Presenting Jim O'Neill's Farewell Letter
As everyone knows by now, Goldman's (now former) top economist (and creator of such K-11 magic as BRIC and N-11) Jim O'Neill has auspiciously found a new role at Goldman Sachs, as Chairman of Goldman Sachs Asset Management (proverbially, the place which will house all remaining 99.9% of the firm's prop traders, and which with $802 billion in AUM should have enough money to pay all of the Goldman hedge funders' salaries no matter how badly they perform), even as in a completely unrelated departure, Eileen Rominger, the global chief investment officer of Goldman Sachs Asset Management is planning on retiring at the end of the year. The two are obviously completely unrelated. What can we say: on behalf of the bear (or is that realist?) community we will miss Mr. O'Neill taunts, just as he will sorely miss the "few incoming hostile emails in response, and references to some weird blog sites who apparently opine on my views." All in good humor, Jim. That said: after succeeding in (at least on the surface) eliminating Goldman Prop, Zero Hedge will next focus its attention on all the juicy gossip, innuendo, and endless fun emanating out of Goldman Sachs Asset Management. We are sure that Jim will find our continued interest in his activities almost as delightful as a ManU come back victory from 3+ goals down. And now, without further ado, here is Jim O'Neill's farewell letter...
As you might have seen, I am moving into a different role for the firm, and am very excited about the prospects. I will still publish my views and thoughts, although not lead the wonderful department I have done for many years. Many thanks to the staggering number of well wishes I have received from so many of you all over the world. I am very flattered.
Anyhow, at this juncture of my career, and reflecting on times moving on, not least as today is the 9th anniversary of the most awful act of terror I can remember from my life, a few thoughts;
1. 9/11 and the state of the world. As many of you will probably know, the atrocity of that day was one of the key forces that led to me to conceive of the BRIC theme. Through its horror, it suggested to me that for globalization and the world economy to thrive, we all needed to accept a world in which different social and political philosophies could sit side by side, and happily all trade with each other for all our benefit. Luckily, and despite the staggering challenges we have been through since, by and large, that seems to be the case. Of course, as much as many negatively inclined commentators allude to the poor performance of the major economies and major markets, since 9 years ago, many emerging markets, led by the BRIC nations, have enjoyed spectacular rallies.
In this regard, Tim Moe, our Chief Asian Strategist has just published a “must read” paper , Global Paper 204, on the future size of global equity market capitalization, showing the remarkable likely developments ahead.
In the same vein, last weekend , someone emailed me a copy of a highly relevant paper published back in the American Economic Review, 2007, entitled “ Demography and Industry Returns”. It shows that demographic changes, however known beyond 5 years or so, are rarely “ discounted” in financial markets. If China and India carry on urbanizing, Brazil ‘s youthful population multiplies as expected, and if it is true as some signs are starting to show, Russia’s doesn’t drop as widely expected, then the BRIC and N11 story has a long long way to go.
In the memory of 9/11, is also interesting to see fresh talks opening between Israel and Palestine, which appear to be more serious than for some time.
2. China at the forefront. The past couple of days has seen China publish all its latest monthly data, for August. China is undoubtedly the star BRIC, and as I have shown in many recent presentations, “ you haven’t seen nothing yet”. Having overtaken Japan about 6 years earlier than we originally envisaged, this decade, the real US$ value of China’s GDP may double again, and contribute twice that of the US between now and 2019.
The past two days data suggest that , firstly, last months perceptions of significant slowing were exaggerated, and secondly, China is in a good position to be regarded as having achieved some sort of soft landing. In terms of its ongoing performance and contribution to the world, two monthly numbers I keep special track of, are both looking encouraging. Firstly, in terms of the trade numbers, the latest data shows in the 8 months year to date, China’s imports have increased by $ 440bn, a bit slower than at their peak rate close to $ 500bn, but still huge. As I am fond of saying, especially to Greek problem obsessed observers, China was importing another Greece every 8 months. It has slipped to every 9. Remarkable. Secondly, I track the relationship between monthly retail sales and monthly industrial production, within the context of overall growth. This month, while IP surprised a bit on the upside, retail sales surprised even more. If China can grow close to trend ( somewhere between 8-12pct) and within that, the ratio of retail sales to industrial production rise, then this is a great sign for the world and for life without the US consumer. At the reported 18pct plus rate-if this were representative of broader consumer spending, this would represent more than $300 bn per annum. By the middle of the decade, it will be above $500bn at the same rate.
3. The other 3 BRICs are , in aggregate, currently, about as economically important as China to the world, both in terms of overall size, and their consumers. Each of them keeps demonstrating that they are coping pretty well with the challenges of the US and the West, as they have done again this week, Russia included. Following their 8.8pct Q2 GDP, India reported an extremely impressive 13.8pct year on year increase in IP. Brazil exceeded expectations with a 8pct plus Q2 GDP also. As for Russia, they came through at 5.2pct. Lots of focus on policy reform across the board, especially Russia in recent days.
4. The “ Next 11” are generally coping reasonably well with the developed nations challenges, with one or two notable exceptions, and as we have shown on many occasions, some of these countries are also becoming more and more important in their own right. As I remarked recently, 9 of the 10 that have equity markets are all positive this year, 5 of them in a major way. A reader corrected me about this statement by informing me, that actually, the 11th, Iran, does have a stock market, and it is also having a very strong year. It is of course, one that many cant really access. I hear from some sources, that a Next 11 fund is about to be launched, perhaps not surprisingly.
5. The Adjusting/Adjusted Developed World. It remains a bit of a myth in the minds of many in the more challenged parts of the West that we are all in the same boat. A number of developed countries are , actually doing rather well. Australia, Canada, New Zealand and Sweden are just four, and perhaps Germany is a 5th. There are probably more.
I spent 24 hours in Stockholm this week, coincidentally the day that their Q2 GDP report was revised from 1.2 to 1.9pct, a pretty remarkable revision. Since then , another extremely strong Swedish IP report has been printed. Our own optimistic Kevin Daly continues to believe that the Riksbank will have to think about more rate hikes than expected by the market. After thinking about it more than I have done for a while, due simply to my visit, the SEK seems exceptionally well placed for finally returning somewhere close to its “ fair value” after many years being somewhat unexplainably weak. A move towards 8.50 against the Euro would seem not especially odd to me, especially given the challenges for many of the major currencies.
6. Currencies more broadly. It really does seem so often these days that the battle between the $, Euro, Yen and Pound has become the dance of the ”least ugly” , which adds to the attraction of the likes of the SEK. It is also of course, why Gold, and within true currencies, probably, why the CHF are both so strong. Gold’s strength as our own team often show, can essentially be seen as pure function of the remarkably low level of G7 real interest rates. As for the CHF, the Euro’s particular structural challenges perhaps add to its allure. Despite this, I saw a major warning sign for all budding CHF fans this week. Wednesday’s FT carried the following headline , “Resurgent Swiss franc appears unstoppable”. Nothing is that obvious in foreign exchange.
7. The US. We just ended the 2nd consecutive week of positive data releases, which after the widespread gloom of July and August evidence is only too welcome. Of the data, both the drop in jobless claims and the sizeable reverse in the trade balance were especially welcome. Thinking 9 years on from 9/11, and more specifically, life 2008 post crisis, the challenge ahead , remains for the US is to replace the impetus to GDP from consumption with exports and private investment spending. Without strong contributions here, then the US is set for years of subdued growth. I suspect it might not be as impossible as many think, given the ongoing flexibility of the US, including the ability of policymakers to turn on a dime. While some of it might have been for the theatre of Congress ahead of the mid term elections, this week’s Obama investment tax holiday proposals are a sign of the possible twists and turns ahead, especially after November.
Shifting to monetary issues, anyone who thinks the US is inevitably slipping down the Japanese path should read the interviews of outgoing Fed Vice Chair Don Kohn from early this week. From someone who has been close to the centre of monetary policy for decades , his thoughts are rather relevant to anyone trying to follow the Fed. He made it rather clear, and this is literally days after he formally left, that if the economy does not pickup in line with the Fed’s hopes, then they will undertake more “ QE” to achieve easier financial conditions.
Anyhow, as my beloved football just showed a couple of hours ago, anything can happen in life ( 3-1 up at the end of normal time, and it ended 3-3……a few hairdryers in the dressing room I suspect after that…!). Best of luck.
Yup, that's it. If you were expecting a mea culpa moment... Sorry.