Jim O'Neill Redirects Greek Problems To The Wonderful World Of BRICs, Suggests A German-BRIC Currency Union (For The Sensational Journalists)
Read the following from Goldman's Jim O'Neill, take two tablets of hopium, and first thing tomorrow use REDI to buy 10 times your net worth in BRIC stocks - buy indiscriminately - they are all going up, up, up. Also don't forget to buy some Man U leaps. After all with a hundred years of momentum behind you (and billions of dollars spent in lobbying to preserve the status quo) it is not as if something new can ever come out of left field (both literally and metaphorically). At least Goldman's permabullish analyst has had the chance to read the Goldman Monthly FX Analyst report, which substantially dropped its $/BRL 3/6/9 month targets from R$1.60, R$1.65 and R$1.75 to R$1.75, R$1.85 and R$1.90. O'Neill notes: "it does appear [the Real is] overvalued" Needless to say, we were looking forward to this happening for quite some time. And as much as Goldman touts the BRICs, we are confident that our own creation, the STUPIDs, will be getting much more airtime over the next decade.
I am just back from -another- fantastic trip to Brazil-Rio to be specific……large part of it vacation, a couple of days at the end , business, and the main timing of it, was as a guest of the Mayor and his staff for a special BRICs conference Monday/Tuesday of this week, to help launch the opening of a new BRIC research centre at one of the local universities . I spoke on the opening panel with some well known important local figures, as well as a guest from Russia. There were a number of other panels that pursued aspects of the BRIC topic, including policy types from all the BRIC countries, ranging from the validity of their efforts to be a "joint force", to environmental issues. Unfortunately, I missed most of these sessions as I had to earn my keep and visit a significant number of clients in Rio- which was also very interesting.
It is indeed, a tough life, but someone has to do it…It was such a dilemma that the event was held at the end of Carnival, and that the weather was over 40 degrees nearly every day, and I went to the Maracana again, and all sorts of other wonderful things…. It was quite a challenge , trying to raise oneself for work…… Anyhow;
1. Brazil's cyclical growth outlook. While I was sunning on Copacabana one day, I read on my blackberry, Paulo's latest upgrade for Brazilian GDP to 6.4pct for this year now…I teased Paulo that he has another one to go…I had been quoted in a number of Brazilian papers earlier that week, suggesting 7pct was not out of the question. From policymakers and local investment firms I met, there is now widespread consensus of a 6-7pct range. ( one policy type suggested 8pct I believe when they heard about my newspaper comments) What was , in many ways, much more interesting, is that virtually everyone I chatted to in any detail, believes that sustainable growth is not much more than 4pct….
2. The structural outlook. As I say, most of those I discussed the issue with at any length, believe that the trend rate of growth is around 4 to 4.5pct, and that, without new initiatives to boost investment, reduce the share of government spending, improve education, and improve infrastructure, that is where it is staying. Moreover, most believe that neither election candidate is proposing clear signs of initiatives to persuade them. I have 3 reactions to this, on reflection;
a/ we have only assumed something between 4.0-4.5pct for our 2050 BRIC projections, so that would be just fine. As it happens, since our December GES- Growth Environment Scores- update, Brazil, now at 5.3, is actually the highest of the BRIC countries, and this partially justifies the relative P/E rerating that has occurred relative to other BRIC countries- especially Russia.
b/ this cautious consensus might be too conservative. Many people told me repeatedly from the early 2000's up until the year before the crisis exploded, the B in BRIC wasn’t justified……..I have a sneaking suspicion that Brazil might be able to grow 5-6pct for some time.
c/ so long as the new government commits to the independence of the central bank, and keeping inflation low, then the underlying benefits for a Brazilian society that is just reaping the early benefits of being a " new country" are still large, and this alone, might do more to boost the share of investment than many assume. It is also a key issue for the attractions to foreign potential FDI providers.
There are of course, good reasons why the cautious consensus may be right, and it is certainly, key that whichever candidate emerges post Lula, they must keep the excellent macro framework of the past 10 years or so.
3. The election and policy. I am not bothered about which candidate wins, the key is supporting an environment that allows the central bank to do its job, encourage more private investment, continue to pursue the more recent path of greater involvement in foreign trade and FDI, and generally "not to get in the way too much". While I respect the views of many, that the election winner might not matter too much, I do think it matters, and some caution is necessary until we get beyond it.
As for the Real, it does appear to be overvalued- one important investor who had just been to London , told me they found London cheap- but it is certainly better than the usual problems they had had with currencies. I would also add, that even though our GSDEER does support those that believe the BRL is expensive, it might well be that valuation models for a country that has got inflation under control for the first time in a generation, is even more suspect than others….
I could go on and on about all sorts of anecdotes, and my views on Brazil, but I have returned thinking , there is a ton of momentum to this story, and lots of smart ideas.
( for all those United sympathizers out there, I saw Botofogo beat Flamengo in the Rio Cup semis, and hadn't even realised Kleberson was on the pitch….nothing new there then as one United fan has already suggested to me!)
On other matters, while I was out;
4. Fed Discount Rate move and its implications. As made clear by Bernanke today, and plenty others, this is not the start of the Fed tightening, and hence all those trades that were initiated by this, perhaps it is not the right thing to have done………..this possibly includes $/Yen, and while I continue to hate the Yen, but not sure this is the definitive trigger- of which the case for hating continues to be strong-…….. All this being said, of course, the Fed wants to keep financial conditions easy, until it doesn't, so I am not sure I would read anything overly bullish for the back months from what Uncle B has said either..he will do, what the evidence suggests he should do.
5. World recovery momentum. As exhibited by our Advanced February GLI, it is still all looking pretty good, so equity bears need to be careful….It was fascinating to be quizzed so much about Greece in Rio, which having now been all over the world in 3 weeks, I can say, is easily the number one topic on people's minds……It shouldn't be, Greece is Greece, the main topics of global conversations should be the BRICs and the US.
6. German exports……….In this regard, take a look at Dirk Schumacher's fascinating Tuesday email re the latest geographical breakdown…each time this data comes out every month, I am almost stunned and I encourage you all to look at it. Dirk suggests that the momentum of China's imports from Germany is such ( India pretty punchy too) that by this time in a year, Germany could be exporting more to China than France. Staggering! (new idea, how about monetary union between Germany and the BRICs? This is a joke, for anyone in journalism or sensationalism) [since Zero Hedge dabbles in both, we will be sure to pass on the joke to Angela Merkel - we are confident she will get it too - the German people will be ecstatic to know that in 10 years they will have to bail out Brazil, Russia, India and China]
7. Chinese FX policies. One of the major news media appears to be confused by my current thoughts about the CNY, or least has managed to confuse some clients, judging by my emails…..so here goes;
Currencies serve a number of purposes. In this case, two are relevant. One, in terms of competitiveness, of course most are convinced that the CNY is significantly undervalued. We used to share this view, but our model, GSDEER, no longer suggests it is. In fact, its current estimate is actually very close to the spot price. It has risen by a significant amount on a trade weighted basis. Pre the start of their moves many years back, our model did suggest it was clearly undervalued. In addition, and something, 90pct of supposedly articulate analysts and policymakers seem to ignore, Chinese import growth post crisis is strongly outperforming exports. ( again see the German export data…….) the evidence in my judgement is that our model, as limited as any of these models are, might be closer than we realise.
Two, and here is the key, currencies perform a key role in monetary policy, and financial conditions. China needs to both obtain tighter financial conditions, and undertake further measures to adjust their economy. And as I wrote about post Hong Kong trip, they themselves realise that - to take a comment put to me- " get it off everybody's daily obsession". The answer is simple, have a small revaluation followed by more volatility. I think a 5pct type move, followed by a wider band , is possibly getting pretty close……….not least as it would be a really good thing to do..
Anyhow here's my last comment for this note., with many moving to Hong Kong for the new world order of China dominance, why don’t some consider Rio? I would, if Rooney and co were there……….
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