US Bull, China Bear

Episode Summary

Executive Summary: Inside Economics featured a wide-ranging discussion with Goldman Sachs CIO Charmine Mosavar-Rahmani on the banking stress, Fed policy, recession odds, housing, and China. The panel generally agreed the banking crisis was likely contained, the U.S. economy remained resilient, and recession risk was elevated but not imminent. Charmine’s team stayed constructive on U.S. equities while remaining notably bearish on China’s long-term growth prospects.

Main Topics: Banking stress and systemic risk (Priority: 5/5): The conversation opened with the March banking turmoil. All speakers leaned toward the view that the worst of the regional-bank crisis was likely behind them, supported by aggressive policy backstops from the Fed, Treasury, and FDIC, though they cautioned that future failures were still possible. Fed policy and rates outlook (Priority: 5/5): Charmine said Goldman still expected one more hike to a 5.0%-5.25% terminal range, followed by a pause and data dependence rather than near-term rate cuts. The discussion emphasized inflation disinflation, labor-market resilience, and lingering effects of prior tightening. Recession probabilities and market signals (Priority: 5/5): The panel debated whether the inverted yield curve, corporate spreads, and equity-market behavior signaled recession. Charmine argued the market had already priced in much of the bad news and that a recession was possible in 2024 but not highly likely in the near term. Equities, valuation, and investment strategy (Priority: 4/5): Goldman’s stance remained supportive of U.S. equities, with an S&P 500 target of 4,200-4,300 by year-end. The reasoning centered on U.S. preeminence, earnings growth, and the idea that investors should stay fully invested rather than try to time volatility. Housing and consumer resilience (Priority: 4/5): Lower mortgage rates and improving pending home sales suggested housing may be bottoming, while rising real disposable income and still-healthy household balance sheets pointed to consumer durability, even if lower-income households remained under strain. China’s structural slowdown (Priority: 5/5): The longest section of the interview focused on Goldman’s bearish China thesis: demographics, debt, weak productivity, stalled reforms, geopolitics, and lower returns on capital imply materially slower long-term growth and reduced global demand spillovers.

Key Arguments: The banking crisis was probably past its peak because regulators were acting swiftly and calmly, suggesting they saw a more stable system than the market initially feared. A quarter- to four-tenths-point growth hit from tighter credit is plausible, but the effect may be partly offset by easier financial conditions and lower mortgage rates. Goldman’s Fed view was for a terminal funds rate of 5.0%-5.25%, a pause, and no quick rate cuts absent a new shock. The yield curve has a strong recession track record, but the timing is bimodal: either a recession arrives quickly or with a long lag, making 2024 the more plausible risk window. Equity markets may have already absorbed much of the recession/rate-hike risk through valuation compression, so flat markets do not necessarily contradict recession risk. The U.S. still deserves a structural equity overweight because GDP growth is usually positive, earnings compound over time, and U.S. institutions and capital markets remain dominant. China’s growth model is increasingly constrained by demographics, debt, state control, weak labor productivity, and geopolitical friction, implying much slower growth than in the pre-COVID era. Lower-income consumers are pressured, but aggregate household cash flow remains supported by rising real disposable income and excess savings, limiting near-term recession odds. Home prices and pending sales suggest housing may be stabilizing, though regional divergence remains large, with the West weaker than other areas. The team argued against crypto as a portfolio recommendation and favored strategic asset allocation instead of speculative bets.

Data Points: House hearing length: 4 hours - Mark Sandy discussed testifying before the House Budget Committee on the fiscal situation. Banking-crisis probability: 60%-70% - Charmine said the worst of the mini-banking crisis was more likely than not to be over. S&P 500 target: 4,200-4,300 - Goldman’s year-end base-case target discussed during the market outlook section. S&P 500 upside: ~9% from current levels / ~13% including dividends - Charmine framed expected equity returns as low-teens for the year. Fed terminal rate outlook: 5.0%-5.25% - Goldman maintained this forecast despite banking stress. Forecast GDP impact from banking stress: 0.2%-0.4% lower growth - The panel discussed estimates for the drag from tighter lending conditions. U.S. forecast revision: 1.5% to 1.3% - Mark Sandy cited the revised growth outlook after bank failures. 10-year Treasury yield: ~3.5% - Used in the yield-curve discussion about recession signaling. 2-year Treasury yield: ~4.2% - Used to illustrate curve inversion. 3-month Treasury bill yield: ~4.7% - Used to illustrate curve inversion. S&P 500 drawdown: ~25% peak-to-trough - Referenced as evidence that the market may already have priced in recession risk. Earnings forecasts decline: 10%-11% - Charmine noted earnings expectations had been marked down materially. Year-ahead inflation expectations (Michigan): 3.6% - Marissa cited the latest University of Michigan consumer inflation expectation. Pending home sales index: 83.2 - Marissa used the National Association of Realtors pending home sales index as a housing signal. Real disposable income growth: 3.3% y/y - Mark Sandy cited this as evidence of consumer financial firepower. U.S. real GDP growth (forecast): 1.5% revised to 1.3% - Discussed as the expected effect of banking stress on annual growth. Goldman recession probability: 40%-55% range / 50% base - Charmine referenced Goldman’s internal probability range for recession. Goldman equity-research recession probability: 35% - Mentioned as the view from Goldman’s global investment research team. Bill Dudley recession probability: 6% - Cited as one end of the spectrum among thoughtful forecasters. China GDP growth pre-COVID average: 7.7% - Used as the benchmark against which future growth is expected to slow. China GDP growth outlook: 3.5% in 2023-2032, falling to 2.5% by 2032 - Goldman’s long-term China forecast. MSCI China price performance: negative since inception - Used to support the view that China equities have underperformed structurally. US Nobel laureates in exhibit: 407 - A report exhibit comparing innovation and human capital across the U.S., allies, Russia, and China. C919 foreign component share: over 80% from the US and Western Europe - Used to illustrate China’s dependence on foreign technology inputs. Consumer confidence gap: 42.2 - Difference between Conference Board and University of Michigan consumer sentiment readings. Mortgage rate: around 6% - Discussed as a tailwind for housing relative to prior weeks above 7%.

Pivotal Quotes: "We call it caution-heavy fog." — Charmine Mosavar-Rahmani: Goldman’s annual outlook framing the high-uncertainty environment. "Our view is that they're actually going to be data-driven. So they'll get their pause and then they'll look at the data for a couple of months and then wait." — Charmine Mosavar-Rahmani: Fed policy outlook after one more expected hike. "The market has maybe low single-digit earnings growth. But if you actually have an economy growing and you have global growth at two to three percent, then your S&P 500 companies will generate reasonable earnings." — Charmine Mosavar-Rahmani: Explaining why Goldman remained constructive on U.S. equities.

Implications: Listeners should expect slower but still positive U.S. growth, a likely Fed pause after one more hike, and no immediate recession call. Investors should stay diversified and strategic, while treating China as a structurally slower-growth market with major global spillovers.