John Waldron Interviews Booz Allen CEO...China's ‘Two Sessions'...Sell-off in the Rates Market

[Goldman Sachs]( [BRIEFINGS] March 4, 2021 Talks at GS With Booz Allen CEO Horacio Rozanski Above (L to R): John Waldron of Goldman Sachs and Horacio Rozanski of Booz Allen Hamilton Last July, Booz Allen Hamilton’s president and CEO Horacio Rozanski opened the firm’s second quarter earnings call with an eight-minute discussion on race and social equity—an unprecedented but essential step, Rozanski says. “I think the agony that we felt as a country after the killing of George Floyd and the things that followed—the conversations we had internally—they were too powerful to not talk about…Until we got that done, we really could not talk about the [quarterly] numbers,” Rozanski told Goldman Sachs president and COO John Waldron in an episode of Talks at GS. In the ensuing months, Booz Allen has undertaken an analysis of its own efforts related to racial equity. “We've done a very comprehensive, intense assessment of ourselves to try and figure out, OK, we've had some success—how do we leverage that going forward, but where are we falling down? Where do we have to step it up?,” Rozanski notes. “It's uncomfortable and it's sobering. And it's frankly what gives me the optimism, because if [everyone] came back and said, ‘Hey, you're great, don't change,’ I would feel short-changed by that.” Rozanski’s own story at Booz Allen—where he started as an intern in 1991, as an immigrant from Argentina—reflects the firm’s underlying commitment to diverse backgrounds and perspectives, he says. “The fact that a company that does so much work in defense and intelligence would choose an immigrant with an accent to have these jobs tells you that a lot of people smarter than I am are willing to put these concepts into action.” [Watch video]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Talks%20at%20GS%20With%20Booz%20Allen%20CEO%20Horacio%20Rozanski&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Ftalks-at-gs%2Findex.html) Top of Mind on the Short and Long of Recent Volatility The volatile start to markets in 2021—with a number of heavily-shorted stocks unexpectedly skyrocketing in late January amidst a boom in retail trading—seems to have subsided somewhat. But the role of retail traders—and short selling itself—remains in focus, according to Goldman Sachs Research’s Allison Nathan, who discusses her new Top of Mind report on the Exchanges at Goldman Sachs podcast. Nathan speaks to Owen Lamont of Wellington Management who says that despite a common perception that short sellers generate volatility, they are actually a stabilizing force in the market. “In places where you don't have short selling or where short selling is temporarily banned or restricted, those places typically have deterioration of market quality and prices are farther from fundamental value,” says Lamont. Could the volatile episode we saw in January repeat? For insights on that, Nathan speaks to Kevin Kelly, Goldman Sachs’ co-head of Global Prime Services, who says hedge funds are now better positioned to manage such risks. “Our clients have repositioned their portfolios to remain nimble to this new market dynamic,” he says. As for the question of whether the recent volatility creates a need for more regulations, Nathan turns to former SEC Chair Arthur Levitt, who remains doubtful. “I don't think I could define any new regulations that could be called upon to protect investors at this time of market volatility,” he says. “We've seen periods such as this before and we'll see them again. So it doesn't surprise me or worry me particularly.” [Listen to podcast]( [Read report]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Top%20of%20Mind%20on%20the%20Short%20and%20Long%20of%20Recent%20Volatility&body=https%3A%2F%2Fyoutu.be%2FhWXuPULVpAk) The Daily Check-In With Goldman Sachs Above (L to R): Hui Shan and Sharmini Chetwode of Goldman Sachs This week, global investors are closely watching China’s major annual political gathering, known as the Two Sessions, for insight into the monetary and fiscal policies that will shape the country’s 14th Five-Year Plan. [Hui Shan]( chief China economist for Goldman Sachs Research, shared her perspectives in a recent episode of The Daily Check-In. “[China] wants to focus on how to make its economy more balanced, more resilient and rely more on domestic demand rather than external demand,” Shan says. To that end, Shan expects the government to focus on three sectors of its economy: technology, consumption and the environment. These areas "link to the principle of becoming more resilient, becoming more productive and becoming a more sustainable growth model,” she says. In another episode of The Daily Check-In, Goldman Sachs Research’s [Sharmini Chetwode]( examines China’s recent pledge to achieve carbon neutrality by 2060. The country’s path to net zero is likely to include investments in technologies such as renewable power, clean hydrogen and carbon capture, but the preponderance of utilities and industrials in China’s economy also means the country needs to evolve its energy mix, she adds. “Renewables can only unlock about 50% of China's emissions. After that, the cost curve of decarbonization rises very sharply,” she says. “Both carbon capture and hydrogen clearly need to become less expensive over time.” For more Daily Check-In videos, [subscribe to our channel]( on YouTube. [Watch videos]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=The%20Daily%20Check-In%20With%20Goldman%20Sachs&body=https%3A%2F%2Fwww.youtube.com%2Fplaylist%3Flist%3DPLIyiGQywEp65ogt2Bi3vTK7ngXDTM6wT9) How Small Businesses Are Faring Entering Year Two of the Pandemic In a recent episode of Exchanges at Goldman Sachs, Joe Wall of Goldman Sachs’ Office of Government Affairs shared results from the firm’s latest survey of nearly 1,300 Goldman Sachs 10,000 Small Businesses participants on how businesses have used the second round of Paycheck Protection Program (PPP) loans that started being distributed in January. “What we see in our data is that while the second PPP loan has no doubt been incredibly important in terms of keeping businesses on a sustainable path, 67% of small businesses who have taken a second loan say that they will run out of funding in April or May,” Wall says. Despite the challenges, two small business owners and graduates of the Goldman Sachs 10,000 Small Businesses program are finding reasons to stay optimistic. “When we shut down our dining room, we went to basically take-out, to-go only...then we made a decision to actually start doing delivery all around the metro place, all in the suburbs, everywhere,” says Brent Reaves, owner of Smokey John’s Bar-B-Que in Texas, who joined Wall on the episode. “So people would start getting family meals and family packs and just really supporting us. And so it was an opportunity to go through something very tough but to see how the community came together to try to help us stay afloat.” The support of the community is also helping fellow entrepreneur JoEllen Hockenbrough, who runs Providence Power Yoga in Rhode Island. “I’m just so encouraged by my ability, our staff's ability and other small business owners' ability to pivot and redirect and be resilient,” she says. [Listen to podcast]( [View infographic]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=How%20Small%20Businesses%20Are%20Faring%20Entering%20Year%20Two%20of%20the%20Pandemic&body=https%3A%2F%2Fyoutu.be%2F-u4ircmhCKI) Briefly…on Reflation, Real Yields and Risk Assets In recent weeks, a sharp move to higher Treasury yields has triggered a sell-off in the rates market, which is starting to spill over into other assets. We sat down with Goldman Sachs Global Markets Division’s Josh Schiffrin, global co-head of U.S. and global interest rate products, and Brian Friedman, global head of market strats, who explain the market implications. In recent weeks, there has been a wave of selling that has driven the yield on the benchmark 10-year Treasury note to its highest level since the pandemic began. Why did the yields move up so quickly? Josh Schiffrin: What happened in February was fundamentally different than the factors that drove the market over the last six months. The market is now looking toward future growth and what a return to normal would look like as COVID-19 cases fall and vaccinations increase. In other words, the trade has shifted from a pure reflationary one to a view that the economy is recovering sooner than expected, and the market is reassessing the growth outlook and implications thereof. What’s more, the composition of the move, to the extent it continues, may be different than the pure reflation trade we’re accustomed to and in fact, is likely to reflect a more dynamic trading environment. From your many conversations across the franchise, are you getting the sense that people are positioned for this? Brian Friedman: Despite the market’s focus on the reflation trade, there was a great deal of complacency priced into the market, as could be seen in historically low volatility and a very slow and shallow hiking cycle. There is a pronounced difference between the long period we were just in, where you had slowing global growth and central banks were making sure real rates globally were repricing even lower, to one now where global growth is going to be growing quite strongly and central banks will now be in the position of trying to anchor real rates from repricing too quickly. That kind of shift is going to obviously affect what assets investors are going to be long. The future period of stronger growth and allowing for higher inflation calls for the market to be long real assets—equities, commodities and real estate—all of which have unlimited upside to growth instead of nominal assets. And as the economy and asset prices start to reflate, we expect to see higher volatility given the procyclical nature of Fed policy, and higher economic volatility emanating from enormous pent-up demand due to the pandemic and historically large fiscal packages. What is the biggest focus from a macro perspective that you’re watching? Josh Schiffrin: The central thing that’s happened in the world over the last year is this terrible virus. Central banks’ stimulus and fiscal stimulus are all a response to the virus—and higher rates would reflect a return to normalcy. Brian Friedman: I’m watching the 5-year Treasury and what a possible infrastructure package may look like. It’s much easier for the Fed to control the 5-year point of the curve. The negative correlation between break-even rates—a measure of expected annual inflation—and real rates has remained high. And so long as the 5-year point of the curve is broadly contained as break-even rates move higher, then that’s a strong indication that the Fed is staying dovish while growth prospects improve—and it’s hard to get bearish on risk if growth is improving and the Fed is remaining dovish. And outside of getting the virus under control, the next important piece of information for the market to debate and digest will be an infrastructure plan coming out of Washington. Details are scarce and it’s an area the market has very little conviction around. Finally, can you outline your views for the Fed’s playbook over the next few years? Josh Schiffrin: We expect the Fed to start tapering bond purchases in 2022 and finish by the end of 2022 or early 2023. From there, we expect the Fed could start to raise interest rates by 25 basis points a quarter, most likely starting in early 2024. Brian Friedman: Ultimately, I think the Fed is going to let the economy run as hot as it can to get the unemployment rate—including the participation rate and minority employment rate—as low as possible. And I think the only thing that will force them to blink and raise rates is if inflation becomes uncomfortably high. [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefly%E2%80%A6on%20Reflation%2C%20Real%20Yields%20and%20Risk%20Assets&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2Findex.html) Goldman Sachs Media Highlights Bloomberg - March 2 [Goldman Plans to Add About 100 Staff in Singapore]( (2:20) Bloomberg - March 2 [Goldman's Kostin: Cyclicals Will Lead the Market]( (6:44) CNBC - March 2 [Goldman Sachs’ Jeff Currie on Why There’s a Structural Bull Market]( (2:52) Bloomberg - March 1 [Goldman Focuses on Value, Cyclicals as Global Growth Synchs]( (1:10) [Subscribe]( [Unsubscribe]( The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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