Goldman Predicts No Pivot: A Letter to Goldman Sachs (op. ed)
I laughed out loud when I saw the headline on CNBC this morning. The headline read, “U.S. Fed ‘definitely’ won’t cut interest rates this year, Goldman Sachs says.” Three days ago, I wrote an article about Goldman saying there would be a pivot in summer. It was Goldman’s third prediction change in three weeks. Goldman’s new prediction is no pivot in 2023, precisely as Chairman Powell has been unambiguously saying and I have written about many times since August.
Goldman, over the last seven or eight months, has repeatedly said, the Fed would pivot in 2023. I laid out a mathematical argument for why Goldman Sachs was wrong here . Goldman Sachs must have read the article because they finally accepted Chairman Powell’s statements. Goldman Sachs predicts a "soft landing” next year but is uncertain whether the pivot will be in the first or second quarter. Since Goldman is probably now reading the blog to figure out which way the wind blows for everyday folks, the rest of the article is my letter to them.
Dear Goldman Sachs,
Thank you for realizing the Fed meant it for the last eight months, as they repeatedly said no pivots were coming in 2023. It took you a while, but welcome to reality. I don't know how you missed it. Powell’s speech writer is very consistent. Here are a few direct quotes that Chairman Powell said multiple times at each press conference and speaking engagement over the last few months.
“It will be a couple of years before we get to that level” (speaking about a pre-pandemic balance sheet).
“We need to keep policy sufficiently restrictive for quite some time.”
“The full effect of our rapid tightening are [sic] yet to be felt. We still have more work to do.”
“We anticipate that ongoing rate hikes will be appropriate to attain a monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Maybe those phrases are open to interpretation, but why did you ignore Chairman Powell saying, “It’s going to take some time for disinflation to spread through the economy, and given our outlook, I just don’t see us cutting rates this year?” . Despite him repeatedly saying it, you still thought he was bluffing or meant something other than the literal meaning of the words. Your predictions have been changing every time the wind blows. You’re up to your third change this month.
There were so many things I wanted to say but refrained. Do you know how challenging it is to sound professional and not make too many sarcastic comments while trying to explain your behavior this month? The following is how I explained your absurdity to my readers three days ago after the second prediction change.
Bank of America and Goldman Sachs now expect the Federal Reserve to raise interest rates three more times in 2023 after the highest PPI growth in seven months. Both banks predict three consecutive 25 basis point raises at the next three FOMC meetings, followed by a pivot. Federal Reserve Chairman Jerome Powell has repeatedly said there would be no pivot in 2023.
The new expectation is the second change both banks made in February. After the 25-basis point hike on February 1, both banks predicted one more 25-basis point hike and a pivot. A week later, the jobs report showed 517,000 new jobs added in January. Both banks added a 25-basis point prediction and then a pivot. A week and a half later, the PPI came in at a seven-month high, and they changed their expectations again to three raises and then a pivot.
Do you realize how ridiculous you sound when you read about your behavior? However, I am glad we are finally on the same page: We shouldn’t tell people to fight the Fed. The good news is now we can start acting like adults and have a reasonable discussion about the facts.
The Federal Reserve balance sheet didn’t go parabolic. It went vertical during the pandemic. The Fed “printed” $16.3 trillion in 2020 and 2021, which more than quadrupled the money supply. It doesn’t take an economics Ph.D., which you have many on staff, to realize that quadrupling the money supply in two years is extremely inflationary. However, many politicians looked into the T.V. camera saying that the pandemic money creation mania didn’t add to inflation. When someone says something so absurd, the beautiful women here in Texas say, "Oh, bless your heart,” which is much more polite than what the men say.
As you know, the Fed only has so many tools to steer the economy. We both know that the Fed can’t sell the assets on its balance sheet to bring down inflation. For whatever silly reason, you keep acting like the Fed has some magic economy-fixing tools left in its belt besides raising interest rates. Since 1933, the law granted the Federal Reserve debt collateral for creating money. During the pandemic, 30% of the debt collateral was mortgage-backed securities (MBS). The other 70% was U.S. Treasuries, but the Fed can’t sell any of them.
The Fed is letting the Treasuries mature instead of selling. Only about $60 billion per month is expiring, so it will take a while to undo trillions. The Fed can’t sell Treasuries because they would be forced to sell at a loss. When interest rates go up, bond values go down. The Fed would be victims of their policy by selling. The mortgage market is getting destroyed because of rising interest rates. During the pandemic, the government put a moratorium on evictions, guaranteed loans, and kept interest rates near zero percent. MBS was a decent short-term liquidity solution, but now the market has moved. The Fed doesn’t have a buyer for MBS because housing is getting crushed due to higher interest rates. The Fed hopes people pay their mortgages, as I am sure you do too. If too many don’t their mortgages, it would be a bigger mess than 2008. The alternative would be a buyer like you with incredible purchasing power to buy the MBS. Do you want to take one for team America and buy the MBS? If not, why not? Do you think housing is going to crash?
In an absolutely emergency, the Fed could use its nuclear option if people don't pay their mortgages. The Fed could use the $2.55 trillion in the reverse repo to reflood the market and restart the inflation cycle. We both know that would be like kissing a rattlesnake on the lips and hoping for the best.
There is another societal infrastructure issue that no one is mentioning, but you know very well. About 10,000 baby boomers per day are turning 65, and it is making the labor market tighter daily. In December, there were 1.7 jobs for every person looking for work. In January, it was 1.9. For the most part, the U.S. is at maximum employment with the lowest unemployment since 1969 at 3.4% . In January, there were 517,000 new jobs posted. (You know, the catalyst for your first prediction change)
What is more reasonable? Did the economy expand rapidly despite the massive layoffs across tech, banking (including the 4000 at Goldman), and transportation sectors, raising interest rates, and 63% of Americans living paycheck to paycheck? Or did many baby boomers retire at the end of the year, and the companies were forced to refill those positions? Suppose it is the aging working population retiring. In that case, no amount of tightening can change those job numbers without destroying the economy and creating a global depression.
The conclusion is straightforward. Inflation will stick around for a long time. The Fed has no options except raising interest rates higher than the market expects and holding it there longer than anyone wants. We will be in tight monetary policy for years. Goldman Sachs has finally admitted that the market is in significantly worse shape than the financial media and politicians pretend it to be.
Goldman, I have to ask. Now that you are honest about the market after months and months of lies, should we expect something worse than 2022? Was 2022 only a firecracker compared to the thunderous dynamite that is coming? Is that why you are being more honest now?
Thanks for finally agreeing with me, Goldman, but you should have listened sooner. You could have used your influence to save countless Americans from the devastating losses they suffered by following your “predictions.” You could have told them to move their money into precious metals to protect their wealth just like you did. You bought record amounts of physical gold last year but told your clients to buy paper. Why did you do that, Goldman Sachs? Are you bad people or just bad advisors?
It's not too late to turn your reputation around and tell the truth. You could use your market influence to tell people to put 10-20% of their portfolio into precious metals. If you publicly said that, you would be a good advisor. However, you want to be something other than a good advisor. You want to be a great advisor who cares about your client's outcome, right? In that case, you should send your clients our way for free education about precious metals from people who care.
Ryan at the U.S. Gold Bureau
(A note from Ryan: Thank you for reading my blog. Hopefully, you find learning about events affecting your portfolio informative and helpful. I took a break from the traditional structure today and hope you enjoyed it. I don't think Goldman Sachs is reading the blog. However, this article has a couple of gut punches they should experience. We can make that happen together. If you want them to read this article also, let's make it go viral. The more you like and share this article, the higher the chance it goes viral and someone at Goldman Sachs will see it. Have a blessed and prosperous day. Thank you for all your support.)