"A Markets Carol" - Goldman Scrooge Gets A Visit By The Three Ghosts Of The Global Economy

Tyler Durden's picture

In its "pre-Christmas" note, it is somehow appropriate that Goldman's Jose Ursua reprises the role of Ebenezer Scrooge, and explains how, in this contemporary Christmas Carol, "The world economy is struggling: to begin with. There is no doubt whatever about that" and, logically, gets a visit from the three ghosts of the world's past, present and future. However, while the narrative is similar for the most part to the Carol morality play, where it diverges is in the Hollywood ending: "As in Dickens’ story, avoiding this outcome will require decisive actions. Unlike Ebenezer Scrooge’s overnight redemption, however, we believe the solution to the current global problems will potentially take much longer. So, although some steps are clearly visible in the right direction, the post-holiday environment will likely continue to be challenging for both policymakers and markets alike." And that's only for the macro; the "micro", as Morgan Stanley explained yesterday, is already slipping regardless of how long the US pretends that Europe is irrelevant for the big picture. The only question is whether the macro follows suit (which in Morgan Stanley's case was left as the optimistic case with full resolution), in which case the ghost of the coming "Great Stagnation" will be one scary dude.

From Goldman Sachs: A Markets Carol


As we head towards the long weekend, we describe the current global situation by referring to the opening line from Charles Dickens’ book (“A Christmas Carol”): ‘The world economy is struggling: to begin with. There is no doubt whatever about that.’ As in that story, we look at how the world economy is being visited by the “ghosts” of its past, present, and (possible) future: ‘Great Recession’, the ‘Great Eurozone Crisis’ and the ‘Great Stagnation’, respectively. We see each of these three issues as part of the current landscape even if some seem more immediate, while others are not yet clearly established.

These three themes have radically affected the economic landscape since 2008, when the ‘Great Recession’ began. As Dominic Wilson highlighted recently, we are now receiving mixed signals from different parts of the world (Eurozone pressures vs US data: a tricky balance). While the ‘Great Eurozone Crisis’ is an ongoing source of concern, data has been more encouraging in the US and parts of EM. But overall, we believe the struggles of the world economy are likely to linger well into 2012. If deeper recessions are avoided both in Europe and internationally, the potential threat the markets will continue to face is the materialization of a prolonged period of sluggish growth, which we have labeled before as the ‘Great Stagnation’ (From the ‘Great Recession’ to the ‘Great Stagnation’?). As in Dickens’ story, avoiding this outcome will require decisive actions. Unlike Ebenezer Scrooge’s overnight redemption, however, we believe the solution to the current global problems will potentially take much longer. So, although some steps are clearly visible in the right direction, the post-holiday environment will likely continue to be challenging for both policymakers and markets alike.

The Ghost of the Past: the ‘Great Recession’

At the global level, the ‘Great Recession’ saw a contraction of about 0.8% in 2009, and a slowdown in growth rates from approximately 4.0% (2000-07) to 2.3% (2008-10). The global performance hides huge regional disparities: advanced economies contracted by 3.6% in 2009, while emerging markets actually grew by 3.5%. The contrast is also visible in the growth rates between 2000-2007 and 2008-2010: from 2.6% to -0.1% in the first group, and 6.9% to 6.0%, in the second case. Thus, one of characteristic features of the ‘Great Recession’ was the resilience of emerging markets in face of a severe shock coming from the developed world.

A second feature was that equity markets across the world showed a strong rebound from their early-2009 troughs to their peaks in early-2010. For example, in terms of MSCI share prices (in US$ ex-div.), trough-to-peak recoveries were as follows: World (60%), EU-27 (66%), UK (58%), US (48%); EMs (104%), India (144%), and Mexico (117%). Although the degree to which those moves have been unwound now varies significantly, it is still true that most markets are a long way above their early 2009 lows.

Finally, the ‘Great Recession’ is also regarded as an episode of relatively rapid and forceful policy intervention--unconventional monetary expansions, countercyclical fiscal deficits, and effective policy coordination at the global level--that can be fairly credited with having averted a much worse outcome in the style of the Great Depression.

While the ‘Great Recession’ itself is in the past, we have argued that its legacy is still very clearly with us. The post-bust headwinds from deleveraging, the strains on public sector balance sheets, the constraints on conventional monetary policy, the sharp differences in excess capacity across different countries and sectors: these are all parts of the ongoing impact of the 2008-2009 crisis. And many of those features are likely to help to define the broad landscape still in 2012.

The Ghost of the Present: the ‘Great Eurozone Crisis’

While the post-bust legacy is part of the broader backdrop, we think the most immediate issue weighing on the outlook is the ongoing Eurozone crisis. While not the only shock that the global economy has encountered this year, nor the only one that will matter in the year ahead, it is front and center in our own forecasts.

Both in economics and markets, the Eurozone is finding itself more quickly back into its second recession in three years after a rebound that has proved relatively weak and short-lived. 2011 was the year when the crisis spread widely. With Italy moving more decisively to the forefront of sovereign debt woes, the issue took on a scale and intractability that became increasingly clear. Unlike 2010 where core Europe by and large shrugged off the economic impact in the periphery, the broadening crisis alongside a global slowdown has meant that core European economies are also slowing sharply, the ECB has shifted from tightening in the first half to easing in the second. And outside Germany, almost all other Eurozone economies have endured at least some challenge to their sovereign credit risk.

Our central forecast is that the economic and market position may get worse before it gets better. Recent ECB action to alleviate bank funding stresses (evidenced by the large take-up in this week’s 3-year LTROs) has been positive. But while the recent EU summit has laid out a potential path for an institutional solution to sovereign problems (exchanging tougher fiscal rules for some risk-sharing on existing debt), there are still important pieces of the puzzle missing (see Global Market Views: Post-Summit Blues). And it is hard to see how the economic pressures, particularly in what we see as the potentially riskier sovereigns, abate quickly given a shared commitment to fiscal austerity.

2012 is likely to be driven to a significant degree both by whether a lasting institutional solution can be carved out, but also by how much Europe’s own problems transmit to the rest of the world. On the first issue, the intensifying stresses have put risks on the table (like an eventual break-up) that seemed farfetched initially. At the same time, however, the risk of extreme scenarios also increases the chances of policy response, making markets more volatile. On the second, we expect the shock to be transmitted to a degree to the rest of the world, particularly those with close links to Europe (as we discussed last month in Transmission of the Euro-zone Shock; and as Jan Hatzius recently discussed for the US: European Banks—A Drag on US Growth?). However, we are less sure about the degree of transmission than about the problems in Europe themselves, and the distinction matters. It is banking linkages that remain the most challenging and concerning channel. But so far, US data in particular has been better than expected. Whether that is a function of resilience or simply of delayed reaction is yet to be seen.

The Ghost of the Future: a ‘Great Stagnation’?

Early in the Fall, we posed the question of whether the ‘Great Recession’ would turn into a ‘Great Stagnation’, which we defined as a prolonged period of sluggish growth. We looked at the global history of these experiences to asses their likelihood, both in general and conditional on the impact form the ‘Great Recession’. One of our findings was that GDP trends in Europe and the US were tracking along typical stagnation paths, with an uncomfortably high probability of stagnation lasting at least eight years in Europe and the US. Since then, the deepening of the Eurozone crisis has made it even more likely that growth in the region will remain stagnant (at 1.5% for 2011 and -0.8% for 2012), while growth in the US still struggles to go back to potential (at 1.7% in 2011 and 1.5% in 2012; Our 2012/2013 Outlook: Still Mired in a Post-Bubble World). If these forecasts materialize, both the Euroland and the US will have accumulated five to six years of stagnant growth by the end of our forecast horizon.

A stagnant economic landscape has important implications for asset prices, especially equity valuations. As David Kostin and team have signaled for the US, economic stagnation will likely imply a stable P/E multiple ahead and equity returns driven mainly by earnings growth (2012 US equity outlook: Strategies for stagnation). For Europe, Peter Oppenheimer and team have shown that recent market action in the region is consistent with the view of a prolonged stagnation (2012: Despair into Hope).

As we have stressed before, the scenario of a ‘Great Stagnation’ is only that--a scenario. While the current global economic environment is still consistent with that trend, it is by no means certain that it will materialize. And while we see the risks of stagnation in the major developed markets as high, our models show that the risks in EM--and so for global growth--are much lower. But we think it is likely enough to warrant particular attention; especially by policy makers, who operate the tools to fix it, and by investors, who must continue to find ways to navigate difficult waters. And even the best scenarios we can imagine plausibly in the US and Europe are likely to involve recoveries that remain sluggish by historical standards.

The End of It?

At some point in the story, Scrooge asks the third ghost (in our case, the ‘Great Stagnation’) whether the scenes it was showing were “the shadows of the things that Will be”, or the “shadows of things that May be.” Scrooge gets no clear answer, but sets about to change his future. There is nothing deterministic in the path for the world economy either. How policymakers react will perhaps be more critical to the outlook than at any point since early 2009. Unlike Scrooge, an overnight change is not possible for the world economy. But we hope that 2012 is a year where eventually we see things move back in the right direction.

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GeneMarchbanks's picture

Crime pays no dental nor medical

Unless you catching time in county state or federal -MF Doom


macholatte's picture


Nigel et al


UK Independence Party (UKIP) Video Tribute - The party of Freedom, Independence and Democracy


Oh regional Indian's picture

Someone should ask these parasites from Gold Mansacks....do you know how much the depth of the crash and the road-blocks to solutions and recovery are at the hands of their firm?

Isn't it strange that everyone knows what the left and right of GS do and they are insidious, incestuous and ruthless all around. 

It's like some freakshow spewing both sides of the hegelian dialectic simultaneously.




Caviar Emptor's picture

Saw this somewhere today: the 0.0001% are giving the 1% a bad name


Have a happy ORI

Oh regional Indian's picture

That is funny and fitting. How long to the top though? 

And you too CE and everyone else reading here.

Tomorrow marks the re-birth of the Sun.

The Son of God.

The Sun of god.

God. goLd.

There are no accidents! ;-)



AldousHuxley's picture

Stolen Goldman Sachs Intern training hidden video.

Level 1 - interview exam to get the job



Level 2 - intern project to fix the economy on the fly as they fall...



Level 3 - Greenspan's Oops...


spekulatn's picture

By design, Caviar Emptor.





The internet is their biggest problem.







Happy Holidays to ZHers far and wide. Thanks for opening my eyes.

ucsbcanuck's picture

"But so far, US data in particular has been better than expected. Whether that is a function of resilience or simply of delayed reaction is yet to be seen."

Or a function of data corruption.

Happy holidays to all at ZH!

ThrivingAdmistCollapse's picture

Has to be delayed reaction.  Europe's economy is collapsing as we speak, American cannot be too far behind.

stopcpdotcom's picture

Bah! Humbug to the lot of them.

GBnotEU's picture

From another famous carol ('It came upon a midnight clear'):

For lo! the days are hastening on,

By prophet-bards foretold,

When, with the ever-circling years.

Comes round the age of gold.

DavidPierre's picture


 This boy is Ignorance, this girl is Want. Beware of both of them, but most of all, beware the boy.

For on his forehead, I see that written which is "doom." Unless the writing is erased.

 If you deny him...slander those who tell others about him...admit he exists but do nothing about it...then doom will engulf you all!


Waterfallsparkles's picture

Oh Goldman, Oh Goldman.

How many presents will not be under the tree because of thee?

How many will not have Hearth or Home because of thee?

How many will not have a Beast to Roast because of thee?

How many will not have Holiday Glee because of thee?

Oh Goldman, Oh Goldman,

How many have you sacrificed for thee?

As capital do floweth to you, the sorrows do groweth.

Yea, your Holidays may be bright and cheery but you left so many dreary.

To wallow in their plight because of your hearts delight.

Wakanda's picture

The heart does not delight in actions that hurt others.

The Iconoclast's picture

I used a little information for a chisel, that's all. It's my nature! I... I... I... can't help it, somebody gives me an angle, I play it. I don't deserve to die for that. Do you think I do?

-- L Blankfein

caustixoid's picture

"Miller's Crossing", the schmada -- NICE!   http://www.youtube.com/watch?v=wGSD0k3xRYc

and remember when dealing with banksters, always put one in the brain.

kevinearick's picture

At geographic saturation, it is theoretically possible to bring the system into equilibrium "overnight," but will be quite difficult in practice without a massive education effort. You have dc, bipolar oscillation expansion...it's a psychology/physics problem...

Socialism pays ponzi participants with increasing lottery returns to accept the lie of demographic borrowing, right up until the viral demographic ponzi implodes, resulting in tyranny, as some of the socialists jump off the ship, some play to become part of the next nucleus, and the rest are smothered on the way to the big bang. The ones jumping off release insider information as they jump, accelerating the implosion, requiring increasing "hard" power to keep the system afloat.

Family Law rests at the bottom of the stack. When it is switched to consumption, women gather power and get "even," as do men when it is switched back to investment. Locking up Family Law ensured an exponential increase in gravity, until it was released, when the dwindling herd can no longer withstand the pressure. The point of the Supreme Court case was not to win, but to prove that all participants, direct and indirect, willingly accepted their roles in generating the cognitive dissonance multiplexer.

If men choose not to get even, and other bipolar event horizons do the same, the system will orbit back into equilibrium, as a foundation for what comes next. To the extent they do not, the kids in real marriages will be "shot" forward in time, creating the next real demand wave, pulling along others to the extent they ejected their own sunk costs associated with the socialist civil contract.

From the perspective of the backward "thinking" (knowledge) socialists, the stack is a pyramid, with an accounting escalator/pump for the fountain/sprinkler system, pulling up knowledge separated from learners in the churn pull. From the perspective of physics, it's an inverted pyramid employed as a timed/distilled catapult.

The tap/drill may be timed as desired to trigger release into the new event horizon circuits, depending on what nucleus is required.

Waterfallsparkles's picture

Taxpayers large and small paid Taxes for Bonuses for Bankers all.


earleflorida's picture

Merry Christmas to all ZeroHedger's, and to Tyler a Ho!Ho!Ho!


Rogue Economist's picture
T'was the Night Before Christmas


T'was the Night Before Christmas, when all through the Bank
Not a Trader was Stirring for fear the market would Tank
PIIGS were hung out to dry with Technocrat care
and out of her Ass Merkel blew some Hot Air.

The OWSers were all nestled snug in their Tents
So Riot Police tried to beat into their heads some good sense
Bloomberg evicted the elves, a victory for all in the top 1%
So back to Facebook and Twitter they all got sent.

When over in North Korea there arose such a clatter
Kim had kicked the bucket was what was the big matter
Pundits fretted that Kim3 was a Kook
Who would light up his enemies with a very big Nuke.

The ECB let loose with cheap Euros for Trash
Stalling still longer the glorious Crash
When what to my wondering eyes should appear
But a Chinook Helicopter with Ben in Good Cheer.

With Bernanke at the stick, so lively and quick
I knew for sure I was about to be sick
More rapid than diareah the dollars got tossed
And he whistled, and shouted as my Pension was lost

"Now Ollie! Now Angela! Now Nicky and Christine!
On Mario and Mario! On, on Von Rumplestiltskin!
To the end of the Euro! To the crash to the Wall!
Then Dash Away! Dash Away, Taking Money from All.

As Fuk-U-shima cores into the groundwater Flow
The Salarymen in Tokyo eat Sushi that Glows
More Toyotas off the production line must roll
Until the next Earthquake swallows Honshu Island whole

And then in a Twinkling, I heard on the NYSE
The sound of Derivatives and Swaps cracking like ice.
As I looked at the numbers on my bright Bloomberg Screen
Gold Bugs and Bond vigilantes alike let out a Blood Curdling Scream

The Mother of All Margin Calls had arrived in full force
and all Asset Classes collapsed in due course
The scramble was on for the run from the Floor
When who but young Katy would come Bar the Door.

Ben's laptop froze up and the Traders were stuck
liquidity dried up as they fought for the last buck
Brooks Brothers suits were in tatters and Italian shoes were all scuffed
As the cry went up to SELL! SELL! SELL! but all the sellers were rebuffed

Blythe Masters was left with no Silver to Short
while Jamie Dimon screamed "Blythe, hold the damn Fort!"
The CME had no Gold the whole Goddamn time
They claimed it was Corzine who committed the Crime

In CONgress the Critters couldn't find what to say
So en masse in the Capitol they all just knelt down and Prayed
Though they knew the whole ballgame was lost
They still hoped the Ferengi would arrive to cover the cost.

At Walmart and Safeway all the Cubbards went Bare
and at Starbucks there was no Cappucino to spare.
The lines at Tesoro got 10 kilometers long
While SUV Drivers wondered where they'd gone wrong?

No more Chinese toys for St Nick to deliver,
Now he's just another Unemployed fat man fishing the river.
The Reindeer and Sleigh are just all outta Gas
as the end of Capitalism at last comes to pass.

Up here in the North, I tally up my good Preps
as the collapse makes its way toward me in each of these steps
To all on the Blogosphere I exclaim as collapse is in sight
"Happy Christmas to all, and to all a Good Night!"


Caviar Emptor's picture

Hey guys! Checkin' in and wishing everyone including the Tylers Merry Christmas.


Have as much holiday cheer as you can get!

lizzy36's picture

Merry Christmas to all.

Thank you ZH and Tyler Durden.

Mine all mine! This girl is teaching her little sis' an important lesson: Respect your elders

Henry Hub's picture

HO, HO, Fucking HO!

cluelessminion's picture

Merry Christmas bitchez...


(so excited I got to say "bitchez")


and happy holidays.

pineyard's picture

And the ANSWER .. to all  is SIMPLE  :

To produce more wealth than one consumes

and to

eradicate  all financial Instruments which pretend there is money to spend , which is NOT THERE