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Jim O'Neill Is Back

Submitted by Tyler Durden on 08/14/2010 11:38 -0400

After a brief hiatus, Jim O'Neill is back, and this time is taking it easy on taunting the bears. In his weekly letter he has some rather lucid questions, the first one of them being the observation of the paradox of the surging Chinese trade deficit in light of the weakening renminbi. O'Neill states: "the GS trade weighted CNY has actually weakened by around 1.75pct since
they “ de-pegged”, by “undershooting” the rise of the Euro, Yen et al." Don't anyone tell Schumer that China's whole revaluation bluff was nothing but (and in fact a smokescreen for further devaluation) or there will be more theatrical demands for blood. O'Neill also looks at recent Chinese regulatory developments and notes that the push "to bring any off balance sheet vehicles for disguised lending, back on
the balance sheet, and to be prepared to raise fresh capital" is sensible but hopes that "if this is going to be implemented, if necessary, offsetting stimulatory measures would be introduced." Sure enough, China also has to pay for the Keynesian funeral for a long, long time. Not surprisingly, O'Neill looks at the one-time record pick up in the German economy courtesy of a massive EUR devaluation and extrapolates far into the millennia: "there seems to be a belief that Germany is on the verge of a jobs “ miracle” , and there is more and more talk of a period of stronger domestic demand." Sorry no. It is nothing like that and is purely a function of the ever more volatile seesawing in key FX crosses, on a trendline to global deleveraging contraction. Germany merely borrowed from the future courtesy of a plunge in EURUSD. It is already paying for this now and this quarter's data will be a major disappointment.

Much more from O'Neill in this week's note, which is now far less permabullish than the Jim of even two months ago.

Not known for the most rational month of the written word given vacation time, this month is turning out to be no different than often. Many examples abound, but I have to pick the UK Independent newspaper so far for “award of the month/nothing to write about” for choosing pages 2-6- yes five pages-for “ Britain’s faltering economy” yesterday. The fact that they ignored the previous day’s report on the biggest quarterly rise in employment for 20 years, I guess is mere incidental. As Ben Broadbent and Kevin Daly have been writing about , there have been some data disappointments, but there also continue to be some positive surprises in the UK, including a probable upward revision to the already strong Q2 GDP data from the revised construction data.

Anyhow, this is not a unique story, as media have a lot of filling up to do in the quiet days of August, as do many market pundits. With that in mind, here are some of the other “ imbalances” that have caught my attention this week;

1.       Chinese data .The two consecutive days of the reporting of the usual monthly Chinese data resulted in widespread commentary about how weak the data was, and there was particular emphasis on the trade data. Well, as our own guys commented, the data was indeed further confirmation that the economy has slowed, but what is the real news from this? In view of the tightening of financial conditions so far this year, cyclical slowing is pretty clear to anyone that follows LEADING indicators. The real issue is whether the economy has slowed enough to reduce the modest inflationary pressures that might have been building, so that the PBOC and other economic agents can move away from their tightening bias, to the beginnings of neutrality/fresh support. That to me is the real issue here. The only real news would be if Chinese policymakers cant respond.

2.       Chinese trade balance and CNY policy. The significant widening of the monthly trade surplus, with a notable slowing of import growth was concerning, as Yu Song and Helen Qiao also noted. Against this background, even those that are often supportive/aware of Beijing’s stance on matters will have raised an eyebrow or two about the fresh weakening of the CNY. As Fiona Lake showed me this am, the GS trade weighted CNY has actually weakened by around 1.75pct since they “ de-pegged”, by “undershooting” the rise of the Euro, Yen et al. And for Beijing to allow the $ to rise against the CNY this week post trade figures, amidst persistently disappointing US data strikes me as most odd.

The “weakness” of imports of course needs to be put into perspective. Not only are 2010 imports year to date still some $246 bn. more than the same period in 2009 (annualized a size bigger than Greece) but for all those who respond to this, “ yes, but low “crisis” base for comparison, imports are $150 bn. more than the same period in 2008, which was pre crisis.

And year to date, the Chinese trade surplus is still “ only “ 2.8pct of GDP.

3.       Chinese regulatory policy towards banks. The other, probably bigger, topic that upset China related markets was news that the regulator, CBRC appears to have told the banks to bring any off balance sheet vehicles for disguised lending, back on the balance sheet , and to be prepared to raise fresh capital , if necessary. This strikes me, as a pretty sensible thing to do, (again as in other areas, anti cyclical, bubble preventive polices seem to be do-able in some places) even if it did hit a market primed for less guidance on banks short term behavior. I suspect that if this is going to be implemented, if necessary, offsetting stimulatory measures would be introduced.

4.       US imbalances. If the Chinese data wasn’t enough, we then got-in addition to the highly disappointing latest weekly job claims- news of a much worse US trade report, albeit the previous month than China-with import growth surprisingly strong. As our US guys pointed out , this suggests a downward revision to Q2 GDP is very likely. It also raises further serious dilemmas about the medium to long term US growth outlook. With consumption as subdued as it is, import growth is not supposed to be powering away in the US anymore. Indeed, as pointed out in a lengthy FT feature article on the US economy today, net export growth along with investment spending are the great hope for the next decade for the US.

Not a great week for those of us that believe that the big era of US-Chinese global imbalances are behind us. Certainly these data points suggest to me that the market isn’t pricing in enough CNY appreciation over the next year, nor should so many people persist with this weird nonsense of buying $ on disappointing US data….

5.       Germany and imbalances. The story of the Summer in many ways. 2.2pct quarter on quarter GDP growth in Q2, the biggest gain since unification. How sustainable is this, how “imbalanced is it”? We are all, assuming it is a/reflective of Germany’s lop sided skill as an exporter, and b/ lagging evidence and will slow. Looking at comments coming from many Germany companies, and increasingly German policymakers, there seems to be a belief that Germany is on the verge of a jobs “ miracle” , and there is more and more talk of a period of stronger domestic demand. If this turns out to be true, it will be such a pleasant surprise, for so many, including Chancellor Merkel. But also, it will be highly important to many of Germany’s neighbours inside of Europe and beyond. Of course, it is probably right to be somewhat skeptical while open minded, and we now need to watch more and more closely evidence about domestic German confidence, especially related to the consumer.

6.       Global Paper on Demographics and Imbalances. In what turns out to be an extremely interesting week for the topic of imbalances, Dominic Wilson and Swarnali Ahmed have published a somewhat controversial paper (number 202) this week, suggesting much of the global “imbalance” problem does in fact, relate to demographics and savings behaviour. They argue that, based on likely savings patterns for the foreseeable future, global imbalances- perhaps not on the pre-crisis scale-could be with us for some time.

7.       India and Demographics. In another recent paper, that is in the “must read” category, Tushar Poddar and Pragyan Deb show that the likely rise in India’s working population will be dramatic in the next 20 years. In Global Paper number 201, they show, helped by rising female participation amidst accelerating urbanization, another 110 million people will enter the labour force this decade , alone. For all those that persist with the idea that the world’s constraints are even more complicated by an ageing problem with less employable people, this is compulsory reading. Over the next 20 years, India can has the potential to create the same size as the current total US work force. McKinsey have also published something else on this topic recently.

While I am on about India, and while nowhere near-yet- the global scale of China, record car sales announced this week, at 158k, up 38pct year on year in July.

8.       Yen and imbalances. Would not want to finish without an honorable mention to the Yen, which at more than 2 standard deviations from our GSDEER fair value still, is showing clear signs of a persistent supply and demand imbalance for the Yen. It is , both obvious and insane, at the same time. Clearly the Yen’s strength is coming simply from the fact that it’s zero interest rates are no longer that different from everyone else in “ developed” world. Japanese policymakers have it within their wherewithal to change it, if they want.   I am so sick of trying to personally pick, and help others try and pick a bottom in $/Yen, but in view of the fact it has bounced in past 2 days, despite the “mood” maybe another token effort is worthwhile?

9.       Markets and the world. As a result of our various “downgrades” , we now forecast 2011 world GDP at 4.6pct, down from 4.8, with no changes for this year, still at 4.8. We remain above consensus apparently for next year, which is around 4.3pct.   Clearly markets are perturbed about a “slowdown” , and if there were evidence of dramatic –global-slowing, those concerns would be warranted. But where are the signs of a dramatic, and persistent slowdown?

Markets are still clearly troubled the perceived direct importance of the US economy, the ability of policymakers to stop another recession/period of extremely weak growth, the supposed dependency of others-especially China- on the US, as well as being generally worried about everything that one can find to worry about.

If I look at all our proprietary tools, our global leading indicator, the GLI has softened. But if you look at our financial conditions indices, ( FCIs), both across the OECD, and especially in the US, they look very supportive, if you look at our index of financial stress, the FSI, that has improved markedly since May, and so while the world has slowed, it is certainly nowhere near “out”. If you add all our measures of value for equities on top of these indicators, I don’t get where this severe fresh bear market in equities that so many gloomy people, and chartists are desperate to see.

Let’s hope they disappear with this current bout of rain that is falling on what had been, so far, a rather pleasant British Summer.

- advertisements -

Sat, 08/14/2010 - 11:58 | 521689 Atomizer

When you ask an economist about the market today, they tell you to ask the weatherman.

MDID - Talk To The Weatherman

http://www.youtube.com/watch?v=e4tE22f0EA0

Old memories at Case Western University.

Sat, 08/14/2010 - 17:49 | 521984 Muscletonian

When did the great anomalies start to appear in S&P (Equities in general)?

I would say after the "flash crash". In a conspirational mind, I then ask myself, was the "flash crash" staged? And if so why?

Fact: One CME member firm had only sell orders that day (there is 250 in total). Is that any where near logical or rational. I say hell no, thats as black a swan as you'll ever see or find.

My thoughts: PPT staged the charade to see what would be the outcome when selling massively in the market (with HFTs and other computerized buy/sell programs running the market). They got a 10% downswing in 10 minutes, not really what they ever could dream of even in a worst case scenario.

After that we have seen strange buying on dips when all macro data has been awful, PPT just don't want that to happen again, anyway not until the stupid/lazy europeans are back from their vacations. A new sovereign debt crisis in Europe will suit Benron and Turbo T much better, those european assholes demanded austerity at the last G20 meeting, totally blanking Turbo T's fiscal efforts. Much better to make it look like the schmucks in Europe fucked it up. And then go for the next round of mega QE on a worldwide basis, no harm no foul if all currencies are inflated at the same time.

Sounds wacky I know, but the actions in the market have been way wackier. Sorry for introducing the thought here, but wanted to keep fresh in everybodys mind.

Sat, 08/14/2010 - 11:57 | 521690 spekulatn

Dipshit, bitchez!

Sat, 08/14/2010 - 12:02 | 521692 Gimp

I think I vomited in my mouth. Note to self - do not waste anymore time reading drivel - stop.

Sat, 08/14/2010 - 12:14 | 521705 asdf

massive euro devaluation? PPP is 1,17 which means that the euro is still overvalued

Sat, 08/14/2010 - 12:50 | 521749 RobotTrader

Volume on this correction has been much ligher than the prior ones.

5-day ARMS closed at 11.6 the other day.

Options Racketeering Week is approaching.

I would bet that retail and banking stocks are going to take off like scalded dogs for a couple of days next week.

Watch out.

Sat, 08/14/2010 - 16:18 | 521932 wowser22

Sure about that Arms number Robo? I show the 5 day ma of the Arms at around 2.2. How do you calculate your 5 day Arms?

Sun, 08/15/2010 - 09:31 | 522315 manifestus

im not so sure this can happen without one more down day. if it does, it's just an opp to reload, and nothing to fear: you can be sure the shorts have already lightened up a bit into this weakness given they too well know OE week is upon us. Much more tricky will be September's OE week.

Sat, 08/14/2010 - 16:08 | 521929 equity_momo

Jim oNiell is just the 21st Century Abbey Cohen. But with less facial hair.

Both industry schills pumping up the ponzi.

Sun, 08/15/2010 - 08:54 | 522304 Dismal Scientist

He is a professional Northerner. Knows what he likes and likes what he bloody well says. Twat.

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Thu, 11/18/2010 - 03:35 | 737102 meichou

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Jim O'Neill Is Back

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