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Your Far Less Than RDA Of S&Panax By Jim O'Neill
From Goldman's Jim O'Neill
It is was another “one of those weeks” last week, wasn’t it? Bears are in their absolute element. “ Sell in May and Go Away” working well. S+P broke its 200 day mvg average for the first time in about a year. Panicky populist policy measures from some , again, Senate passing Financial Reform Bill, some signs of slowing momentum in some key lead indicators, Chinese A share market breaking the bottom of its range of the past 9 months..it was all there…….even the St Paul’s Cathedral clock stopped on Thursday…. Yes , it did, I kid you not! I found that more eerie than the rest of what was going on . Those of you who have not had the pleasure of being bored to death in my office will not know I possess one of the best views of St Paul’s that exists. It is such a beautiful view. It was quite disconcerting that it didn’t work for the past 2 days. Perhaps it stopped at the same time as the S+P fell below the 200 day? Is it some sign from above on high? I am sure it’s failure will be blamed on people in finance, that’s for sure………Anyhow, of note, this staggeringly glorious –rare- weekend in the UK;
1. 200 day moving averages. As you can see below, a break above, or below, has sometimes been extremely useful for trend followers/passive investors. You would have gone long or invested in the S+P 500 around the 930 level at the end of May 2009( note to Sell in May and Go Away guys- sometimes a complete disaster), and stayed invested until this week. You would be up around 19-20pct, not a bad return eh?( if you ignore the near 50pct rise from the trough that happened before that…) And if you look casually, you might think it would have helped you a lot when the market bull run broke down in late 2007, and in the whole move up from 2003 to 2007. However what would you have done in the 2003 bull run, each time the market kept slipping back below the 200 day, which it did often in 2004, 05, and 06? And what would you have done if you had got out after the first break down in August 07, when the market then rallied another 100 points plus before finally turning?
When I first sat on a trading floor in the early 1980’s, some FX guys said to me “never ignore the charts”. I learnt then that you indeed, can’t especially when a trend has been so smooth. One of them also quickly added, don’t forget though that “every sunken ship has a chart room”….
Sums it up really? Is the market breakdown for real or not?
2. The World Economy, EMU, the US and China. In last week’s Global Economics Weekly, I authored a piece entitled; “ Why the World is Better than You Think”, and in it, I showed that during this decade, 2010-19, of all the world growth we anticipate, it will be dominated by the Four BRICs, and the US, especially China. Not a single Euro Area country will make the top 10 individual contributors, not even Germany. Greece will contribute a bit less than Bangladesh.
In this regard, it is extremely interesting to see the speech of US Treasury Secretary Geithner in Beijing earlier today. He has-correctly in my view-said that the EMU sovereign debt crisis is not the most important global issue, it is how growth is managed in the US and China. He also complemented China for the shift to a more domestic demand driven economy and the associated decline in their current account surplus. He seemed quite upbeat about the US also. At last, a Western policy maker realizing what is going on.
In the same vein, it is very interesting to see our ex colleague, New York Fed President Dudley making some rather optimistic noises about US employment trends in a speech. Not known for his overexcitement, an interesting comment.
3. European growth troubles? As I inferred above, in some –global –way, so what if it were, unless it was disastrous? No signs of that, although clearly some early signs of softening judging from the latest German IFO and the flash PMIs Friday.
Germany is a real odd ball in some ways. The initial estimate for the latest quarter GDP seems quite strange. Up a disappointing 0.2pct, the only positive contributor is inventories. Exports did well, but imports even better. Consumption-of course- was down.
Against these bits, as Erik Nielsen picked up on, the latest European power demand numbers look rather impressive. Interestingly, this includes Spain. No signs yet, of any catastrophic slowing.
4. Competitiveness within the Euro Area? It is currently fashionable to talk about how uncompetitive all the Club Med countries are , relative to Germany because of no exchange rate freedom. The exact opposite view was just as fashionable in the early days of EMU. I read countless notes on why Germany had entered at an uncompetitive rate, and EMU couldn’t survive. Same stuff exits now, but 360 degree the other way.
We always did, and still do, construct GSDEERs for the major Euro economies. The current ones show Spain around 10pct “expensive” compared to Germany with France and Italy between the two. Hardly significant by the standards of these things. I suspect the frequency of this discussion is yet another signal of how bearish, and short many have become on the Euro (more below).
5. New leading indicators for CEEMEA developed by Ahmet Akarli and team, which , can supplement our FCIs for the region. So we now have leading lead, lead indicators and our E-MAP scoring system for the larger economies in emerging Europe and the region. By the way, this includes Russia, and along with the one we already have for China, we are now going to develop a BRIC “LI”.
6. LatAm, and its past poor productivity. The IADB sent me an interesting research document, “ Ideas for Development in the Americas” which includes a fascinating walk through the region’s poor productivity history. It points out that had the region shown the same productivity as the world average since the 1960’s, Argentina, Venezuela and Honduras would now enjoy the same GDP per capita as France, Israel and Spain. Questions to Messrs Leme and Ramos, and team as to how and when this might ever change.
7. Financial Reform, Smart or Political motives? Thinking back as to why the S+P has broken its 200 day moving average, my suspicion is that it is simply due to the accumulating effects of lots of “initiatives” to regulate finance more. When I think of all the things that have surprised me since December, the only negative things ( except China not moving exchange rate yet) have all been in this area. UK bonus tax, the sudden announcement of the “Volcker Rule”, issues involving us, the German short sale ban- not discussed in advance with the French-. What ever happened to the fabulous spirit shown the creation of the G20 and the Financial Stability Board (FSB). Lots of purely domestic initiatives , with little thought for their global effectiveness. Quite worrying, as you don’t know when the next “surprise” in this area might come.
I spoke to a number of central bank policymakers this week, many with regulatory responsibility, and some of them seemed quite worried about it all too. Let’s hope they have some influence as to what gets implemented. And of course, there is Basle 3, and now the Senate Finance Bill.
Anyone know the direction to the nearest monastery?
8. Currencies, and the disliked Euro. In the past 3 weeks as more and more people have increasingly wanted to hate the Euro, I have found myself increasingly wanting to be bullish-ish, at least for a sizeable bounce. Another thing my mates in the 1980’s taught me, “ never be with a lazy consensus”… EMU has lots of problems, it always did. It is a relative currency pair. For much of the past few years, the US$ reserve currency status was supposedly about to disappear. That was a load of nonsense, as is the idea that the Euro is. There was some rather smart money buying the Euro since a week ago Friday……….( !). I reckon we are going back to the mid 1.30’s, which by the way remains our forecast. Once there, it might be right to think again.
Someone asked me how come with all Europe’s problems, and the new UK authorities showing impressive determination to reduce the deficit, the Pound goes down and the Euro up? Good question, funny old world foreign exchange. I think the answer is Mervyn King, who is getting shrewder than I realize. Sounding as gloomy as ever, I suspect , especially given a tougher fiscal stance than otherwise, he wants to keep the Pound low, and financial conditions accommodative to sustain a strong recovery. The Bank’s forecast is slightly more optimistic again, but you would never guess coming from him.
Finally, has anyone got a nice chocolate flavoured hat for me? I had promised to eat my hat if China didn’t move the CNY this week. A week left….
Anyhow, who is going to turn on the St Paul’s clock again, and when???!
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Yup, no doubt about it - the fucking guy's on heroin.
Ooooohhh, I'm puking again and it feeeeelllsss sooooo gooooddd...
He also just called EUR:USD at potentially
parity on BBG, distancing away from his
his last week's 'EUR:USD bottomed up' comment.
We'll see how that will work out over the few months..
The euro will climb to mid 1.30s? What would make him think that?
LSD.
Lots and lots of purple microdots in that tea he seems to be supping all the time.
He also sees flying BRICs ... or is that just backwash from the other guy?
"...issues involving us..." (wow politic, schmuck)
EUR/USD 1.2384
Fucking comedy gold, O'Neill...he'll be here all week...try the soup.
You know why St. Paul's stopped, Jim? Because you have no fucking clue what time it is!
LOL
Life is good. Its a nice relaxed job - just shoot from the hip - say something - just say it with the casual nonchalance that some people may mistake for brilliance. In any event - who cares about these "forecasts". The prop desk guy? Your joking. Any currency traders - why would they? No - this is just entertainment - is not intended to be anything more.
Jim O'Neill is a sensible man. One who gives a reaction to what he has seen. When we get back to stronger, more efficient markets that are not predictable and that do not keep giving our blood to the vampires, the 200 day m.a. will be as he says about as useful as tits on a bull, as will all other behavioral forecasting. What I find completely objectionable is the assumption that growth is the sole determinant of success. After all, 1% growth in Europe is worth a lot more than 5% growth in India or Russia in value terms. But this is not what I find objectionable. I find the assumption that growth is good to be objectionable, in the same way I find that US and Europe GDP "growth" as measured is simply the transferring of future growth, via a fiscal injection (of heroin) to today. We do not have growth, and we need to right size the economy. Now I can see that rightsizing an economy is difficult to sell as a source of value, but nonetheless that is what it is. Rightsizing the economy so that it exists without heroin is where we need to be.
The proper debate should be whether we do the rightsizing using methadone or with cold turkey. Europe is doing it with methadone over a three year period and hoping there is enough welfare cheques out there to pay for the patient doing nothing for that long. The US is doing it with heroin. I have a view that Europe will come out of this before the US and Europe will gratefully accept all the heroin the US supplies to traffic US taxpayers money to BRIC's. It is my view that the divergent fiscal policies now being enacted by Europe and the US represent a decoupling of these two major trading blocs.
Make no bones about it, all European banks are "pants". But the great European experiment will persist for three years during which attempts will be made to rightsize and create a sounder base. Breaking up the Euro is just too much to take on. Germany breaking away from Europe now would be akin to the Texas withdrawing from the Union. Greece breaking away would be akin to Michigan (yawn).
What we can all watch out for is growing unemployment in Europe and the deflationary impact of moving jobs out of "make work" government program like the civil service and into (after 5-10 years) full employment. I personally don't think the US has the political ability to do what Europe has begun.
Anyway, rightsizing Europe means another 5-10% of GDP for 3-5 years, unemployment rising from c.10% to c.20% and deflation of around 3% per annum. Europe will swap paying for useless Government work and pay unemployment benefit instead. We are at the dawn of a giant leap in the welfare state as three years of pain "rightsize" the European economy.
I would love to think that the toxic assets in Europe and the US will actually pay off in ten years. But good luck with a haircut of less than 40%!
So I think there is another big picture view.