“In any contest between power and patience……bet on patience” — WB Prescott
Dear Clients and Friends,
In May of this year, I had the opportunity to attend a conference at the headquarters of Goldman Sachs near Wall Street in Lower Manhattan. When you wander the canyons of the Financial District and look up at One World Trade Center or look across at the now completed 9-11 Memorial and Museum, you can’t help but be overcome with emotion and overwhelmed by the gravity of what happened on that September morning in 2001. The terrorists struck this site because it represented the heart of Western capitalism. As I walked around the 9-11 site and surrounding neighborhood this spring, 13 and ½ years later, it is evident that Lower Manhattan and the Financial District has rebounded like nothing I had ever imagined possible. Stronger than ever.
I have long held the belief that the firm of Goldman Sachs attracts many of the brightest minds in economics, finance and investment management from all over the world. When offered the opportunity to spend 3 days at their headquarters at 200 West Street (which is right across the street from the new One World Trade Center), nobody had to ask me twice if I wanted to attend. The days were full with information and insight from some of the best players on the Goldman Sachs team. I took many notes but after sifting through them I have chosen to share the information that I gathered from the better presentations. Here they are:
Notes from the Goldman Sachs conference, New York City (May 7th and 8th) 2015:
Abby Cohen (Partner GS, Senior Economist, Head of Global Market Strategy)
1.) Excuses for the weak 1st Qtr are legitimate
2.) Harsh winter cut construction by 25%
3.) U.S. exports down by 20% due to West Coast dock worker’s strike.
4.) Strong dollar was a real headwind.
5.) Still on track for 2.5% GDP growth
6.) Consumer is in better shape and has the lowest debt to income levels ever.
7.) Europe is our best export customer. The reversal of austerity and QE from the ECB is turning Europe around quicker than most had thought (1.5% GDP in 2015 is possible).
8.) Japan is looking better for the 1st time in 20 years. Abenomics is working. Japanese companies are doing very well and this is significant to world trade.
9.) For China, double digit growth is over for good. GDP will be between 6 and 7% going forward. Their economy is bigger than in years past. Govt. infrastructure spending was huge and they had an underpriced currency for far too long.
10.) Worldwide growth will be good for the foreseeable future and no recession is in sight.
Her other thoughts:
1.) Earnings have been good but much of that is accounting. Keep an eye on real profits and revenue growth.
2.) Problem #1: The unemployment rate dramatically understates the severity of the underemployment problem. The unemployment rate for those with less than 2 years of college and for those with a high school diploma or less, still is running between 7 and 10%
3.) Problem #2: The unemployment rate for those between the ages of 20-24 is still at 11.5%. The rate for those aged 25-34 is 6.8%. Many of these people have not received their first real job yet and they are the future. What is this doing to their perception of the future? How is this effecting their spending and savings rates?
4.) Google is hiring more people in NYC than in California right now because of the NYC push to build tech campuses. Keeping interest rates low is not as effective anymore. Targeted economic development in cities is creating far more jobs.
5.) In 2004, the U.S. was #1 in government R&D spending. We are now #10. We have shifted spending from education, research and development to entitlement spending. We are not encouraging the best and the brightest to stay in America.
6.) South Korea has the most patents issued outside of the U.S. Their population is growing, is more educated and wealthier every day.
7.) The U.S. stock market is right about where it should be here in 2015. It is underpriced if you look out to 2016.
8.) Stoxx Europe 600 and the Topix (Japan) are still very cheap on a P/E basis to the S&P 500.
9.) Energy prices are now at fair value but need to see Capex pick up in the 2nd half of 2015.
10.) As far as the oil crash, nobody, nobody, saw the how fast the U.S. could ramp up production from shale oil.
11.) Of course government bonds are way overpriced all over the world. Biggest worry to Abby is that rates are too low all over the world. It is distorting proper decision making. Need to get off of 0% right now.
12.) U.S. government debt relative to GDP is lower today than during the Reagan administration. However, the baby boomer is aging and growing entitlements are a problem. Not Social Security but rather Medicare as the boomer requires more care.
John Tousley (Managing Director GS, Economist and Senior Market Strategist)
1.) 5 and 8 sigma events are happening with regularity. The one day movement of the Swiss Franc in January was an 11.5 sigma event. Occurs one in every 3 quintillion years. Big events are happening with more frequency.
2.) The latest move in the German and U.S. rates is more of a correction from a drastically over- bought condition than a bubble collapse.
3.) Emerging market debt is still way under owned by investors. Different countries “stories” will drive the performance of their debt.
4.) The high yield default rate is currently at 1.2% vs. the historical average of 4% and high yield bonds have NOT sold off with the 10 yr. Treasury which says that investors still like them and they are the place to be.
5.) The quality of corporate credit is still good since the LBO market remains flat. Debt service levels are still at historical lows and companies are using equity to finance vs. debt at this point in the cycle.
6.) Why is it so easy to knock this economy down? Because the recovery is growing old at 68 months in length. The average global expansion is 72 months. The average global expansion with a housing bust thrown in is 102 months so we may still have a 1/3rd of an expansion left or we may be in the fifth inning of the ball game.
7.) We are moving from a “P” (price) market to an “E” (earnings) market.
8.) In a “multiple” expansion, even the worst ideas work. Going forward it will be more important when it comes to “what you don’t own” vs. “what you do own.” The market is beginning to look “bottoms up” vs “top down”. Stock picking is back in and indexing is out.
9.) Big Data or the digital signal will in the future, help companies determine the price elasticity of the customer. This is a huge industry opportunity — big data gathering and big data interpretation.
Urban Meyer — Ohio State University Head Football coach
1.) “Clarity of purpose is inspirational” – Marcus Littrel
2.) What is a better motivator: Love or fear? The Army has proven that it is love of family and love of the team or “unit”.
3.) Leaders are not BCD’s (blamers, complainers and defenders).
4.) Chaos is a de-motivator. The power of the unit is more powerful than the individual.
Gary Cohn – President and Chief Operating Officer of Goldman Sachs.
1.) Corporate boards need to be more long-term focused.
2.) The markets may be at an inflection point. Trends may be changing towards higher rates and more erratic equity markets.
3.) M&A is now heating up after 6 to 7 years of cautious behavior. ROE’s and EPS are increasing due to increased efficiencies.
4.) The heavy lifting of increased regulation is finished and now beware the unintended consequences like liquidity the credit markets. Dodd-Frank has forced dealers to increase capital and carry less inventory. What happens when everyone wants out as rates rise?
5.) 0% interest rates have forced individual investors out in maturity, quality and duration. What does this look like when things “change”?
6.) What scares him the most? Cyber Crime perpetrated by terrorists. Power grids and global stock exchanges.
7.) Next thing – income inequality and the quality of job creation. Why, because we now have a globalized workforce and new jobs are lower paying. Many of the new jobs are internet based. For example: Uber drivers are 1099, not salary. Instacart (web based grocery home delivery) pays people 1099 income by the # of bags of groceries they bag.
8.) What excites him? Companies have done a great job of creating efficiencies and that is now engrained in corporate culture. Europe has bitten the bullet and growth around the world is accelerating. Regulatory bodies around the world are beginning to look at the unintended consequences of excess regulation — i.e. credit liquidity.
Nearly all of the volatility in the markets recently seems to be correlated with either FED speak or the potential of a Greek exit from the European Union. What would a Greek exit look like? Nobody seems to know for sure and opinions range from calamitous to a non-event. The following is a recent article from Jim Cramer and gives probably the best perspective of what to expect from a possible Greek exit:
Greece Is the Word, Perhaps Too Often
By Jim Cramer Follow | Jun 3, 2015 | 1:19 PM EDT | 0
Do we focus on Greece too much? Do the media overplay its importance? Are the 11 million people in this small country really able to bring down a continent with 742 million people?
Candidly, if you pay attention to the stories about international finance, the weight of evidence says, absolutely, it’s incredibly important. In fact, if you listen closely enough, you might think these talks going on right now, which are allegedly in the last hours, could be as important as the fall of Lehman was to our country. In other words, there is tremendous systemic risk if Greece defaults on its obligations. There could be hugely negative repercussions if it is stripped of its status as a member of the European Union in good standing and must substitute its own currency for the euro.
And that’s the chief reason I brought in Pierre-Andre de Chalendar, the chief executive officer of Saint-Gobain, the 180,000-person-strong worldwide materials company that does business everywhere in the world, with a concentration in Europe and has done so for 350 proud years.
Chalendar has perspective. He’s not an economist. He’s not a politician. He is a businessman with a unique perspective of being a dominant company in Europe. That’s why his answer to the question I asked about whether we spend too much time in the media talking about Greece is so telling: “I think so. To put things in perspective, three years ago, the problems in Greece were a threat to Europe. The eurozone has changed, you know, banking union and all that, so now I think we (in this case he clearly meant Greece) could leave. I hope it is not going to happen, but I think it’s much less a problem than it was three years ago.”
In other words, the systemic risk has been minimized because Europe is much stronger and the mechanisms are in place to deal with a Greek default without contagion that could rapidly spread through the weaker countries of Europe.
Now, I do think there’s a lot at stake here, but it is more of a moral, not economic, issue. Unlike Spain and Ireland, where growth is very solid even if it isn’t yet rewarding as many as it should, austerity has failed in Greece. Some of that is because Greece has been, frankly, quite bad at executing austerity, repeatedly backsliding when it had a chance to reform its labor practices and government spending while failing to privatize assets that could have brought money in and forcing the population to pay taxes in a reasonable way. In some ways, the Europeans who are on the hook for a bailout gone wrong have paid more of a price per person for what Greece refuses to do than the Greeks themselves, although they elected this government to repudiate previous reforms that were necessary to continue a bailout.
But there’s also a sense that Germany, which has been the biggest winner from the euro when it comes to bountiful exports both to other EU members and to other countries with stronger currencies, has enough money to look the other way on Greece while it tries to come back from the abyss.
More important, though, is the fact that the attention has paralyzed the world. Yes, there will be dislocations on a breakdown and a so-called “Grexit.” But those dislocations will be caused more by hedge funds using borrowed money that are on the wrong side of the trade than by actual economic loss.
That’s why we just need a darned conclusion to move on. To recognize that this little country is holding all of the world hostage. The failure of leadership on all sides is behind this miserable situation. That said, I am with Saint-Gobain. We are overdoing it. When the denouement happens, there will be a few weeks of angst and then we will wonder what the heck we were so worried about. In fact, I think the euro rallies, which would be terrific for our stocks. So Mr. Chalendar, thanks for putting it in perspective. We needed it.
I understand that this missive was a little long but I thought this would be good information to share with you. I hope you enjoyed it.
PS: When I got into this business in 1981, I took the NYSE Series 7 exam (equivalent to the Bar exam) in WTC Tower #1 on the 76th floor.
Uber recently snapped up more than 50 scientists from the Carnegie Mellon Institute to devote full time research to self-driving cars.
One half of all homes on the market in Denver are selling in 8 days or less! Next up is Oakland, California at 15 days followed by Seattle at 22 days.
Sources: 361 Capital, Real Money and Goldman Sachs.
Ken Beach, President of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.