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Goldman Releases "Strategies For Stagnation"
The title says it all: US Portfolio Strategy 2012 Outlook Strategies for Stagnation, From Goldman's David Kostin
Index: Our year-end 2012 S&P 500 target equals 1250
- Economy: Stagnant US economy growing by 1.5% in 2012 and 2.2% in 2013; low inflation; low interest rates.
- Earnings: We forecast operating EPS of $100 in 2012 and $106 in 2013 (bottom-up consensus is $108 and $119).
- Valuation: Historical precedent suggests stable P/E ratio of 11.8x in 2012. DDM supports our 12-month target of 1250.
- Money flow: We forecast $500 billion of net inflow into US equities in 2012. Buybacks will offset retail outflow.
Risks: Policy, economy, and margins
- Policy: In Europe, sovereign debt crisis. In US, election and budget negotiations. In Asia, policy responses to inflation.
- Economy: US data remains lackluster. We forecast 9.0% jobless rate for year-end 2012.
- Margins: We forecast net margins will peak in 2011 and begin to decline in 2012. Consensus expects margins to rise.
Sectors: Stay near benchmark given macro uncertainty
- Overweight: Information Technology, Consumer Staples, and Telecom Services
- Underweight: Consumer Discretionary, Industrials, and Materials
Themes: Five strategies for stagnation in 2012
- High Quality stocks (Bloomberg ticker: <GSTHQUAL>);
- High dividend yield and growth (<GSTHDIVG>);
- High US revenues international sales
- Cyclical stocks with attractive risk/reward if activity normalizes (<GSTHCARR>);
- Use equity options to outperform (call overwriting and tail risk hedging).
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Kind of like the Japanese would have needed to have a strategy for stagnation in 1990 that would have lasted....20 years so far?
As uncomfortable as it is to be on the same side of the trade as the Squid, the strategy is reasonable. Philip Morris Intl., for one, has been very good for the personal portfolio these past two years, and fits the Squid's template quite nicely.
...And we'll not be selling it just yet either.
Exactly, our economy will at best be like Japan's horrible 2 decades (which is still going). We told them to get that bad debt off their books and they didn't and guess what, we aren't doing it either.
USA = Japan
www.greedion.com
Japan = Clusterfuck
Why so many people feel comfortable with this side-by-side comparison with Japan, I'll never know. It's only been 4 years into America's Japanization and already 'the lost decade' is upon us. People just don't have the patience for a good suspense plot anymore...
After watching that Kyle Bass video from yesterday, I'm inclined to agree that Japan = clusterfuck. Sadly USA = clusterfuck too, it will just take a little longer but I bet you it's way more violent.
You know what? I watched and listened to him last night attentively. Although he makes total sense, there was a strange moment where the lady asked him: So Greece defaults, how do we get from Greece to Japan? Then Kyle hesitates. It isn't really what he said that I disagree with, it's the sequence of events that isn't very convincing. The dominoes are lined up just so... From here we go there...
Very general statements so be advised. Personally I'm watching the UK right now amongst other core Eurozone countries...
I noticed that too, wasn't sure what to make of it. The UK is definitely one to watch, especially since it might not exist come 2013 - when the scots vote for independence: Leading scottish independence website
Without the oil revenues, England would be even more reliant on an out of control though diminished City of London.
While its hard to question Bass, the order of his sequence is worth challenging. Historically, we've followed the British Empire playbook to a T. The UK is culturally very similar (at least since our government ceded monetary controls to a banking cartel)... Japanese are savers, Americans and Brits consume -- to me, that's a material distinction.
Read: Century of War by Engdahl
We'll be lucky if we have Stagnation. We're in for a currency collapse right after the Euro collapses.
Disagree. The USD will actually enjoy a short-medium term benefit as the Euro falls apart and the Japanese economy crumbles to dust. There's only three legs to the wobbly forex table, and the USD has the short-term benefit of not being the other two. Long run it's obviously terminal, but not yet.
A good synopsis of the Kyle Bass position.
He makes a convincing case and I've yet to hear someone provide a rebuttal that is stronger.
When either the USD collapses or the Euro collapses, it will bring the other down with it. Which is why I see the main problem being the USD because the Euro can kick the can down the road for a bit longer as compared to the road in the US is just about gone.
Only if oil ceases to be priced in dollars will that play out. Or until another energy source replaces oil. I'm guessing the former will happen prior to the latter.
Oil doesn't have to stop being priced in USD for the USD to hyperinflate. The lower bound is depositors losing their money. If depositors lose money, then confidence in the USD and the entire banking system will be quickly lost, which is why depositors won't be allowed to lose their deposits. Instead, the Fed will print in order to keep the banks from breaking. The more that's printed, the more malinvestments there are, and in turn, the more that needs to be printed in the future to cover up the malinvestments, creating one giant snowball effect. All of the money that will be created will causes oil prices to continue to rise indefinitely at an increasing rate. I guess you're kind of right because when the world gets of the petrodollar, the fiat game will be over immediately (which is quite an incentive for central banks to stay on the petrodollar). But just because the world stays on the petrodollar doesn't mean that the USD is safe. So when will the world comes off of the petrodollar? $5 / gallon? $10 / gallon? $100? $1,000?
It seems like the markets are starting to see that deflation is not the scare because central banks will print in order to keep depositors from losing their money. $5 / gallon gas is probably 2 to 5 months away. $10 / gallon gas is probably 8 to 18 months away.
You are making the same error I made in 08.... the price of oil cannot increase indefinately, the economy grinds to a halt once oil crosses threshold, around $125...We can argue whether it is $125 or $140 or $150....but I won't
The dollar is backed by the military which enforces the petro-dollar. The dollar dies when the US military is no longer able to project power abroad, in particular, in the oil exporting regions of the world...
No sir, the price of oil can and will rise indefintely. Higher oil prices do hurt the economy, but oil prices going higher and the ecnomy getting weaker go hand in hand because the weaker the US economy gets, the more money will need to be printed in order for depositors to be kept from losing money and the more the government will have to print because entitlements grow faster in a weakening economy.
And the growth of the world is no longer dpendent on the US as the US is an ever shrinking portion of the world economy. Once other countries (China) stops sending us real goods that took real resources and real labor to make in exchange for USDs from a printing press, those countries will be able to consume those good and oil themselves and be much better off.
The military is no match for the force of the market. When the real printing starts and USDs swamp the planet, the price of oil will rise. Like I said in the prior post, when the petrodollar dies, then fiat dies almost immediately. But just simiply staying on the petrodollar will not prevent the USD from hyperinflation.
A 2008-like even will likely not occur, however it is possible that a much smaller and much more brief dip could materialize. It is no longer a banking crisis like 2008 where private losses and private risk could be socialized. It is now a sovereign debt crisis and the only solution is to print money. Here are some other differences:
1) In 2008, nobody knew for sure if the Fed and government would team up to save the banks. The Fed has shown its hand and now everyone expects the banks to be saved. 2) Rates were able to be lowered to 0% in 2008. Now, rates have been at 0% for nearly three years and can be lowered no further. 3) The Fed's balance sheet has exploded since 2008 and is now nearly $3T. Further expansion of the balance sheet will have severe inflationary consequences.I used to think like that... I realized my error...
The US dollar is the last fiat to go... when it is the last one standing, maybe then, I may reevaluate things about the end game...
Now if you can figure how all that printing can get into hands of the masses, I may change my tune. There is no cheap credit to be extended to consumers, ergo, they get priced out of the market and demand destruction (not to mention economic destruction) ensues.... Chindia then takes up any slack in the world export markets...
I have referred to it here for over a year as the Saw-tooth economy....
There is another end-game:
When the interest on US dollar debt not held by central banks (i.e. the Fed) can pay for the available oil on the markets... Best guess for this is 2028 or so.... YMMV...
Look up a list of the largest oil exporting countries....you only need 33 to basically cover all the oil exports, now look at the presence of the US military....
In 2008, the market very badly misread the situation. There was a rush into the USD because they thought it was the safest thing. Seriously, how hard can the market pile into USDs any longer? The banks are on the verge of collapse again..MF Global, the largest commodities broker in America just went down because they were stealing from clients and they're likely not the only ones doing it, municipalities are starting to file bankruptcy, states are hurting real bad, 50% of mortgage holders are underwater, real inflation is raging, real unemployment is raging, real wages are crashing
The US is borrowing / printing about forty percent of what it spends. The US is bringing in revenues of about $2.2T, spending about $3.8T, has a debt of around $15T (and that that does not include all of the off balance sheet debt like Frannie / Freddie, as well as all of the debt of the banking system which the government is backing), and unfunded liabilities are about $100T. By dropping a few zeroes, we can wrap our heads aroumnd the financial situation of the US: Income = $22,000, spending = $38,000, an adjustable rate credit card balance which currently has ultra low interest rates and just the minimum payment is being payed and the balance is continually increasing = $150,000, unfunded liabilities = $1,000,000. It is impossible for an income of $22,000 to able to handle a credit card balance of $150,000 and rising with $1,000,000 of unfunded liabilities on top of that.
While intriguing and interesting this post has nothing to do with breaking the relationship between oil and the dollar....
There will be another rush into the USD, it is the only place to hide for a lot of "money"....
Sure it does, my point is that the supply of USDs are going to rise. I doubt the supply of oil will rise or the demand for oil will fall faster than the supply of USDs.
Obviously.... but you forget that demand destruction occurs, the other side of the coin...
Clearly there are limits to the printing...we are not there, yet.
You forget that demand destruction (I would term it differently, but I'll go with your term for now) can only occur up until the point that depositors are to lose their money. At that point, the decision must be made to either allow demand destruction to keep going, or to save the depositors from losing their money.
So the lower bound is that depositors can't lose their money, and the government can't default. If either of those two happen, then the system breaks and you better be rockin' physical.
You clearly do not understand the term "Demand Destruction".... please look it up.
Look, a slowing economy causes asset prices to fall. If asset prices fall too much, then depositors lose their money. Depositors won't be allowed to lose money, so asset prices won't be allowed to fall much more, which means that printing must commence in order to keep the economy from slowing further. Finding a good definition of demand destruction won't help the US out of this predicament. Yes, demand for gas will fall when gas prices rise. Yes, people will get more fuel efficient cars and change travel habits. But people need their gas and I'd say it's a relatively inelestic good. When gas prices reach $5 and the banks are about to fail, guess what..the government will print the banks solvent driving gas up further. Gas will go to infinite, the USD will be worthless, and silver will have the purchasing power that $1,000 has today.
It is so inelastic that we have cut about 1.6 mmbpd over the past few years or almost 8% with no attendent drop in price because Chindia is ready to step in and snarf up those exports...
You do understand the difference between discretionary and industrial use? Do you?
Silver will never reach $1000 of current purchasing power.... sorry, and I am a PM bull (and probably have a lot more physical than you...)
Put together a concise arguement that consists of more than hand waving and I might be persuaded. Untill you can convince me that all this printing can be put into the consumers hands, the price of oil is effectively capped...
Your tone is offensive. China is growing dramatically and the world no longer depends on us to consume all of the oil. When China stops throwing their money away on buying our debt, China will boom and world oil consumption will explode. America is the caboose of the world, not the engine. The world gives America goods that took real resources and real labor to get and in exchange they get USDs from a printing press. The USD is America's largest export.
Silver will reach $1,000 when fiat implodes. Gold will hit at least $10,000 and the silver to gold ratio will compress to at least ten to one.
I guess I don't know what you mean by the consumer's hand. I told you many areas of where the new money is being spent and I guess its not good enough. I'll try again I guess: The government is spending 40% more than it brings in, unfunded liabilities are outrages and going to swallow the US whole, the national debt is unpayable and the interest on the national debt will swamp the country if it rises only a few percent. Not only can we not cut the national debt, but we can't stop borrowing and we can't even slow the rate of borrowing. The super committee couldn't even agree to pretend cuts of a measly $120 billion out of what we would've otherwise overspent and the cuts don't even start for a year, it's becoming much harder to transfer liabilities from the private sector to the public sector to keep the banks going, 50% of mortgage holders are underwater, rates are 0% and if they rise, housing tanks and interest on the national debt goes up tanking teh country, so rates can't be raised, the government is providing cheap loans, the government banks 95% of newly issued mortgages, student loan debt has passed credit card debt, entitlements are outrageous, the Fed's balance sheet is outrageous.
The printing gets into the hands of the consumer when government spends borrowed / printed money (medicare, medicaid, social security, national defense, all federal agencies and federal jobs, much of state funding comes from federal funding and much of municipal funding comes from the state..so all state and municipal spending and jobs), when banks don't foreclose on homes because they don't want to take the write downs so the delinquent homeowners doesn't have to pay rent, cheap home loans, cheap car loans, cheap loans, employees pay of bailed out companies...
Jeepers..when that much is printed, it gets into the economy.
You are referring to crumbs in this case...
The bulk of the monetization went to money heaven.... aka excess reserves at the Fed..
A trillion here..a trillion there..that's not just crumbs. And its growing faster and faster.
Is it growing significantly (compared to M2, or some similar measure)? Provide some evidence. I'll check in later
M2 is growing pretty fast and will continue to grow faster and faster, but I don't think that's what you're looking for. Money is making it "into the economy". And just because a lot of new money doesn't make it "into the economy" doesn't mean that providing that new money doesn't have consequences. The consequences are that the malinvestments are able to be kept hidden and that just means more malinvestments and more money printing later to keep the malinvestments hidden. New money can no longer be created simply by lowering rates because they're already at 0%, so now we're at an all new part of the game.
I'm starting to build a website to explain my reasoning at thesilverjournal.com.
Work on your comprehension...
Your thesis is that federal transfers are growing fast enough to allow the masses to bid up oil... I asked you to show those transfers growing as quickly as some measure of printing (e.g. M2).... I don't think you can and your thesis relies on that...The ball is in your court....
First of all, that's not my thesis. I was going down the road you lead me on. My thesis is that artificially cheap money is destroying productivity. Mis-pricing money causes resources to flow into unproductive areas. The return of market-priced money will expose the malinvestments that have been created by artificially cheap money being pumped into the economy and cause short-term pain, but will also cause a boom in productivity because resources will once again be allocated much more efficiently.
Postponing the pain by providing more artificially cheap money only causes more malinvestments and therefore even greater pain in the future. Bankers and politicians enjoy their control over the printing press and do not want to be blamed for the pain, which is why the pain will likely be delayed until so much artificially cheap money is created that the USD becomes worthless.
The money printing is shown by M2...the ball is in your court...
Well if your thesis is "artificially cheap money is destroying productivity" then why are you arguing that oil can rise in price to no end?
If productivity is destroyed, then supply doesn't increase fast enough. Lower supply = higher price. The more productive we are, the higher supply is, so the lower the price is. Deflation is the normal state of an economy. The reason the US has experienced inflation over the last 100 years is because the Fed is printing money at a much faster rate than gold is being mined. In a normal economy, prices would fall as technological gains improve productivity, allowing the amount of goods to increase faster than the money supply. To simplify, with the same amount of gold chasing more goods, prices fall over time in terms of gold.
Sorry bud.. this is verging on being word salad....
So being "productive" will magically increase the supply, are you saying this applies to "supply of oil"?
For shits and giggles, what was the value of the gold mined last year? What was the value of the oil extracted from the earth? What was the ratio?
And still have not shown me that Federal transfers are rising as fast as M2, you have provided no mechanism for the masses to bid oil to the moon...
What happens if the US reduces its oil imports to zero through demand destruction? What does that imply for the dollar?
M2 is rising pretty sharply right now: http://research.stlouisfed.org/fred2/series/M2
Actually, I think it starts biting about $90.
90 is like throwing a handful of sand in the gears... hurts but it still grinds on...real demand destruction comes with higher prices,
Flakmeister, you are a condescending prick which undermines your credibility, even when you seem to be making sense.
BTW SilverJournal won the argument handily.
Grima, have you come out to play?
Somehow, I am not surprised by your conclusion after all you believe that you win every argument about abiotic oil... Mr SJ hasn't thought things through.... Do you really think that Ag will go to $1000 in todays dollars?
I guess anyone who knows more than you about a topic is a "condescending prick", no wonder so many people here are confused about so much...I have enough sense to shut up and listen when somebody who knows more about a topic starts talking, whereas clearly you do not...
Kyle Bass style, huh rp?
Not sure. It seems strange to me that after a massive failure in a major FX currency people will flock into... another major FX currency? There is no logical necessity there even though the risk off trade is always treasuries. Either way I'd rather be on the sidelines owning PMs.
Major FX currency is all 90% of people know or ever considered. When the shit hits the fan in Europe there will be a rush to US Dollars by the investor class, both cash and Treasuries. It's just their mentality. In their minds the Fed will ALWAYS print more, so that's the last fortress of the "status quo."
If you look at countries in the EZ that have the highest rates of savings: Spain, France, Germany in that order not counting the Swiss. Assuming EMU schism happens the problem will become sovereigns without their own currencies. The first order of business, IMO, would be to convert balance sheets over to their former currencies not look for USD safety. This rush to $ en mass assumption will be true up until it isn't. I literally think it'll be that fast. Only a change in perception, like the Russians recently.
But what if you were a big life/pension fund or a bank.
Can't all rush into PMs at once. No?
I can't answer that. I'm glad to not be in the position of a pension manager. Take a look at this freshly baked tidbit:
http://www.zerohedge.com/news/portugal-latest-country-go-mf-global-raids...
Who knows what will be left when it's all over....
I was an investment consultant to some large public DB plans... only a select few will be prepared:
Texas Teachers is atop that list (buying bullion by the ton, with sizable allocations to ag funds as well).
The FED has tied US to the Euro with a $7 trillion rope. We're going over the edge with it.
Congressman Calls for Hearings Into Fed’s Secret TrillionsU. of Texas took physical delivery I believe.
1. High Quality stocks...
No such thing.
just go for yield, then?
nice unicorns, doncha think?
I found goldie's list of high quality stocks from 2005:
AIG, C, JPM, GS, GM, GE, BAC, CFC, WFC, LEH, BSC, F, FNM, FRE...
Here is my list from 2007...
PBT, SBR, HGT, MO, ETE, POT, HLPRB... they got beat up a bit in 08 but came back very nicely....
Recent additions to the list include TNH, UAN, TCLP, CSX, CNI, UNP, PSE, EXXI
If there is so complete collapse that the above stocks become worthless, having a few gold and silver coins laying around won't make a bit of difference....
"If there is so complete collapse that the above stocks become worthless, having a few gold and silver coins laying around won't make a bit of difference.... "
A complete collapse in those stocks does not imply a complete collapse of the USA. And any USA collapse would be quite temporary.
The USA economy is going to be reset. What kind of wealth will get through the reset? Quality stocks?
Your comment is ridiculous.
Yes, and that is why I advise people to also own PMs..
Do you think that in the Reset that ownership of all assets will be brought into question, say like the French and Russian revolutions? That is what you are implying (and you may very well be correct).
Is the reset going to result in an agrarian non-technical society? Will the reset be a complete total wipe out? Will the reset involve roving packs armed gangs looting and pillaging for their daily bread?
Since you know exactly how things are going to play out, by all means tell us exactly how to optimize our assets given that the collapse could take 5 days or 5 years to occur....
I am all ears, seriously...
----
I swear, based on a lot of comments, it is like people here are playing checkers and the game is really chess...
I've always wondered who the fuck reads all those reports, which never even come close to the reality but have big impact on the markets. Probably the only usefulness of them is to predict what will be in fashion for short time untill they change their forecasts. All those expensive money managers follow those reports and sheeple pay for it.
Goldman always has a host of such reports on hand, many of which are contradictory, and pull them out depending on who they need to get a big chunk of money from. Tell 'em what they want to hear so they write the check. In the end it's not any more complicated than getting some poor schmuck to buy property in Florida a la Glengarry Glenn Ross.
Always
Be
Closing.
Got to love the assuption the Chinese govt is actually releasing truthful growth. Since we are not allowed to see how much is due to govenment capital injection, the growth may be similar to the US in that it takes several yuan of govt spending to generate 1 yuan of growth. I suspect the situation is much more dire than being released.
Even a subdued CPI of 1.7% is devastating when wages are contracting or only growing at 0.2%.
I'll be impressed if govts and banks can keep things floating into fall 2012.
Maybe for you CPI grows at 1.2%, to me looks more like 6 or 7%, my Quicken shows me that and my life style hasn't changed for years. Wages growing? Really where is that phenomenon is most pronouced, in DC? And anyway why you're so interested in Chinese economy, are you in resale business of chinese products?
high quality stocks, when the market has been cleaned out and the deflation reset is over : all those corporates with value added, non financial expertise with global markets access and solid balance sheets. Good R&d potential vital. But their future performance is conditioned by speed of unwind of world financials. So we won't see many home runs being hit in the mean time.
Its a quiet Sat and only the die hard fatalists are posting on this thread, can I take a moment to run a straw poll... Do you think the euro will no longer be a currency by..say the end of 2012?
My position, Brit , no English actually, spend most days flip flopping between yes and no to the question posed, buying gold and silver but still leaving enough to run my business ( and probably a lot more than needed too), my answer to the question, I really really struggle too see it happen.
It'll be there but errbody in the Eurozone will be celebrating Carnival and The Chinese New Year...
It's never too late to learn a good lesson.
The Euro has been a source of fiscal mischief for a dozen years. Very few currencies in history have deserved execution more than the Euro. All roads lead to its demise through debt repudiation...the " when "part is anybody's guess. Fiscal union without sovereign union cannot work....despite the fact that Merkozy, and the German and French banks would like it to be so.
Yes
The Euro will survive 2012. The only question is printing, and the ECB is in fact doing that despite the posturing and Germans whining. The front page of Der Spiegel at the moment is a cracked Euro coin with the title "And Now?". Point is they'll kludge it together.
Scot BTW.
I believe (no, I hope) that the Euro stays in existence past 2012. On the other hand, it may decline and not be worth much relative to other currencies. I believe, however, that its demise will be very slow and painful, yet inevitable. The "official" slide to oblivion will begin the day the first country either leaves the Eurozone or another one refuses to enter it altogether.
As it slides, the economic refugees will come to the dollar in an attempt to save themselves and raise the dollar despite Uncle Ben's work to devalue it. The scenario unfolding is much like 1931-1934, except with the dollar rising in value against European and possibly even Asian currencies, which should make for a great short opportunity in the US equities markets.
My hope is that it continues until past 2014. As long as the Euro is in existence, the US will not have a stable equities market. Since I trade actively, this US equities market instability means more money for me.
Ironically, the real safe havens for assets may lie in the currency and investments with true past "banana" republics like Costa Rica, Chile, Ecuador, Peru, etc.
What does Meh plus Duh equal?
US Strangulation 2012 Outlook Snuff Strategies
Risks: What Risks? We own Congress, President and the Supremes
Throw all growth strategies in the round file when .gov's borrow and spend bender finally ends. That is the uncomplicated truth.
That cyclically adjusted P/E chart on page 29 looks like fun.
Riiiiiiight.
Call overwriting? Yea that's how people blow up in idiotic rallies.
Projections of this sort mean precisely nothing unless oil is the primary parameter with the heaviest weighted coefficient.
None of these economists understand it yet. Their theories are garbage, because oil controls everything.
It's like the desperate desire by History academe to ignore malaria in Rome. Malaria as the cause of the fall of Rome destroys upcoming decades of PhD students who might pay tuition to fund their dissertation advisors.
Once it is understood that oil controls everything, you can stop funding Economics departments, within academe, government and the private sector all.
GS should change their logo to BS or even better, FBS
Because thats what they are: Full of Bull Shit.
S&P500 @1250 by end '12?
Lets come back to this thread and crack a laugh on 31/12/2012
sweet baby jesus, thank you squid. now i can plan my 2012 accordingly and sleep at ease.
SP500 bull vs bear battle reverts to bearish bias after price action on Friday and more downside expected.
My long term indicators have continued to warn of US Dollar strength and EURO weakness and these signals have increased since 2009. The overdue dollar rally should be substantial.
http://stockmarket618.wordpress.com