Everybody loves to hate Goldman Sachs, or at least everybody who doesn’t work there and, in a few cases, even a few people who do. However, it cannot be denied that the firm is supremely successful and it would be fatuous to simply dismiss every contrarian claim made by its research people as being it talking its own book.
We all laughed when it forecast oil to fall to US$15 per barrel and even more when it failed to go below US$26/bbl in the depth of the down-draught in February. But whether right or wrong in its price targets, the thinking behind them is predominantly sound and rarely worth overlooking. Thus, while the International Energy Conference is in full swing in Istanbul and West Texas Intermediate is trading comfortably above US$50/bbl (US$51.25 at the time of writing) on the back of Russia aligning itself with OPEC on production caps, Goldman is anything but enthusiastic about others’ assertion that US$60/bbl is only just around the corner.
Their scepticism is not solely based on the more common assumption that eventually nobody will abide by the agreed quotas but more on the level of surplus reserves which pervade. The reserve overhang is such, so Goldman argues, that even an immediate cut in output will not significantly influence supply to the market and therefore the current rise in prices is premature and not necessarily supported by the numbers. If there is one thing that Goldman has always been good at, and which has made it and its operatives rich, then it has been its ability to cut through the white noise of trading activity and to grasp that sooner or later fundamentals will prevail. It also has a management that has the ability and the confidence to permit these longer views to be positioned and held against short-term market movements and without the tight stop-loss limits that hamper traders in other firms.
I am reminded of March 2009, just six months after the collapse of Lehman Brothers while most of the world was still busily preparing for the end of the world as we know it, when Goldman called the bottom of the stock market. Within a few days it had turned and while all and sundry were busy trying to cover shorts, the boys and girls at Goldman were most probably sitting back smiling and watching the bonus clock tick. Of course they’re not always right but it can be argued that they’re right more often than they’re wrong lest they’d be gone and Lehman or Bear Stearns would rule the world.
Perhaps one might also note the Goldman comment on currency outflows from China. The yuan closed yesterday at Rmb6.7248 against the dollar, a six-year closing low. Goldman points out that net monthly outflows are currently around US$28bn as opposed to a run rate of just US$4.4bn during the five years to 2014. The yuan is full of imponderables that make it a tough call, especially as it is now a formal IMF reserve currency. Whether we are watching a controlled evaluation of the Chinese currency or whether it has escaped the grasp of the authorities is not entirely clear but I agree with those who suspect that markets have exaggerated expectations with respect to Beijing’s ability to control all aspects of the nation’s economy.
We recently had Ken Rogoff’s warnings on debt levels in China and the risk of a significant economic downturn. Now we have Goldman Sachs holding up a warning flag. If China is the last great growth engine but the outflows were to point towards the rats leaving the sinking ship, then the great short might just be around the corner. And who was it that suggested there might just be an almighty repricing of equities before the end of the year? Yep, you’ve got it. Maybe it would not be the stupidest thing in the world to step back, join up the dots and see what Goldman is telling us.
Data dependency
Meanwhile, a little vignette from Greece where the Eurogroup approved only a partial disbursement of the €1.1bn earmarked for debt servicing while holding back a €1.7bn sub-tranche linked to arrears clearance due on October 25. Jeroen Dijsselbloem, president of the Eurogroup, rather pointedly commented that he has no appetite to reopen debt talks every month. In typical eurozone double-speak, while withholding payments due to non-compliance with the agreed terms and conditions of the bail-out, ministers of the Eurogroup praised Greece for the way its reform programme was progressing. Doh!
The uncertainty in European bond markets with respect to “tapering” goes on. In an interview in the US, the governor of the Banca d’Italia and member of the ECB Central Council, Ignazio Visco, commented “…communicating as to when and how we are going to exit from our asset purchase programme is difficult…” inferring that monetary policy remains data dependent. What “data dependent” actually means other than “we don’t know so we can’t tell you” is impossible to define. We’ve lived with Janet Yellen’s “data dependency” for long enough to know it’s the most rubbery of policy definitions, which is of no use to man or beast. Transparency and data dependency totally cancel each other out.
Finally across the pond to the Land of the Free where Donald Trump’s list of Capitol Hill friends and supporters continues to shrink. That might please his opponents but adds fuel to his powerful and vote-catching argument that the closed club of establishment politicians in Washington needs blowing open and that he is the man to do so. That said, the probability of him prevailing on November 8 is diminishing but one would discount him at one’s own peril. He might lose but many Americans will have expressed their dissatisfaction with the status quo. The popular coup that Brexit brought with it might now look less likely but it would be lunacy to celebrate a potential Hillary victory as a ringing endorsement of the existing political structure.
The world is changing. Whether for the better or the worse is not the point for either way it will not stay the same and we’d do well to start adjusting. Digging in is not the way forward.