This time is different.
Or, actually, this cycle is different.
The first of those two assertions is famously dangerous. I don’t know about the second one, but Goldman was bold enough to make it the title of their year-ahead macro outlook.
As a brief reminder, this is the time of year when major banks release flagship research pieces which serve as the anchor for the coming year’s periodic forecast revisions. These pieces are multitudinous. Typically, every silo in each bank’s research division produces its own outlook piece. So, there’s one for equities, one for rates, one for FX and so on. Some are nearly book length. It’s impossible to cover them all. There was a time when I endeavored to read most of them. Now, I pick and choose.
One pillar of Jan Hatzius’s macro view (he used the interrogative to pose “the most fundamental question”), is that the Fed will succeed in bringing core inflation down by two full percentage points over the next 12 months with just a half-point increase in the unemployment rate. That’s the sort of contention the likes of Larry Summers and Olivier Blanchard have repeatedly suggested is far-fetched. Indeed, Blanchard equated it with “immaculate conception” in an interview with Goldman’s Allison Nathan.
Hatzius is, of course, deeply immersed in this debate. Unaware of Blanchard’s criticism Hatzius most assuredly isn’t. Indeed, he offered the counterpoint to Blanchard in the same focus piece moderated by Nathan (clicking here will bring up a quick summary).
“Doesn’t this fly in the face of the experience from prior high-inflation episodes — most notably the 1970s — that ended with a much bigger increase in unemployment?” Hatzius asked, in the bank’s 2023 outlook. The answer is “yes,” but for Goldman, “this cycle is different from prior high-inflation periods.”
The bank draws a distinction between “excessive employment” (“too many jobs” leaves a bad aftertaste) and record-high job openings. The figure (below) is a rough illustration.
Employment is merely back to pre-pandemic levels, and, as Hatzius was keen to note, employment relative to the working-age population is still short of pre-COVID levels. It’s openings which remain anomalous.
Going forward, Goldman expects the disparity between openings and workers to close. “Demand has slowed, the pandemic has subsided, unemployment benefits have normalized and excess savings are coming down,” the bank said. “It is therefore not surprising that job openings and our jobs-workers gap are coming down quickly.”
The bank looks at real-time measures of openings from Linkup and Indeed, and based on those readings, Goldman thinks the jobs-workers gap has contracted by a third already, and should reach levels consistent with slower wage growth relatively soon. At that point, the labor market would no longer be a severe impediment to the Fed’s inflation-fighting goals. Essentially, Goldman still believes the soft landing avenue which goes through fewer job openings is open to the Fed.
But that’s not the only reason this cycle is different. Goldman also noted that “the recent normalization in supply chains and rental housing markets is a source of disinflation not seen in previous high-inflation episodes such as the 1970s, and it is only beginning to show up in the official numbers.” They cited specifics. Consumers are shifting from goods to services, which should moderate goods prices, on top of the impact from “healing supply chains and rebounding inventory levels.”
As for services, the bank noted that asking rents on new leases have come down “sharply.” “The October CPI report suggests that the lagging measure of sequential monthly official CPI shelter inflation — which captures both new and continuing leases — has likely peaked too,” even as the 12-month prints “will likely rise through next spring as rents on continuing leases catch up to higher market rates,” Hatzius said.
Finally, Goldman reiterated the familiar talking point that inflation expectations are still anchored. If the 70s is the yardstick, the comparison isn’t even worth making. Longer-run consumer inflation expectations in the late 70s were upwards of 8% and 9%. With the caveat that anything’s possible, the odds of the five- to 10-year measure of consumer inflation expectations in the University of Michigan survey (for example) printing that high in the modern era are infinitesimal.
I’d be remiss not to at least suggest that the title on the figure (above) can probably be taken literally. That is: I don’t think the comparison is apples-to-apples. But, as Goldman noted, you don’t have to rely on any one survey or measure. The notion that expectations for longer-term inflation outcomes are still anchored “is true for each of the available measures [including] surveys of households, surveys of economic forecasters and inflation-protected bonds.”
So, where does that leave us? Well, it leaves Goldman projecting a decline in core PCE inflation to 2.9% by December of 2023.
The figure (below) shows the breakdown of that call. “We expect supply-constrained durable goods with still elevated margins, such as used cars, to drive nearly half of the slowdown in overall core inflation,” the bank said.
If that’s correct (a big “if”) and the Fed manages to hold terminal through year-end 2023 (another big “if”) then Fed funds would probably be at least two full percentage points above core PCE.
Speaking of the Fed, Goldman was quick to note that their relatively benign outlook for inflation won’t translate into a dovish Committee. “As real income recovers, a negative FCI growth impulse is required to keep growth below potential and continue rebalancing the labor market,” the bank said.
In other words, as inflation abates, wage growth, while moderating, will probably remain a semblance of sticky, which means consumers may enjoy real income gains. That could lead to overconsumption, too much demand and a delay in labor market normalization, all at odds with the inflation-fighting agenda. So, the Fed will need to guard against that by keeping financial conditions tight.
“As a result, and even under our relatively optimistic inflation forecast, additional rate hikes of at least as much as markets are now pricing are likely required to keep the labor market adjustment going,” the bank said.
That, in essence, is why this time or, this cycle, is different.
I am of the opinion that everything is always different, with that in mind. What Goldman is saying today is what I conjectured early summer. This is my rosy outlook and I hope it comes to be.
Xi is talking about another Belt and Road summit. Perhaps he will reign Putin in before then. Diminishing globalization may not be in his best interest.
It would be interesting to read what these banks forecasted last year i.e. late 2021 what would happen in 2022. Everybody was of course off by a long shot (don’t have the data to back it up) due to the war in Ukraine which nobody foresaw. I suspect however that 2023 will be similar i.e. Goldman and the rest don’t have a clue.
Folks, I’m going to politely ask everyone to be realistic about this. If we can’t all be adults, then I’ll stop summarizing year-ahead outlook pieces and talk about something else instead.
Obviously, nobody on Wall Street knows precisely what’s going to happen in any given year. If the question is “How accurate, historically, are Wall Street’s year-ahead outlook pieces,” the answer is “Not very” if your standard is “crystal ball.”
The point of these outlook pieces isn’t for banks to compare notes they took while on a group field trip to the future.
They don’t know how things are going to play out, and guess what? Neither do you, neither do I and neither do any hedge fund managers. I grow weary of the (patently false) notion that these “name brand” fund managers who show up on CNBC and at various conferences, etc. have a better idea about what’s going to transpire than Wall Street. They don’t. How could they? Are they time travelers?
Here’s the bottom line: If there’s anyone out there who actually has a good idea about what’s coming, you won’t hear from them almost by definition. Because as soon as they tell you about it, there goes the alpha. Let me say that again: If there’s a fund manager out there who really and truly has an edge on the likely evolution of events looking out over a 12-month time span (as opposed to just a guess), you won’t know about it, because if he or she were to tell you, the scope of the alpha opportunity on offer would diminish in proportion to the number of people who are apprised. (Sure, you want everyone to eventually understand what you understood initially, but not too early! You don’t want to be out in public idly musing about something you’re pretty sure is going to happen before you have the trade on in full and are ready for the world to catch up.)
So, please, lest I should be compelled to stop summarizing these outlooks, let’s all be realistic and admit that no, in fact, none of us have any idea what’s coming. All we can do is present an educated guess based on intuition, experience and our access to data and capacity to process that data.
If any of you think you’re in a better position than Wall Street to make such an educated guess, I suppose I’d suggest you’re being a little disingenuous, because however “wrong” they may turn out to be, Wall Street is drawing on skyscrapers full of people (literally, assuming they’re all back in the office), unlimited data and in-house traders and salespeople whose job it is to handle order flow from the biggest investors on the planet including, by the way, many of the hedge fund managers alluded to above.
As for the finance blogger / finance-focused social media peanut gallery, do yourself a favor: Tune that out. If those people were actually making the kind of money in markets they implicitly claim while deriding the Fed, and the sell-side and so on, then what the hell are they doing tweeting 10,000 times a day and writing 55 blog posts about everything from macro to the weather to celebrity gossip?
I, for one, greatly appreciate your summaries of commentary from major financial institutions. As far as I know, no university offers a degree in prophecy and there is no reliable certification one can obtain. To expect prophecy is to expect the impossible.
It is not only a financial market, it is also a marketplace of ideas. It’s axiomatic that a market can not exist without contending valuations. I’m not looking for certainty. Smart people offering thoughtful opinions are quite enough for me. Thank you for bringing me so many every day.
Don’t mind my ill conceived comment. I blew off some steam (shouldn’t have). I enjoy reading your articles as much as the next guy.
Don’t take it personally, man. I’ve been back to the 2020s five times now, and four of them, he’s posted that same response, almost verbatim, to someone on this same post.
But, I fear I’ve said too much.
Gen Z is handling inflated housing cost with ease- by living at home for longer. As a result, they have more money available for services, aka “partying”.
This time is different because when my generation graduated – there was no way we were moving back home.
I do think that the pandemic changed what is considered socially acceptable/normal because many Gen Zers had no choice other rhan to move home during covid because college dorms/housing closed and classes were online. Therefore, that generation does not look unfavorably upon someone who has chosen to live at home with family for longer.
When I got out of college – there is no way I would have dated a man still living at home.
Social norms have changed.
H, please do continue to ‘pick and choose” and present these summaries of major research reports from credible sources. I especially enjoy your perspective on the findings in these reports.
I for one also appreciate NOT having to go through “several books” presenting divergent financial/market forecasts and which clearly cannot all be right.
H: I echo the sentiments of those who appreciate your summaries. People forget that the purpose of any projection is to assess the underlying drivers of performance. If the actual result is in the ballpark of your projections for the reasons you thought, congratulations! If events or the decisions of others cause performance to deviate, reassess the underlying drivers, adjust the projections, and move on. The point is to try to understand dynamic factors that will determine future outcomes– not easy, especially in these trying times.
The other thing I try to remind people from time to time is that these are research guys and gals. These aren’t gun slingin’ traders, or sales or IB folks. I’m not trying to perpetuate a naive approach to Wall Street, I’m just trying to convey to an (understandably jaded) world, that short, paraphrased excerpts from 30,000-foot macro musings interspersed with my own, unbiased editorializing containing no specific trade recommendations is about as harmless as harmless gets. People have a tendency to paint everyone on Wall Street with the same brush. Somebody saying, in 2022, “Hey, we looked at data from Indeed and some stuff on apartment leases and came away thinking maybe core CPI might fall to 2.9% in 12 months,” isn’t the same person as the guy from some nefarious chat room 15 years ago fixing the fixes and pushing around metals and FX. I mean, as boring as this sounds, the reality is that a lot of the folks in research are just writing research. There’s an amusing disconnect between the way in which some of the research is summarily dismissed as not worth perusing and memes about everyone on Wall Street being some measure of nefarious. The guy eating a turkey sandwich and looking at FRED charts all day isn’t Christopher Moltisanti fixing bid-asks. I’m not out here quoting Christopher Moltisanti. I’m quoting the turkey sandwich people.
My chief mentor in grad school used to tell me that if you want to make actual money in the actual market then you need to understand the way the world works better than other folks, use your understanding to discover something new and favorable, make the appropriate investments, and then tell your secret discovery to anyone who will listen. Finding a secret before others do is great but if what you know remains a secret no one else will start buying so your secret can pay off.
PS: the same guy also told me that only secrets you discover on your own are any good. If someone gives you a tip, something guaranteed to make you rich, it’s best if you assume you are the last to hear this great tip and everybody else has taken the profits. The market IS a Snipe hunt.
I guess my Gen Zer’s sample are exceptional. Yep they lived at home a long time. Began working in their teens, got educated, work in tech, homeowners. It seems to me the stereotypes are more prominent now, but maybe i was not paying attention before.
H. Please continue providing these summaries.
The utility of research from wall street is often to give the facts and the fact pattern plus perhaps to lay out an analytical framework. Anything you get after that is a gigantic bonus. Use the information as you can to draw your own conclusions
@RIA, I agree. To me, the value of Street strategy pieces is:
– Data, charts, patterns, explanations
– Ideas, theories, insights
– Consensus and outliers
Not “answers”. Those, we have to come up with ourselves.