Top of Mind at Goldman Sachs

Many view the recent rise in the unemployment rate as a concerning sign about the economic outlook, fueling recession fears. Could the US economy fall into recession, and will overly tight Federal Reserve policy be to blame? In the latest episode of Goldman Sachs Exchanges, Allison Nathan discusses these questions with three top economic minds: Claudia Sahm, the creator of the “Sahm rule” and Chief Economist at New Century Advisors, former Federal Reserve Bank of New York President Bill Dudley, and Goldman Sachs Vice Chairman and former Federal Reserve Bank of Dallas President Rob Kaplan. This episode explores the latest Top of Mind report, “Is the Fed behind the curve?”

With the strength of the IPO market and the surge in IPOs via SPACs continuing into 2021, host Allison Nathan, creator and editor of the firm’s Top of Mind report, asks experts whether or not these trends are sustainable. She speaks with Goldman Sachs’ head of Global Equity Capital Markets, David Ludwig, Professor of Finance at the University of Florida, Jay Ritter, and Professor of Business and Law at Stanford Law School, Michael Klausner. A note to subscribers of the Top of Mind at Goldman Sachs podcast: going forward, we will be publishing future episodes as Exchanges at Goldman Sachs so please be sure to subscribe to that feed.

After the US Dollar surged in late March as investors rushed to its safety amid the global onset of the coronacrisis, its value has since declined sharply. As uncertainty about the virus trajectory and the global economic recovery continues to loom large, the key question from here is whether this retrenchment marks the start of a multi-year Dollar down cycle, and, even more fundamentally, an erosion of the Dollar’s dominance in the global monetary system.  In this episode, host Allison Nathan interviews three experts to answer these questions: UC Berkeley’s Barry Eichengreen, Cornell’s Eswar Prasad and Goldman Sachs’ own Zach Pandl. They don’t necessarily agree on the direction of the Dollar ahead, with Eichengreen less convinced than Pandl that the Dollar is set for a period of sustained depreciation. But they do agree that despite economic and geopolitical trends that suggest an eventual erosion of the Dollar’s global role, there’s still a long way to go before potential Dollar substitutes—the Euro, RMB and digital currencies—challenge its dominance.

The US presidential election is shaping up to be one of the most contentious and consequential in modern history, making its potential policy, growth and market implications Top of Mind. In this episode, host Allison Nathan discusses the candidates’ economic policy priorities with Kevin Hassett, former Chairman of the Council of Economic Advisers under President Trump, and Jared Bernstein, economic adviser to former Vice President Biden. For perspectives on US foreign policy, she speaks with Eurasia Group’s Ian Bremmer, who sees significant alignment between the candidates on many key foreign policy issues—including trade.

Well into the COVID-19 pandemic, countries continue to grapple with managing the virus while restoring economic activity. Where the virus will go from here, what that means for the economy and markets—and how the vaccine outlook might impact everything—is Top of Mind. In this episode, Allison Nathan speaks to Harvard’s Dr. Marc Lipsitch, who believes that the rising expectation for a resolution of the pandemic in 2021 is a plausible best-case scenario, but one we likely won’t be sure of until at least midyear. Our own Jan Hatzius argues that economic activity should be able to normalize further even if the virus remains an issue, and that a vaccine would only reinforce the economic recovery. Finally, Allison asks CEPI CEO, Dr. Richard Hatchett, if the rise in vaccine optimism is warranted. He’s also hopeful about the vaccine timeline, but cautions vaccines likely won’t be a magic bullet.

America appears to be at a point of reckoning with its long history of social and economic racial inequality. How to close the large and persistent Black-white earnings and wealth gaps central to this inequality is not just Top of Mind, but one of the most pressing questions of our time. In this episode, Allison Nathan interviews Kerwin K. Charles, dean and professor at the Yale School of Management, for perspective on the magnitude of these gaps, their evolution over time, and what these trends suggest for effective policy solutions moving forward. And we dig into racial gaps in healthcare with Dr. John Z. Ayanian, director of the Institute for Healthcare Policy and Innovation at the University of Michigan; and access to capital and professional advancement with Margaret Anadu, the firm’s head of the Urban Investment Group. All are core areas that must be addressed if we’re serious about reducing economic inequities. Our key takeaway: overcoming these inequities will require a holistic approach from all areas of society, and coming together to achieve this goal is not only a moral imperative, but also essential for the health and vibrancy of our economy and our nation more generally.

Government deficits, debt issuance and debt levels are set to surge as countries race to ease the economic impact of the coronacrisis. This raises many questions: who will finance this debt, will it force a market repricing and/or an eventual growth or inflation problem, and would greater use of negative rates help avoid any of these risks? At the same time, whether corporate bankruptcies could derail the economic recovery is a key concern. In short, how disruptive the recent, dramatic shift in debt dynamics might be is Top of Mind. In this episode, Allison Nathan consults Harvard professor Kenneth Rogoff, University of Pennsylvania’s David Skeel, and Goldman Sachs’ chief economist Jan Hatzius. Our key takeaways: the benefit of running large deficits today far outweighs any eventual costs; worries about distress in emerging markets and the Euro area are largely warranted; and a likely wave of corporate bankruptcies could prolong—but likely won’t derail—the economic recovery.

With mitigation measures leading to an apparent leveling off of case growth globally at the same time that the economic costs of such measures continue to mount, several countries around the world have begun to plan for—or have already started to implement—economic reopening. But absent herd immunity or a vaccine, such reopenings increase the risk of a resurgence. With this in mind, what a safe reopening might look like, how well-positioned the US is to achieve one and how quickly reopening would really translate into economic recovery is Top of Mind. In this episode, we consult three experts on these questions: University of Pennsylvania’s Dr. Zeke Emanuel, Duke University’s Dr. Mark McClellan and Harvard University’s Dr. Barry Bloom. Finally, with more complete economic normalization only likely with an effective testing regime, treatments, or a widely available vaccine, we discuss where we are on all of the above.

The global oil market is experiencing a massive demand shock, with demand for transportation fuels sitting in the crosshairs of the coronavirus crisis. At the same time, major oil producers have engaged in a war for oil market share, resulting in a sizable supply shock. The impact of these simultaneous shocks on oil prices, OPEC+, the oil industry, and credit and financial markets more broadly are Top of Mind. In this episode, Allison Nathan interviews three energy experts, Pulitzer Prize-winning author, Daniel Yergin, PIRA Energy Group Founder, Gary Ross, and our own head of Global Commodities Research, Jeff Currie. They discuss the enormity of the current oil shock, how we got here, and what’s in store—namely, sharply lower, and even negative, crude oil prices as oil infrastructure is overwhelmed by the supply surge. But they also argue that the sharper the price decline, the sharper the eventual rebound as oil production is shut in.

Coronavirus has pushed the global economy into a recession of historic proportions and halted the longest-lasting equity bull market on record. As infections spread globally, economic activity collapses, markets recoil and policymakers respond, the depth and duration of the economic and market downturn is Top of Mind. In this episode, Allison Nathan speaks with the former Chair of the Council of Economic Advisers, Jason Furman, and Goldman Sachs’ Chief Economist, Jan Hatzius. Both agree that the near-term economic damage will be severe, but whether it proves longer-lasting will depend largely on the virus’ trajectory and somewhat on policymakers, who have done a lot, but may need to do more to sustain households, businesses and market functioning in this difficult period. To that end, we assess the risk that the global health crisis becomes a financial crisis. And we discuss how this might play out in markets, and what investors should do from here. For that, we draw on the wisdom of Oaktree Co-Chairman, Howard Marks. His advice? Buy things with solid fundamentals when they go on sale.

Amid many concerns heading into 2020, the event that no one expected was the outbreak of COVID-19—a coronavirus that first emerged in the populous city of Wuhan, China, and which is now proving to be both more infectious and virulent than the common flu. As China attempts to restart its economy after an unprecedented lockdown, the virus continues to spread globally, and data on the sizeable economic fallout starts to trickle in, coronavirus is Top of Mind. We feature expert interviews with Harvard’s Dr. Barry Bloom and University of Minnesota’s Dr. Michael Osterholm to better understand what we know—and don’t know—about the virus today. We also interview Goldman Sachs’ Chief Economist Jan Hatzius about the economic impact of the outbreak—both on global growth and actions of central banks around the world.

In this episode, we dig into what may be the most important issue of our time: climate change. On the heels of a climate-focused World Economic Forum in Davos, the unveiling of Europe’s new Green Deal, and increased attention on climate change by the world’s largest asset managers and banks, climate change is undoubtedly Top of Mind. We speak with Michael Greenstone of the University of Chicago, Nathaniel Keohane of the Environmental Defense Fund and Goldman Sachs’ Steve Strongin about the climate challenge, and what it will take to address it. We also discuss how capital markets and climate policy are driving transformational shifts in the energy industry, and what it means for sector returns. Finally, the head of the Goldman Sachs Sustainable Finance Group, John Goldstein, provides insight and advice on ESG investing and integration, and the growing implications of shareholders and clients increasingly demanding more accountability on climate.

With monetary policy, conducted by central banks, nearly exhausted in the major economies and low interest rates globally, whether fiscal policy, conducted by governments, should play a greater role from here is Top of Mind. In this episode, Goldman Sachs Research’s Allison Nathan interviews former IMF Chief Economist, Olivier Blanchard, Harvard professor, Alberto Alesina, and Goldman Sachs’ Chief Economist, Jan Hatzius. They discuss whether increased fiscal stimulus today would do more good than harm, and, even if it would, whether the economies that need it the most will pursue it. Our key takeaways: Germany should embrace a large fiscal expansion, but likely won’t; investors should expect some more fiscal stimulus in China, but only enough to avoid a sharp slowdown. Audio of former European Central Bank President Mario Draghi is courtesy of the European Central Bank YouTube channel via the Creative Commons Attribution license https://www.youtube.com/watch?v=TjIaLD4I8go).

The market has once again been gripped by recession fears at the same time that geopolitical and policy risk is flaring up. Some of these risks—like the US-China trade war—are feeding recessionary fears, while others—like the attack on Saudi oil facilities that led to the largest ever daily disruption in oil supplies—have gone almost unnoticed. And this is despite the fact that oil shocks were one of the most common causes of recession historically. Whether this complacency is warranted, and the vulnerability of the economy and markets to this and other geopolitical shocks, is Top of Mind. In this episode, Goldman Sachs’ Head of Energy Research Damien Courvalin explains why the oil market is much better positioned to deal with supply outages today, and thus is a less likely recession trigger than in the past. But the Council on Foreign Relations’ President, Richard Haass, and Columbia Professor Richard Nephew explain why instability looks set to rise in the Middle East and beyond.

President Trump has voiced concern that a strong Dollar is damaging US competitiveness. Of course, exchange rates do matter for trade, and the US' non-oil trade balance has deteriorated sharply since the Dollar began to climb in 2014. So it’s no surprise that Trump’s laser focus on the US trade deficit would end up targeting Dollar strength—and that currency would become another front in the US-China trade war. Whether the US should, could, and would begin to proactively manage the Dollar, and whether these actions—or further trade war escalation—could lead to a global “currency war” is Top of Mind.   In this episode, Goldman Sachs Research’s Allison Nathan gets perspectives from the Peterson Institute’s Joseph Gagnon and the Council on Foreign Relations’ Brad Setser; both believe that Dollar strength and the associated US trade deficit are cause for concern, but see low odds of US foreign exchange intervention that triggers a currency war (Goldman Sachs analysts agree). But given that China has been managing the Yuan stronger than it otherwise would be, trade war escalation that motivates a sharp Yuan depreciation could be such a trigger.

The US Federal Reserve’s sharp pivot toward easing amid substantial White House pressure has raised concerns about central bank independence, as have developments in other advanced and emerging market economies alike. How worried we should be about this threat—and its implications for policy, the economy, and markets—is Top of Mind. In this episode, Goldman Sachs Research’s Allison Nathan interviews former central bankers Donald Kohn and Sir Paul Tucker who explain why central bank independence is critical to maintaining price and financial stability—even today when too little, rather than too much, inflation is the main problem. But while Kohn is concerned that Trump’s overt pressure could undermine Fed credibility, Tucker worries more that over-reliance on central banks since the GFC has left them vulnerable to politicization. Nathan also speaks with the firm’s chief economist Jan Hatzius who does not believe the Fed has responded directly to pressure from the White House, but does think that political pressure could already be influencing Fed policy through indirect channels such as bond market pricing. That said, Hatzius argues this in itself shouldn’t inflict too much harm on the economy unless inflationary pressures rise materially.

With the US expansion now the longest on record and no shortage of risks on the horizon, growth uncertainty is Top of Mind. This uncertainty has been at the heart of the dovish pivot from central banks this year, which has generally helped push bond yields lower in anticipation of Fed rate cuts ahead, but equity prices higher. So just how concerned about growth should we really be? In this episode of the Top of Mind at Goldman Sachs podcast, Goldman Sachs Research’s Allison Nathan asks Bridgewater’s Ray Dalio, Goldman Sachs’ Jan Hatzius and others to weigh in. Dalio argues that recent price action makes sense given the Fed’s easier stance, but worries we’re pushing the limits of monetary easing, which—among other political and geopolitical factors—will ultimately bring about a negative shift in growth and markets. But Jan Hatzius argues that markets are perhaps too concerned about growth and not concerned enough about the direction of Fed policy, as the costs of easing now potentially outweigh the benefits.

The prospect of a larger and longer trade war has increased as US-China trade negotiations have taken a turn for the worse and President Trump has opened up trade battles on new fronts. Allison Nathan from Goldman Sachs Research speaks with experts about how we got here, where tensions may go from here, and potential implications for the global economy and beyond in this episode of Top of Mind at Goldman Sachs.

Elections for the European Parliament taking place May 23-26 are setting up to be exceptionally important given the rise of populist and nationalist forces that threaten Europe’s long-standing centrist status quo. Some even see this election as a crucial moment in deciding the future of the European Union. Allison Nathan from Goldman Sachs Research talks to experts about the potential implications of this important election in this episode of Top of Mind. José Manuel Barroso, former President of the European Commission and Chairman of Goldman Sachs International, gives firsthand insight on the large and growing relevance of the European Parliament. Mark Leonard, Director of the European Council on Foreign Relations, provides his view on how a possible realignment in power at both the European and national levels could disrupt everything from EU leadership appointments, to trade deals, to the EU’s budget— not to mention implications for fiscal policy in member countries, among other policy areas.

The surge in US corporate buybacks to all-time highs in 2018 has generated public debate about the effects of buybacks on workers, companies, and the economy. We speak with William Lazonick, prof. at the University of Massachusetts, about the concerns driving this debate, at the core of which is the notion that buybacks come at the expense of investment. But GS portfolio strategists see little evidence of this. Aswath Damodaran, prof. at the NYU Stern School of Business, argues that’s because buybacks redirect—rather than reduce—investment, and trapping cash in firms that don’t have a good use for it instead would harm their competitiveness. More broadly, Steven Davis, prof. at The Chicago Booth School of Business, explains that such an inefficient allocation of resources would shrink the size of the economic “pie” and likely reinforce the unequal distribution of it. As for market impacts, we conclude that banning buybacks would likely lead to lower and more volatile US equity markets.