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Stress among small banks may slow the US economy

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Fri, Mar 17, 2023 02:13 PM

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- Plus: ♻️ How clean hydrogen is moving us closer to net zero. -------------------------

- Plus: ♻️ How clean hydrogen is moving us closer to net zero. --------------------------------------------------------------- In today's edition: - After a [week of turbulence]( we look at how [stress on smaller U.S. banks could affect markets and the economy.]( - Find out why U.S. housing affordability reached historically low levels. - "I'm sure I got rejected 100 times, 150 times. The mental model has to be: You've got to be fine with hardcore rejection.” ⁠— CEOs share [their journeys]( to success. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- The impact of bank failures on markets and the economy Silicon Valley Bank became the largest bank to fail since the 2008 financial crisis, [sparking broader concerns about the health of the U.S. banking sector.]( But a repeat of the turmoil 15 years ago seems unlikely. For one, SVB's collapse “was a very idiosyncratic situation where you had a bank that had taken a lot of interest rate or duration risk on their portfolio — coupled with the fact that they had a very concentrated deposit base that was very exposed, obviously, to the venture capital community and venture capital portfolio companies that were experiencing these very significant outflows,” Goldman Sachs Research's Richard Ramsden, business unit leader of the Financials Group, says on the [latest episode of Exchanges at Goldman Sachs.Â]( “the quality of the assets, so the quality of the collateral, is orders of magnitude better today than it was in 2008,” Lotfi Karoui, chief credit strategist tells host Allison Nathan. “There's also greater transparency over its valuations today relative to the run up to the global financial crisis.” This banking turbulence, however, is likely to have near- and long-term impacts: - “There is going to be some migration of deposits from the smallest institutions to the largest institutions,” Ramsden says. “But I also think there's going to be some migration of deposits outside of the banking system as well. And I think those two things are happening concurrently.”   - “We have seen a tightening of lending standards in the banking system, and my suspicion is that they will tighten further from here and potentially could tighten quite sharply, at least in the near term,” Ramsden says. “On balance, my guess is that banks will take a view that this could result in either a near-term recession or a deeper recession than you would have had without this event.” [Listen to the full podcast.]( --------------------------------------------------------------- Stress among small banks is likely to slow the U.S. economy As stress ripples through smaller banks in the U.S., the [tightening in lending standards among those institutions is expected to reduce economic growth this year, according to Goldman Sachs Research.]( While the macroeconomic impact of a pullback in lending is highly uncertain until the extent of the stress on the banking system becomes clear, economists in Goldman Sachs Research lowered their forecast for fourth quarter U.S. GDP growth (year-over-year) by 0.3 percentage point to 1.2%. The new estimate incorporates expectations for tighter lending and reflects, in part, a larger downgrade to investment spending. - Tighter bank lending standards help limit demand growth, sharing the burden with monetary policy tightening. Our economists' analysis implies that the incremental tightening in lending standards they expect from small-bank stress would have the same impact on growth as roughly 25-50 basis points of rate hikes would have via their impact on market-based financial conditions. - Our economists expect lending standards will tighten more, to a degree that will be greater than what we saw during the dot-com crisis but less than during the financial crisis or the height of the pandemic. - As a result, Goldman Sachs economists [have penciled in a pause in Fed hikes for March]( but otherwise left their Fed forecast unchanged and now expect a peak funds rate of 5.25-5.5%. - Economists at Goldman Sachs have also adjusted their probability for a U.S. recession in the next 12 months to 35%, up from 25%.  --------------------------------------------------------------- US housing affordability reached historically low levels Affordability is the “biggest challenge” facing the U.S. housing market, according to strategists in Goldman Sachs Research. The Goldman Sachs Housing Affordability Index, which measures the extent to which a typical household can afford a new mortgage, fell to around 70 (as of March 8th) — well below the level deemed healthy by our strategists. This index attempts to quantify the ratio between the median monthly income and the median monthly mortgage payment, according to credit strategist Vinay Viswanathan. When the index is at 100, affordability is at equilibrium level, he says. However, when the chart goes under 100, affordability declines. Even though income levels have generally risen in recent years, Viswanathan says two key factors have driven housing affordability down in the U.S.: higher home prices and mortgage costs. He outlines why deteriorating affordability could have big implications for the U.S. housing market: 1. Some lower-income households, who might have been on the cusp of buying a house, now can't afford it. Instead, they've been forced to continue renting. “Owning a home is an important part of most people's lives, and this is certainly making it harder,” Viswanathan says. 2. More broadly, it means people aren't buying homes; they are waiting for mortgage rates to fall and for better financing conditions to come. In addition, homeowners likely won't want to sell because there aren't better options out there right now. Viswanathan describes this as a “lock-in effect” where people aren't buying or selling homes like they have in the last 20 years. 3. Finally, Viswanathan expects declining affordability to cause home prices to slip further. Overall, his team expects U.S. house prices to fall an additional 6% in 2023. --------------------------------------------------------------- Clean hydrogen production is picking up Hydrogen can help address one of the biggest challenges of moving to a net-zero economy: removing carbon emissions from heavy industry. So it's welcome news that the use of “green” hydrogen, which is produced by using renewable energy sources to electrolyze water and split it into hydrogen and oxygen, is accelerating. As a result, [Goldman Sachs Research has nearly tripled its base case hydrogen forecasts for 2030Â]( anticipates that as much as 137 gigawatts (GW) of electrolysis capacity could be operational by the end of that year. In numbers: - The market is still in its infancy: At the end of 2020, only about 0.3 GW of capacity was installed.  - The clean hydrogen industry is scaling up, not just in the number of projects planned but also in the average size of them. The research team estimates that the average project will increase more than 600 times from the current dimensions. - The incentives in the Inflation Reduction Act have spurred a development boom in the U.S., with planned installed capacity jumping to 12 GW from 2 GW by 2030. - Analysts estimate that Europe will drive the growth of installed capacity, adding 50 GW of cumulative capacity by 2030, followed by Australia with 34 GW, Africa with 25 GW and Latin America with 17 GW. Given the long lead times in creating clean hydrogen production facilities, [GS expects even more projects will be announced in the next few years.Â]( of the projects for the second half of this decade still have not yet been announced and are therefore not captured here, implying further upside,” writes Goldman Sachs equity research analyst Michele Della Vigna. --------------------------------------------------------------- Three CEOs on the innovations driving their businesses [Talks at GS]( hosts CEOs, entrepreneurs and other leaders who are making an outsized impact on their industries. Three recent guests shared thoughts on being brave, curious and honest that could be applied in almost any business. - Timo Boldt, founder and CEO of Gousto — "People always only remember the success you have, and they don't see the failure. I'm sure I got rejected 100 times, 150 times. [The mental model has to be: You've got to be fine with hardcore rejection.]( - Emma Grede, CEO and co-founder of Good American — "[Naivety can sometimes be a bit of a superpower](. In the early days of your business, sometimes what you don't know is a great thing." - Astro Teller, Captain of X's Moonshot Factory — "We have to be excited about running the experiment in really scrappy ways and being intellectually honest about the outcome of every experiment we try [so that we get super tight learning loops.]( --------------------------------------------------------------- Briefings brainteaser: What makes hydrogen blue? Hydrogen is often categorized by color, [depending on how it's produced and whether it emits carbon.Â]( and green hydrogen are two of the most common types. The latter is produced by using renewable energy to electrolyze water and split it into hydrogen and oxygen. What makes blue hydrogen different from green?  A) Only blue hydrogen emits a blue flame when burned B) Blue hydrogen is produced from sea water C) Blue hydrogen is exported by members of OPEC+ D) Blue hydrogen is made using fossil fuels and involves carbon sequestration [Check your answer here.]( --------------------------------------------------------------- ICYMI: In the media [BloombergÂ]( March 15 [Asian equities have a lot of upside attraction: Moe]( (3:49) [Axios]( March 15 [College basketball stars' favorite small businesses](  --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. 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. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from Goldman Sachs Global Banking & Markets, please [click here]( for information relating to Goldman Sachs Global Banking & Markets material and your reliance on it. The Investment Strategy Group, part of the Asset & Wealth Management business (“AWM”) of GS, focuses on asset allocation strategy formation and market analysis for GS Wealth Management. Any information that references ISG, including their model portfolios, represents the views of ISG, is not financial research and is not a product of GS Global Investment Research and may vary significantly from views expressed by individual portfolio management teams within AWM, or other groups at GS. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. [Click here]( to unsubscribe. © 2023 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.comÂ]( |  [Careers Blog](  | [Privacy and Security](  | [Terms of Use]( [Twitter](

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