| One of Wall Street's favorite trades is stalling, Goldman Sachs leaders prepare to face shareholders and investors debate the US economy's path. — Kristine Aquino To catch up on the trading day in the UK and Europe, check out Markets Today. One of Wall Street's favorite trades — buying China assets — is stalling two months into 2023. Money managers are getting mixed regulatory messages from a government that's snapped its focus back to geopolitics, superpower rivalry is ramping up and there's concern that President Xi Jinping's greater executive power raises the risk of a policy misstep. "Most market participants we speak to don't believe China will return to being a focus the way it was during the pre trade-war era," said Jon Withaar at Pictet Asset Management. "Ultimately it comes down to visibility — on policy, earnings and geopolitics." Goldman Sachs leaders taking the stage this week at the firm's second-ever investor day plan to tout its $2.5 trillion asset and wealth management business, which the top brass see as critical to unlocking a higher valuation. It's also a test for Chief Executive Officer David Solomon, whose foray into consumer banking lost almost $6 billion since its inception. "It's not good to see Goldman flailing," UBS Group AG banking analyst Brennan Hawken said in an interview. "There's a perception that all the partners are not singing from the same hymn book. It leads investors to conclude that the CEO might be losing confidence of the partners. And that is worrying."  | Investors are divided over where the US economy goes next, according to the latest MLIV Pulse survey that featured more than 2,200 participants. Less than half see a soft landing, which respondents defined as inflation slowing to below 3% without growth slowing too much. More than third expect a hard landing, and about 18% see no landing. When asked for an alternative to the airplane metaphor for growth, respondents pointed to a balloon. For some, its natural buoyancy means it needs "less wing lift in diversified globalized economy," and thus the Fed is not so relevant. S&P 500 futures and Nasdaq 100 contracts climbed about 0.5% as of 5:47 a.m. in New York. The Bloomberg Dollar Spot Index retreated from the day's highs, lifting most Group-of-10 currencies. Treasuries edged lower, mirroring moves in global bond markets. Gold was little changed, oil fell and bitcoin resumed losses after gains overnight. At 8:30 a.m., we'll get durable goods orders data. Pending home sales figures and the latest readings of the Federal Reserve of Dallas's manufacturing gauge are due at 10 a.m. and 10:30 a.m., respectively. Fed Governor Philip Jefferson will speak at 10:30 a.m. Earnings include Zoom and Workday. Here's what caught our eye over the weekend: In 2016, then Fed Chair Janet Yellen talked about some theoretical benefits of letting the economy run hot: If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market. One can certainly identify plausible ways in which this might occur. Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending, especially if accompanied by reduced uncertainty about future prospects. In addition, a tight labor market might draw in potential workers who would otherwise sit on the sidelines and encourage job-to-job transitions that could also lead to more efficient — and, hence, more-productive — job matches. Finally, albeit more speculatively, strong demand could potentially yield significant productivity gains by, among other things, prompting higher levels of research and development spending and increasing the incentives to start new, innovative businesses. Hysteresis effects — and the possibility they might be reversed — could have important implications for the conduct of monetary and fiscal policy.
Anyway, the speech was entirely theoretical at the time. The economy wasn't running particularly "hot" when she delivered it. And the Fed wasn't about to shift gears to get us there. Of course, today is a very different situation. And the widespread belief is that things are hot, both because inflation is high and also because consumption data remains resilient. And of course, the argument the hawks will make is that all of the temporary drivers of inflation are fading away, leaving us with a new steady state of rapid wage growth, high consumption, tight labor markets, and above-target inflation. What's more, as The Washington Post wrote this weekend, the evidence is accumulating that Biden's various legislative accomplishments (CHIPS, IRA, etc.) are bearing fruit in terms of getting CEOs to build more factories in the US. Those pieces of legislation aren't intended to be stimulus per se, but regardless, this is more domestic investment at a time when resources are strained. It looks like the "high-pressure economy" is here. So it seems we might actually get a test of reverse-hysteresis, and whether sustained heat can have broader benefits, in terms of productivity, investment, and so forth, as Yellen speculated about in 2016. It seems like a safe bet that certain industries which are receiving direct subsidies will increase their capex and investment. Perhaps a more interesting question is whether other industries, seeing demand stay strong and labor remain scarce, will kick their own investment into a higher gear due to macro conditions.
As we've been talking about on the Odd Lots podcast for years now, the post-GFC saw a clear hollowing out of domestic capacity across a range of industries. Why keep your factory open if demand is so mediocre? Maybe the 2020s will see the opposite. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart | 
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