Goldman's Jim "BRIC" O'Neill Capitulates On China

Some more amusement from Jim O'Neill who certainly adds comedic value to any discussion on the economy, if nothing else, now that even he has thrown in the towel on his endless China bluster.

Not sure where to start. Markets remain mesmerized about the EMU crisis, China slowdown/bubbles, generally anything that could be a disaster. On my pad where I note things that caught my eye, since you last received one of my ditties, just last Thursday, I have 24 things jotted. I shall try to summarize them more succinctly- you will be pleased to know. Anyhow;

1.       Eating Hats.  Well, I was in northern Sweden late last week, as a guest of Brummer and Partners for their offsite. On Friday, we had a splendid dinner at the beautiful estate of their founder, and his wonderful Chef created a special bread tasting wonderful Hat for me…much appreciated……….I asked the Chef if he had any idea of where the CNY was heading?!

2.       Dream Team! People must be feeling sorry for me, because I come back to London, and receive a wonderful box of 12 cakes all decorated in the name of our ( actually your ) World Cup Dream Team….fantastic.

3.       Bangladesh, one of our “Next 11”. Amongst the fascinating things at the offsite was the presence of their Bangladeshi team.  By coincidence, I showed a chart about the next 10 year’s likely global GDP change, and pointed out, Greece will contribute globally less than Bangladesh. Unbeknown to me was that they have a devoted fund there. So we had some interesting time discussing it. Just confirms my view that at least half the world doesn’t wake up and say “ credit crunch” before its breakfast.

4.       African Lions? Talking of which, have you seen the FT today? It has a 2 page special about Africa, pointing out that this credit crunch has rather flown over that continent. My pal, Ngozi from the World Bank , is quoted saying that an eminent businessman once told her that “ profit lies where the gap between perception and reality is greatest”. Even some mention of Africa collectively as a BRIC. This follows some reference yesterday to what seems like an extremely interesting new piece from The Boston Consulting Group about 40 companies in Africa that are rivaling those in the BRICs as global competitors.

So that is 1 billion people there, 160 million in Bangladesh, 1.1 bn in India ( 8.6pct GDP latest quarter), this is around 1/3 of the world’s population doing rather well, and I haven’t even mentioned Indonesia, Turkey, and of course, all the other BRIC nations- well until my next bullet.

5.       Russia. Remember I had mentioned earlier this year about Medvedev’s guys trying to do things to shift the economy away from oil and gas, and undertaking steps to “upgrade” the place? Read Newsweek of May 24/31 about “ Smart Russia” and the plans to attract foreign capital to their Silicon Valley in “Skolkovo” just outside Moscow.  Add this to the stuff about some signs of improving demographics, and it looks more and more interesting to me. In a couple of weeks, I shall be participating in this year’s St Petersburg Forum, and I look forward to hearing more about all of this.

6.       China. Oh China, China China. Just when I was thinking there was evidence that the A share market was forming a bottom around 2,600, we seem to have sunk below it. The China bubble bursting crowd are probably having a field day. Property transactions starting to slow sharply, latest PMI rather weak, here we go….

Our Chinese financial conditions index has done some pretty serious tightening recently, or as Mike Buchanan would prefer “ reverse loosening”. Measured on its normal basis, the FCI was 106.9 at end April( tightened more since), up some 300 bp since the easiest levels of late last year. We had moved down to that level from around 111.0 in October 2008. So we eased some amazing 710 bp, and have taken back more than 300. Looking at changes in money growth on a monthly basis instead of an annual one, it would look like an even bigger development.

If I stick with my principles, of using what you develop to keep you objective, it seems pretty clear to me that the cycle of Chinese momentum has peaked….there you go, I feel relief…  from now on, I suspect we are going to see more and more evidence of this. It will scare many, please the China bubble blowers, but to those of you that think in sensible terms, this is actually good news. China over eased, they have “ over rebounded” and need to get back within a 8-12pct range as measured by our proprietary GDP indicator, the GSCA.

If you want to hear some decent Chinese anecdotes, speak to our own Anna Stupnytska, one of the BRIC “ alumni” who has just returned from an interesting visit re tourism market.

7.       Global economic momentum. As Dominic and the Global Markets team published yesterday, there is now clearer evidence that our proprietary leading indicator, the GLI, has lost some upward momentum. It is backed up by an extremely interesting Global Markets Daily today, from Alex Kelston, who showed how a PPP weighted global PMI has moved during August. Softer activity in the Euro Area ( oh my gosh, coming depression………..) and some of the emerging world lead the way.

Some hints of softening from Korea’s last 10 days trade data too, although I would be very careful about over interpretation of that.

What is especially interesting, WITHIN this global trend, both the US and UK look pretty perky. US new orders-inventory looks as though strong growth in manufacturing lies ahead more, and in the UK, the PMI stayed at last month’s 15 year record high. Within it, export orders look very strong. Could it be, that both the UK and US are going to emerge stronger, fitter, etc, etc than poor old Japan and the continent from this mess?

I still like the Pound, it is easily the least unattractive in the world of “ugly sister currencies”. Challenge is for the Bank and No 10 to stop it recovering too much.

8.       EMU-land. In what is probably the most positive news for weeks, Germany won the Eurovision Song Contest ( embarrassment all round……). Was this a special reward for past, and likely future financial contributions to the rest of Europe?   The mood about the Euro Area amongst people is truly dire, and almost definitely a gross overreaction. I am not sure what is more interesting. German winning the Eurovision  or all the Club Med countries starting to fall in love with fiscal tightening, or France admitting that their AAA status might not be with us for long? A new dawn is with us, change in Europe might be –finally-starting to happen. Talking of which, why did Fitch choose to reduce Spain’s credit rating Friday, the day after what appeared to be more fiscal moves in the right direction?  Talk about trying to get on a fashion trend. I rather like the views of the ECB’s Noyet about the general behavior of credit rating agencies.

I think Spain should undertake their own version of a “ stress test” as I mentioned last Thursday. If they do that, then this whole mess will calm down a bit..

9.       Canada, first G7 country to raise rates. They moved by 25 b.p yesterday, and followed it up with a rather dovish statement. What a unique place within the G7 Canada is these days. For all the rest of the G7, actually, Canada should serve as a reminder that you can tackle huge fiscal debts without crippling yourself. ( it also seems to me from what I am hearing they are the voice of reason inside the G20 these days too)

10.   Israeli-Palestine tensions………..what another sad twist in this ongoing saga. Will someone involved show some imagination and lateral thinking please?

11.   G20 Finance Ministers meet this weekend. I would expect a much stronger, calming message of co-ordination than we have seen from them so far in 2010, with a message that they are not going to allow the global recovery, EMU or anything else fall apart.

Lots of conflicting comments from important corporates flying around , ranging from the negative, Hitachi –about government spending sensitive infrastructure in Europe- to the outright upbeat from Renault/Nissan-globally- and Saint-Gobain…  who do you believe?  S+P failed at its first attempt to go back above the 200 day moving average Friday, lets see what is next. May apparently was the worst May for stocks since 1940, surely June is going to be better?

I am off to Japan early next week for the first time this year, what a place to experience the start of the 2010 World Cup!


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