Walker Webcast: Goldman Sachs’ Lotfi Karoui’s Perspective on All Things Financial
Amid concerns about inflation, geopolitical issues and rate hikes, Lotfi Karoui, Goldman Sachs Inc.’s chief credit strategies and head of credit and mortgage strategy research provided clarification on these and other finance trends.
During his appearance on the May 11, 2021 Walker Webcast, Karoui and Walker & Dunlop CEO Willy Walker provided insights on topics including interest rate hikes, ESG funds, globalization and supply chains and oil price increases.
In discussing the status of interest rates and bonds, particularly public bonds, Karoui said that risk-free assets could be considered investment opportunities that weren’t really available as recently as six or nine months ago. So, with corporate bond spreads widening dramatically in recent weeks, “the message has been you should re-engage, but pick your spots,” he said. “Focus on pockets in the market where the rebuild risk has gone far enough.”
Karoui also pointed out that the Goldman Sachs view of the Fed Funds terminal rate could end up at around 3.75%. Karoui also spared a moment of empathy for the Federal Reserve, its current handling of the economy, and the potential for recession.
“The path to a soft landing is narrow because the equation the Fed is trying to solve is a difficult one,” he commented. He explained that on the one hand, the current monetary policy in place is attempting to slow down labor hiring without cutting workforces. On the other hand, even if the worst-case scenario should happen and the U.S. economy sinks into a recession, both corporations and households are in a position of strength. Businesses still have proceeds from debt raised in 2020 and 2021 on their balance sheets, while households have savings and pent-up equity in their homes.
Furthermore, “you’re not seeing the type of imbalances in the financial sector you saw prior to the global financial crisis,” or even the early 2000s recession,” Karoui said. Even as Goldman Sachs puts the near-term recession odds at 35%, “we’re going into this with interesting lines of defense,” Kaouri pointed out.
Finally, in response to CEO Willy Walker’s question as to what one data point suggests that “things will be okay” in 2023—specifically, Russia leaving Ukraine, the Fed slowing down its interest rate hikes, a slowdown in inflation or all of the above—Karoui said “all of the above” is a move in the right direction. Also important when assessing the outlook, he noted, is examining risk and the price of risk. The price of risk has gone up over the past two months, meaning the market is paying more.
Meanwhile, de-escalation of conflict in Ukraine would be welcome, on both the humanity and economic side. And yes, inflation considerations remain important.
Concluded Karoui: “If in three or four months from now we’re in a situation that everyone is confident in the mean reversion in inflation, and we can engineer a soft landing without anything breaking in the system, that would be a great development.”
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