Interview with Goldman Sachs on Financial Markets

A recent Global Economics Weekly report from Jim O’Neil and the team at Goldman Sachs (GS) Global Economics highlights the answers to seven key questions that, according to them, should provide an indication of whether the improvement in the global economy and performance of world financial markets can be sustained.

1. Will leading indicators, as highlighted by our own GLI, continue to improve?

Will leading economic indicators continue to improve? We capture a wide variety of global data through our global leading indicator (GLI) and the GLI continues to show strong upward momentum. The GLI should lead the economy by a few months and we therefore are still optimistic about the coming months. As a result we have upgraded our economic forecasts for global GDP growth to 4% driven by improved (less bad) forecasts for the U.S., Europe and Japan.

2. Are the better signs in the U.S. housing market likely to persist?

One of the sources of this crisis seems to have bottomed. The Case-Shiller house price index rose 0.75% in June, the 1^st rise since May 2006.

3. What will tighter financial conditions in China do to growth?

Chinese policymakers have indicated they may want to slow the pace of lending and tighten financial conditions, but so far we see no evidence in the data for this.

4. Will Chinese import growth continue to accelerate relative to exports?

Import growth in China has been stronger than export growth. Popular wisdom holds that China only exports. It may be possible that China does have domestic demand and may play a role in the global economic recovery and the rebalancing of the world’s imbalances.

5. Is the recent positive surprise in Euro-area activity a one-off, or is it set to continue?

Europe, particularly Germany and France, surprised on the upside in the 2^nd quarter. Looking at the breakdown of German GDP, we noted a 2^nd quarter of positive personal consumption, something we believed Germans didn’t do. German forward looking surveys (e.g. PMI, IFO) continue to surprise on the upside, so the Q3 data should be an important item to monitor to see how the Eurozone as a whole will develop.

6. Will inflation continue to behave, despite improving growth and accommodative policies?

As we have argued many times, we don’t believe inflation to be a significant threat in the near term. There is too much spare capacity for inflation to really take hold. Monitoring inflation data should confirm this view.

7. When will policymakers withdraw the stimulus?

Investors are starting to get concerned about exit policies. We believe that policymakers will only start withdrawing stimulus measures once they perceive that their economies can sustain growth without their help. Only if we continue to see significant surprises on the upside, will they start earlier than we forecast now. This would however be a change of strategy for positive reasons. We believe also that the private sector will return at a certain point and that the world will be able to survive without government support.

The Goldman team concludes:

Based on our latest forecasts and recommended trading strategies, we expect equity markets and other risky assets to continue to perform generally well as we move into the final third of the year.

Source: Goldman Sachs, September 2, 2009.

Comments

[basehitz:]

Some questions I would have asked GS:

1) You said derivatives with AIG as counterparty were hedged and you were not at risk. Why then did you accept the $12.9B back door payout through AIG since you had no risk? And why was there an additional $6B similar type of payout?
2) According to a NYT article, after your HFT program was stolen “"Goldman raised the possibility that there is a danger that somebody who knew how to use this pro gram could use it to manipulate the market in unfair ways.”. What did you use if for? Are you willing to publicly disclose how you used that program?
3) You admitted recently that “admitted that banks lost control of the exotic products they sold in the run-up to the financial crisis, and said that many of the instruments lacked social or economic value”. Yet all indications are that you are now pursuing just as aggressive of a trading strategy as before the crisis that let to a taxpayer bailout. What specifically are you doing differently now to not add systemic risk to the system?
4) The NYT got hold of Paulson's phone records for Sept. 2008, which detailed many calls between him and Goldman right before the government's decision to bail out AIG. AIG had taken large trading risks including many with Goldman on the other side of the transaction. You also had many discussions with Paulson PRIOR TO obtaining a waiver to an agreement from Paulson not to contact you directly due to obvious conflict of interest. What was discussed in those many discussions?
5) Did Hank Paulson contact Goldman after a lunch with Bernanke on Thurs., Aug. 16, 2007? That day Wall Street seemed to get wind of the idea that the Fed was planning to do something big, and stock prices rallied strongly at the very end of that trading session. The very next morning Bernanke cut interest rates, the first of many such moves. Are you willing to swear you had no tip-off from your former CEO?
6) The ubiquitous “stick save” in the final hour of trade has become so mechanical and predictable to be a standard joke in the blogosphere. Does GS have any part, either for it’s own account or on behalf of a very deep-pocketed clandestine player, to artificially support the market to give the appearance of a healthy market?
7) Why does GS hold private meetings giving investment advise to a select group of clients, but others get the info days later? Has GS ever heard of Reg FD?
8) How is that 6 months after getting $10B TARP money plus the $19B AIG backdoor payout, that you miraculously were paying record bonuses again? We learned this through your Europe office, which you initially denied but now we know your denial was phony. Explain how question 2) and 3) are now integral with your newfound “prosperity”. Please try to explain how all that happened in a manner that is at least somewhat plausible.
9) Would you agree to repeat this entire interview under oath?

I’m sure many readers could expand greatly on the above. I welcome more ideas.

Sep 15 08:08 AM

[basehitz:]

Before considering GS opinions for your own investments, understand how GS makes their money. Note in particular the last item.

From a 9/13 AP article:
• That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall
• Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.
• The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse -- a precedent that could encourage even greater risk-taking from the private sector.
• "We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund.
• Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings.
• During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, TRADING REVENUE HAD CLIMBED TO NEARLY 50 PERCENT OF TOTAL REVENUE, closer to where it was two years ago before the recession began. JP Morgan's reliance on trading revenue has exhibited a similar pattern.

Over 50% of their revenue in trading. So for whom do you think they are issuing their “analysis”? To Goldman Sucks, we are all just a source of funds.

Full article:
finance.yahoo.com/news...=

Sep 15 08:33 AM

[John Galt:]

Interview With Goldman Sachs on Financial Markets:

So did you get the regular client view or the *preferred* client view?

Sep 15 09:06 AM

[Tony Petroski:]

Interesting interview.

"Popular wisdom holds that China only exports. It may be possible that China does have domestic demand and may play a role in the global economic recovery..."

China has more that a billion people and they do have "domestic demand."

"Europe, particularly Germany and France, surprised on the upside in the 2nd quarter. Looking at the breakdown of German GDP, we noted a 2nd quarter of positive personal consumption, something we believed Germans didn’t do."

Germany doesn't have a billion people, but they do consume.

Sep 15 09:07 AM

[PDiesel:]

It's hard to bet against GS when there is a revolving door between them and Capitol Hill- though I believe their success is prop trading is unsustainable

Sep 15 09:23 AM

[kmarkt2:]

This interview with GS has no value. I am perplex with basehitz's commentary - its entirely out of point to the content of the 7 questions, but however, I share his views about GS.
The institutions of Wall Street, Capitol Hill, the Fed, WH Administration are so copulated, that any attempt to have policies that serve the commoners are lost. Another Gettysburg is required - People v/s Wall Street; a seige of Wall Street to be raise and then a reverse takeover to follow - bring the game to Masters of the Universe - they are the best, but this time, make them the targets. The People ought not to have any respect to the rules of game as laid out by Wall Street; they did not have that respect for the People when the few of Wall Street oligarchs, like cockroaches, came to raid your coffers. Stop intellectualising on the need for retaining talent on Wall Street - its has nothing to do with talent but all to do with copulation with capital C!

Sep 15 09:33 AM

[Jeff Diercks:]

At this point with their significant influence in Washington and how thinly the markets are being traded, it would be stupid to bet against Goldman. If they say the equity markets will be up in the third half of the year...you can bet they will.

Sep 15 12:33 PM

[Alphameister:]

LOL at "third half". Intentional irony?


On Sep 15 12:33 PM Jeff Diercks wrote:

> At this point with their significant influence in Washington and
> how thinly the markets are being traded, it would be stupid to bet
> against Goldman. If they say the equity markets will be up in the
> third half of the year...you can bet they will.

Sep 15 01:09 PM

[Mickey 13:]

At this stage, the markets are feeding ever higher levels through pure momentum trading. Analysts don't have any "not as bad as expected" earnings reports until next quarter so they are priming the pump with articles like this. Fear of missing the rally sucks in a lot of people that come in at exactly the wrong time. A prime example is the release by the airline industry of a dismal projection for capacity and expected losses. Traders ignored the report completely and drove the airline stocks up significantly. Greenspan's irrational exuberance seems to be back with us in force...

Sep 16 01:17 PM

[H. T. Love:]

When I saw, I justgured that GS was now that powerful! =8-O

HardToLove


On Sep 15 01:09 PM Alphameister wrote:

> LOL at "third half". Intentional irony?

Sep 18 07:04 AM