Jim O'Neill Describes Europe's Surreal Times, Asks If Germany And The Euro Area Even Want The Monetary Union Any Longer

Tyler Durden's picture

Among the traditionally meandering permabullish ramblings of a man who continues to ignore the disconnect between reality and his view of the world, tonight's note by GSAM loss leader Jim O'Neill "Surreal Times" has a very ominous rhetorical question inbetween all the bullish propaganda: "The ECB doesn’t seem to regard 10-year Italian bonds as a bargain and, of course, it is rather tricky as they need to be sure that Monti will deliver. In turn, this means that what is really important is that Mario gets support from those in the background and, ultimately, the Italian voters. And then there is Spain. And still, of course, the troubling Greek situation. And ultimately, the complex world of Berlin and Frankfurt. As many European newspapers are asking in recent days, does Germany actually really still want the EMU? And, as I shall now provocatively ask, does the Euro Area? All very surreal." No Jim, all very logical, because for the first time in decades, Europe is finally starting to do the math and realizes it is failing miserably. It is those stuck in a world in which combined total exports are greater than total imports by over $300 blilion: a mathematical lunacy, who think that what is happening is "very surreal." To everyone else, the right phrase is "very much expected."

From Goldman's Jim O'Neill

Surreal Times.

Another fascinating week passes with the European mess understandably dominating the minds of everyone around the world. It is quite surreal. There are no signs of any real collective central leadership, many key players are hardening their positions, other regions of the world are increasingly worrying about it, and markets ended the week with a sort of eerie silence.

As I often have said since the European troubles escalated in August, there is life outside of Europe. That remains the case. But virtually wherever and whoever I talk to or with, people are so focused on the European issues. In the week ahead, I will be participating in a board meeting of BRUEGEL, the European think tank, which will be most interesting. Anyhow, more of this topic and others below.

Good Lord – Gaylord!

My last week started with a brief 2-day trip to Maryland and back. I thought I was going to Washington DC, but, in fact, it was a few miles out in what seemed like a new purpose-built area called National Harbour. I had been invited to participate in a panel at an event for UBS (Paine Webber) at a get together of their most senior nationwide sales team. I had the honour of being on a panel with Alan Greenspan, Otmar Issing and Ken Rogoff to discuss and debate the world.

I think I was there to make the drinks (and offer some perspectives on the so-called emerging world too). The venue was the Gaylord Hotel, which seemed to expand for miles. Think one of those so-called Ghost cities in China or Vegas, but a few miles outside DC. Most surreal. But it was fascinating and thanks to the hosts for inviting me.

I took away two things from this discussion. The first is that everyone wants to talk about Europe, and most people are so negative about it all. I didn’t hear much positive sentiment there myself, but I will repeat what I wrote last weekend. I can’t see how the EMU can survive without Italy, and I can’t see Italy surviving with 6-7 pct 10-year bond yields.

Something has to give, which is actually why it is quite exciting now – even if it is somewhat scary. The second takeaway, and more important one, is that my confidence in the US cyclical recovery picking up momentum is higher than before I joined this panel, not least of which because I heard independent confirmation of the things I notice. I don’t think it is appropriate to mention what others actually said, but it was consistent with my own thoughts. In addition to most actual points of reference supporting this view – another modest decline in job claims this week – I detect more minds coming around to my thinking that we may be close to a turning point in the US housing market.

As I start to think seriously about 2012 and where GDP might be, both absolutely and relatively to consensus, it seems to me that there are notable upside risks to the US outlook. Of course, there are plenty of things that might go wrong, but there are also plenty of things that could go right.

China and the RMB.

As I write this Viewpoint, there are some interesting comments on the wires that imply that Beijing is exploring widening the trading bands of the RMB. This wouldn’t surprise me at all. While many will see this as purely a sign of likely renewed appreciation of the RMB against the Dollar, I am not sure that is the real key. In the reported comments, Premier Wen has said that China will “strengthen the Yuan’s trading flexibility in either direction,” which could suggest that if the US$ were to appreciate significantly, then the RMB might actually decline against the Dollar. This will ultimately be what happens, i.e., the RMB will become more volatile as it becomes more open and less controlled. It will go up as well as down.

What is more clear to me is that such a development is all part of what might be an accelerating path towards opening up the RMB as Beijing moves towards full convertibility. I am now assuming that 2015 is a realistic goal, and if this statement is soon backed up by evidence, happening so soon after the G20 meeting, it is a rather good sign for the world. It is also extremely exciting for anyone involved in the asset management business, as it means  we are likely to see considerable developments in the Chinese bond and equity markets. And, this will all be consistent with the 5- year plan and China moving towards a more domestic consumer-driven economy.

Like many other weeks, I had many interesting conversations with people about China (and the other Growth Markets) this week. On Friday, I had a particularly interesting chat over a sandwich lunch about the big picture with an investor.

This gentleman shares my own optimism, but he had been asked to stress test the rather negative views of his colleagues who couldn’t join us. In particular, they wanted to really delve into who is going to buy all the things that China will produce in the future, implying that they won’t be able to produce much, and that China is heading for a hard landing. I think this is an understandable, but also a weird question. It is understandable because so many Western observers, especially from my generation, simply can’t get their minds around China becoming a significant consumer. It is weird because it is so Western-minded. My best way of answering this beyond repeating all the numbers I have worked on with my colleagues, is to cite 2 anecdotes. One comes from a meeting 12 months ago or so with the CEO of one of the world’s best known retailers who has been expanding considerably in China. He wanted my views on when he should plan to exit, as he thought it was inevitable that China would find a credible domestic competitor at some stage. The second relates to a personal investment I made many years ago in a Chinese luxury company, which continues to grow rather well. It has a number of suitors, including European ones.

As I ended up saying, even in the consumer’s share of total output weren’t to rise above 35 pct of GDP by 2020, China will create at least $3,500 trillion worth of consumption value between now and then – about 10 times the size of Greece.

If it were to rise to 45 pct, at least an additional $5 trillion, or the equivalent of 2½ new Italy’s.

Europe and the Euro Area.

What another remarkable week. We are all fond of saying that Europe doesn’t move very quickly, but look at the events that have occurred in Italy this past fortnight. Berlusconi is gone, Mario Monti is in place, and the country now has a technocratic government led by a collection of reformist-minded individuals and a very pro-European leader. Mario unveiled the broad path of likely initiatives, and from where I sit as someone who has followed the Italian economy closely for 30 years, it looks quite exciting. Not only are there ideas to deal with important deficit and debt challenges, but of greater importance, ideas to boost Italy’s supply side potential, including steps to encourage and help women enter the labour force and to attract the young and brightest from not going overseas to seek opportunity. A significant part of me thinks that 7 pct 10-year bonds for Italy may turn out to be a bargain.

However, there are so many hurdles.

The ECB doesn’t seem to regard 10-year Italian bonds as a bargain and, of course, it is rather tricky as they need to be sure that Monti will deliver. In turn, this means that what is really important is that Mario gets support from those in the background and, ultimately, the Italian voters.

And then there is Spain. And still, of course, the troubling Greek situation. And ultimately, the complex world of Berlin and Frankfurt. As many European newspapers are asking in recent days, does Germany actually really still want the EMU? And, as I shall now provocatively ask, does the Euro Area? All very surreal.

Is it Time for a Referendum?

One of the most interesting things that didn’t get that much press this past week is that German Chancellor Merkel is now openly saying that she believes the Treaty surrounding the EMU should be changed. I think I am right in saying this is the first time she has stated this definitive goal, and may be seen as a signal that Germany thinks it can take Europe, or the Euro Area, or at least those that want and can stay in it, down the path of more fiscal and political union. This, as I have written about many times, is what key German thinkers have believed was ultimately inevitable and should have been agreed before the EMU started in 1999. Beyond all the critical short-term questions, renegotiating the Treaty for more substantive changes is a really big step in my view. It is probably a sensible step to take, as it would allow everyone in Europe a fresh say on what they are really signed up for. As I have also written before, this crisis is not really a sovereign debt crisis, but a crisis of the EMU’s structure and leadership. In this context, I found myself thinking why not actually use this as an opportunity to do something really radical and seek more legitimacy from the European people? As part of a new Treaty, why not allow or encourage all 27 member countries to hold a referendum on what the new Treaty would be and, therefore, seek genuine support from our citizens? In the rather unlikely event that this would happen, it would seem to me that many of the persistent alternative views between different EMU players, including the ECB, would probably disappear.

It seems like a very unlikely thing to happen, but given the remarkable unfolding events across Europe, how can anything be ruled out, especially when it would probably allow the EMU to be strengthened and help the legitimacy of the EU itself.

And Finally, a Brief Note on Japan.

The Economist magazine this week has a most interesting short piece pointing out that Japan showed stronger GDP per capita growth in the past decade than either the US or Europe. That simple, but important, analysis comes at the end of a week when Japan reported 6 pct annualized growth last quarter, not far off BRIC-like standards and way above the US and Europe. I published an op-ed online in the FT about this last week, and pointed out that markets seem pretty disinterested in the Japanese growth numbers. This is especially interesting when Japanese equities are at such a remarkably low valuation compared with certainly any metric. And, at the other extreme, the Yen is so idiotically expensive. Something has to give here also. I suspect what it might end up being is that markets start to realize that the US is not going down the path of Japan, and the Yen begins to reverse, perhaps significantly. It might take more involvement from the monetary authorities to help it along. If this outcome doesn’t happen, then Japan’s relative growth outperformance might end up being even more temporary than many expect, as more big Japanese corporations abandon domestic production. All very interesting, and yet another source of big opportunity going forward. It looks to me that there are so many opportunities for investors as we near the end of 2011 and into 2012. We just have to figure out what side of them to be on!

Jim O’Neill

Chairman, Goldman Sachs Asset Management

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AccreditedEYE's picture

Dear Jim- We Grizzlies are about to EAT YOUR LUNCH tomorrow. Sleep tight!

Dr Paul Krugman's picture

You are a day trader?  The Euro is up.  They will bail out the banks and you will get flattened.  Good luck and good night.

AccreditedEYE's picture

When and if the banks get bailed out, you can kiss sovereign ratings goodbye. Since when did I say I was a day trader? I'm glad you know me so well Paul. You know, if I were you I'd be spending my time polishing up what to do with my career after Keynesian policy dies instead of trying to fight the Last Fight on the blog that called the truth way ahead of everyone else. (including your blinded phD buddies locked in their Ivory Towers)

WonderDawg's picture

This Krugman fucker is like a cross between RobotTrader and MillionDollarBonus.

trav7777's picture

how can anyone be surprised?

We've KNOWN since the GS mafia swaps were disclosed that nations such as Italy entered into that there was a timebomb out here.  Italy fucked its future in order to get below the accession deficit targets.  They straight out fucking LIED and GS and the Street aided and abetted the entire thing.

Italy's cashflows for NOW were swapped in exchange for lump sum payouts back then...just like how people sell annuities for payouts in the present.  There's no way out of this...Italy's austerity will have to be big enough not only to cover present deficits (including these plus-sized payouts) but the deficits they HID for years using lumpsum cash which has now been burnt through!

Sell you future salary for a payout today and then burn through that....then what?  How do you pay the bills now?

WonderDawg's picture

Well said. Perspicuous, even.

WonderDawg's picture

Living proof that you can be retarded AND delusional.

knukles's picture

LOL.  Squared.

I know a nice convent in the Catskills if his tenure at the Times is becoming slippery what with Sunday's article.

chump666's picture


i don't think it was him...I dunno, he sounded kinda high.

Milestones's picture

Ya ever think he just might have his tongue in his cheek--just maybe??      Milestones

Ragnar24's picture

And now the euro is falling... just like Krugman's credibility (the real Krugman that is).

I would, however, love to meet the traders who are gobbling up ES all the way to 1208 right now (2:30a EST). I must be missing something.

silver500's picture

Dont you mean Dr Paul "Fake Space Alien Invasion" Krugman fucker?

PersonalResponsibility's picture

Paul is /sarc 201 (he passed 101).  Play along if you want to make snarky commedy.  Otherwise, you'll be sucked into the /sarc.

Collapse is imminent's picture

Who will bail out banks? Governments? lol

Careless Whisper's picture

I don't read posts from Goldman. I just comment on them. Vampire Squid seems to me to be a criminal syndicate that sells shitty CDOs to their clients, then buys Credit Default Swaps to collect on when the shitty CDOs default, which they did and will, because Vampire Squid packaged them that way. ZH has become an aider and abettor with all these Goldman posts; as if they are a legitimate investment bank. pfffttt.


Mentaliusanything's picture

Just remember Government do not have their own money. They produce nothing and at best are inefficient distributors of created wealth. The only money they have, they take from workers and industry. Governments now are facing sovereign defaults and will have a hell of a time just keeping the state running.

Michael's picture

Watch Krugman Kringe;

November 20, 2011

Congressman Ron Paul delivered a speech for the National Association of Home Builders at the 29th Annual Cato Monetary Conference. The key topics were the US monetary policy and the Federal Reserve.

Ron Paul: How To END THE FED


Ron Paul: How To END THE FED 1/2 FED Crimes / Solutions


Ron Paul: How To END THE FED 2/2 FED Crimes / Solutions


Careless Whisper's picture

Thanks for the links. That man is consistent and ROCK SOLID.


paarsons's picture

Isn't O'Neil just another Goldman cocksucker who can't get anything right?

Fuck him.


Dr Paul Krugman's picture

Germany needs to step up and so does the rest of Europe.  They need to bail out the banks.  It worked for the U.S.


You are a tool Krugie. Go F yourself you fiat whore. 


Moneyshot20's picture

Krugman trades during the day and blowes old homeless men during the night.

Everybodys All American's picture

Has it? I think the jury is still out. Lehman collapsed.  Bear Stearns gone. Citi zombied. Goldman Sachs and Morgan Stanley are now bank holding co's and can access the overnight facilities. Who knows the exposures to Europe banks they all hold. CDS contagion is only a bank failure away unless the ISDA decides a default is not a default. Remember the clowns are ruining the capital markets. Try as a bond trader to navigate this mess. let alone the equity markets.

knukles's picture

Good God man.  Worked for you and your 1%'ers.

Klaus Kastner's picture

Yes, the problem must be attacked at the source (zillions of poor loans) and not at the symptoms (expecting bankrupt borrowers to pay). Yes, European banks must be bailed out. The question is how. Simply transferring bad assets 1:1 from risk takers to tax payers is a joke. Force banks to make a true "mark-to-market". Then replenish their equity with preferred shares (with funds from where? From the ECB's emitting its own bonds). When the dust has settled in a few years, sell the preferred and if money is left over for common stock, fine with me. If not, not good for existing shareholdes but who ever promised them that equity investments would be without risk?


Golden Boy's picture

Why do we have to listen about the economy from a Harvard homo? Seriously, guys...

Dr Paul Krugman's picture

Jim is smart but he is getting gun shy.  He needs to stick with how we laid all of this out for everyone.  We need to stick to what works, and what has worked.  Europe should stop panicking, and start meeting their debt obligations.

chump666's picture

Jeez 1000 + yrs of Euro-centric psycho drama and you think that a quick print job will  fix the ills?  As far as re-cap banks, Germany will do it to their own banks sans the rest of EZ.  You can start to make bets that Greece/Italy even Spain will be booted out of the EZ after Germany shores up capital for it's own banks.  The PIIGS, devalue their own currencies go bankrupt take out the greedy bank debt holders, then you get maybe 2yrs of a depression.  Either that Germany goes into stagflation and Europe just erupts into one big riot.


Spastica Rex's picture

With humor, as with most things, less is often more.

Take a break.

Mentaliusanything's picture

There is a Hole in your Argument Dear Krugman a Hole

FT beat me to it


Dr Paul Krugman is a man who drinks to much Koolaid and handjobs others way more than is healthy.

And he is a dickhead

Anomalous Howard's picture

So the squid is saying, "Our positions are in place and we'll leave the rest of you the option of taking your best guess...plbplbplb".

small watcher's picture

They really said "plbplbplb"? At least they didn't say "Phnglui mglw nafh Architeuthis dux 85'Broad wgah nagl fhtagn"; then I'd be worried.

Ahmeexnal's picture

Spain will break the thousand year reich pipedream:





"Many got into debt when times were good, buying houses and cars and starting families," says Ricardo Jiménez, who runs the local branch of the Catholic charity Caritas. "Families are very close and help one another out, but we already help 80 families and more come every month. Some are asking for help to feed their babies," he said. That means almost 5% of the town needs church handouts.

Others are handed money by the town hall or given whatever jobs local politicians can invent. "If we have to dig a ditch we do it by hand, rather than with a digger, because that way we employ more people," said councillor Manuel Moguel.

As markets demand ever higher interest payments for lending Spain money, and the European Union instructs its politicians to slash its deficit, public money is drying up. Yields on Spanish debt have now overtaken Italy's and soared to the same levels at which Greece and Portugal needed to be bailed out. And if Spain – a much larger economy – fails, then it may bring down the euro.

Spain's biggest problem remains the money owed to banks for property or land bought during a decade-long boom fuelled by cheap credit. The rows of unsold new homes in Benalup are evidence of Spain's housing bubble, which burst in 2008, leaving 700,000 unsold new houses on the market.

By 2004, more than 80% of Benalup's labour force worked in construction, building homes or holiday apartments along the nearby Mediterranean coast.

Peña delivers the same diagnosis of Benalup's ills as his Socialist opponents. "Too many people dropped out of school to become bricklayers. They can't even write a sentence properly."

bob_dabolina's picture

I have a question about Hugh Hendry and Europe. 

I don't know the details of his EZ interest rate trade but I know he get's 40-to-1 on his money if the ECB lowers rates to 1%. However, if there is no ECB (EZ breaks up) would he still get paid? Anyone know how that would work?

I wonder if this was something he took into consideration when putting the trade on.

Ghordius's picture

Hugh Hendry knows that this "EZ break up" up is a pipe dream made for speculation

he is just betting on a ECB ZIRP, which is a different scenario altogether

remember that he has a huge portfolio of longs which he just hedges with a few side bets

Catflappo's picture

Since the all-night session which resulted in the wonderful and 'total solution' announcment of the EFSF and the 50% haircut on Greek debt, what have we heard from Merkel ?    She and Sarkoy were on the tapes almost every day in the weeks and months leading up to that summit, and since then....... NOTHING.     That's all you need to know about what is REALLY happening in the German parliament and their thought processes.

ISEEIT's picture

Butt, Butt, bbbbbbUUUTTTT!

What about OWS and obamas second coming and the debt doesn't matter and, and , and,

Oh shit.

These rightwing extremist are really at it now.

I'm just going to go relax at the huff where the world is still swell and money is just something that Ron Paul worries about!

Eireann go Brach's picture

Jim, you senile old Irish wanker! Fuck off!

Catflappo's picture

"It looks to me that there are so many opportunities for investors as we near the end of 2011 and into 2012. We just have to figure out what side of them to be on!"

Holy Moly - what a way to finish.  Absolutely incredible Added Value, Jim.

jez's picture

Yep. Worth every penny of whatever his salary is.  You have to pay top dollar if you want to attract and retain talent like this.

Here's my equally valuable analysis of "opportunities for investors as we near the end of 2011 and into 2012." Pretty much every asset you can think of is either going to go up or go down, unless it stays about the same.

Need a right-hand man, Jim?

Bansters-in-my- feces's picture

Jim finds it "somewhat exciting"

Fuck you rich banker.

May you live in the streets one day.!!!


Bansters-in-my- feces's picture

Dr Paul Krugman.

You make me want to puke.

You fucking programmed piece of toilet scum.

Fuck off.

You are not welcome here.

obejoyful's picture

Wow another person calling the housing bottom.

rambler6421's picture

Merkel is a sellout.  Germany will cave.



Spastica Rex's picture

I detect more minds coming around to my thinking that we may be close to a turning point in the US housing market.

What a load of psychobable mumbo jumbo.

J.Z. Knight would be proud:


gatorengineer's picture

No doubt housing is turning, turning and getting ready to take another 30-40% dump.........

Unprepared's picture

Mr. Surreal strikes again. Does this moron know any other adjective to discribe his total fucking cluelessness other than the word "surreal"?

chump666's picture

Bring on deflation so my f*cking landlord can go bankrupt, and i can have some sexy (female) squatters move in.  

I love surreal markets.