Last week I had the good fortune to spend several days at the Goldman Sachs Headquarters in NYC on a Due Diligence trip. We started the first day by listening to John Tousley, their Global Head of Advisor Solutions, who reminded us that Trump has issued 11,500 tweets since being in office, but thankfully the market mostly ignores the tweets, except when connected with trade.
According to Goldman, we are vulnerable to a recession, but a recession is not inevitable. To put a fine point on it, Goldman believes that we are vulnerable to shocks, which could cause a recession.
What are they? There are five major shocks that could lead us into a recession, including a fiscal shock, manufacturing shock, energy shock, monetary shock and financial shock.
Goldman was not so concerned about these shocks at this time, seeing them as irrelevant or that the economy can absorb whatever mild shock occurs (for example, if oil prices increase or manufacturing slows down). In particular, they believe that manufacturing is only 10% of the economy. So, although the stock market reacts to slowing ISM or PMI, it is not an issue for the economy. Regarding oil, we use much less oil per GDP, and we also benefit from higher prices with fracking so there is a counterweight. Indeed, oil prices have 1/10 the impact on the economy than it did 40 years ago. Therefore, a global oil disruption does matter, but the economy can absorb higher prices much better today.
According to Goldman, the Fed wants to stay on the sidelines for 2020 and could tighten in late 2020. We obviously had financial risk about ten years ago with the housing bubble and twenty years ago with the tech bubble, but Goldman believes that financial risk remains contained.
In short, they feel that bubbles of the past are not what they are now as banks are well capitalized and the consumer doesn’t have a ton of debt either.
Instead, we need to look at corporate debt and government debt, but that can be easily refinanced. Goldman feels corporate debt is not a systemic issue for the market.
Indeed, Goldman believes that interest rates are the biggest risk, but they are also not concerned about the brief inversion earlier in the year.
In short, Goldman had a mostly bullish stance. They had two ideas: Be active in Munis, as bond and security selection matters. Regarding international investing, they also believe that idiosyncratic factors have grown in importance as drivers of European equity returns. In short, if you can do great work in picking companies, then be globally diversified and use active management. We agree with both of those sentiments.
All in all, it was a great few days at Goldman and we were able to bring back great ideas for our clients!
Have a question for Debbie?