Jim O'Neill is here to tell you that things are not as bad as futures (at least the part trading between 6pm and 3am, not the Fed manipulated portion since) will have you believe. As always, his words can be summed up: "BRIC, and ye shall receive." Side effects of reading include nausea, miraculous appearance of rose-colored glasses, and head sinking in sand.
Well, I suppose we can at least get some peace on Saturdays……it is increasingly feeling a bit Autumn-08-ish the past couple of weeks, let’s hope it is isn’t going to go on all Summer- again…..anyhow, of interest ;
1. EMU crisis. Clearly the starting point for anything at the moment. Last week, I asked whether European policymakers could rescue the May markets from being typically “ May”-along with the Chinese- and certainly, what was announced last weekend resulted in a very impressive response from markets Monday . Shame it didn’t last. A few specific points;
a. The measures announced, summarized in detail by Francesco Garzarelli and the Markets team last weekend, and also by Erik Nielsen and team in the European Weekly Thursday, were certainly not dreamt up at the last minute, as many seem to think. Many aspects of the measures were agreed in principle some days before. I think that the rather awkward timing of the German election was an important part of the puzzle.
b. This , while obviously being a Euro Area issue, should not be seen as purely a Euro area policy response. This was a policy response that has many interested parties outside of the Euro zone, as indicated by many signs, phone calls from President Obama included, the reopening of swap lines and the G7 statement .
c. I emphasize this because of course, while I argue Greece doesn’t really matter, if we get dramatic contagion through the Euro area and its banks, then of course, it is probably going to spread everywhere in the developed world, and we might be back in Autumn 2008. And then we get the “undesired” financial conditions tightening throughout the OECD, which would force us optimists to shift our stance.
d. For this reason, it is highly unlikely that what we saw last weekend, and the market intervention Monday is the last response, given how poorly markets ended the week.
e. Many people keep asking about “ how much” in terms of secondary bond market intervention. I think it is not really relevant. As Francesco talked about during the week, it is probably best to think about it as “akin” to foreign exchange market intervention. In this context, it is the “ surprise” factor and unpredictability of it that often results in success or not. You are not going to find out these issues and shouldn’t be so bothered about it.
f. It seems clear to me, that some new sort of EMU Fiscal Rules are going to have to be formally introduced, and followed, as the EU has already started to suggest. In any case , and something to not dismiss, some European countries are moving rather quickly to implement tougher fiscal measures, as certainly evidenced from Spain this week.
Expect more policy moves, especially those to try and calm money and government bond markets.
2. EMU and client views-especially on the Euro! This week, we hosted back to back 2 important events in London, our annual CIO client conference, and our inaugural full blown BRIC conference. There were about 300 people at both, many of which were the same people.
Anyhow, at the CIO conference, I chaired a panel on EMU with some academics discussing all the topical issues. At the end, I asked the audience;
a. Will EMU still exist by 2020? About 85pct said Yes.
b. Will EMU include all the current members? About 10pct said Yes.
c. Will the Euro be significantly higher or lower against the Dollar , by this time next year. 2 people, yes, only 2, said Yes!
d. I asked the same question about the Euro the following day, in the am at the BRIC conference. This time, 1 person said Yes. So that was 3 people out of 600, or if you average them as many might have been the same, 1.5 people out of 300.
These answers coincide with a reported record number of speculative shorts on the IMM position, and partly because of this, our GS Subjective Currency Index at historically , statistically , reliable levels of being an excellent reverse indicator. Are you sure you want to be so bearish Euro, at this level and given the company?
3. Russia. At the BRIC conference- which had many companies presenting as well as many of my colleagues from ECS around the world, and some GS company analysts- I had the pleasure of interviewing Mr. Shuvalov, Russia’s First Deputy PM and a key driver of Russian economic policy issues for many years. He was prepared to take questions on any topic, and he certainly had some blunt ones from the floor…Amongst the things we chatted about2 things stood out. Firstly, Russia is obviously really keen to host the World Cup in 2018. Secondly, he suggested that the life expectancy of males in Russia was starting to rise somewhat. Specifically he suggested it is no longer 59, as I had been assuming, but he thought 65. I checked with a couple of Russian experts I know later in the week, and the view was he is kind of right, although they suggested 63 might be more like it-at the moment.
All in all, why people seem to think we should drop the R in BRIC is beyond me, and I increasingly think Russia might be quite a positive surprise going forward. There were a number of auto people( had a session on the sector) from the BRIC world present, and in this spirit, they all seemed to suggest the biggest recent surprise they were witnessing was a very strong recovery in Russian car sales.
4. UK election, the economy, policy and markets. Normally given the historically remarkable events in the UK, it is remarkable that it isn’t dominating all of our attention, but of course, it is much less globally relevant than the EMU issue. Here’s my thought for what it is worth;
a. It is impossible to know how this coalition will work. I think it is worth keeping a very open mind, and it is quite exciting. It is far from clear to me why this should be regarded negatively.
b. The UK markets have reacted well to this development. The decline in the Pound came after yet another –very-dovish series of comments from BoE Governor King. UK equities were also doing fine until the EMU storm re-brewed Friday.
c. The economy and markets. I think the Governor is deliberately trying to keep UK financial conditions easy despite recognition of an improving economy. It makes quite a bit of sense, especially as with this coalition, fiscal policy is going to be tightened more than otherwise.
d. I don’t see anything to be that bearish about on the UK. As Ben Broadbent and Kevin Daly have shown in their recent Global Paper, sensible expenditure driven fiscal tightening can often lead to better, not worse , things.
5. India. Back with BRICs. McKinsey Global Institute published a very large detailed book about demographics and urbanization trends last week, and supplement every thing we have published. India’s working age population between now and 2030 could grow as much , the change I emphasize, by the same number as the current LEVEL of the US working population. India, if it improves its infrastructure and productivity , could be the single biggest economic story in the world over this period.
6. China reported many of it’s monthly economic data last week, and there is a bit more sign of some loss of the incredible momentum of the economy, especially with the IP data. As Professor Song , our China advisor showed on a joint client conference call with me Friday – “ Why the World is Better than You Think- China’s trade balance is running ¼ of its recent trend, with import growth still the key story despite the April trade balance bouncing back into surplus. At this rate, even some academic observers might start realizing that China’s trade position is nothing like it has been in the past, and a miracle might happen, and some Western politicians might also.
That being said, it doesn’t mean an exchange rate move from Beijing wont happen. The all important US-China Strategic Dialogue will take place May 24-25th, so the window I have been heavily influenced about on the topic , will possibly close soon. ( another important reason for DC to be so focused on the issue of EMU and the Euro). China’s chance of “rescuing the world” and May’s markets is still very much alive.
7. The G20 meet in June. Another reason for China to show a gesture, and also another reason why more co-ordinated policy action will happen on EMU is there are 2 G20 meetings coming up next month. I also interviewed Shriti Vadera at our BRIC conference, who these days, is a special advisor to the Korean Presidency of the G20. It is quite clear to me that the G20 is alive and well, and very market contagion “resistance” driven. There are continuing developments with respect to monitoring of each other’s economic forecasts, and encouraging the IMF to “opine” about how the G20 stack up, individually and together.
8. Financial reform and Paul Volcker. I was invited to the Harold Walcott Press and Broadcasting Awards Thursday, where Tall Paul was the guest speaker. I was a fully paid up member of the Volcker Admiration Society when he was Fed Chairman in the 1980’s when I lived in the Big Apple. He is clearly on a mission with his goals for bank reform, and judging from what I heard, he thinks he is getting somewhere.
9. Football. Chelsea have just won the English “Double”, winning the FA Cup to back up the Premier League last week.. I suppose one has to say “ well done”….
We had a highly amusing dinner on the first night of our BRIC event, where I had the pleasure of chairing a panel of Alan Hanson, Gary Lineker, and Steve McManaman to discuss the World Cup and all the obvious questions. They all seemed to fancy Spain, as so many others do.. To my constellation, they hadn’t read in advance our 2010 World Cup Book front to back…I hope you all have, or will…