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Goldman Sachs is bullish on America. Although it hasn't officially adopted the theme once identified with Merrill Lynch, Goldman's economists and strategists have gone from being among the more circumspect about the prospects for the U.S. economy and stock market to among their biggest boosters.
Nowhere is this better exemplified than in an opinion piece in Tuesday's Financial Times by Jim O'Neill, the influential chairman of Goldman Sachs Asset Management, headlined "This will be the year that the U.S. makes its comeback." A target of 1500 for the Standard & Poor's 500, some 16.6% above current levels, stands out in Goldman's optimism.
America will surprise by not emulating Japan's two lost decades, he contends. At the same time, O'Neill sees the credit crisis as not being altogether bad for the U.S. by forcing Americans to boost their savings. This is gleaned from what he admits is an observation from 40,000 feet and a pure macro level. "An economy cannot live off borrowed money forever, especially when it is that of overseas investors."
In nearly the next breath, O'Neill praises U.S. policy makers for their decisiveness -- in enacting massive fiscal and monetary stimuli, which amount to borrowing and printing money.
The impact of the Federal Reserve's purchases of $600 billion of Treasury securities and the fiscal deal hammered out by the White House and Congressional Republicans at year-end is apparent in the major stock averages' hitting highs not seen since August 2008.
It is the most marvelous rally that a couple of trillion of dollars injected into the economy via government borrowing and the central bank's printing presses can buy. And market sentiment reflects as much.
The latest Investors Intelligence polling of newsletter advisors has bullishness back to within spitting distance of its December peaks while bearishness is the lowest since May just before the Flash Crash (remember that?) Meanwhile, the VIX, the so-called Fear Gauge of options premiums on the Standard & Poor's 500, is back down to levels that BCA deems consistent with complacency.
While the flood of government liquidity expansion is lifting all boats on Wall Street, it is having a different effect on Main Street. There, commodities prices don't represent an "asset class" but a cost of living. Soaring food and fuel costs are hitting households earning $67,000 or less particularly hard. That represents three-quarters of the population.
Thanks for that data goes to Joan McCullough of East Shore Partners, whose invaluable daily insights put in perspective the diverse effects of money and markets between the high and mighty and hoi polloi. Her latest missive reminded me of a recent dinner I attended with estimable investors whose careers almost certainly predated the introduction of Merrill's famous ad slogan in 1971.
In a club housed in a brownstone on Manhattan's East Side, over a dinner of fine beef and even better wines, the conversation inevitably turned to investment ideas, especially those that would prosper with the potentially inflationary effects of the "decisive" expansionary policies lauded by O'Neill.
One participant suggested not commodities, gold or energy stocks but the shares of the mega-retailer known for its everyday low prices. Whether the future holds inflation or deflation, the masterful management of this retailer will find a way to maintain profits, he said.
McCullough corroborates this thesis, albeit from a vastly different perspective in a conversation with two middle-aged women working the night shift at some big-box retailer. There's no way to know if it's the same retailer whose shares were touted at my posh dinner, but it's hard to conceive that the conditions the ladies describe is unique to their employer.
With the upsurge in input costs, their supervisors have come down hard on them to, in effect, do two shifts' of work in one. That means stocking twice as many shelves. There's also talk of cutting back benefits, such as boosting their portion of health-insurance costs, they said, which will take a bigger chunk out of their 11 bucks-and-change hourly wage (which includes an extra dollar for working overnight.)
That's how the cost of skyrocketing cotton futures gets absorbed in the price of tee-shirts -- by squeezing the compensation of lower-level employees who put them on the shelves. And those folks have to pay more for their groceries, to fill their autos' gas tank and to heat their houses.
From 40,000 feet, the policies that have lifted stock prices look terrific. At ground level, the view is different.
Comments: E-mail randall.forsyth@barrons.com
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