YouSaid · the spoken record

Jake Norton

lines on the record: 27
first: 2017-10-30
most recent: 2017-10-30
sittings or episodes: 1
sources: podcast

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“a sort of second opportunity to sell the market around that time, assuming that is that you can recognize in real time that the bounce is not just the end of a small correction, but is rather the start of something more severe. And that's the complicated thing because many times towards the peak of the market when you do get a correction, people see it as a great buying opportunity, which is in a sense why you get that balance. But recognizing when you get a shark correction and a bounce, but some of these broader conditions that we've been describing are in place, gives you a bit more confidence that this is really an opportunity to be lightening up on risk.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Market kicks in. And that's interestingly about the same size as the fall you get in the first three months of a decline. So someone who sort of pulls out three months early is relatively speaking pretty much in the same position as someone who stays fully invested and waits until the bear market actually starts in order to tell. But the second factor which is quite interesting is that in equities bear markets very, very rarely start with a precipitous collapse in equities that takes them all the way down to the 30% or so that they finally tend to fall. What nearly always happens is that you get increased volatility around the peak and typically what we describe as a bear market bounce. That is to say all bear markets tend to start with a correction and then very sharp rebound before you get a more persistent decline. So at least theoretically there's typically”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“This is a very interesting question, Jake, because one of the slightly encouraging things that we found looking at bear markets in the past is that trying to predict the actual peak of a market, A, is a very difficult thing to do unless you're extremely lucky. But secondly, may not be that much worth doing. It's much more important to try and identify when the trend changes rather than what the particular day of the peak of the market would be. Give an example, we found that on average in the US, an investor who might be very clever and recognize that a bear market is coming and sells everything just three months before the peak, loses on average the opportunity to see about a seven percent rise. That's the typical rise that you see in equities in the four.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Now, why do I say this? Well, as I mentioned earlier, structural bear markets really need to see major imbalances unwinding. They tend to result in very deep and long, intractable recessions, and typically they're associated with financial bubbles. And in many respects, I think the period since the financial crisis has seen a lot of those sorts of imbalances unwind, or at the very least, some of these imbalances being shifted away from the private sector or the corporate sector towards the official sector, which means that they can be managed much more carefully. So I think the structural bear market is much less likely. When we've looked at the indicators that we put together previously, some of the conditions for a more cyclical type of bear market are in place, but again, the key thing that is not yet in place is that rise in inflation expectations.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Going back to your three types of bear markets, event driven bear markets a little hard to predict. We'll take that off the table. But between a structural bear market and a cyclical bear market, which seems more of a risk at the moment.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“For about seventy five percent of the return that equity investors have enjoyed. So there is a big question about the reversal of this quantitative easing, depending on how quickly it happens, whether that pushes down the valuation component of the return, whether it pushes, for example, P multiples lower, and that at the very least reduces the return available, and in a worst case scenario actually pushes down prices. So I think that QE is going to be important as we see it gradually unwind over the course of the next several months and years.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“An important component here is a game valuation. I mentioned earlier that we can think of the last near decade as an environment of significant disinflation in the real economy, wages and consumer prices, even commodity prices, at a time when asset markets across the board of done very well, bond markets, credit, equities both in DM and emerging markets, but a good deal of that has reflected the impact of quantitative easing, pushing up valuations. Even here in the US, for example, around forty five percent of the return to investors since the low in two thousand eight or nine has come from valuation expansion, multiples, p multiples going up. In the case of the European equity markets, for example, where earnings have actually been much weaker than in the US, corporate earnings growth, valuation expansion has accounted for”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“The Hunt for Yield. The Hunt for Quantitative easing was obviously a historically unprecedented policy. And it's opposite, the unwinding of asset purchasing by central banks, rising interest rates will be similarly unprecedented. What will you be watching to see how resilient markets are as QE begins to unwind?”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Lack of alternatives is a very good way of putting things. Look, bear in mind we still have risk free rates, government bond yields or policy rates at close to zero, certainly in real terms. And there is a necessity and a requirement to get and generate a return. And if you've got a combination of strong growth with still very, very low interest rates, there's a willingness to move up the risk curve into assets like equities. And although their valuations in absolute terms are high, things like P ratios or cyclically adjusted PE ratios are high relative to history, you still got a relatively attractive income that they generate compared to what you can get if you lend money to the government or put your money into an interest-bearing deposit. So there's still some relative value there. And as long as investors still believe that growth”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Are still pricing very low in stable interest rates. An adjustment in those interest rate expectations could well trigger some kind of pullback in financial markets. And if interest rates are really the key, what we would likely see in that situation is financial asset prices across the board adjusting downwards. And it would be an environment where most financial markets were quite highly correlated. It would be difficult to protect from that kind of an adjustment.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Well, I think again what's important here is really expectations. Inflation expectations have remained incredibly low. And one of the reasons for that is that expectations about growth continue to be pretty sandwine, and that's allowing the markets to continue to price a very modest pace of tightening of interest rates, even in the US, where the economy has been growing strongly now for a number of years. I think what we need to be very vigilant of is evidence that we're finally seeing wage pressures picking up because that could feed through into lower margins in the corporate sector and also into a more generalized rise in inflation expectations. Ordinarily, none of that would necessarily be a bad thing, obviously in some ways rising wages could be helpful. But given now high valuations in markets, and given that the financial markets”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“And there may be some very good structural reasons why inflation is staying low. Obviously, innovation in technology and disruption in many industries is keeping prices down. We're seeing still the effects of globalization, which is having a dampening effect on everything from wages to generalized prices. And some of this disinflation is very positive. It's giving a boost to consumers and keeping growth strong. And if we can maintain this combination of decent global balanced growth with very low inflation, then that would be a very healthy environment for, in particular, equity markets. But it is worth noting that while global growth is finally normalizing to the sort of pace we were seeing before the financial crisis, so far inflation expectations, and importantly, interest rates have not. We may find that just small rises in interest rates.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Well, I should say that the other four are not telling us that we're about to have a bear market, but the risks associated with them are certainly rising. And inflation is so important here because you asked at the beginning, Jake, about the differences between this and perhaps previous cycles that we've seen. And I think that one of the most dramatic differences between this economic cycle and previous ones is the absence of traditional inflationary pressures. Now I mentioned that the inflation that we've observed has rather more been in financial assets as interest rates have collapsed and we've seen quantitative easing coming through than we have seen inflation yet in the real economy.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Indicator, a Goldman Sachs proprietary indicator which looks at the pace of global growth, and that's currently pointing to around 4.5%, the best growth that we've seen and the most balanced growth since the financial crisis began, and 90-odd percent of the countries that we cover are seeing growth above their trend. Typically, that's suggesting that over time things will get less good, and that's a point where we need to be alert to those risks.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Again, it's somewhat related to the point about unemployment. When everything is going well and manufacturing surveys are showing that the economy is being fully utilized, the probability is that over some months you'll start to see a slowdown. Now, a slowdown in growth doesn't mean bad growth, but it's important to emphasize that in anticipatory markets like equities, it's not just the level that's important, but the rate of change, the second derivative. And very often when you get a slowing in the pace of growth, at a time when inflationary expectations and monetary policy are tightening, it's that combination together with already pre-existing high valuations that raise the risks. And indeed, in many parts of the world, we are seeing very strong growth right now, and that's to be applauded. That's a good thing. We have a current activity.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Unemployment is a reflection of course typically of a strong economy and when you have full employment you typically have full capacity utilization the economy is heavily utilized you don't have much spare capacity that tends to push up prices prices of wages prices of commodities and other factors of production and it's this sort of rise in prices which tend to lead to a tightening of monetary policy which ultimately starts to slow economic growth and raise concerns about a potential downturn it's also the case that in the US in particular when unemployment has reached very low levels just small rises in unemployment have nearly always preceded recessions so when you get to a very low level of unemployment as we see now in the US and in some other parts of the world it's usually a sign that we should start to be alert”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Are able to identify those factors most correlated, the onset of a bear market. Valuation was one of them. Another was unemployment. You found that when unemployment reaches the loan cycle, along with high valuation, it can pretend a pullback in equities. Explain why that is.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Thirdly, if you look at the US in particular, which is really leading the global economic cycle, we are at record profits in the corporate sector. We're at record margins, and that again would suggest that there's some risk that we're towards the peak of the cycle. And as you quite rightly said, QE has been a major driver of the bull market so far, and we may now start to see an unwinding of it, or at least a slowing of the monetary support that we've enjoyed in recent years. So these are all factors, I think, to take into account. But none of them of themselves are necessarily likely to be triggers for a market downturn. And I think what we found in our research is that you really need some kind of reason to worry about an economic downturn. And that typically requires some kind of meaningful tightening of monetary policy. And the absence of inflation still...”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“They do, I think there are some important factors that we need to be aware of which would raise the risks of a potential downturn, but none of them necessarily are catalyst. So you mentioned a couple of them already. It's been a long and strong bull market. That doesn't mean to say that it's going to end, but we're certainly not at the beginning of it. Secondly, valuations are very high. We think this is true across all financial asset markets, largely because of the extent to which lower interest rates and QE have boosted the valuations of financial assets. It's been an interesting period because while in the real economy we've seen a lot of disinflationary pressures, wages have hardly moved and consumer price inflation has been very low. Asset prices across the board have increased dramatically in recent years as a result of low rates and increased valuations. So that's another factor we need to take account of.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, and the market has adjusted to the higher risk and you get some kind of readjustment of expectations, but it doesn't have broader macroeconomic implications. The cyclical ones usually take two or three years for prices to fall to their lows and then they get back.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“fall 25 or 30 percent, the structural ones usually 50 or more percent declines. The event-driven ones are very short and sharp. They tend to be all over and dumb within about half a year and you're back to where you started within a year.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“The second group we call event driven are really, as the name suggests, bear markets that are triggered by exogenous shocks or some kind of one-off factor that increases uncertainty and has a negative effect on financial assets, particularly risky ones. So this might be something like an oil crisis or a buildup and geopolitical tensions or a conflict. And then the third type of which I already referred, which we think that the great financial crisis that we've lived through in the last decade relates to is what we call structural bear markets. And these are different from the cyclical ones because they preceded really by major imbalances in economies and usually financial bubbles. And it's the unwinding of these which create the bear market itself. The differences are important because both the event and cyclical driven bear markets tend to see price”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Yes, so we looked back at around 200 years of data predominantly in the US, and we found that you could really classify bear markets into different types according to their triggers. And the three that we came up with were what we called cyclical bear markets, event-driven and structural. Now, the cyclical ones, in a sense, the most common, and they're generally about investors worrying about a prospective decline in profits as a result of a potential recession. And nearly always they have some kind of monetary driver. In other words, a result of a tightening of monetary policy as inflation picks up late in the cycle.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Really focused on Europe. That became the second epicenter with what's now seen as the sovereign debt crisis, the banking crisis, which really plagued Europe predominantly through 2010 to 2012. And just as things started to recover from that following also very aggressive policy using in Europe, we saw a third wave which really focused on or reflected a collapse in global commodity prices and then a downturn in emerging economies, particularly around 2014 to early 16. So although in aggregate terms this has been a strong and longboat, it's actually come in various phases, all of which have looked quite alarming as they've evolved.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“It is, in absolute terms, in fact this has been one of the longest and strongest bull markets that we've seen in the post-war period, certainly in the US. But it is unusual because it's really come in different waves, and that again, I think, reflects the way that the markets have responded to the unminding of imbalances that pre-existed the financial crisis itself. We really focus on three waves. The first one, of course, was centered in the US with the collapse of the housing market and the downturn that that created in 2007 to 2009. It had global consequences, as you saw a broadening credit crunch and a very deep global recession. And the response to that was swift and very sharp, in particular through cutting interest rates. And initially, global economies responded positively and started to recover, but we had a second wave.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Yes, I think we like to describe this bull market as one of the most unloved in history. You know, it's been one of the longest and strongest, but many people don't really feel it in that way. We haven't seen the typical exuberance that you often get when prices rise in a way that they have done since the worst part of the financial crisis. And part of that is because the financial crisis itself was so significant and impactful. And the bear market that it created, we describe really as a structural bear market because like some others in history, it was really preceded by some major imbalances which unwound and had huge macroeconomic effects and also spillovers into financial markets. And because ever since then investors have been constantly looking over their shoulders for other potential tail risks that might have evolved, it's been really”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT
“Well, partly because we're not yet in a bear market, and it's always good to stand back when things are looking really good to look at the sorts of things that may change, that situation. And we found that, in fact, trying to pinpoint the absolute peak of a market doesn't often make that much sense. It's much more important to identify a change in the trend when it comes and what actually triggers those changes. Generally, I think finally we're starting to see quite significant investor optimism, global growth is strong and synchronized in a way that we really haven't seen since before the financial crisis. And we've had a long and strong bull market. Profits and margins are at record highs, at least in the US. Valuations are very high. And we're starting to perhaps see the exit of QE, which has been so instrumental in generating the high returns that we've had in exit. So I think all of those are reasons why we've wanted to look at this question now.”
2017-10-30 · Goldman Sachs Exchanges · The Bear Necessities · IDENTIFIED FROM THE TRANSCRIPT