Lloyd Blankfein worries that tax cuts and a government spending spree could overheat the US economy

Lloyd Blankfein worries that tax cuts and a government spending spree could overheat the US economy

Goldman Sachs CEO Lloyd Blankfein: 'I haven't felt this good since 2006'
Goldman Sachs CEO Lloyd Blankfein: ‘I haven’t felt this good since 2006’

Lloyd Blankfein is worried that a spending spree bythe Trump administration could overheat the American economy.

“The odds of a bad outcome have gone up,” the Goldman Sachs CEO told CNN’s Christine Romans in an interview airing Wednesday.

Blankfein noted that the economy was already humming along before the federal government juiced it with $1.5 trillion in tax cuts and $300 billion of additional spending, pushing up the budget deficit. And now, President Trump has proposed a $200 billion infrastructure package.

That kind of spending is normally reserved for recessions — or at least fragile recoveries — not booms.

While it’s not his “base case,” Blankfein said the risk is that all that stimulus could be “too much of a good thing” for the economy and financial markets.

“Don’t forget, all of these deficits have to be paid for,” he said on the sidelines of Goldman’s 10,000 Small Businesses Summit.

Related: Trillion-dollar deficits will hit sooner than expected

Wall Street loudly celebrated after Trump and the Republican-controlled Congress delivered major tax cuts in December. At one point last month, the Dow was up 45% from the level it was at when Trump won the election. The index jumped 1,000 points in the space of just seven trading days in January.

Optimism is also on the rise among smaller companies. A recent survey by the National Federation of Independent Businesses found that owners of small firms say this is the best time in decades to expand.

For Blankfein, who became Goldman CEO nearly 12 years ago, the current upbeat mood is laced with memories of the heady days that preceded the global financial crisis.

“What could possibly go wrong? I haven’t felt this good since 2006,” he joked.

Related: Are Trump’s tax cuts backfiring on Wall Street?

Investors have begun to worry about a potential hangover. Fears that inflation will force the Federal Reserve to end the party by aggressively raising interest rates sent the Dow plunging 1,300 points, or 5.2%, last week. It was the index’s biggest weekly drop in two years.

“If the economy starts to overheat, and the Fed feels that it’s behind” on inflation, it will need to act, Blankfein said.

Concerns about runaway inflation forced the Fed to scramble in 1994 by dramatically raising rates more than Wall Street anticipated.

“I remember 1994,” Blankfein said. “That’s possible, too. That would be quite jarring to the economy.”

Heavy selling has already lifted the 10-year Treasury yield from 2.4% at the start of 2018 to around 2.85% today. That’s critical because Treasuries help set the price for virtually every other asset. Higher returns for U.S. government debt, which is seen as an ultra-safe investment, could hurt demand for riskier assets like stocks.

While Treasury yields remain historically low, they are climbing. That’s down to a variety of reasons, including the stronger economy, more inflation and concerns about rising deficits that could reach $1 trillion in fiscal 2019.

Related: The bond market scare might not be over

Washington’s spending binge will force the Treasury to borrow more by issuing more bonds. Those bonds will need to be sold at the same time that the Fed is winding down its past stimulus efforts, which were known as quantitative easing (QE), by offloading vast amounts of Treasury notes.

“They have a competitor: the central bank,” Blankfein said. “They’re going to sell into the same kind of market to the same investors.”

To be clear, Blankfein isn’t predicting disaster. He noted that interest rates remain relatively low and said his “base case” is that the economy will stay broadly on track.

Still, he urged individual investors to tread carefully.

“I wouldn’t throw all in,” Blankfein said. “With the Fed raising rates, with the withdrawal of QE, with the budget deficit widening out, I wouldn’t say this is the time I would max out on my risk.”

Published at Wed, 14 Feb 2018 12:41:45 +0000

Blankfein: Economy is higher under Trump than if Clinton won

Goldman Sachs CEO Lloyd Blankfein: 'I haven't felt this good since 2006'
Goldman Sachs CEO Lloyd Blankfein: ‘I haven’t felt this good since 2006’

President Trump’s closing campaign ad portrayed Lloyd Blankfein as a globalist villain. Perhaps the Goldman Sachs CEO will play the role of hero next time.

Blankfein, who backed Hillary Clinton in the election, is giving Trump credit for the soaring American economy.

“If the president didn’t win, and Hillary Clinton won … I bet you the economy is higher today than it otherwise would be,” Blankfein told CNN’s Christine Romans in an interview that aired on Wednesday.

Blankfein was responding to a question about how much credit Trump should get for the stock market surge and stronger economic growth.

The Wall Street titan didn’t exactly embrace Trump.

“At the time I supported Hillary Clinton. We’re not talking about all things. We’re talking just about the economy,” Blankfein said on the sidelines of the Goldman Sachs(GS) 10,000 Small Businesses Summit.

The U.S. economy is indeed strong. Unemployment has dropped to a 17-year low, small business optimism is roaring, and economic growth has picked up.

If anything, Blankfein is worried that the Trump administration could be overheating the economy, raising the risk of inflation. He mentioned the federal deficit, which will balloon because of $1.5 trillion in tax cuts and $300 billion in additional spending.

“The odds of a bad outcome have gone up,” Blankfein said.

Related: Blankfein: Odds of a ‘bad outcome’ for economy have gone up

Inflation numbers released on Wednesday renewed Wall Street’s concerns that the Federal Reserve will need to cool off an overheating economy.

Even though Trump portrayed Blankfein and Goldman Sachs as part of the problem during the campaign, he filled his administration with veterans of the influential bank. Treasury Secretary Steven Mnuchin and chief economic adviser Gary Cohn are Goldman alums.

To support its economic track record, the White House promotes the $1,000 tax cut bonuses that have been handed out by major companies like Walmart(WMT), Bank of America(BAC) and JetBlue(JBLU).

But Blankfein said they won’t make a lasting difference for workers.

“I think a lot of it is symbolic and making a statement,” he said. “We’re dealing in a world of sentiment. Symbolism matters.”

The one-time bonuses also won’t solve income inequality, which Blankfein said has “created political instability” and is being “compounded” by the rise of technology.

He gave the example of a hypothetical ride-sharing company that garners a $50 billion market value, but displaces 30,000 taxi drivers along the way.

“It’s kind of a wealth transfer in the short term, from labor to capital,” Blankfein said. “Over time, people find other jobs to do, other things to do, but that’s over time. And by the way, it may not be the same people.”

Related: ‘Main Street is roaring’: Wages are rising, survey says

Like other CEOs, the Goldman Sachs boss lamented the “poison politics” of today, in which “extremes of both parties” are being elected by promising not to compromise.

“So everyone goes to Congress and gets nothing done,” Blankfein said. “Would we have a country if people went to Philadelphia [to form the Continental Congress] that way? Of course not. It’s crazy.”

Business leaders like Blankfein have criticized Washington’s unsteady handling of the Deferred Action for Childhood Arrivals program, an Obama-era initiative known as DACA that protects immigrants brought to the United States as young children.

The status of these immigrants known as Dreamers has been in limbo as Congress debates what to do with DACA.

“I couldn’t bear the idea of sending outside the country someone who grew up here his or her entire life,” Blankfein said.

Blankfein said he understands that some Americans struggling with unemployment “view immigrants as a threat.” However, he noted that “over time immigrants add to the economy because they bring in skills.”

He expects DACA to be resolved through a compromise — eventually.

“This is a political event, it involves sentiment, but it isn’t necessarily ruled by reason,” Blankfein said.

Published at Wed, 14 Feb 2018 15:50:19 +0000