The Banking and Strategy Initiative

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Goldman Sachs gurus present their verdict

The five questions doing the rounds in the first week of the new year (here) are certainly key to mapping the world in 2012 and even later. However, the economist’s responses in each case have a certain correction we could make from our vantage point, without allowing ourselves to lose the mandate to advise them! !!

On our basis of a larger picture of well being,  than the targeted bears and bad mouthing these economists have been facing, we might well score better ( again!) es if your trades back us..also, to set the ball right on point, the bank has also been wrong this time on crucial Gold and commodity calls, though they are still long and yesterday’s shift to a weaker dollar may well survive longer with QE steaming up from the rich worlds, cascading to another year of global inflation in which case..

The first question, requests that growth is limited by global oil, we would say that again is a almost wishful statement as growth predicates and waste of oil are two distinct silos, twains that have never met. US has been consuming less and less oil and the housing market will bottom out in a slow turn, that most will agree with Goldman Sachs and we also hold forth as the assumption that will aid growht and not hamper growth. The difference being credit flows ( and I could almost say new Credit Card laws and CFPRA head but that would be like Romney and Co or other political chicanery in person (sic!) ) and lower credit growth vcould speak to more room to grow.

First, will US growth pick up to an abovetrend pace? We think not. Underlying growth is probably considerably weaker than implied by our 3.3% tracking estimate for Q4 GDP growth; tight oil supplies act as a “speed limit” for global growth; fiscal policy remains a drag on growth; and the spillovers from the European recession are likely to increase.

There will be some happy spillovers from Europe too, and essential trade will go on even as Exports to Europe affect everyone from China to LatAm to US and again allowing an even keel int he economic situation. like the room to grow in credit without fuelling excess inflation, will be fuel for growth.

The 1.8% Q4 growth for US was good, the fat cash balance sheets of its corporates more availabele for deals better and profits certainly the best gaining for equities and reinforcing the above “neo economic ” postulates that will change the growth equation out from Oil and from Europe. If Asia is the trend pace, US will definitely fall below the line but Asia being the top and Mineral resources not making a comeback too much in a hurry, it is likely that the world work out the conundrum of a negative Europe and a negative Latam/Russia/Australia in 2013 after US and Asia perfrom in growth estimates to maybe even 3% growth. Of course the GS guru will stick to 3.1% being in his estimate range of growth (BELOW TREND!) 

Also the impact from Europe – I want to see how everyone started playing with this 1% GDP loss figure and it has instead become some kind of psychobabble to carry with you..

Of course, if the flight of capital from Europe’s stability plan crashes through then one can visualise the black swan scenario of US crashing through the Top floor, Asia as well. ( as well as the paradox of thrift argument)

On the other hand, a failure of peripheral European economies to stabilize due to a “paradox of thrift” situation in both the public and private sectors poses a downside risk for Europe and ultimately also the United States.

On the Third question of the US housing market recovery, we have already started putting the evidence from the Santa Thanksgiving and December as the first leg to that recovery and we agree it will not achieve anything more than keeping any further decline away these first few months , i.e. all of 2012

The only reason US housing will recover is that when others not us bankers or traders or even  investors realise that it is value accreting to invest in a house again and carry an american dream and only consistent growth will make that happen.

On inflation, the Goldman Sachs prediction is a worry as it relates to Commodities prices and the strong dollar is anathema to that commodities pricing cycle. Spending usually keeps inflation in a healthy range and we would be very worried if it stays near Goldman Sachs estimates of less than 2%

The FOMC minutes however will keep correcting that situation every month now that they would also be publishing forecasts and planning rate hikes on this rate of inflation. Bernanke, ever the Old man in a hurry!! The inflation line is unlikely to be a straight even wavy drunk curve as long as the only Central Bank economics is interventionist Economics..that is all I needed to monitor inflation, like the tick on your HF trades, a second before a second too late

And of course with that predication of our own we have given our hand away because the last question indeed that the Goldman Sachs took to hand was will the Fed ease further and Tyler (@zerohedge) is already with the majority opinion that the QE has infact already been priced in…Goldman Sachs thinks it more like only agency MBS and we think it a response to Europe affecting us and here we think Ben Bernanke and most of the Fed will wait for us and realise late that no bad things may happen to US because of European QE as long as Europe remains on negative watch in 2012. That means that the agency MBS buying would only be gap filling to keep the yields perky, which anyway is more a function of traders like Bill Gross running around with heavy handed early deals and bankruptcies that others take care of!






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