Regime Change - Jim O'Neill, Meet Humility: Ten Reasons To Be Bearish From The World's Biggest Permabull

From Jim O'Neill

Friday was , seemingly just one of those days. About the third attempt to break back above the 200 day moving average failed, some extreme comments about Hungary, some rather ill timed ones about the Euro from France, a disappointing payrolls………first week of June ends like the whole of May, and the bears are out in force…. Causing us with a more optimistic tendency to ponder……..

As I mentioned in the week, I am heading off to Japan for the first time this coming week, always things to be grizzly about there of course. At the core of Japan’s issues, is there anyone in Japan that is eager to do things to bring an end to  their “ happy depression”   as one of our seasoned traders dubbed it a long time ago. The Japanese populous are seemingly content to see their politicians come and go, but do little to generate productivity, and domestic sustained growth.  I look forward to quizzing people if anything is about to change. Anyhow of note about things to worry;

1.       Grizzle factor, one. Euro Area fiscal unsustainability.  Those of us that have been arguing that the issue is containable, especially post the EMU policymakers package early May ,are starting to struggle as the price action remains pretty unforgiving, especially now towards Spain, and even France getting dragged into things. If you really want to grizzle of course, the EMU area’s fiscal position , nor its debt position are as bad, on a weighted average basis ( yes, Greece and Portugal ) compared to  some others, especially the US and Japan. Japan’s is much worse. Many think that the EMU area fiscal position is just a “ warm up” act for the real stuff coming up?

2.       Grizzle factor , two. Many people include the UK   amongst those “just waiting around the corner to blow up”, but as I have pointed out recently, the very latest figures show the deficit is already 15pct lower than what it was as recently as December. It is incredible what a bit of nominal GDP growth can do for these things, and getting growth, and no deflation, are key for fiscal improvement. Many of my colleagues have written pieces on this issue in recent weeks, whether it is the UK or elsewhere, including EMU-land. And it is the key. Cutting deficits for the sake of it, without involving supply side steps to boost growth not a good idea, especially where demand is weak. But this is where many are even more bearish. The absence of significant supply side reforms in large parts of the developed world mean weak trend growth, and deflationary pressures persist.

3.       Grizzle factor, three. The Euro.  Why oh why, did I suddenly decide 3 weeks ago, that I now liked this stupid thing, after feeling most comfortable thinking it sucked for much of the past 2 years, especially in Q1 this year, when it was so clear. I certainly wasn’t banking on the French PM being so blatant about where his country would rather see it……… inept in his timing? There is one thing for the EUR/$ to cyclically decline, which indeed might help those trying to restructure, but when EMU itself is under some questioning, and we are seeing the contagion we have… I guess 1.18-ish might be a fresh area for hopefuls to have a go on the long side, but………..

4.       Grizzle factor, four. This is where it really gets going. After a somewhat disappointing US payrolls, and against the background of the above, what is the US going to do to get its unemployment to turn significantly, and life back to “normal”?  Back in February, President Obama announced a plan to double exports in 5 years, which in theory strikes me as do-able, and at the core of what the US does, indeed need.  Things not turning too helpful on that score since, with the European mess, the US$ rising, China not moving the CNY and China slowing their economy down. To get really grizzly, if we don’t get anything soon on the CNY front, then lets throw in some real Congressional impatience, and you know what comes next….protectionism…Just for good measure, it appears as though the G20 statement has incorporated the desire to correct fiscal imbalances, which makes it kind of hard for the US to push that button again, as it appeared to have been entertaining recently. I suspect the US will be more eager to stop fresh Euro weakness than perhaps Europe.
5.       Grizzle factor, five. China’s imminent slowing? It is amazing how easy it is to grizzle if you really try….I have seen someone trying to argue that the big wage increases going through in China this year, including last week, are another really bearish sign, supposedly on the grounds that this is going to destroy China’s competitiveness, which undermines any rational for China to exist, etc…  Here’s me thinking that we want China to be a/less competitive, and b/ have higher disposable incomes to sustain consumption, etc, etc. These developments are structurally positive. Now as it happens, China is probably in the process of slowing somewhat, which given the degree to which it has warmed up, is good. But this market might not like it for a while.

6.       Grizzle factor, six……….Middle Eastern politics…..tough to argue with this one at all…

7.       Grizzle factor, seven. Growing financial stress. “ It’s just like Autumn 2008 all over again”. Financial stress is clearly been on the rise.  As Lotfi Karoui and Francesco Garzarelli showed Friday, our own FSI- and index of Financial Stress, introduced in late 2008, and designed  to measure systematic stress has deteriorated. But it is a relatively modest amount  so far, and current levels of the index were seen a number of times last decade.  We are nowhere near  late 2008 territory , at all……….Aha, I hear some grizzling, just wait, that means there is plenty of room for it to still deteriorate.

8.       Grizzle factor ,eight. Not only is our FSI tightening, but so are our FCI’s , and now our economic leading indicator , the GLI is losing momentum. All three key proprietary variables, that heralded the massive market recovery in the Spring of 2009, are now going the other way…… It is true albeit modestly at the moment, but if you look at things coldly, it is true.

9.       Grizzle factor, nine. The G20. Against the background of grizzle factor eight,  many say the G20 are impotent to do anything about it. They are tightening fiscal policy, intent on dramatic tightening of financial regulation, the only thing missing would be across the board, tighter monetary policy. Luckily , at least in the US and Europe, that is not coming any time soon.

On this score, there is some possible hope, because from what I can decipher from the Finance Ministers statement, they seem to be now thinking a bit more carefully about rushing to implement too much financial regulation, Basle 3 included. And of course, given the battery of measures they undertook from Autumn 2008 through Spring 2009, they will be watching measures of financial stress just like our FSI, and if needed, they will act to reverse them.

10.   Grizzle factor, ten. Those dam charts.  Of course we failed repeatedly to get back above the 200 day moving average of the S+P, and other “ growth financial variables trade poorly too. Now, as I have written about recently, charts are charts, and sometimes chart lines are there to be broken. It is also fact that during the whole rally from 2003 to 2007, we had a number of times when the S+P fell below its 200 day moving average-including for 3 months in 2004,  so for big picture people, it doesn’t mean anything.

However, if a poor technical picture coincides with key signs like the FSI, various FCIs and our GLI losing momentum, then we have to take note. Let’s see what the week ahead brings.

Those interested in football, and see the number of top class players dropping out of the World Cup- Ferdinand, Drogba, possibly Robben, might want to have a grizzle about this too…

I managed to write something, with not a single mention of the phrase BRIC, or its young cousin, N11. It is a good job they exist, as without them, the world would indeed be a place to worry about more. Anyhow, good luck…