Goldman: The Last Time This Happened Was Just Months Before The Start Of The Great Depression

Ah Goldman, never change.

One week after Goldman's chief equity strategist David Kostin predicted a three-year bull market of "rational exuberance", lifting his 2018 S&P price target from 2,500 to 2,850 rising to 3,100 in 2020, and stating that should the exuberance turn "irrational", the S&P could rise as high as 5,300 by the end of 2020, another Goldman strategist, Christian Mueller-Glissmann, has decided it may be a good idea to play bad cop and cover all bases.

And so, in a report released on Tuesday "The Balanced Bear - Part 1: Low(er) returns and latent drawdown risk" this now bearish Goldmanite warns that in the medium-term, the two likely scenarios are either i) a "slow pain" deflation scenario of low yields and high valuations "which persist as macro is stable but there are less windfall gains from rising valuations and less carry - as a result, returns are likely to be lower across assets", or ii) a "fast pain" drawdown scenario in which there is "either a material negative growth or inflation/rate shock, or a combination of both, which drives a drawdown in 60/40 portfolios."

For those confused, don't worry - you read it right. While on one hand Goldman is predicting nothing but blue skies for the "medium-term" of the next three years, predicting no recession and double digit equity upside, at the very same time, the very same Goldman is also forecasting either a "slow" or "fast" pain scenario, which while different, share one thing in common (as the name implies): "pain."

No surprise, Goldman talking out of both sides of its mouth, the only question being while the client-facing "research" is obviously crap and meant to get clients to do the opposite of what Goldman's prop traders are doing, it remains debatable on what side Goldman's prop is axed. Is the bank pulling a CDO and shorting everything it sells to its clients, or has the bank assured further S&P upside, even as valuations no "longer make sense" to quote, well, Goldman?

We don't know the answer, nor do we care. For those who do, here is Mueller-Glissmann summary:

We think a period of low(er) returns (scenario 1) is more likely than a full-fledged bear market in 60/40 portfolios (scenario 2), at least in the near term. But there will likely be a balancing act with slowing growth and rising inflation. And at current low yield levels and with the ‘beginning of the end of QE’, bonds might be less effective hedges for equities and are likely a larger drag on balanced portfolios. And rising inflation could move the central bank put ‘more out of the money’, requiring a larger ‘growth shock’ for central banks to ease policy. Also current easing options are more limited for central banks as rates are still low and QE purchases have only just been reduced.


And once the balanced bear comes, it might be larger and faster. Duration risk in bond markets is much higher this cycle and vol of vol in equities has increased since the mid-80s. While we think investors should lower duration and run higher equity allocations in scenario 1, they should consider hedging at least the risk of smaller equity drawdowns in the near term. We like shorter-dated S&P 500 put spreads. In part 2, we intend to explore different strategies to enhance balanced portfolio returns while managing drawdown risk in case of a bear market.

Ultimately, like every other forecast to come out of Goldman, it's garbage: want bullish, read Kostin; want bearish - either a little or lot - stick to Glissman. Just remember to use your friendly, Goldman salesperson who will gladly collect the trade commission whatever you do.

That said, there was one useful data point in the 26 page pdf: a chart showing that not only are we nearing the longest 60/40 bull market without a 10% return drawdown, but that the last time we were here was sometime in the late 1920s... and the Great Depression would follow in just a few months.

As Goldman observes: "we are closing in on the longest 60/40 bull market in history - there has been no 10% drawdown in real terms since 2009. A passive long-only balanced portfolio has delivered attractive risk-adjusted returns since the 90s. A favourable ‘Goldilocks’ macro backdrop, supported by the ‘Great Moderation’ and the central bank put, has boosted returns in both equities and bonds. However, after the recent ‘bull market in everything’, valuations across assets are as expensive as they have been this century, which reduces the potential for returns and diversification in balanced portfolios.

Some more statistics:

We are nearing the longest bull market for balanced equity/bond portfolios in over a century - a simple 60/40 portfolio (60% S&P 500, 40% US 10-year bonds) has not had a drawdown of more than 10% since the GFC trough (8.7 years) and has delivered a 143% return (11% p.a.) since then.

And when was the last time a balance portfolio had such a tremendous return? Goldman answers again:

"The longest run has been during  the Roaring 20s, ending with the Great Depression. The second longest run was the post-war ‘Golden age’ in the 50s - the 90s Boom has been in third place but is now fourth, after the current run.

In other words, one would have to go back to some time in early 1929 to be looking at the kind of returns that a balanced "60/40" portfolio is generating today.  In fact, the current period of staggering returns without a 10% total drawdown is now 8.7 years. How long was the comparable period in the 1928s? 9.1 years. Which means that if history is any guide, the second great depression is just around the corner.


lester1 Tue, 11/28/2017 - 19:17 Permalink

The idiots at Goldman forgot that last time we didn't have a Plunge Protection Team and the Federal Reserve buying stocks!! All will be fine.

Dr. Ed Tue, 11/28/2017 - 19:28 Permalink

A possibly more likely scenario is that stocks start to go parabolic from here so it’s a perfect time to buy in big to the well run blu chip coz .

zerotohero Tue, 11/28/2017 - 19:52 Permalink

I'm starting to think that perhaps things really are different this time - with algorithms morphing and accelerating the game perhaps the matrix has it all under control - maybe

Fantasy Free E… Tue, 11/28/2017 - 20:07 Permalink

Articles like this always leave out the main ingredient. The market of 1929 was made up of real people buying real stocks. The economy was mostly free market. The public sector was very small. The Great Depression genuinely ended when Roosevelt died and it was clear that the push towards socialism had ended. market of 2017 has been driven by political decisions to elevate prices. The free market system has mostly disappeared. Aggregate demand has grown completely as a result of intentionally elevating asset prices. Central banks are buying stocks outright and by proxies and will not stop until they are forced to. Even with as much corruptions there was in the market and government during the 20s. that was nothing compared to what is going on today. There is a realistic chance the next depression will destroy the political system. The economy has been gutted, there is no guarantee there will be a recovery. 

Wormwoodcums Tue, 11/28/2017 - 20:17 Permalink

In the 1930's we changed to a debt-based monetary system which permitted a population explosion.  When the debt system implodes so will over half of the population that it supports.  This will be NOTHING like the great depression. It'll be The Great Armageddon. 

Ms No Tue, 11/28/2017 - 21:20 Permalink

It's coming eventually.  While I might partially enjoy watching billions of mouth breathers being slapped awake all at once, I would always rather it wait a year or two.  I don't have the energy to deal with all of their meltdowns as they finally put a pinky toe into reality.  Meh...  you really just want to be away from everybody by then really.

Gobble D. Goop Tue, 11/28/2017 - 21:44 Permalink

They didn't have Prozac and Zoloft back then.  Now they do.  These days they can treat the depression so everybody will think it's all ok.  Till they go off their meds and cut thier grand ma's arms off and jump off a cliff.Keep stacking comrade citizens.BBB

DC Beastie Boy Tue, 11/28/2017 - 22:32 Permalink

During the great depression the USD was backed by gold and there was lack of liquidity, gold had to be revalued.There is nothing backing the USD now and it's printed for basically free and they lend it out at near 0% interest. Everything will get more expensive and it's full steam ahead.  This is hyperinflation until it's not.  But, it's going up a lot more.