By Jim O’Neill, Goldman Sachs Asset Management.
This week, I was severely tempted to pursue the analogy of comparing 2012 with 2011 and 2010, especially as it relates to most peoples persistent belief that we live in a US-dominated world. But these two gentlemen stopped me. Thanks to Adam and Masaaki . Mind you, if weekly job claims rise again next week in the US, it might prove irresistible more on that below. Or more likely, by the time of my weekend Viewpoint, it will perhaps be too late as the worlds scribblers will be all over the idea. Or will I? Because in fact, while next weeks job claims are by nature really important, the 27th BOJ board meeting and policy decision is also rather important. I think that this might create some fun and games. As for Adam Posen and the UK, whoever would have thought that irony could happen: Adam abandoning his dovishness at the same time as perhaps Shirakawa-san is becoming one? (I exaggerate, of course, but you get my drift.) Anyone for GBP/Yen? Or GBP/Swissy?
Markets and the Future.
Last Thursday, I had a rather odd day stuck in a building (a rather prestigious one, I might add) with a group of leading economists and thinkers to discuss the future of mankind this decade, financial markets and, in particular, computerized financial markets. It was a bit of a weird experience, but one that I found rather amusing, if somewhat of a luxury and hard work. Anyhow, the group was tasked with brainstorming about what the future held in terms of growth or no growth, and more or less openness of markets. From what I could tell, the hosts had pretty much predetermined that whatever we said, computerized financial market investing and price discovery would rise, which was a source of debate amongst some of the more noisy of us. But it was also interesting to hear in gory detail just how gloomy most people are. But I kind of knew that anyhow. Which, yet again, brings me back to the fact that I would rather trust the mean-reverting tendencies of the currently rather high Equity Risk Premia (ERP) than all of that kind of stuff, as interesting as it was. I left that lengthy meeting thinking once more that it wont take much good news for equities to rally.
The IMF and China.
As interesting as that last meeting was, it pales into irrelevance compared with one of the oddest meetings I have ever attended earlier last week. I cant really reveal all the details, but I had been asked to attend a small group meeting with an important policymaker from China. I sort of expected it to be rather formal, and full of pleasantries, which it was. But it was way more than that. After answering in impressive detail and style a number of questions about the economy and investing, the policymaker then spent a considerable amount of time suggesting that other countries should be careful about lecturing China how to run itself in all fields, especially those of human rights, given others own historic track records. It was quite remarkable, and I am still not entirely sure what to make of it.
Anyhow, this meeting conveniently followed the recent release of Q1 GDP and much other data, and also preceded the quite important official change in the IMF forecasts of future Chinese BOP current account surpluses, which I mentioned briefly last week. As this past week advanced, I noticed some more sell-side China analysts picking up on what I had seen last weekend. Within the softer-than-expected 8.1 pct year-on-year GDP rise, policymakers said that more than 75 pct of this had come from consumption. This implies that consumption is already a notably rising share of GDP. When I reflect back on this part of the meeting I attended with the policymaker, I think China is already further down the path of adjustment than many external observers realize. I am glad to see that this doesnt appear to include Christine Lagarde (and Tim Geithner) following their quite positive comments on China this week. If evidence continues to be released to support this soft landing, then certainly Chinese equity markets would be delighted, and it should be a pretty good source of support for the rest of the worlds markets too.
By coincidence, the day after the China policymaking meeting, I attended a small lunch with some of the top London- based Hong Kong business people and advisers. That was also interesting, not least because many of them seem to not realize the degree of change going on in the mainland. Or let me put it another way, many of them share the immense skepticism I hear and read elsewhere.
Dont Cry for Me Argentina.
So, when considerable parts of Latin America seem to be trying to integrate themselves into the rest of the world, Argentina seems to be intent on joining the minority and going the other way. What an odd and seemingly mistaken decision they made regarding their oil company this week. Perhaps they might want to take back a certain footballer there permanently too? (And, at the same time, encourage a little genius to move from Spain to the red side of Manchester.)
What is actually going on in the US?
This past week was the second not great week for those of us more bullish in the past 6 months to a year on the US. In addition to the disappointing additional jump in weekly job claims, both the headline and details of the April Philly Fed were not great. This certainly supports those that believe some of the Winter impetus was simply due to unseasonably warm weather, and it may support others with deeper misgivings. We shall see, and of course, it simply means the next evidence, including next weeks job claims, are important. While the temptation to simply jump ship and join those that believe the US cant get out of a 1-2 pct GDP growth trend for years is there, I still believe that there are two, perhaps even three, fundamental forces suggesting that the underlying momentum is improving. Specifically, those forces include a turn in the housing market, the collapse in natural gas prices and the associated weak Dollar, and vast improvements in the domestic competitiveness of US manufacturing. But we need to take each stage of evidence as it comes. Certainly, the past two weeks have not been great for those thinking of GDP growth surprising significantly on the upside.
Adam. What is going on?
So the big market story in the UK this week is that the past years arch dove, Adam Posen, has shifted his position. He is now both seemingly concerned that there might be some inflationary impetus in the UK (which before he had believed was temporary), and with it, evidence that the survey data is more accurate than much of the official data and the UK economy is strengthening. Certainly Fridays gangbuster retail sales suggested that not all is ill, as did the surprising drop in unemployment reported for the latest month. It is very hard to believe that UK productivity is as weak as the combined unemployment data and latest industrial production release would imply. I suspect again that the UK economy is stronger than many believe and certainly than much of the official data is suggesting. And more importantly, the marginal balance at the BOE is shifting.
At a time when other central banks are still thinking of additional steps of their own versions of QE, this shift in the UK is quite interesting. And of course, markets have reacted already. But, depending on what is coming in Switzerland and Japan, it looks to me, at least from a tactical perspective, that there may be an interesting currency trade in it.
And his Ex Guru Land, Japan?
As I mentioned about Mr. Posen, it is quite ironic in some ways as those who know him would appreciate, one of Adams many claims to fame is being a bit of an external guru on Japan, having undertaken detailed research on their fiscal policies in the 1990s and beyond. I rather suspect he would be pleased by the apparent shift in the beliefs and stance of the BOJ, or at least the determination in which some are trying to oblige the BOJ of their newly-stated 1 pct Inflation Target. From what I can tell of Shirakawas public comments this week, the BOJ is committing itself to further monetary steps to actually achieve 1 pct inflation. If this is true, there is only really one transmission mechanism of getting that goal, and it is through a weaker Yen. If the BOJ is serious, then the Yen is headed to Y95-100, as I have believed since the start of the year. Lets see what they have to offer on the 27th. For me, it will be the big global event of the forthcoming week.
Other Things. The Growth Markets Summit.
There are so many other interesting things, but beyond a brief mention of two, I shall leave them for another time.
Germany once again published a better-than-expected IFO survey last Friday which, contrary to the PMI, would suggest Germany is getting more excited about Germany (and Europe, as it is a good lead indicator historically of the whole Euro economy, not just Germany).
And on oil, the same theme has been in my mind for a while. Nick Butler, ex BP, had a rather interesting article in the FT last week suggesting that the fundamentals for the oil market were increasingly very different than those discussed by many practitioners. He also suggested that the current high spot prices were a bubble. I am not sure that I would quite go that far, but this adds to my own belief that the 5-year price is more indicative of things ahead that the current spot price.
Once I can get beyond Sundays rather important football fixtures, I will be getting my mind in gear for our 2012 GSAM Growth Markets Summit, which will be held in New York next week on the evening of the 24th and all day on the 25th. We have quite a remarkable agenda and some real stars joining us (well adjusted for football, that is). It promises to be most exciting. See some of you there.