Goldman Sachs

Who Is Winning The Race To Debase?

For nearly 30 years, two of the world's largest economic nations (China and the US) have continually debauched debased the purchasing power of their currency. For the last 12 years, the rest of the world joined in. So who is winning the race to debase now? It appears globalization was really all about currency debasement and exporting inflation (i.e. loss of FX value) with debt being the inflation buffer (i.e. borrow to afford or vendor-financing - see AMZN). The problem now is the entire world is saturated with debt and so there is no-one left to export inflation to anymore. We do indeed live in interesting times.

Is Bernanke Betting The Ranch On A US Demographic Renaissance

The BOJ pioneered QE in March 2001, with two objectives. The first was to eliminate deflation, which took hold in the mid-1990s; and the second was to shore up Japan’s fragile financial system. Did it work? Yes, for the second objective - the BOJ arguably bought time for banks tied up in NPL disposal; but, unfortunately, QE was not successful in combating deflation. The BOJ’s intended policy transmission mechanism was so-called portfolio rebalancing. Ideally, the buildup in banks’ deposits at the BOJ that earned no return (but carried zero risk) should have prompted banks to seek higher returns (with higher risk) and thus increase their lending. But portfolio rebalancing did not kick in for several reasons; most of which are the same as are occurring in the US currently. More fundamentally, however, Japan's demographics hindered any hopes of a capex-driven recovery - and policy can do little to affect that. While the US faces a less dismal demographic picture, the Japanese experience highlights that other policies (as Bernanke himself admits) are required for any sustained benefit in the real economy.

Goldman Sees Stock Plunge Then Surge

Goldman's equity strategist David Kostin has been very quiet for the past year, having not budged on his 2012 year end S&P target of 1250 since late 2011. Today, he finally released a revised forecast, one that curious still leaves the year end forecast unchanged at a level over 200 points lower in the S&P cash, and thus assuming a ~15% decline. The reason: the same fiscal cliff (which would otherwise deduct 5% in GDP growth) and debt ceiling debate we have warned will get the same market treatment as it did in August of 2011 when the only catalyst was a 15% S&P plunge and a downgrade of the US credit rating. However, one the fiscal situation is fixed, Kostin sees only upside, with a 6 month target of 1450 ("We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed."), and a year end S&P target of 1575, calculated by applying a 13.9 multiple to the firm's EPS forecast of 114. Of course, this being bizarro Goldman Sachs it means expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE. Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth, having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.

Amplats Refuses To Follow In Lonmin's Footsteps, Fires 12,000 Striking South African Workers

Several weeks ago, the platinum producing company that started it all (after police killed 34 of its striking workers at its Marikana South African mine) Lonmin, conceded and agreed to a 22% wage hike. In doing so it once again proved that in game theory he who defects first, defects best. Shortly thereafter the strike spread to all other South African mining industries, and has even spilled over into the trucking industry, whose ongoing strike has crippled the country and threatens to paralyze all commerce. The only reason for the continued worker boldness: Lonmin folding to worker demands, in the process empowering all other workers in the African country to demand equitable treatment. Which is why today's news that that "other" platinum miner in South Africa has decided to go the opposite route, and instead of yielding to worker demands for a raise, has gone and fired 12,000 workers taking part in a three-week strike. How this dramatic shift in the balance of power affects the already struggling country, and its mining sector remains to be seen. However, if recent events are any indication, he doubt local workers will just put down their banners and go back to work as per the old status quo. In the meantime, look for ever less platinum,and gold, to be produced by this mining powerhouse.

Spot The Odd One Out

As a job-safe Big Bird might have said "one of these things is not like the other" as we look at the performance difference between financials and industrials in the new normal. While short-term newsflow keeps banks to'ing-and-fro'ing, the inevitable truth is that it appears it is different this time - and not in a good way.

Goldman's NFP Postmortem

The fact-digging continues, this time out out of Goldman, which has some less than stellar words about what the superficial consensus says was a strong number. Then again, Goldman's agenda is pure goldilocks: an economy that is not too strong and just right for another $2 trillion of QEternity at a minimum. Remember: if jobs were to really surge someone might ask Bernanke if when he will stop his $85 billion/month flow program aka QE3.

China To Challenge US Dollar Reserve Currency Status

Alan Wheatley, Global Economics Correspondent for Reuters has written a very interesting article, 'Analysis: China's currency foray augurs geopolitical strains’ where he emphasizes China’s desire to wean out the US dollar’s currency reserve status. China is actively taking steps to phase out the US dollar which will decrease volatility in oil and commodity prices and deride the ‘exorbitant privilege' the USA commands as the issuer of the reserve currency at the centre of a post-war international financial architecture which is now failing.   In 1971, U.S. Treasury Secretary John Connally said, "It's our currency and your problem". China is frustrated with what it sees as the US government’s mismanagement of the dollar, and is now actively promoting the cross-border use of its own currency, the yuan, or also called the renminbi, in trade and investment. China’s goal is to decrease transactions costs for Chinese importers and exporters. Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar, euro and yuan and perhaps other currencies such as the yen and the Indian rupee. "The shortcomings of the current international monetary system pose a big threat to China's economy," he said. "With more alternatives, the margin for the U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."

Goldman: "Neither Democrats Nor Republicans Look Inclined To Budge On The Fiscal Cliff"

The market appears convinced that it now has nothing to worry about when it comes to the fiscal cliff. After all, if all fails, Bernanke can just step in and fix it again. Oh wait, this is fiscal policy, and the impact of QE3 according to some is 0.75% of GDP. So to offset the 4% drop in GDP as a result of the Fiscal Cliff Bernanke would have to do over 5 more QEs just to kick the can that much longer. Turns out the market has quite a bit to worry about as Goldman's Jan Hatzius explains (and as we showed most recently here). To wit: "our worry about the size of the fiscal cliff has grown, as neither Democrats nor Republicans look inclined to budge on the issue of the expiring upper-income Bush tax cuts. This has increased the risk of at least a short-term hit from a temporary expiration of all of the fiscal cliff provisions, as well as a permanent expiration of the upper-income tax cuts and/or the availability of emergency unemployment benefits." This does not even touch on the just as sensitive topic of the debt ceiling, where if history is any precedent, Boehner will be expected to fold once more, only this time this is very much unlikely to happen. In other words, we are once again on the August 2011 precipice, where everything is priced in, and where politicians will do nothing until the market wakes them from their stupor by doing the only thing it knows how to do when it has to show who is in charge: plunge.

Chart Of The Day: The Rise Of Global Central Planning

There was a time when the world had (somewhat) free markets. Then Lehman failed as the inevitable culmination of a credit bubble that was second in size and severity only to the one being blown currently, and the central planners took over, converting equity, bond and FX markets into nothing but monetary policy tools dominated by central banks. Below is a great summary of how parallel to SkyNet's HFT takeover of stock trading, the central planners conducted their own not so stealthy take over of all capital markets. The chart is open-ended. Expect much more intervention by the Big 4 in the months and years ahead as the circular nature of increased central bank intervention leading to less faith in financial markets leading to increased private sector deleveraging leading to increased-er central bank intervention and so on, accelerates.

Frontrunning: October 4

  • Romney dominates presidential debate (FT)
  • What Romney’s Debate Victory Means (Bloomberg)
  • Obama Lead Shrinks in Two Battlegrounds (WSJ)
  • "Everything will fall apart unless the Spanish conditions are extremely tough" German policy-maker (Telegraph)
  • Draghi Stares at Spain as Brinkmanship Keeps ECB Waiting (Bloomberg)
  • RBS facing loss after Spanish property firm collapse (Telegraph)
  • Burdened by Old Mortgages, Banks Are Slow to Lend Now (WSJ)
  • The Woman Who Took the Fall for JPMorgan Chase (NYT)
  • European Banks Told to Hold On to $258 Billion of Fresh Capital (Bloomberg)
  • Europe Weighs More Sanctions as Iran’s Currency Plummets (Bloomberg)

4 Years After TARP - Winners, Losers, Bubbles, And Troubles

Four years ago today, the Troubled Asset Relief Program was signed into law. We thought it timely to take stock of different asset price levels with respect to that magnificent day in the history of our country as well as how a broad cross-section of global asset markets have performed relative to their pre-crisis peaks. Of the major US banks, Wells Fargo has done the best (-2.3%) while BofA and Citi are worst (down ~80%). As Goldman notes, two features stand out when we look at the broad markets: asset markets that have outperformed and are closer to pre-crisis peaks are either ‘defensive’ in some way, or have benefited inadvertently from the ‘Great Easing’ in response to the crisis. From precious metals and Swedish and Canadian house prices at the top to European bank stocks and US Growth at the bottom; 'hard assets' and 'defensives' combined with central bank yield compression has, as we would expect, dominated performance.

Ultraluxury NY Real Estate Market Cracking As Legendary 740 Park Duplex Sells 45% Below Original Asking Price

Even as the media desperately tries to whip everyone into a buying frenzy in an attempt to rekindle the second housing bubble, the marginal, and less than pretty truth, is finally starting to emerge. Over the weekend we presented the first major red flag about the state of the housing market - in this case commercial - when we exposed that "New York's Ultraluxury Office Vacancy Rate Jumps To Two Year High As Financial Firms Brace For Impact." What is left unsaid here is that if demand for rents is low, then, well, demand for rents is low: hardly the stuff housing market recoveries are made of. Today, on the residential side, CNBC's Diana Olick adds to this bleak picture with "Apartment Demand Ebbs as ‘Avalanche’ of New Units Open." In other words rental demand for both commercial and resi properties is imploding. But at least there is always owning. Well, no. As we have shown, the foreclosure, aka distressed, market is dead, courtesy of the complete collapse in the foreclosure pipeline as banks are effectively subsidizing the upper end of the housing market by keeping all the low end inventory on their books (who doesn't love the smell of $1.6 trillion in fungible excess reserves to plug capital holes in the morning. It smells like crony capitalism). But at least the ultra luxury, aka money laundering market was chugging along at a healthy pace. After all there are billions in freefloating dollars that need to be grounded in the US, courtesy of the NAR which is always happy to look the other way, another issue we discussed this weekend. Now even that market appears to be cracking, following the purchase of a duplex in New York's most iconic property: 740 Park, by, who else but a former Goldman partner, at a whopping 45% off the original asking price.

Frontrunning: October 1

  • Trade Slows Around World (WSJ)
  • Debt limit lurks in fiscal cliff talks (FT)
  • Welcome back to the eurozone crisis (FT, Wolfgang Munchau)
  • Euro Leaders Face October of Unrest After September Rally (Bloomberg)
  • Dad, you were right (FT)
  • 25% unemployment, 25% bad loans, 5% drop in Industrial Production, and IMF finally lowers its 2013 Greek GDP forecast (WSJ)
  • Global IPOs Slump to Second-Lowest Level Since Financial Crisis (Bloomberg)
  • France's Hollande faces street protest over EU fiscal pact (Reuters)
  • EU Working to Resolve Difference on Bank Plan, Rehn Says (Bloomberg)
  • China manufacturing remains sluggish (FT)
  • Samaras vows to fight Greek corruption (FT) ... and one of these days he just may do it
  • Leap of Faith (Hssman)
  • Germany told to 'come clean’ over Greece (AEP)

Guess Who Was The Biggest Beneficiary From The Fed's POMO Bonanza

There was a time before the Fed announced it would commence sterilizing its Large Scale Asset Purchases when every day in which there was a Permanent Open Market Operation, or POMO (remember those?) was a gift from Bernanke, virtually assuring the market would ramp higher. This phenomenon had been documented extensively in Zero Hedge and elsewhere (a comprehensive analysis can be found in "POMO and Market Intervention: A Primer"). The pronounced market effect of POMO was diminished somewhat once the Fed sterilized the daily flow injection by selling short-term bonds to Primary Dealers, even though the Fed continues to buy $45 billion in long-term bonds to this day, effectively mopping up all 10 Year+ gross Treasury issuance, and keeping the stock of long bonds in the private market flat at ~$650 billion as we observed before. All of this is well known. What was not known is who were the Fed's POMO counterparties. Now we know. Yesterday, the Fed for the first time ever released Transaction level data for all of its Open Market Operations. The new data focuses on discount window transactions (completely irrelevant now that there are $1.7 trillion in excess reserves and the last thing banks need is overnight emergency lending from the Fed when there is already a liquidity tsunami floating, yet this is precisely what the WSJ focused on), on FX operations, and, our favorite, Open Market Operations, chief among them POMOs. What today's release reveals is that once again a conspiracy theory becomes fact, because we now know just which infamous bank was by fat the biggest monopolist of POMO operations in a period in which banks reported quarter after quarter of zero trading day losses. We leave it up to readers to discover just which bank we are referring to.