Goldman ignores double dip warnings

Goldman Sachs Investment Management
is recommending to its high net worth clients that they keep a long-term focus
and stay fully invested, even amid the growing correction in equity markets and
the louder calls for a double-dip recession.

In a report entitled ‘Double Dip or
Double Up?’ that is being bandied about on trading-room floors today amid the
rally, Goldman’s strategy group (not associated with their research division)
cites the rarity of a double dip retrenchment, flaws in bearish technical
analysis, policy overhang and cheap valuations as reasons for its bullish
long-term view.

“Even slow 1-2 per cent GDP
expansion would be sufficient to generate positive earnings growth from current
levels,” states the report. “We believe that clients should continue
to use market weakness to build toward or maintain their strategic equity allocation.”

The report points out that a double
dip recession has happened only twice, in 1981 and 1931, with a tightening of
monetary policy the common denominator in both. “We believe that it is
highly unlikely that the Federal Reserve will tighten monetary policy anytime
in the foreseeable future.”

Not all investors agree in this
thesis. “Just because double dips are rare does not mean they cannot occur,”
argues Brian Kelly, founder of Kanundrum Capital. “The distinguishing
characteristic that makes this recession and recovery different is the popping
of the credit bubble. Credit is the engine of the economy and has been growing
exponentially since WWII – it is now declining. Without credit growth, the past
assumptions about an “average” recovery are completely invalid.”