Tuesday, December 21, 2010

Goldman's Jim O'Neill; 2011 - The Year of the USA?

Is there any more room on this party boat?  Count the father of BRIC, Goldman Sach's Jim O'Neill among those tipping champagne glasses towards the heavens... indeed, he asks will 2011 be the year of the USA?  20% gains in 2011?  No problem.  Overseas he points to Indonesia and Turkey (two countries I am very interested in) along with Korea and Mexico as very interesting venues.

Again, we have to ask at what point does "everything is rosy, and backstopped by governments and central banks" get priced into the market - it has been 4 months of revelry.  Apparently the near term answer is: not yet.  (hat tip Zerohedge)


At a London client Christmas Pension Fund dinner I traditionally speak at, I found myself dubbing 2011 as the likely year of the USA last week. Since then, we have seen more evidence of improving economic recovery, further increases in US bond yields, and an increased number of GDP forecast revisions for 2011.
As outlined in the GS US Economics Weekly, Jan Hatzius and his team are now forecasting a rather robust 3.4 and 3.8 pct real GDP growth for 2011 and 2012. I strongly concur. I notice Alan Greenspan has thrown his hat into the more optimistic ring also. This growth is likely to be strong and robust enough to lead to declining unemployment which, if correct, should mean that the worst of the social consequences of the credit crisis should start to ease.

All of this will result in a mood that the US is returning to “normal,” which will have predictable consequences for financial markets. The US stock market will continue to rise, probably with another 20 pct increase. US bond yields will rise further, although I am not sure that they will get to the 5 pct “normal” I discussed last week. On the foreign exchanges, the Dollar could rally quite a bit, although US policymakers will be eager to resist a significant increase. Of the alternatives, the Yen strikes me still as easily the most vulnerable currency, as the whole Japan comparison that is so popular in Tokyo will fade.

Of course, things will not return to pre-crisis normality in the US, as it wasn’t really that normal before the crisis. The US can’t survive with an over-levered consumer, a low personal savings rate, and a large current account deficit, and it won’t. I think 2011, in this regard, will be the beginning of a new phase in which the US has strong GDP growth, but it will be led by exports and investment.

Against this background of the US, next year could see the world growing by close to 5pct.

2011 will also be the year that economists and investors will learn to distinguish between what are genuine modern “growth economies” and those that are still emerging. While many of these distinctions are somewhat arbitrary, GSAM will be moving to brand the four BRIC economies and some other important ones; Indonesia, Korea, Mexico and Turkey as “growth economies.” All eight are already one percent or more of global GDP and are likely to see their share grow even more. This means that they are increasingly, economically speaking, substantial countries where investors will be able to choose investments with increasing flexibility and alternative thought. They will have their own dynamics and will be remain key contributors to the world economic cycle in their own right.

Other “N11” economies have the chance of joining this club in the future with Nigeria, the Philippines and perhaps even Iran, as those that could reach such size in the future. There are no doubt others also, but they are not so identifiable. While many other emerging economies have the potential to grow strongly and have many attractions, they should generally be regarded as “emerging” as they are still small and highly dependent on the economic cycle and policies of the G7and the other “growth economies.”

2011 is likely to witness a lot more dilemmas surrounding the indebted countries a nd the structure of EMU. As I have discussed recently, I don’t think this is truly a crisis of debt; it is more one of leadership and governance. As I have written, the weighted average debt position (and deficit) of the Euro Area is much better than that of the US, the UK, and Japan. Only Canada stands out in the G7. The US fiscal position is pretty comparable to Portugal, but the US isn’t facing the same dilemmas. That is probably because investors have faith in the structure of US governance and economic leadership, which, in turn, is probably easier as the US is a single nation.

Portugal’s problem is similar to that of Greece, Ireland, possibly Spain, maybe Italy and, in some circumstances, perhaps even France. Will ALL key European policymakers support them? The answer is: we simply don’t know. I think at some stage, the answer is going to be “yes.” All of them, Germany included, will be there, but it might still be messy and tricky. There was an excellent story in Friday’s Financial Times suggesting that German leaders are now starting to talk more of their “European-ness” and I think this will come through in 2011. When it does, hindsight might have suggested current wide bond spreads were attractive. But, this is one for the buy and hold, and don’t watch every day, category.

[Oct 21, 2010: Godfather of BRIC Nomenclature, Jim O'Neill, Interviewed on CNBC]
[Jan 22, 2010: FT.com - How the BRIC was Born]
[May 22, 2009: Indonesia: A Must Own Emerging Market]
[Apr 1, 2010: Indonesian Market Continues to Star in 2010 - Market at All Time Highs as Country Opens Itself Up Further to Foreign Investment]
[Jul 6, 2010: Turkey - Where East Meets West, and Prospects are Improving

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