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Lloyd Blankfein: Odds of a 'bad outcome' for economy have gone up

Lloyd Blankfein is worried that a spending spree by the Trump administration could overheat the Amer...

Posted: Feb 14, 2018 2:28 PM
Updated: Feb 14, 2018 2:28 PM

Lloyd Blankfein is worried that a spending spree by the Trump administration could overheat the American economy.

"The odds of a bad outcome have gone up," the Goldman Sachs CEO told CNN's Christine Romans in an interview airing Wednesday.

Blankfein noted that the economy was already humming along before the federal government juiced it with $1.5 trillion in tax cuts and $300 billion of additional spending, pushing up the budget deficit. And now, President Trump has proposed a $200 billion infrastructure package.

That kind of spending is normally reserved for recessions -- or at least fragile recoveries -- not booms.

While it's not his "base case," Blankfein said the risk is that all that stimulus could be "too much of a good thing" for the economy and financial markets.

"Don't forget, all of these deficits have to be paid for," he said on the sidelines of Goldman's 10,000 Small Businesses Summit.

Related: Trillion-dollar deficits will hit sooner than expected

Wall Street loudly celebrated after Trump and the Republican-controlled Congress delivered major tax cuts in December. At one point last month, the Dow was up 45% from the level it was at when Trump won the election. The index jumped 1,000 points in the space of just seven trading days in January.

Optimism is also on the rise among smaller companies. A recent survey by the National Federation of Independent Businesses found that owners of small firms say this is the best time in decades to expand.

For Blankfein, who became Goldman CEO nearly 12 years ago, the current upbeat mood is laced with memories of the heady days that preceded the global financial crisis.

"What could possibly go wrong? I haven't felt this good since 2006," he joked.

Related: Are Trump's tax cuts backfiring on Wall Street?

Investors have begun to worry about a potential hangover. Fears that inflation will force the Federal Reserve to end the party by aggressively raising interest rates sent the Dow plunging 1,300 points, or 5.2%, last week. It was the index's biggest weekly drop in two years.

"If the economy starts to overheat, and the Fed feels that it's behind" on inflation, it will need to act, Blankfein said.

Concerns about runaway inflation forced the Fed to scramble in 1994 by dramatically raising rates more than Wall Street anticipated.

"I remember 1994," Blankfein said. "That's possible, too. That would be quite jarring to the economy."

Heavy selling has already lifted the 10-year Treasury yield from 2.4% at the start of 2018 to around 2.85% today. That's critical because Treasuries help set the price for virtually every other asset. Higher returns for U.S. government debt, which is seen as an ultra-safe investment, could hurt demand for riskier assets like stocks.

While Treasury yields remain historically low, they are climbing. That's down to a variety of reasons, including the stronger economy, more inflation and concerns about rising deficits that could reach $1 trillion in fiscal 2019.

Related: The bond market scare might not be over

Washington's spending binge will force the Treasury to borrow more by issuing more bonds. Those bonds will need to be sold at the same time that the Fed is winding down its past stimulus efforts, which were known as quantitative easing (QE), by offloading vast amounts of Treasury notes.

"They have a competitor: the central bank," Blankfein said. "They're going to sell into the same kind of market to the same investors."

To be clear, Blankfein isn't predicting disaster. He noted that interest rates remain relatively low and said his "base case" is that the economy will stay broadly on track.

Still, he urged individual investors to tread carefully.

"I wouldn't throw all in," Blankfein said. "With the Fed raising rates, with the withdrawal of QE, with the budget deficit widening out, I wouldn't say this is the time I would max out on my risk."

Indiana Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 51079

Reported Deaths: 2756
CountyConfirmedDeaths
Marion12019693
Lake5588248
Elkhart353959
Allen2939134
St. Joseph210669
Hamilton1691101
Cass16449
Hendricks1454100
Johnson1340118
Porter82638
Tippecanoe7709
Vanderburgh7276
Clark69544
Madison67464
LaPorte61628
Howard59858
Bartholomew59745
Kosciusko5754
Marshall5449
Noble51328
LaGrange4849
Boone48244
Jackson4783
Delaware47152
Hancock46736
Shelby45425
Floyd40644
Morgan34231
Monroe34028
Grant31826
Dubois3046
Henry30018
Montgomery29720
Clinton2903
White27410
Dearborn25823
Decatur25632
Lawrence25225
Vigo2528
Warrick25029
Harrison21722
Greene19432
Miami1932
Jennings17912
Putnam1738
DeKalb1694
Scott1649
Wayne1546
Daviess15017
Perry14710
Orange13723
Steuben1362
Jasper1352
Ripley1307
Franklin1278
Gibson1202
Wabash1162
Carroll1142
Fayette1067
Whitley1066
Starke1043
Newton10010
Huntington942
Jefferson862
Wells821
Randolph794
Fulton731
Knox710
Jay700
Washington681
Pulaski661
Clay645
Rush613
Posey570
Spencer541
Owen521
Benton510
Sullivan501
Adams491
Brown431
Blackford402
Fountain352
Crawford330
Switzerland320
Tipton321
Parke270
Martin260
Ohio230
Vermillion200
Warren151
Union140
Pike110
Unassigned0193

Ohio Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 64214

Reported Deaths: 3036
CountyConfirmedDeaths
Franklin11724445
Cuyahoga8979393
Hamilton6781207
Lucas2952305
Marion274539
Montgomery244035
Summit2327209
Pickaway222241
Mahoning1928239
Butler182147
Columbiana137860
Stark1214114
Lorain112069
Trumbull104578
Warren97725
Clark80010
Delaware69815
Fairfield66717
Tuscarawas60410
Lake58923
Medina58232
Belmont56922
Licking56812
Miami50631
Portage49259
Wood48851
Clermont4737
Ashtabula44744
Geauga42543
Wayne37253
Richland3715
Allen35641
Greene3439
Mercer29910
Erie27122
Holmes2595
Darke25626
Huron2402
Madison2169
Ottawa17324
Sandusky16015
Washington14620
Ross1443
Coshocton1423
Athens1391
Crawford1385
Putnam13715
Hardin12312
Morrow1201
Auglaize1094
Jefferson1092
Muskingum1001
Union931
Preble901
Monroe8917
Hancock861
Lawrence830
Guernsey823
Clinton811
Hocking809
Williams762
Shelby744
Logan711
Ashland672
Carroll673
Fulton670
Scioto670
Wyandot635
Brown611
Fayette550
Defiance533
Knox531
Champaign511
Highland501
Van Wert471
Perry441
Seneca412
Henry330
Paulding300
Jackson280
Pike280
Adams261
Vinton232
Gallia201
Noble140
Harrison131
Meigs130
Morgan110
Unassigned00
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