Bloomberg Television talks to Jan Hatzius, chief economist at Goldman Sachs and Gregg Lemkau, co-head of global M&A at Goldman Sachs at the Goldman Sachs Leveraged Finance Conference in Rancho Palos Verdes, CA.
Jan Hatzius discusses the risks associated with the Federal Reserve overshooting full employment, why he’s not worried about a U.S. recession, and corporate America’s constructive view of the U.S. economy.
- “I’m not very worried about a recession. I think the risk of recession — if I look at the indicators that seem to predict recessions the best –“
- “I think high yield spreads are obviously things that you want to monitor because you want to know what the market is saying, but I think, when I look at the risk of recession, I look at things like credit growth, where you are relative to full employment, and while we’re approaching it, I don’t think we’ve overshot it yet.”
Gregg Lemkau calls M&A pipeline for rest of year “good.”
- Lemkau says regulatory headwinds affecting big deals
“…and we’ve seen real regulatory headwinds, so the government has been a lot more active blocking transactions for both anti-trust and then for tax reasons, and I think in particular, as a risk to the largest transactions, that’s what’s chilled activity to a degree.”
- Biggest M&A concern is risk of antitrust
“If the deal is going to happen, everything’s great, and I think what we’re seeing now in a world where the anti-trust bodies are a lot more stringent on transactions is companies that are thinking about a deal where there might be a risk of anti-trust not approving it are going to think twice or think three times before they go out and do it, and I think that’s really what’s chilled some of the activity on a big, big scale.”
- Seeing “massive” pickup in China outbound deals, with most of them “interloping” other deals
“So we’ve seen a massive pickup in outbound M&A from China, so 26 percent of volumes –“
- Says volatility affects CEO confidence for deals
“…the one great qualitative factor that drives M&A is CEO confidence, and it’s hard to measure… even though the markets have recovered, I think the anxiety at the CEO level and in the board rooms is still there and they’re a little bit more cautious about going out and taking on some kind of external growth via M&A than they would have been a year ago”
Jan Hatzius: I’m Not Very Worried About a Recession
Goldman’s Gregg Lemkau on Mergers and Acquisitions
Jan Hatzius Transcript:
Alix Steel, Bloomberg Anchor: Jan, great to see you. I want to get to your overall take on the economy, but first, I want to get to the data that we saw today. I mean, we got (ph) umish last week, retail sales holding up pretty well, core CPI also rose. At what point does it become harder for the Fed to not hike rates if this data keeps coming in positive?
Jan Hatzius, Chief Economist, Goldman Sachs: I mean I do think it’s supportive of most of what we see, not everything. Empire yesterday was on the softer side but generally it’s supportive of the idea that we will see some rate hikes this year and we are getting that story from the Fed, people like Williams. But also, if you look at what Fed president Dudley said on Monday last week, it’s certainly supportive of the idea that we will get some hikes. At what point they come? I think that’s still a little more uncertain. June seems less likely now but I do think we’ll see some hikes.
Alix Steel: But at some point, the data dependent — when the data actually comes in better, means they should be hiking, to some extent. Do you think data dependent is real or it’s just lip service?
Jan Hatzius: No, I think it is real, and I do think that markets underestimating their willingness to follow through on what they say now. I mean, if you are approaching full employment, and I think we’ll be at full employment sometime late this year, you’re approaching it with an average of 200,000 jobs per month being created, more than twice the long-term trend. I think you will want to see a little bit of a slowdown in that, in the direction of 100,000, so that you don’t overshoot full employment by too much, because it’s risky. It’s risky to overshoot full employment and then have to ultimately bring the unemployment rate up and achieve a soft landing from below. That’s very difficult to do, historically.
Alix Steel: And you recently downgraded your rate hike forecast to two this year, but it was almost kicking and screaming, like you really didn’t want to do it.
Jan Hatzius: Well, we didn’t want to do it because we — I think the fundamental case for them to normalize is still pretty strong. At the same time, we forecast what we think is the most likely case and June has gone to a less likely case. Partly because the data had been a little weaker, including the last (inaudible) report, partly because some of the Fed commentary has become a little more non-committal about the immanent case for rate hikes and partly also because, if you look at market pricing, the hurdle for them to basically generate pricing that’s consistent with the hikes is pretty high now. So what I mean by that is that we’ve never had a hike that was priced as low in the bond market, 30 days ahead, as this one. So that makes it a little less likely.
Alix Steel: The market’s really behind the curve in that sense. We’ve also seen the yield curve really flatten here. When you look at that, at any point, are you worried about a recession?
Jan Hatzius: I’m not very worried about a recession. I think the risk of recession — if I look at the indicators that seem to predict recessions the best —
Alix Steel: So yield curve is not one of them?
Jan Hatzius: I think the yield curve is a financial indicator that’s obviously important. I think high yield spreads are obviously things that you want to monitor because you want to know what the market is saying, but I think, when I look at the risk of recession, I look at things like credit growth, where you are relative to full employment, and while we’re approaching it, I don’t think we’ve overshot it yet. If we had already overshot full employment by a significant amount, I’d be a lot more concerned because again, it is very difficult to achieve a soft landing from below. There’s never been an increase in the unemployment rate of more than a third of a percentage point that wasn’t associated with a recession. So if that was the case, I’d be more concerned, but right now, the indicators to me just don’t look that concerning.
Alix Steel: Which kind of brings me to what David Solomon had (inaudible) here at Goldman Sachs was just telling me, that on one had, you have investors who are still relatively cautious, but on the corporate side,