Goldman Sachs, Almost Schizophrenic in China and Oil Calls (GS, BNO, FXI)

If you think Wall Street is confusing and even think that it is a game loaded against the little guys, then today is another day that will fuel more to that fire.  When you see two differing strategists calling for different outcomes, usually that is what you would say “makes a market.”  But what about when you have two differing strategists from the same firm making nearly opposite strategy calls at virtually the same time?  Goldman Sachs Group Inc. (NYSE: GS) looks a bit schizophrenic today when it is outlining China’s GDP and oil, even if there is a rational explanation.

It really was not that long ago that Goldman Sachs reversed a bullish position in oil and other commodities.  But now that oil has pulled back, a strategy call from the commodities team has now raised its target on oil to $120 and higher by year-end and into 2012 for Brent Crude.  Another Goldman Sachs strategist is now looking for a slowdown of China’s GDP growth this year and next with 9.4% GDP growth in 2011 rather than a prior 10% target.  For 2012, it looks like Goldman trimmed the growth to 9.2% from about 9.5% expected previously. 

What is interesting is that the GDP call noted a sharper slowdown in industrial production in China and that is its growth lifeblood.  Goldman Sachs also noted that inflation is not dropping as fast as previously hoped, which may only mean more bank and economic tightening from central planners and that means slower growth.  We aren’t going to spend too much time on their call since some of the inferences fly directly against each other.

What is hard to imagine is how commodities will rise this much more and putting this much price pressure on goods if the firm is also cutting China expectations.  How much of the world growth is tied to China?  That is an opinion of course which does have varying answers.  Investors and readers need to recall that India is being almost equally aggressive when it comes to putting on the inflationary brakes even while it acknowledges that the actions will slow economic growth.  Cutting expectations in China is almost equal to cutting growth rates in India. 

The reality is that you can actually have prices rise, even if growth rates either slow or if they contract.  We did not invent the term ‘stagflation’ and it is used for a reason.  If both India and China are really going to see lower growth, then it would seem plausible that they will be consumer that much less in commodities and that means that commodity demand will be that much less pressured. 

Anyhow, these two calls can actually co-exist regardless of how opposite they sound and despite the point that one strategist team is likely to be very wrong here.  If the dollar has a significant recovery over time, that is not a certain outcome of a bear market in stocks even though stocks have been reacting to the currency markets any time there is a large move. 

Maybe today was an instance where Goldman Sachs truly was operating behind a Chinese Wall, no pun intended.  From an outsider’s viewpoint it sounds more like a situation lost in translation.

United States Brent Oil (NYSE: BNO) is up almost 1% at $74.11 today while stocks are down by only 0.1% at 12,365 on the DJIA.  iShares FTSE China 25 Index Fund (NYSE: FXI) is actually up 0.4% at $43.11 today.  These moves almost seem counterintuitive.

JON C. OGG