for this county. They spend every fucking dollar that comes in and then make big purchases (bond offerings) based on that income growing exponentially. THEN, when growth stops and the income levels off or heavenforbid starts to fall, they scream bloody murder about how the community is screwed! HOW ABOUT THE FUCKING TAXPAYERS!!?? When the hell do we get any consideration in this formula? Do they think our incomes were climbing at the same rate the fucking real estate bubble was inflating? Bunch of absolute fucktards running our county gov't, probably can't even balance their own checkbooks but here they are obligating the taxpayers to millions in new construction that isn't even needed! Assholes, the lot of them!

nmewn's picture

"Did they give a shit about the geometric rise in property taxes while that shit was happening?"

Ponzi-nomics 101...all your assets are belong to us.

cheeseheader's picture

'...are obligating the taxpayers to millions in new construction that isn't even needed! '


Municipalities are people, too...doncha know.  If a neighboring town has a new po-lice station/library/firehouse/towncent(re)!/museum/century park (with fountain)/playground at the north forty/walking path/riding path/horsey path/community pool/communiity senior cent(re)?/community outreach center(paying attention?)/community pool hall/community holocaust center/community rec center/community daycare cent(re)..back to that spelling...millenium park (way different to the community park--on either forty)/history center/.., then we need one of these babies, too. 

Gotta keep up with the Joneses, or else everbody will move over there--along with their tax dollas.


flattrader's picture

They hopium for that so they can sell more toxic shit.

That won't happen for years.

The index needs to go back to the mid 1990s first...another drop of 50% +/- to set things straight.

It will be slow and painful as they continue to dribble out shadow inventory.



gatorengineer's picture

With real near double digit inflation we are experiencing (see car prices), housing has to start going up or at least being flat, you correct the chart for inflation, and well its pretty ugly....

I am more equal than others's picture

Compared to the estimate of equilibrium.  When Obama puts himself in the top 4 of presidents - with that type of comparison his estimation skills are off by a factor of fantasy plus 1.

philipat's picture

Conclusion: The squid is still short MBS's

Gully Foyle's picture

Isn't the number one key question is how the fuck are they going to sell the predetermined Romney as viable when he does so shitty in the polls?

Bicycle Repairman's picture

Romney sucks.  His talking points are laughable.  An empty suit.

StychoKiller's picture

In which case the Decepticrats will have no reason to NOT vote for Obamatron.  Make no mistake, the Republicons arent' any better, except for the RINO, Ron Paul.

Ned Zeppelin's picture

No difference between Obama and Romney.  Vote for Ron Paul, but I doubt you'll get the chance.

Snakeeyes's picture

Interesting summary. Not sure about housing being back at equilibrium prices since the variation across metro areas is substantial.

Cognitive Dissonance's picture

The only Goldman question that matters.

"How much can we rape, rob and steal in 2012?"

Azannoth's picture

The answer is Elementary - how much is there left to loot and pillage ?

Those guys don't pull any punches, they will milk the cow till there's a bone dry corpse left behind

LongBallsShortBrains's picture

.......How much MORE can we rape, rob and steal in 2012?"

Fixed it for you

dick cheneys ghost's picture

The Fed has a dual mandate to protect the (1) criminal scum on whore street and (2) the banks in the city of london............

Fuck Golman Sacks


GeneMarchbanks's picture

Bottom in housing while inflation stays low? I'll have what they're smoking.

Nice to see notional GDP targeting getting some press. A QE-as long as we feel it's appropriate. No more 'market' moving announcements.

TheSilverJournal's picture

Housing has much much further to fall. Ultra low rates and government backing of over 95% of all newly issued mortgages are keeping prices propped up. Not to mention American's will become much poorer during hyperinflation.

Sudden Debt's picture

Goldmannnnnnn... How much taxmoney will they receive to pay their bonusses with in 2012 it the key question for them.
None other really matters.

Dan The Man's picture

those poor dears..


apberusdisvet's picture

We all need a good laugh today.

RobotTrader's picture

All I can say is that regardless of how Goldman does, it always seems like each summer season at The Hamptons is more outlandish than the previous year.

2008 was the only down year, ever since real estate prices are back on the rise, even bigger homes are being built by TPTB, even more exotic hookers are imported from Thailand and Ukraine.


Q3 2011 Hamptons Sales Rise Slightly After Big 3 Year Downturn

“Compared to the third quarter of 2010, home sales in the Hamptons and North Fork jumped 14.7 percent, to 538 from 469, and the median price rose 12 percent, to $700,000 from $625,000?

The headline:
East End market gains over last year

Third quarter marks second highest number of $5M-plus sales in four years


Caviar Emptor's picture

That's nuthin: Manhattan just had the most expensive apartment sale ever and similar apartments were marked up. A Russian billionaire was of course the only one to afford it. And most high end sales have been to foreigners who don't reside on site. Good sign for the US economy : we're going the way of England and France

Perfect indicator of biflation: the high end was up but according to Case Schiller NYC as a whole was down. 

mick_richfield's picture

( Robo doesn't know that I can trace him this far back on ZH... )


RobotTrader    Sat, 1 January, 1790

  In spite of some minor recent Unpleasantness among the Rabble, I can assure you that the Estates of Her Majesty Marie Antoinette at Versailles, as well as those of other Nobles, still enjoy the very Highest Valuations.
  I can foresee no Circumstance that will interrupt this happy Appreciation, and can only suggest that all Serious Investors hurry to participate!


Caviar Emptor's picture

lol +10

Bastille? Shmastille....

small watcher's picture

Marie Antoinette? Wasn't she the one who was so famously bullish on Cheesecake Factory?