Jim O'Neill Releases Latest China Pitch, Remains Permabullish, Praises Greenspan And Dismisses Europe Problems
Just in case you were mystified what "excess capacity" cheerleader #1 Jim O'Neill thinks of the world, be mystified no more. Spoiler alert: Jim uses the words "remarkable analytical mind" and "Alan Greenspan" in the same sentence. And with that out of the way, read on, and while you are at it, buy buy buy.
I am just back from a very demanding but fantastic short trip to Hong Kong, where we hosted, what I suspect, might have been the biggest macro client conference I have ever spoken at in my time at GS-which is quite something of course, if true. Coming a few days after macro client events in London and New York, I feel a tiny bit macro conferenced out…….but this one, especially due to its size, breadth, and being in the "action" centre of the Universe was especially interesting. I have returned with some dangerously strong views……( apologies in advance). Anyhow;
1. India. We heard from some Indian policymakers at the conference, and amongst the many things in general that were fascinating from the region, this might be the most interesting "new" thing I heard. Remember the great new ambition to lift daily road building from 2 km to 20km per day I started writing about last Autumn? Well , according to what we were told, it us already up to 9. According to Tushar Poddar, the National Highways Authority has said an additional 275km were built in December, which is consistent with 9 km. If India carried on down this path, then they are on course for lifting the trend growth rate in my judgement, and taking India down China's path for the next decade and beyond.
At the conference also, we had a "BRIC panel" which I chaired with four of my colleagues, and I asked them all whether domestic demand would be stronger or weaker this decade than the past one. Brazil, China and India all said yes. ( Rory said that Russia's would be fine but it would be tough to match the amazing strength of the past decade). If they are correct, by 2020, the BRIC economies will indeed have come bigger than the US, and the transformation of world leadership complete , which would have considerable implications of course. ( including that Obama's doubling of export growth might not be as insane as many think, and if Greece were still in EMU by then, who really gives a hoot as to whether they are keeping their fiscal house in order or not).
2. Indonesia. At one of the three dinners I spoke at, the first one had quite some discussion as to whether Indonesia is in a different spot than the past. The general view seemed to be " yes". While I would like to see more evidence through a couple more years, I was impressed by what I heard. And this means that all three most populous Asian nations are all showing very strong demand at the same time, as this decade gets going.
3. World growth? At the end of my speech, I asked the 800 plus present, " is growth going to be above or below the consensus in 2010"? I might have confused people I suspect, as the consensus that I showed was 4.1pct, but I think I said when I asked the question, it was 4.5pct, which of course is our forecast. Anyhow the answer was 49pct "above", 51pct " below". In London last Tuesday to obviously a very different group, and exactly a week earlier, when markets were not quite so fraught, the same question had an answer of " 54pct vs. 46pct". As I joked in HK, who would have dreamt that a London audience would be more bullish than Hong Kong…….no idea whether this is true, but ….
While I met individually with many optimists out there, I also met with many quite gloomy, including a rather pessimistic bunch from the private equity world.
4. The thoughts of Dr Greenspan. I had the pleasure of interviewing the ex Fed Chairman via satellite, and still had more than half the questions I had planned when our hour was up. What a remarkably analytical mind Alan has, and he shared many interesting things with us. Of them, I would highlight;
a/ he remains strongly of the opinion that equity prices are an important determinant of economic growth, and is a big fan of our financial conditions indices.
b/ he seems a bit more optimistic than us about the relatively near term cycle for the US but less so longer term.
c/ quite concerned about the level of US government spending and the ability of Congress to reduce any of it going forward.
d/he seems pretty convinced that US inflation is inevitably going to rise. I probed quite a bit here, and he divulged an interesting model he follows , which is monetary growth relative to excess capacity with a long lag. I remain very unconvinced about this, or that inflation is set to definitely pick up much.
e/ he was bullish about near term prospects for China, but far from convinced over the longer term due to the roll of government.
f/ he is not a fan of EMU.
g/ He doesn’t accept that the 2 pillar strategy is better than the Fed's.
5. China and the CNY. And here is the especially strong view bit.
I have returned with a rather dangerously strong feel that China might be close to doing something of note on the CNY. It has been my rising view since the inflation evidence picked up in early January, that the circumstances were starting to change, and in the weeks before this trip, the evidence has built, and a couple of bits and pieces I have thought through, as well as chatting with some interesting people on my trip, I think something is getting closer. Moreover, contrary to our formal forecast of a 5pct rise of the CNY versus the $ starting in a few months time, I have a hunch that as and when they move the exchange rate, it might involve something different, possibly a one off revaluation followed by a broader band. I emphasise that this might just be what I think they SHOULD do, as oppose to will do, but the two have merged in my jet lagged mind. My guys in the team , are far from sure that I am anything other than out to lunch….
Why do I think this? The external "pressure" as such is there as always, and while I generally accept the notion that China won't like to move when everyone outside is nagging them, there have been a couple of more nuanced outside comments. The RBA " no move" meeting last week and reference to China, is one of them, as well as a slightly more subtle comment from Mr Geithner on the topic. Moreover, the main reason why they would move will be , if it suits them domestically. And it is this which has changed. Inflation - this am's numbers not changed anything -is picking up, and the economy is , if anything too strong. While many argue that Beijing is still troubled by "weak" export growth, exports are clearly on the rebound. A few people I chatted to , make me think that exports are probably rising quite a bit now to the rest of EM, and from a cyclical perspective, if exports were to recover any more, then GDP growth is simply far too strong.( as an aside, look at the staggering import growth of 86pct in Jan trade data) And as one person interested in these matters put it to me recently, " how can we get the CNY out of the daily attention of everyone?" .
The persistent focus on the CNY is clearly complicating monetary policy, and at a time when inflation is becoming a policy issue, they need to try and get rid of it. One way of doing this is to do a decent reval ( say 5pct) and introduce a genuine wider band, or a Singapore style true basket, in which they let it become both more volatile and a creature of other exchange rates for some time. Of course, one of the major reasons against then doing anything, is that if it were to simply attract even more speculation, then it would be counterproductive, but in my judgement, the evidence that the CNY is as undervalued as so many observers still say, is increasingly less clear. ( both our GSDEER and the trend of the trade balance suggest this lazy consensus thinking could be wrong).
As to what would be the consequences of such a move on other markets? Many I discuss it with, think local equities would go down, and this would translate into other regional markets. I strongly disagree, and think the opposite. It would bring the end game of tightening closer to the end, and would be a strong move to support the declared policy shift to encourage strength of domestic consumption relative to other parts of the economy.
Anyhow, it wouldn’t be the first time I was out to lunch…………..
6. Overall views.
Irrelevant of my thoughts on this topic, I return thinking just as confidently, if not more, that Asia is indeed increasingly the centre of gravity of global DEMAND, not just growth ( along with my next destination, Brazil), and while I had ridiculously long conversations about Greece with people, from a global perspective, the Greek issue is simply not as important as many worry.
From a European perspective, of course, the underlying issue is really all about a stronger fiscal framework being agreed and implemented for EMU participants, and anything the EU say later today with respect to the current situation, it is not going to be the end of the matter.
Now, on other topics, Just when Nani was getting his extended run, he might be accused of stopping us being back at the top above Chelski………..