Generations of children have enjoyed the story of Goldilocks and the Three Bears.
Papa Bear’s porridge was too hot and Mama Bear’s was too cold. But Baby Bear’s porridge was just right and Goldilocks ate it all up.
It seems economists like fairytale characters too.
David Shulman of Salomon Brothers wrote a piece in March 1992. He called it ‘The Goldilocks Economy: Keeping the Bears at Bay.’
A ‘Goldilocks Economy’ is one that is not too hot nor too cold. It’s not so hot that it causes inflation, and not so cold that it causes a recession.
The term describes an economy that is operating in an ideal state. It has benign inflation, full employment, low interest rates, increasing asset prices (stocks, real estate, etc.) and brisk but steady GDP growth.
The world’s biggest bond fund believes we’re in a Goldilocks environment. And they think the trend will persist throughout 2018.
In their regular ‘Cyclical Outlook’ report, PIMCO economists Joachim Fels and Andrew Balls put out their forecasts for 2018. They see real (inflation adjusted) world economic growth of 3.0–3.55 in 2018 — about the same as in 2017.
PIMCO is the world’s biggest bond fund with about US$1.7 trillion under management.
In their report, the analysts say:
‘Barring a zombie apocalypse or a sudden spontaneous collapse in asset prices, the current Goldilocks environment of synchronized, above-trend global economic growth and low but gently rising inflation will likely persist in 2018.
‘In fact, recent growth momentum has been even better than expected across many economies, providing a strong ramp into next year. Moreover, easier financial conditions (reflecting buoyant markets for risk assets and still-low interest rates) imply sustained near-term tailwinds, and fiscal stimulus in the U.S. and elsewhere in the advanced economies is forthcoming. Meanwhile, China keeps suppressing domestic economic and financial volatility while fundamentals in many other emerging market (EM) economies continue to improve. Taken together, PIMCO’s baseline forecast is for world real GDP growth in a 3% to 3.5% channel in 2018, about the same as in 2017 and a quarter point higher than in our September forecast.’
The economists warn that a Goldilocks-extended scenario is very much baked into consensus opinion and asset prices. In other words, the stock market is fully priced for a Goldilocks economy to continue.
In their forecast for the world’s biggest economy, PIMCO are looking for above-trend real GDP growth in the US of around 2.5% in 2018.
The US Federal Reserve Board agrees. The Fed now predicts 2.5% growth for the US economy in 2018, up from the previous estimate of 2.1%.
Retiring Fed Chair Janet Yellen painted a rosy picture of the economy. She gave her final scheduled press conference last Wednesday after the Fed raised rates as expected.
Yellen said during question time:
‘The global economy is doing well. We’re in a synchronised expansion. This is the first time in many years that we’ve seen this. Inflation around the world is generally low. So I think the risks are balanced, and there’s less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook.’
Regarding the stock market generally, Yellen said the Fed characterised valuations as ‘elevated’.
‘But economists are not great at knowing what appropriate valuations are,’ she added. ‘We don’t have a terrific record, and the fact that those valuations are high doesn’t mean that they are necessarily overvalued.’
So there we have it. The biggest bond fund in the world paints a rosy picture of the global economy and the world’s biggest central bank agrees.
We’re very fortunate. Our colleague Phil Anderson at Cycles, Trends and Forecasts didn’t wait until December 2017 to turn bullish for next year.
He’s been saying it for years. And we’ve been privileged to listen.
Phil has summed it up in a picture that’s worth a thousand words:
Source: Cycles, Trends and Forecasts
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Phil has used his Grand Cycle Theory to accurately predict market moves time and time again.
It flies in the face of conventional wisdom on Collins Street, Martin Place and Wall Street.
Imagine the benefit of having such foresight. Back in 2004, Phil warned of the ‘winner’s curse’ phase about to unfold. This proved to be the final couple of years into the peak of the cycle.
It’s when real estate buyers leapfrog each other, chasing higher and higher prices into the peak in 2007. All financed by reckless lending from the banks. Maids were able to borrow $1 million without any hope of being able to repay.
Importantly, Phil also forecast the best time for buyers to step back into the market to buy real estate and stocks. Years ahead of the event, he said real estate prices would bottom out in 2010/11. And the stock market would bottom out a year or two beforehand.
History proves this foresight was remarkable.
For Markets & Money