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This is what Goldman Sachs considers "the greatest risk to the US economy and market".
Goldman Sachs pointed out that the core risks currently facing the US market and economy are no longer excessive financial behavior in the private sector, but rather the increasingly severe public sector debt problem and high asset valuations.
On July 29th, Jan Hatzius, the chief economist of Goldman Sachs, released a report stating that despite high real estate valuations, the risk of financial imbalances in the private sector, including households and businesses, remains relatively low. In contrast, the fiscal situation of the public sector poses a more significant medium - and long-term threat.
The report warns that if debt and its interest expenses grow out of control, the United States will face severe fiscal sustainability challenges. This potential risk could push up interest rates, tighten the overall financial environment and drag down economic growth.
Fiscal sustainability: The Biggest challenge for the United States in the Medium and long Term
The report clearly points out that the greatest risk the United States may face in the medium and long term lies in fiscal sustainability.
If the scale of national debt and the corresponding interest expenses grow to a large enough extent, at that time, merely to stabilize the debt-to-GDP ratio, the government will be required to maintain a large-scale fiscal surplus for a long time, which is politically unsustainable.
Although it is hard to predict when the market will develop more serious concerns about this issue, any resulting upward pressure on interest rates could tighten the broader financial environment and drag down economic growth.
Goldman Sachs particularly emphasized that at a starting point where asset valuations are already high, the destructive impact of such a shock could be even greater.
Goldman Sachs pointed out that despite high interest rates and increasing geopolitical uncertainties, the valuation of the US stock market remains at its highest level since the late 1990s.
The bank's portfolio strategist model shows that the reasonable price-earnings ratio (P/E) predicted by the model is 20.7 times, while the current actual level is 22.4 times, which is much higher than the average of 15.9 times since 1990.
In addition, Goldman Sachs 'speculative trading index also points to the current increase in risks. Among them, phenomena such as "Meme stock" trading are one of the signals that market risk appetite is particularly high.
High real estate prices are not a concern, and the debt risk of the private sector is controllable
Although Goldman Sachs 'monitoring indicators show that house prices pose certain risks, its team of economists is not overly concerned about this.
They believe that the current high housing prices mainly reflect the persistent imbalance between supply and demand of single-family homes, rather than loose loan standards or speculative purchases - the latter would trigger real financial stability issues.
The report predicts that the shortage of single-family homes may persist for some time, which limits the risk of a significant drop in house prices.
Meanwhile, data shows that loose credit is not the main driver of this round of housing price hikes. The median credit score of borrowers at the time of mortgage issuance is still slightly higher than that in the years before the pandemic.
In terms of household debt, the report addresses two major concerns:
Firstly, regarding the concern over a persistently low savings rate, the Goldman Sachs model indicates that a low savings rate ultimately depends on fundamental factors such as the level of household wealth.
Secondly, regarding the financial vulnerability revealed by the rising default rate of consumer credit, the report holds that this mainly reflects the "unintentional risky lending" in the past rather than the general deterioration of household financial conditions, and the current default rate has tended to stabilize.
In terms of corporate debt, although corporate interest expenses have risen significantly in recent years, the consequences still seem limited to this day.
Goldman Sachs estimates that refinancing maturing debt will only increase interest expenses by 3% over the next two years. This forecast is far lower than its estimate of 7% in 2023, mainly due to the fact that a large amount of debt has been refinanced in a higher-interest-rate environment and corporate bond yields have dropped significantly recently.
Risk Warning and Disclaimer
The market involves risks. Please invest with caution. This article does not constitute personal investment advice and has not taken into account the individual user's specific investment objectives, financial situation or needs. Users should consider whether any opinions, views or conclusions in this article are suitable for their specific circumstances. Any investment made based on this is at your own risk.