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Goldman Sachs Up To Its Old Tricks Again
by John M. Curtis
(310) 204-8700
Copyright
August 5, 2014
All Rights Reserved.
Telling investors that stocks will outperform bonds
over the next four years, Goldman Sachs hopes to stem today’s exodus from stocks
that have taken the Dow Jones Industrials down 1,000 points in one week. When former President Bill Clinton’s
bull market unraveled in March 2000, Goldman Sachs’ Executive Vice President
Abby Joseph Hoffman was still hyping stocks on MSNBC. Warning of higher interest rates, Goldman Sachs makes the audacious prediction that
equity markets will continue to rise beyond today’s inflated levels, sending the
Dow to over 20,000 by 2018. Looking
into their crystal ball, Goldman Sachs told investors in a newsletter that the
Federal Reserve Board will take the current zero-to-quarter-percent federal
funds rate to four percent or 400% higher by 2018. Pimco’s conservative bond guru Bill
Gross doesn’t anticipate rates moving much higher, perhaps only two percent.
Federal Reserve Board Chairman Janet Yellen has told markets that any
interest rate increase would be contingent on a stable and growing jobs markets,
already showing signs of weakness.
Goldman’s advice to investors is so self-serving, so transparent and so
misleading that it defies logic. If
short-term interest rates rise, it typically hurts stocks by giving risk-adverse
investors an opportunity for more secure investments. “We forecast a dramatic divergence
between stock and bond returns during the next several years,” Goldman
strategist David J. Kostin wrote in newsletter.
Kostin predicts the S&P 500 will return about 6.2% to investors when the
federal funds rates hits four percent.
Kostin’s statements to investors directly contradict his own predictions
of how stocks will outperform bonds.
When equity markets start to tank, like they are now, investors flee into
safe-havens like bonds.
If Goldman Sachs correctly predicts a dramatic jump in short-term
interest rates, it won’t help equity markets, as Kostin suggests. But like Pimco’s Gross, there’s
nothing on the horizon that comes close to Goldman’s interest rate scenario,
when Yellen hinted it will be some time before she ratchets up rates only 25
basis points. Goldmans defies all logic predicting that rising rates would give a 10-year Treasury a
return of only one-percent, compared with the 10.9 percent yield over the last
five years. Treasuries haven’t
yielded over 10% since interest-rate crazy early 1980s when the Prime-rate his
21% in 1980. the year the late President Ronald Reagan ran for office. Goldman sees U.S. Gross Domestic
Product rising to 3% in coming years, forcing the Fed to hike interest rates to
control inflation. With the U.S.
jobs market dicey and publicly traded companies scaling back, it’s doubtful GDP
will rise that much.
Yellen’s former boss Princeton University economist Ben S. Bernanke hoped
and prayed after dropping the federal funds rate to zero to a quarter percent in
2008 that the economy would rebound enough to raise rates. When he left office Feb. 3, 2014, despite improvements in the U.S. unemployment rate,
there were scant signs that the economy could sustain growth without the
artificially low rates. If the
stock market continues to sell-off, correcting as much as 20% or more, it’s
going to force publicly traded companies to stop hiring, perhaps start a fresh
wave of layoffs. Given the stock
market’s performance since the Dow bottomed out March 9, 2009 at 6,547, the
economy has added about 8 million jobs, erasing the ones lost during the Great
Recession. Yellen expressed
concerns that if Wall Street goes into a prolonged correction, it could hurt the
U.S. jobs market.
Goldman’s analysis of rising equity market are based on substantial
corrections that have taken the Dow down 1,000 point in one week. If another crisis pops up on the
world stage, it could give Wall Street the excuse needed to drop the stock
markets more than 20%. Given the
high probability of a major correction, Goldman/s predictions of bullish equity
markets look like pie-in-the-sky.
No one saw markets rising 200% since March 2009 without settling back to earth. If they continue to rise, it prices
virtually everyone out the stock market.
Forecasting rising interest rates should fuel a furious rally in the bond
market where investors jump on the chance to own higher-yielding bonds,
especially federally insured products.
Looking at an a bloated stock market, it’s doubtful things can keep going
up without a major correction, something completely ignored by Goldman Sachs.
When markets disintegrated in 2000, the Fed increased interest rates six
times, causing the tech-rich Nasdaq to fall from 5,400 to 2,200 in less than a
year. While there’s no evidence
today of another 2000 tech bubble or 2008 real estate bubble, over-heated equity
markets are in need of a breather.
Telling investors to look forward to big returns in equity markets, Goldman
Sachs sounds strangely reminiscent to what they told investors in 2000 and 2008
right before equity markets crashed.
Goldman’s predictions about rapidly rising interest rates aren’t born out
by statements already made by Yellen and the Fed’s Open Market Committee. Yellen
has told Congress that it’s necessary to keep interest rates low for the
foreseeable future until there’s proof that gains in the jobs market are here to
stay. Judging by uncertainty at
home and abroad, the Fed won’t raise rates anytime soon.
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