Jim O'Neill's Farewell Letter

Over the years, Jim O'Neill, former Chairman of GSAM, rose to fame for pegging the BRIC acronym (no such luck for the guy who came up with the far more applicable and accurate PIIGS, or STUPIDS, monikers, but that's neither here nor there). O'Neill was correct in suggesting, about a decade ago, that the rise of the middle class in these countries and their purchasing power would prove to be a major driving force in the world economy.

O'Neill was wrong in his conclusion as to what the ultimate driver of said purchasing power would be: as it has become all too clear with the entire world drowning in debt (and recently China), it was simply debt, which moved from the funding developed world consumption to handing out credit cards to consumers in the developing world.

O'Neill was horribly wrong after the Great Financial Crisis when he suggested that it would be the BRIC nation that would push the world out of depression. To the contrary, not only is the world not out of depression as the fourth consecutive year of deteriorating economic data confirms (long since disconnected with the actual capital markets), but it is the wanton money (and bad debt) creation by the central banks of the developed world (as every instance of easing by China has led to an immediate surge of inflation in the domestic market) that has so far allowed the day of reckoning, and waterfall debt liquidations, to take place (and certainly don't look at the stock index performance of China, Brazil, India or Russia).

Despite his errors, he has been a good chap having taken much of the abuse piled upon him here at Zero Hedge somewhat stoically, as well as a fervent ManU supporter, certainly at least somewhat of a redeeming quality. Attached please find his final, farewell letter as Chairman of the Goldman Asset Management division, as he moves on to less tentacular pastures.

From Jim O'Neill

The World.

For my last Viewpoint, I have chosen to focus on the world. Attached is the opening presentation I gave at the 2013 GSAM Growth Markets Summit last Thursday in New York. It was a brilliant event and I wanted to thank all our guests who joined us as speakers, panellists, and in particular our clients who attended. The main theme was the growth that has taken place in the evolving world and the challenges that go with it.

My second slide shows the population of the top 20 countries in the world today. The size of our populations alone does not drive economic growth, but it is a necessity to become big. Of the 20, only three are from the so-called developed world: the US, Japan and Germany. They are, of course, the three biggest developed economies in the world. Of the rest, all four BRIC countries and ten of the Next Eleven are among them. On the basis of population alone, South Korea is not included and is therefore perhaps fortunate to be regarded in that group. Three other nations – Ethiopia, the Congo and Thailand – would be those with the most to say about not being included in such a grouping or if it were a football team, the subs bench. From many of our guests, we heard exciting things about their activities in many of these 20 nations. A personal highlight of mine was hearing an investor focused on the consumer who said she had 44% of their fund invested in Mexico and the Philippines on the basis of these two being currently ‘re-rated’. Additionally, the interview I did with the Governor of Lagos, who happens, amongst other things, to be a big Manchester United fan, was another highlight for me.

The third slide shows the top 20 economies by nominal GDP in US-Dollar terms at the end of 2012. There are seven countries; Canada, Australia, Spain, South Korea, the Netherlands, Saudi Arabia and Switzerland, that are in this list and not the first one. As I said, it would be interesting to test whether investing in these seven would have been more rewarding than an investment in the other 13, a simple measure of whether size of population is financially rewarding or not. Our results suggest that over a 15-year period the seven small countries did slightly better, however, the difference was not significant. The existence of South Korea in the chart, as I have often suggested, is a justification of some sort for them to be included in the N11, and certainly a role model for aspiring emerging economies.

Throughout the day’s event, the importance of China was mentioned repeatedly and with it the complex questions of whether population size would lead to future spectacular growth and/or financial return. We heard some considerable scepticism from some, including Ian Bremmer, President of the Eurasia Group, and Paul Tudor Jones II, Co-Chairman and Chief Investment Officer of the Tudor Investment Corporation. From others, we heard first-hand evidence of how it was impacting their revenue and profitability, and the excitement that came with it.

Of course, size is not the same as wealth, as we often forget. As I pointed out with the help of Chart 4, only three of the most populated countries – the US, Japan and Germany – are currently in the top wealthiest. Of the other top 20 wealthiest nations in US-Dollar terms, only Canada and the Netherlands appear. Therefore in aggregate today, only five of the world’s biggest economies are in the top 20 wealthiest. Hence, being big isn’t the same as being wealthy, and a country can be wealthy without being big. Many of us around the world shouldn’t fear others becoming economically  big as we can remain wealthy. Indeed, as many of the subsequent charts about changing trade patterns show, the BRICs and the N11 becoming bigger should make us all wealthier in aggregate. I didn’t state this at the conference, but South Korea is the 27th wealthiest, which is why it is a particularly strong positive example for large populated emerging economies. I also didn’t cite Singapore as an example, but I suspect that small island nation is more of a role model for the likes of China than many western developed economies.

In terms of the rate of change of world growth, charts 5 through 7 show the dramatic shifts occurring. The aggregate contribution to nominal GDP in the 2001-2010 decade of the ‘Growth 8’ (the four BRIC nations along with the four so-called MIST that each represent at least 1% of global GDP) was bigger than the aggregate of the G7 in 2010 US-Dollar terms. In the current decade, 2011-2020, their aggregate contribution will be close to three times that of the G7. The BRIC nations alone will contribute more than double that of the G7, and the aggregate of the N11 will contribute more than the US. Each of the ‘Growth 8’ will be among the top 10 contributors to global GDP. China will contribute as much as the rest of the ‘Growth 8’ countries collectively, even though, as page 7 shows, China will grow by ‘only’ 7.5%. Indeed, as I stated at the GSAM Growth Markets Summit, this page is probably the most important, as it suggests that if China grows by 7.5% in this decade, and if the developed world returns close to trend, then the world will grow by around 4%.

Crucially, if it does, then the continuing emergence of China and the other ‘Growth 8’ will make the world a stronger economy. I also pointed out that if the deceleration of the BRIC group is due to China, in contrast to the acceleration of the N11, then perhaps this explains the increasing evidence for the N11 equity markets outperforming the BRIC markets. I did not highlight this point, but both Brazil and Russia are, decade to date, growing by less than we have assumed. This would be an acceleration from their performance in the last decade. On one of our consumer panels, some investors showed excitement about Russia despite this evidence.

Page 8, which I didn’t dwell on, is the most futuristic of the slides showing China and India’s possible huge share of global GDP by 2050 along with each emerging nation whose GDP may represent more than 1% of the world. Nine of the N11 make the cut, which represents an additional five to the four that have achieved this today. Their demographics position them for this potential growth, although some of these are currently very challenging nations.

Pages 9 through 14 highlight the actual dramatic shifts occurring in world trade, and the future 2020 trade patterns. In my view, page 14 is particularly remarkable. We took this from the latest United Nations Statistics Division 2013 report and it suggests that trade between the so-called ‘south south’ countries is already approaching that between the so-called ‘north north’. As can be seen on pages 9 and 10, I showed which countries would become the top 3 export markets by 2020 for two scenarios: (1) if trends between 2000 and 2012 were maintained and (2) if everyone’s exports to China grew at only half of their 2000-2012 pace, to account for the complexity of China’s future.

As discussed, having a large number of people is no guarantee of economic success. Page 15 shows the GS Growth Environment Scores (GES), an index used to measure sustainable growth or perhaps a measure of productivity. Each individual variable, as well as the total index of all 18 variables – listed on page 16 for the ‘Growth 8’ – are expressed on a scale from 0 to 10. As I joked at the conference, 10 is Manchester United and 0 is Liverpool, although in view of last week’s football results, I suggested 10 might be better represented by Borussia Dortmund. Interestingly, in the afternoon, I had the pleasure of hosting a discussion with Rick Parry, the former Chief Executive of the Premier League and Liverpool FC, and Sunil Gulati, President of U.S. Soccer. They both thought the structure of German football may be a major lesson for us all. Rick suggested that Germany might be more likely to win the 2014 World Cup in Brazil than Spain. Back to the GES scores. I highlighted the success of South Korea to the ambassadors in the audience and recommended they suggest a visit to South Korea to the influencers in their countries in order to adapt and apply any potential learning to their own economies.

I finished my presentation by turning to the US and suggested that perhaps now things have shifted in such a way that the US is in a position to benefit more than many realise from this changing world. This is helped by the competitive US-Dollar and competitive energy markets for industry and business. Page 13 showing US export certainly suggests that the US is enjoying strong export growth to China, the BRIC and N11 countries. Interestingly, it is showing a slowing momentum to Germany recently. In terms of the US balance of payments, page 18 shows that while far from strong, this changing world is contributing to an improvement in the current account and the broad balance of payments (BBoP).

I did not have time to focus on pages 19 through 22 but three of the four show how China is developing as well as showing the flipside to the US. Page 21 is my regular guide to the relative performance of consumer spending compared to industrial production and is especially important while reasonably encouraging. I did finish with page 23 which I used to suggest that while global growth in itself cannot tell you which are the best countries to invest in, if 2011-2020 continues broadly as I have assumed, this slide suggests that the current ERP (equity risk premium) is unlikely to stay this high. Current ERP levels continue to indicate that equity markets are still quite attractive in many parts of the world.

I will not do justice to all of the subsequent sessions nor to the interesting and colourful interview I conducted with Mr Sarkozy, President of the French Republic (2007-2012). For this, I apologise to our presenters and panellists, but due to my schedule, I did miss a few of the panels. I believe Katie Koch highlighted that we had 47 speakers in total. Of those I heard but haven’t made reference to, I shall finish my Viewpoint with some comments.

We had sessions on the Middle East, Food and Water, Education, the New China, A New Geo-Political World Order, Women: The Emerging World’s Greatest Asset, The Next 11, The New Digital Age as well as an interview with General Stan McChrystal, which I did manage to get about half of, and he was remarkably interesting. I hear all the panels were as fantastic as these. I highlighted next year’s GSAM Growth Markets Summit has already been set for 8th and 9th April 2014.

Tony Hayward, Chief Executive of Genel Energy and ex-Group Chief Executive at BP, gave a brilliant tour de force of the world and the oil markets, sharing with us his rich experience of that complex world.

I then had one of my most remarkable personal experiences as part of a brilliant presentation from Michael  Pritchard, the Inventor-Founder of LIFESAVER, a water-purifying company. Many people do not believe there are enough resources to deliver the 2050 type vision I espouse, and Michael demonstrated the staggering challenge of safe clean water. His remarkable invention was prompted by the 2004 tsunami. To demonstrate its success, he had a tank brought on stage filled with water from the Hudson River and subsequently sprinkled with various assorted ingredients, including some of New York’s finest horse dung. As a leaving gift, I was then a guinea pig, invited to drink a glass of it which had been little more than 10 seconds through his bottle purifier! Astonishing. If this type of technology can be scalable, the world is going to be a very different and happier place.

Another highlight for me was an interview I held with the legendary Paul Tudor Jones II, who was on particularly top form. Amongst his many entertaining thoughts, he presented an extremely bullish case for European equities, citing the Rogoff-Reinhart debate I discussed last week in addition to the likelihood of more ECB stimulus. The appointment of Enrico Letta as possible Prime Minister in Italy is a clear supportive sign for this view, judging by his remarks last week.

Another huge highlight for me was the football panel, and it really has added to my belief that the manufacturing industry is not the only thing we can learn from Germany.

Thanks for the event go in particular to each of Kathryn Koch, Jessica Douieb, Stephanie Roberts, Luke Barrs, Lizzy Maxwell, Zachary Tcheyan and Kayley Laren. It was fantastic! Thanks to all my incredible colleagues at GS and GSAM from today and yesteryear, and best wishes to all of you and, of course, all of our clients around the world. Lastly, good luck to all 7 billion plus of the world’s inhabitants, especially the Manchester United fans among you!

Jim O’Neill


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