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Goldman Sachs: 2010-2011 will see strong growth

|Includes:GLD, PowerShares DB USD Bull ETF (UUP)

     The raging debate between V-shapers and "new normal"ers continues with Goldman's release of its global growth projections for 2010-2011.  Interestingly, chief economist Jim O'Neill sees 4.4% and 4.5% growth in the next two years, seemingly dispelling any notion of a douple-dip recession.  To me, the most compelling part of Goldman's release is the discussion of a "low-inflation" environment marked by lower risk premiums. It seems difficult to imagine how we can get decent global growth without stoking the flames of higher oil prices and some level of inflation. Nevertheless, Goldman is maintaining faith in the Federal Reserve and its ability to successfully manage the transition from an artificially supported economy to a consumption/investment driven economy. Their projection of a lower-than-expected inflationary environment may bode ill for gold, though at this point the yellow metal seems to be focused only on central bank purchases. I think the burden remains on V-shapers like Goldman and JPM to show where growth is going to come from without government backing.  The meager productivity and demand increases we are seeing presently, both in the U.S. and China are taking place in the most liquid conditions the market has ever seen. Additionally, we should note that despite these rosy GDP expectations, there are several risks to simply going long equities.  First, the global growth story will most likely be one of 'haves' and 'have-nots' with the U.S., UK, and EU potentially growing at a slower rate. Investors should be selective in equity allocations.  Additionally, stock prices in most countries have already built in strong growth expectations and remain at historically above-average P/E valuations here in the U.S.  Thus, despite decent GDP growth, stocks may not be the best place to look.  
     Goldman offers some other interesting recommendations, including buying the pound against the kiwi and the Polish zloty against the yen.  We definitely like the second recommendation with Poland's growth prospects and the continued overvaluation of the yen.  Not so sure on the pound/kiwi trade, we are secular bears on the pound at this point. Nevertheless, the GBP/NZD pair seems to be trading back and forth within a broad range, giving credence to those who seem the pound gaining in 2010, if only in a countertrend rally.  


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Finally, in a somewhat bold call, Goldman suggests getting short Irish government CDS. Clearly, they are less worried about the issue of sovereign debt than some. Despite their confidence in governments, they do believe that anxiety will rise over Spain's ability to pay its debts and suggest getting long Spanish sovereign credit protection.  

Disclosure: No positions held

Stocks: UUP, GLD