Good stuff in the latest letter from GSAM chairman Jim O’Neill who remains pretty sanguine about both China and the US.
I spent quite a bit of time discussing China at the Texas event, but importantly, there was also a panel discussion from 3 top strategists about Emerging Markets and China especially. I would describe two of them as soft landing guys, and one, hard landing. The hard landing case seems to be centred around the difficulty of reducing the reliance of public investment going forward, and a belief that it will be impossible for Beijing to keep the investment boom/bubble going. Of course, there are lots of colourful anecdotes around that can easily be cited to support such views, ranging from stories of further delays to the high speed rail network, the opening up of regional bond markets for the first time since 1994 (both highlighted in Friday’s FT) and, of course, the endless videos of supposed empty cities. At times, some of these facts are quite scary, but as I mentioned last week, we hosted our own internal GSAM focus on the country with a guest
who is at the lower end of GDP forecasts for the next 3 quarters and expects an additional 10 pct drop in house prices.
From all of that, his view is for 5 pct non-performing loans and, linked to the high likelihood of CPI inflation returning below 4 pct early next year, expects fresh policy stimulus to result in growth returning above 8 pct in the second half of 2012.
I continue to believe that China is in the early stages of moving to a new, softer GDP trend of 7-8 pct, which contrary to widespread belief now, is actually really bullish for Chinese markets and their influence and participation in the world economy. The Chinese authorities want to reduce the role of public investment (and exports) and hope to have consumption rise as a share of GDP. The inflation path remains key to this view for coming months.
While I was in NY, I had a quick meeting with the CEO of Teach for All which is the global umbrella organisation for the various national organisations such as Teach for America and Teach First. There are now 23 such national entities including Teach for China. It was fascinating to listen to the early developments of Teach for China, especially as it has quite a bit of US influence on a daily basis. It seems like it is being strongly embraced by important decision makers in the country. Those that don’t believe China can adapt and change should take a look (and support its expansion across
the BRIC world!).
So, I went to the States thinking that the US is doing better than many realise and I returned thinking the same. About the only really disturbing published data point I have seen since the late July market meltdown was the August Philly Fed plunge. This week’s survey, for October, shows a major reversal of that decline, suggesting it was false. The ongoing trend in job claims is ok, as is other generally reliable coincident and lead data (not consumer confidence which has no reliability). Many corporate CEOs appear to continue to be pretty sanguine also across a number of sectors. And, after watching hours of financial TV, I noticed more and more of the money centre banks reporting evidence of a pickup in commercial and industrial (C&I) loans, something which the data is now showing too.
While the domestic financial media is highly focused on Europe and the Occupy Wall Street movement, one thing that is not getting enough attention are efforts to get the housing market sorted out. Alan Blinder published an interesting article on the topic in Thursday’s WSJ, which coincidentally follows a most interesting discussion I was part of at a hedge fund lunch I attended Wednesday. Until this topic was raised at the lunch, the mood was as gloomy as it had been at a similar event back in June. But, when the idea was put on the table that it was inevitable that something is going to be “done” to solve the supply overhang and refi problem, I detected a shift mid-lunch. GSAM’s own Tom Teles is highly focused on the topic, and I have returned thinking that this topic could be a big – bullish – wild card for late this year and into 2012
for the overwhelming bearish consensus.
As a final odd US anecdote, I also found myself thinking that flying around the US didn’t seem as much as a miserable experience as I had remembered for most of my career. For readers that think I am always bullish, for a considerable part of the 1990’s and Noughties, I used to think that the general poor standards of domestic flying around the US were a clear lead indicator that the hype surrounding the productivity miracle was just that. Hype. Not only did the AA in-flight magazine have a 6-page special about the Centre of the Universe (and its football team), but I enjoyed my first ever JetBlue flight, which I found as enjoyable as some suggested it may be. It allowed me to watch an additional 4 hours of financial TV too, which means I am now an expert on riots in Greece as well as various Apple apps. Perhaps my experience was just a fluke, but it left an impression.