Goldman says facts do not justify market gloom
In a briefing note entitled ‘Let’s worry about everything’, the somewhat exasperated chairman of Goldman Sachs Asset Management said market participants should shake off their prevailing funk, given better-than-expected data from various markets.
Jim O’Neill said traders’ minds seemed fixated on bad news rather than various expectation-beating data.
He also looked, unexpectedly, to Scandinavia’s funkiest export – Abba – for an upbeat note amid the gloom.
One of the quartet’s songs – Chiquitita – may have applied to recent market sentiment – “You’re enchanted by your sorrow / In your eyes there is no hope for tomorrow”.
But O’Neill highlighted expectation-beating figures from the Chicago ISM (60.4) and Chinese September PMI (51.2), a 26,000 fall in Germany’s September unemployment and Berlin voting, by a wider margin than many expected, to expand the eurozone bail-out fund.
And talk is increasingly of “a ‘big bang’ solution’ to the European problems’.”
Given all this, O’Neill said last week “should have been a better week.
“Much of the latter end of the last week has felt rather surreal to me, as much of the economic data and comments from companies have been rather benign. And yet, markets continued to explore the grimmer angles.
“Judging by the price action, market participants seem to be increasingly convinced of imminent recessions in Europe and the US, as well as a prolonged period of ‘Japanisation’ in which positive GDP growth struggles to keep ahead of a weaker underlying growth trend. What is the matter with everyone?”
O’Neill said people should also stop worrying about ‘hard landings’ in China.
While Beijing’s policy to cool real estate prices over the past two years would probably produce “some failed property lenders…I can’t understand why it therefore translates into a ‘hard landing’.
“China has entered a new phase of development where the quality of growth matters more than the pure quantity, and with it, the sustainability of growth.” O’Neill predicted annualised economic growth over five years of 7.5%, “and as a critical part of it the Chinese consumer is going to be more important”.
He added it was “surreal” that the US dollar strengthened since the start of September against many currencies and breached its 200-day moving average “against virtually all cross rates that matter to the US”.
O’Neill attributed this largely to risk aversion and thirst for liquidity, but said there was little case for sustained US dollar strength against many ‘growth market’ currencies, “in fact, on the contrary, the dollar should resume weakening against most of them through time.
“While many associate the dollar move as another ‘bad’ sign for the equity markets and confirmation of other darkening signals, there is no reliability about the consequences of the dollar breaking above its 200 day moving averages, either as a precursor to sustained dollar strength, or its consequences. There are many instances when the Dollar has appreciated for good, not bad reasons.”
Closer to home, O’Neill said the November G20 is likely to be “a major point of inflection, which will either resurrect life or leave us in deep hibernation through the winter. We need to have by then a credible path for Greece, elements of the big bang in terms of bank recapitalization, and collective buy-in from all of Europe’s key players.”
He added Vladimir Putin and Dmitry Medvedev probably trading places in the Kremlin next year was not necessarily a bad thing.
“For those of us who do not live in Russia, I do think we all need to remember that Russia likes its strong leaders, and if this transition is peaceful and things remain stable, that will be more than a decade of stability, which for Russia, is quite an achievement.”
After refuting so many doom-mongers, London-based O’Neill turned to Abba for some light relief.
“On Friday outside our offices there was an Abba tribute band entertaining lunchtime workers. I ate my sandwich watching them – a beautiful distraction from the prevailing mood of the markets and the economic world.”