Jim O'Neill's Latest Spin: "The Quicker China Slows, The Better"
It was only a month ago that Jim O'Neill was openly taunting those who refused to suckle on Goldman's Kool Aid teat: "dear grizzlies…….bet your worried about today’s rally? See u later." (sorry, we won't let this go for a long time). Then again, those who did believe Goldman's and David Kostin's advice that the market would be 30% higher now, are down to 70% of AUM (the very same David Kostin who on September 12, 2008, the weekend before Lehman blew up, predicted a 12% rally by the end of 2008 on the road to "S&P 1,400"). So, yes Jim, the grizzlies are far less worried at this point. Wish we could say the same for the bulls. Which incidentally may explain why Jim O'Neill has been completely gone from the scene for the past month. Luckily, he has now reappeared, and is once again dispensing bullishness to all who care to listen. The quote du jour this time: "While I can understand why some of the China bears will be full of the
joys of Spring right now, this is a “desired slowing” and unlike some
of the many issues in the West, the quicker they slow, the better." And we thought Bob Pisani had trademark to the "a nuclear holocaust is a victory for the bulls" phrase. Needless to say, we disagree with everything Jim has to say, except for his world cup pick. That said, we certainly enjoy his spin for the comedic content.
Both the World Economy, and the World Cup have entered highly interesting phases . I am off down to Capetown Sunday to share in some of the “beautiful” game for a few days, as well as a client event. I have managed to experience some of the flavour of each World Cup since the US held one in 1994, and they are fabulous occasions. Gideon Rachman had a lovely piece in the FT earlier this week, summarizing their flavour, and suggested that they lift the world into a more wonderful place, even if only for a brief period. He is right… Perhaps we should have extended the World Cup for the whole “ Sell in May and Come Back on St Legers Day” this year………? That would be fun. Anyhow if the phrase works this year, as it sure has been doing since the start of May, only another 2 months and the market might start to find a floor……..and then the bulls return..
Anyhow, the Netherlands has just beaten Brazil, so there is a major shock again, and it means we can only get 2 of our 4 predicted semi finalists correct. (Argentina and Spain). Away from this, to the world economy. Of note;
1. China, and so on. We revised down our China GDP forecast for 2010 today , from an above consensus 11.4pct to “in line” at 10.1pct. This is the first revision lower we have made for China since the immediate aftermath of 2008, and of course, since March 2009 have been much more optimistic than the consensus. As explained in the note from Yu Song and Helen Qiao this am, and discussed by Mike Buchanan earlier in the week, we expect that the next couple of quarters could see growth slip –temporarily-quite a bit.
All of this needs to be put in some kind of appropriate perspective. First of all, we remain more bullish about both a/the trend rate-we think 10pct, and b/ 2011 where at 10.0pct, we are back above consensus; and b/ we expect inflation to actually fall significantly now. The latter especially means that, the key issue is “when do policymakers stop tightening financial conditions?” as when we reach that stage, all guns start blazing again.
While I can understand why some of the China bears will be full of the joys of Spring right now, this is a “ desired slowing” and unlike some of the many issues in the West, the quicker they slow, the better. As I have said on many occasions recently, using our own proprietary GSCA as a rough tool, that moving back within an 8-12pct range, is the sign we should be looking for.
Lots of other interesting things also about China this week, especially as it relates to the CNY. It strengthened quite a bit more this week, currently 6.7710, yet I didn’t see hardly any email chatter about it. This is a sign that China has done a great job on the currency issue, introducing more flexibility as well as appreciation.
In addition, there were some quite interesting comments from the IMF’s Strauss Kahn this week, specifically suggesting that, as Mike B and I wrote about in a recent Global Paper, the SDR will soon need to be adjusted to include the CNY. He did suggest the soon might not be tomorrow, or next week, or even any time really soon, but it is coming..
One last thing, back to Chinese GDP. They actually revised , yet again, previous year’s GDP growth higher, from 8.7 to 9.1pct, suggesting to me that they must be extremely close to that magical point of becoming bigger than Japan.
2. Global Papers abound. Talking of global papers, 2 very important new ones this week.
Global Paper no 199 from Dominic Wilson, Anna Stupnystka and Alex Kelston, on our revamped GLI, our global leading indicator. A must read for anyone interested in a/leading indicators, and /b our views. As explained, it is now truly more global than before, and it suggests the GLI might have peaked the month before last.
Global Paper no 200 comes from Jan Hatzius and all the US team, and is also a must read. The paper focus on both fiscal and monetary stimulus, and why we believe US authorities are right to have resisted the popular mood from many others for an early tightening. It is an excellent detailed piece for anyone interested in the US and economic policy.
3. G20 and “ squabbles”. Talking of which, while the likes of the UK are eager to pursue this notion that their new “tough” stance on fiscal policy is the only game in town, you can bet our new PM and Chancellor will get their ears bashed when they visit DC in coming weeks. The run of disappointing US economic data continues apace this week, with almost something daily. Of which, the hints of a new rising trend in weekly job claims, the drop off in new orders in the ISM survey , and the weakness in housing indicators all vie for “most concerning”. I rather suspect our 2 new British super heroes are rather hoping that not too many others tighten fiscal policy sharply, especially the US, as their will be no export markets ( beyond the BRICs for anyone to sell to). While it is possibly cool for those tough enough to tighten their own fiscal belts a lot, for all G20 members to do it simultaneously would –obviously-be rather nuts.
4. EMU-land and the Euro. Surprise surprise, the Euro suddenly finds it not so difficult to rally. As I have argued with my few week old “ new balance” about this particular currency pair, it is indeed a currency pair. Now whether the FX market knew whether the Netherlands would come up with today’s surprise or not, or whether it is the market simply derating the US once more, who knows, but the more balanced shift was rather predictable. Now just stop to think about, what happens IF the Spanish stress tests are credible, and – did you see that pig flying past your window- there is a credible stress test of all of Europe’s challenged banks, then this thing could easily get above 1.30……..on the other hand…..
There is an excellent new paper from BRUEGEL which discusses much of the topical EMU stuff, especially the complex German politics. “Why Germany fell out of love with Europe”, authored by Wolfgang Proissl, a Brussels based commentator for FT Deutschland, and a temporary scholar at Bruegel. it is well worth reading. He argues that Germany has lost some of its love affair with Europe, while at the same time, EMU is indeed, increasingly German driven. And one part I especially sympathize with , “ too many rules” are obsessively created , only to be easily broken. Get on with supply side reform and allow the notion of a true common currency area to flourish- my view- otherwise you are stuck with a glorified European Monetary System reincarnated.
5. Sweden showed , that not all developed countries are in the same troubled waters, raising rates this week. That follows the earlier crowd led by Australia, who have of course, been having lots of their own fun and games with politics and corporate blame games…
Anyhow, come on Argentina………..