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Goldman's Jim O'Neill Explains Why 2011 Will Be Excitinger... With Risks
Jim O'Neill, who after migrating to his latest and greatest position within Goldman as Chairman of GSAM, was expected to keep a low profile, has realized he has yet to meet his match at Goldman in the permacheer department. Which is why he now has a weekly column sent out as pep talk to all Goldman clients. His latest, "2010 was exciting with risks. 2011 will be even more so!" is basically a call to arms, in which he gives everyone to all clear to buy double inverse VIX ETFs on margin. And yes, in pursuing the last margina consumer, O'Neill has once again abandoned the BRICs and continues to pound on his latest N-11 concept, which contains such pent up purchasing powerhouses as Nigeria, the Philippines and, yes, Iran. Although with the prevalent thought for 2011 now being an inverse decoupling, in which the US is supposed to lead the world to new heights (so contrary to just 4 months ago... and all it took was a payroll tax cut), we fail to see how any of this is relevant. Then again, we often have the same question about Jim's writing in general. Full commentary presented below.
2010 WAS EXCITING WITH RISKS. 2011 WILL BE EVEN MORE SO!
Well, we creep towards the end of 2010. By and large, it has turned out pretty much as I expected. A year ago, I published a piece describing the outlook for the year ahead as “Exciting with Risks” in which it seemed to me that world GDP growth would surprise on the upside, monetary policy remain accommodative as there would be no inflationary pressures and, therefore, risky assets would perform well. In fact, it looked so good that there would be obviously some major risks to such a rosy outlook. Among those that threatened to throw us off course was the possibility of trouble in the Euro Area.
Before I look into my crystal ball for 2011, let me reflect a little more on 2010.
In terms of major surprises in 2010, I think Germany has to be – at least in terms of real GDP growth – regarded as perhaps the biggest. While the export machine that Germany is continues to pound away, a pleasant surprise was the strength of German employment and increasing signs of a more rounded economic expansion including robust domestic demand.
For the US, it is not that surprising to me that the economy is ending the year on strong footing. If there is any surprise, it remains a bit of a mystery as to why the country suddenly lost momentum in the spring through the summer.
In the rest of the world, the BRIC and other large “Growth Economies” generally delivered as expected, with perhaps the surprise being the breadth of the expansion seemingly taking place in some of the non- BRIC economies like Indonesia and Turkey.
For markets, the three reoccurring dynamics that the year will be remembered for, at least by me, will the persistence of “QE” and its unknown consequences, including the Fed’s lead up to QE2, the threat and, in some cases, actuality of capital controls. And thirdly, of course, the mess in EMU and problems for the periphery. While most focus on the debt sustainability for the struggling countries, this remains a crisis of structure and governance in my opinion.
2011. THE YEAR OF THE USA?
At a London client Christmas Pension Fund dinner I traditionally speak at, I found myself dubbing 2011 as the likely year of the USA last week. Since then, we have seen more evidence of improving economic recovery, further increases in US bond yields, and an increased number of GDP forecast revisions for 2011.
As outlined in the GS US Economics Weekly, Jan Hatzius and his team are now forecasting a rather robust 3.4 and 3.8 pct real GDP growth for 2011 and 2012. I strongly concur. I notice Alan Greenspan has thrown his hat into the more optimistic ring also. This growth is likely to be strong and robust enough to lead to declining unemployment which, if correct, should mean that the worst of the social consequences of the credit crisis should start to ease.
All of this will result in a mood that the US is returning to “normal,” which will have predictable consequences for financial markets. The US stock market will continue to rise, probably with another 20 pct increase. US bond yields will rise further, although I am not sure that they will get to the 5 pct “normal” I discussed last week. On the foreign exchanges, the Dollar could rally quite a bit, although US policymakers will be eager to resist a significant increase. Of the alternatives, the Yen strikes me still as easily the most vulnerable currency, as the whole Japan comparison that is so popular in Tokyo will fade.
Of course, things will not return to pre-crisis normality in the US, as it wasn’t really that normal before the crisis. The US can’t survive with an over-levered consumer, a low personal savings rate, and a large current account deficit, and it won’t. I think 2011, in this regard, will be the beginning of a new phase in which the US has strong GDP growth, but it will be led by exports and investment.
THE REST OF THE WORLD. GROWTH VERSUS EMERGING.
Against this background of the US, next year could see the world growing by close to 5pct.
2011 will also be the year that economists and investors will learn to distinguish between what are genuine modern “growth economies” and those that are still emerging. While many of these distinctions are somewhat arbitrary, GSAM will be moving to brand the four BRIC economies and some other important ones; Indonesia, Korea, Mexico and Turkey as “growth economies.” All eight are already one percent or more of global GDP and are likely to see their share grow even more. This means that they are increasingly, economically speaking, substantial countries where investors will be able to choose investments with increasing flexibility and alternative thought. They will have their own dynamics and will be remain key contributors to the world economic cycle in their own right.
Other “N11” economies have the chance of joining this club in the future with Nigeria, the Philippines and perhaps even Iran, as those that could reach such size in the future. There are no doubt others also, but they are not so identifiable. While many other emerging economies have the potential to grow strongly and have many attractions, they should generally be regarded as “emerging” as they are still small and highly dependent on the economic cycle and policies of the G7and the other “growth economies.”
As an aid to thinking about all of this, Dominic Wilson and Stacy Carlson published the annual update to the Growth Environment Scores (GES) in Global Economics Paper number 206 this week. The GES scores are a good guide to productivity, sustainable growth and indeed, perhaps even wealth. The scores are available for just over 180 countries.
THE EUROPEAN SITUATION.
2011 is likely to witness a lot more dilemmas surrounding the indebted countries a nd the structure of EMU. As I have discussed recently, I don’t think this is truly a crisis of debt; it is more one of leadership and governance. As I have written, the weighted average debt position (and deficit) of the Euro Area is much better than that of the US, the UK, and Japan. Only Canada stands out in the G7. The US fiscal position is pretty comparable to Portugal, but the US isn’t facing the same dilemmas. That is probably because investors have faith in the structure of US governance and economic leadership, which, in turn, is probably easier as the US is a single nation.
Portugal’s problem is similar to that of Greece, Ireland, possibly Spain, maybe Italy and, in some circumstances, perhaps even France. Will ALL key European policymakers support them? The answer is: we simply don’t know. I think at some stage, the answer is going to be “yes.” All of them, Germany included, will be there, but it might still be messy and tricky. There was an excellent story in Friday’s Financial Times suggesting that German leaders are now starting to talk more of their “European-ness” and I think this will come through in 2011. When it does, hindsight might have suggested current wide bond spreads were attractive. But, this is one for the buy and hold, and don’t watch every day, category.
I won’t go on as it is the season of good cheer and so on, but suffice to say, it is nice to see a certain football club entering the festive period in their rightful position at the top. It is a shame that the snow in London has stopped us ruining Chelski’s season in the process!
Season’s greetings and best wishes for 2011.
Jim O’Neill
Chairman, Goldman Sachs Asset Management
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Now wait a second. I thought everything was supposed to collapse in 2010. Now it's 2011? Fuck me why don't we all just agree on 12.21.2012! I am so sick of the goddamned wait! I want the Fallout 3 lifestyle! I want the a Boy and His Dog Cannibalism!
I bet many of you fat bastards are downright succulent!
+1 Go long on Long Pork, man!
He has to write more and more of his uber-rosy little poems to keep up with the flower smelling summer breeze from oh so lovely Chiswick.
Jim O'Neill joined team Goldman (formerly known as "Dewey, Cheatham & Howe') so that he'd have license to go into the closet to change his mind.
While recognizing Goldman Sachs as a purely criminal institution devoid of any ethics, morals and scruples, whatsoever, I do have to admit that their ability to pretend as if they maintain an ounce of credibility with anyone who knows any truth is pretty remarkable.
That they've got U.S. lawmakers and regulators in their pocket is their true 'one point feasability' plan.
God surely won't help them if that powerplay ceases to work properly, even if they laughably proclaim that they do 'god's work.'
The truth is that money is Goldman's true 'god,' and history is littered with the corpses of institutions with this same notional 'god.'
It won't take long for Goldman to self-destruct.
sooner or later God will cut you down.
Or fuck you up.
http://www.youtube.com/watch?v=pFzlX9X3E18
I must assume that you do not believe they, (GSers), are angels doing God's work. What be they ???
For example of the outright insanity, CNBC just announced 'stocks are up based upon positive momentum'. Well hell go all in fully hedged on that!
I always appreciate the vacuous Yahoo Finance headlines as well, "stocks up on investor enthusiasm" or "stocks down as investors take profit" when they might as well just say "we have no fucking clue why, but stocks are up/down right now and we'll change this title to the opposite in 5 minutes."
Really shows how ridiculous this is getting . Although my favourite headline was back in October after some very poor data was released ( can't remember the specifics ) which read something along the lines of " Stocks rise despite negative data on QE expectations. "
You can say that again!
" Stocks rise despite negative data on QE expectations. "
There, that oughta do it. Now we can all go buy some stocks with certainty, aplomb and assurity of a good nights sleep before the most exciting new year.
AAGGGGGGGGGGGGGGRRRRAHHHHHHHHHH
Maybe Dr. Who'll let the Daleks make off with this fine a specimen as can be found as the surprise in a can of Beanie Weenies.
Really shows how ridiculous this is getting . Although my favourite headline was back in October after some very poor data was released ( can't remember the specifics ) which read something along the lines of " Stocks rise despite negative data on QE expectations. "
Really shows how ridiculous this is getting . Although my favourite headline was back in October after some very poor data was released ( can't remember the specifics ) which read something along the lines of " Stocks rise despite negative data on QE expectations. "
I looked into my Goldman Sachs forecast and saw a golden turd.
Consumer discretionary still outperforming.
Carnival Cruise lines at new 2-year highs.
I've thought about taking the wife on a "last hurrah!" cruise too, but the sober part of me needs to buy PMs while their prices are suppressed. I wonder how many mortgage payments the average cruise costs the average deliquent home owner?
Stocks up, Euro down.
S & P 500 still advancing higher in foreign currencies.
And S&P way down for the year priced in PM's.
"All of this will result in a mood that the US is returning to “normal,”"
This, presumably, is the 'normal' of 2000's tech bubble and the 2007 housing bubble?
DavidC
Yes 'normal' levels of delusion where good slaves are supposed to buy into the present bubble mania economic model whatever it is so they can again be fleeced.
The meltup in retail stocks is simply staggering.
No pullbacks allowed.
I'd imagine it will continue until some semblance of volume returns in January . I mean just look at the volume currently , it's pathetic . S&P trading at/above pre-Lehman collapse levels . Now that is staggering .
O'Neil should be dating Abbey Joseph
Cohen. Nary a mention that anybody
buying up here in Nosebleedville is
paying 30-50% more than Hatzius' 3.4%
GDP is worth. These guys all continue to be scammers, below used car salesmen
in the pecking order.
Its insane, people paying at least 50% premiums on these MOMO bubble stocks that give me flashbacks to DotCom bubble mania times with 100+ P/E's all over the place...I never realized so many people were just degenerate gamblers.
So there we have it,it's official,the recession that never was,merely a pause in the neverending boom that is the US economy and stockmarket.Corrections are not even allowed now, never mind stocks being allowed to fall,house prices can only go up.If you refuse to join the madness your money will turn to dust.
God bless America.
Well its still a depression, in a country with a destroyed 75% Borrow and Consume economic model, just that its been papered over with 2 ply FRN's which are worth less every day. Yea, this surely is the future of america all is well as long as about $10 billion can be thrown at stocks daily.
Frankly, you can have it I'm out!
US$ devalued. Stocks up in US$.
I have to admit I'm gonna be happy
when these same dumb mutherpuckers
lead everyone into another crash.
Oh look the stock indexes are up again, I'm sure a lot of folks are feeling richer and may spend more on Christmas, an-away, thats the whole idea behind the fed induced manipulation of stocks.
Yes also they believe if they can just pump hard enough, the FED can finally pass off the bag of crap its been purchasing to retail. MOMO bubble-mania and all that. Personally, I dont think they ever will accomplish that feat.
I truly believe the public is flat broke for the most part. To many boom and busts so close together has led many to simply cash out for good. They know what happens when the financial media starts hyping the markets. The longer the stock indexes rise without a meaningful correction the faster and deeper the next drop will be, happens every time.
Yet another gap up on the open in SPY. Gap up sideways 6 hours in a 2 point range.
Yep. Well the day will come at some point where the $8 billion daily to support stocks and hammer down metals will come to an end.
A gibbering pumpmonkey.
Of course! Why didn't we all see this? The US will be entering a new phase. Yes, a new phase indeed. We will grow our GDP by exporting FRN toilet paper and investing in Apple, Netflix and Amazon.
So simple, even Wanger and Robo could sniff that one right out of O'Neill's fat ass.
Does this guy suck the Bernank's dick for pleasure or because he thinks it's a lollipop?
Well, we know he's a liar, anyway.
Anybody calling 3% "strong GDP
growth" has to be well beyond stupid.
The only difference between the US and Portugal is we can print our own currency and we have the arrogance to believe that others have confidence in our "leadership."
When you permabears drop your idealism about the way the world ought to work and accept that mediocre investors earning mediocre returns inflated by various subsidies for the mediocre are what make the world go round, you'll start to see that actually the seemingly ultranaive permabulls like O'Neill are right more often than you are.
Watch how wrong you will be now that
we've built in a permanent unemployed
underclass.
After all, the entire system (and
especially the stock market) is reliant
upon selling overpriced crap to the
idiots. Now the idiots are broke and
have no prospects.
Yes and no. Some idiots are broke, most not. Consumption of tard toys and lardass-o-cola is growing. I suppose someday the US will have another depression but not in 2011.
"2010 was exciting with risks. 2011 will be even more so!"
A quote from F. Scott Fitzgerald comes to mind, which is an appropriate response to this missive:
"Cut out all these exclamation points. An exclamation point is like laughing at your own joke."
Watch O'Neil's and the squids forbearers
doing a rabbit drive in 1934.
http://www.youtube.com/watch?v=YDxvc-BuS5A
It really is astonishing how we all, even those disinclined to sign onto ebullience, have forgotten that foreclosures have been frozen by all banks, ALL BANKS, for about 5 weeks now, with a few of them only recently restarting.
That is a lot of deadbeat cash going to retail. It won't show in bank earnings, of course, because Feb 2009 FASB rules lets them maintain the value of the mortgage.
The next downtick in GDP projection will come from the Tea Party attempts to cut spending. If they can get 100-150 billion off, that should take GDP down to 2.7ish%. Another 200 billion from state government spending cuts should be good for another 1% in GDP next year BUT, and it's a big one, Bernanke may fund that 200 Billion overtly . . . to avoid further unemployment from fired state employees (or private employees funded with state contracts).
This just runs out the clock as oil production falters, and the waivers for US car mileage requirements get filed.
Retail stocks are going up because the economy is making a structural change to adapt to servicing the upper 50% (and upper 25%) of the wealth population. Sadly, the economy is "moving on" and unemployment does not matter, nor does the housing market for that matter. Corporations are restructing to live and thrive on the upper 50%. I do not condone this, it is just my observation, and could explain why equities continue to rise.
Stocks have risen because of massive direct and indirect government subsidization, and because corporations have been literally wringing out as much overhead and clearing head counts of workers.
The 'kick the can' methodology of floating an economy structured to produce far more goods and services than markets wish to consume will cause the system to come crashing down, and things such as the commodity bubbles, margin compression and other distortions created by insane and out of control Keynesian monetary policy will soon reveal itself for what it is; an abomination of monstrous and frightening proportions.
George is right, the economy is moving on and adapting to high unemployment. You can bet that if hiring is starting to pick up as it tentatively appears, these are mostly younger people who were previously not counted in the labor force, and not the officially unemployed, most of whom will probably never return to work.
I see this "recovery" as driven by excessive risk induced by fiscal and monetary stimulus and fated to undermine itself by driving up inflation and interest rates, until it collapses in fiscal crisis in 2012-2013. But, though I don't really like to make market calls, as pessimistic I am it does look to me like 2011 will probably be a good year for stocks.
I just don't see how they'll be able to turn off the free money spigot, now that it's been flowing for a while. Even the slightest hint that the Fed will slow easing or that interest rates might rise would crash the markets instantly.