August 30, 2010
A floundering Jim O’Neill has never seen decoupling as wide as it is now, and the man is now openly hallucinating, seeing every non-developed country as a potential BRIC (see this Friday’s FT OpEd: How Africa can become the next Bric). Well, of course, China needs its resources. Soon every open mine will be a “BRIC” to be exploited by Chinese interests, which come, see, and suck the place dry as they build yet more vacant cities, ghost towns, and highways to nowhere, hoping they can sustain the illusion of the world’s greatest bubble for a few more months. Which is precisely all those who are betting on a collapse of China are playing it not with China CDS, but those of Australia: for when the worm turns, Bad in Beijing, will be nothing compared to the Massacre in Melbourne. Yet even Jim’s nagging conscience is not allowing him to blindly continuine to ignore the other side of the coin, namely that he is once blatantly wrong, and decoupling never did, and never will occur: “What can emerge if Ben Bernanke and the Fed is wrong? What if this slowdown is sustained, and we actually move into another recession? The American Dream needs something new. In conventional terms, it needs booming private investment and booming exports. And they might happen. I find it hard to see how net exports were such a genuine real negative contributor to Q2 GDP as reported today, and I strongly suspect this will be reversed. But what if it isn’t? The scope for more conventional fiscal stimulus is hardly available. So in this light, the US needs its own BRIC equivalent. How about something real on the infrastructure front ? ( a nice mode of transport downtown Manhattan from JFK would be a sign). How about literally some forced measures to shift the auto user on masse from conventional fuels ( combined with a major hike in gasoline taxes)?” Jim’s conclusion: now that China is actively moving to developing its own middle class, perhaps it is time for the US to finally roll over and admit its consumer are on longer the world economic dynamo. He asks whether it is time to “borrow a few hundred million BRIC consumers?” Surely China will be ecstatic that the US will now be funding the development of its own middle class. As for ours…Oh well.
The long holiday weekend arrives in the Europe with everyone praying that the weather takes a turn from the miserable August to date in many parts of it, as we come towards the finale of the summer in the US and Europe. What shall September bring us , more of the gloom that has generally prevailed on and off since May, or will September and the arrival of the St Legers race, allow the famous stock market saying to come really true this year, and we re-commence the rally that ended in April, having started in Spring 2009? We shall see.
I write after the close of European markets today, and some time after the much awaited words of Fed Chairman Ben Bernanke, and following another week of pretty dismal US data, many were looking for some signs of hope for survival from him. As discussed by our US guys, in fact, Bernanke seems to have stuck to a pretty sober tone, suggesting that the recovery will continue into 2011, which implies that the FOMC see recent weakness as not so persistent. He, perhaps more importantly made it even clearer-if there were any doubt- that in the event that things transpire differently from how the Fed see things, then they will undertake further measures to boost financial conditions, as we expected.
In that regard, I would like to reiterate what I wrote in my last note, and will go into in more detail in next Wednesday’s Global Economics Weekly ( GEW), US financial conditions are more important for the rest of the world than the US economy. So for everyone else, the Fed’s policy response to more economic weakness is, in my judgement, more important than the economic weakness itself.
Anyhow, amongst other things that have struck me this week, just for a change, is how powerful my beloved BRICs are, and those either not a BRIC, not a potential BRIC, or not close to one, life is quite tough. In this regard;
- A d v e r t i s e m e n t
1. BRICs and style. Did you see Tyler Brule last Saturday in the FT, giving his own most amusing take on the BRIC story? Not surprisingly, in his world of style, Brazil is the major winner! While one can easily broadly concur, I suspect some slight selection bias there when it comes to the examples given. One can easily think of some choices from the others, or at least some. Some aspects of clothing fashion from India for example? Anyhow a great read.
2. Brazil news all over the place. Brazil isn’t just winning the BRIC style council, lots of other interesting bits and pieces. As Lula’s preferred candidate Dilma soars ahead in the polls, the media is full of stories of booming consumer confidence, declining unemployment. Martin Sorrell of WPP made some interesting comments this week with his latest results ( always a good bell weather) saying his clients were undertaking a “ mad scramble” for acquisitions in Brazil ( and China). He also said that BRICs were having a disproportionate influence on clients’ thinking . in this general vein, I gather the proposed merger of LAN and TAM would create the biggest airline by market cap if it went through.
3. BRICs and Africa. I had an op-ed published in the FT today, where they rather naughtily chose a headline that implied I was adding Africa to the special four….subsequently, as you can imagine, I have received numerous emails offering my advice on this notion and all the various other candidates. I was merely trying to highlight, that IF African countries, especially the large ones got their act together, then they could be as big as the BRIC countries are going to be. I also pointed out that it is extremely difficult for the s in BRICs to become an S ( although they forgot the capital the second time). South Africa has too few people to become big. In any case, as I mentioned, if the ANC carries on down its recent proposed policy path, it won’t get close. Trying to muzzle the media is not what this country needs. We will be writing something more substantial on Africa in September.
4. Germany, which appeared to be greatly influenced by the BRICs has been the economic “star” again this week. It is starting to look more and more as though Germany has entered a period of self sustained domestic demand. This week’s IFO, its retail component, the latest consumer confidence numbers, all paint a rather rosy scenario. Now due to past disappointments a plenty, it is tough to really believe this is for real, but what a contrast to the US? Ask yourself this, dear grizzly. For all those years when Germany has struggled , often when the US was booming away, no-one ever said that Germany( and Europe, or Japan’s) weakness would negatively affect the US, so why should Germany suffer from the US? If you look at their export business, as I and Dirk Schumacher discuss endlessly, they are benefiting enormously from the BRICs.
Here is a silly anecdote that struck me as another sign of Germany doing well with its brands.. On one of my rare August days in London , I was driving in on the M4 flyover, and just before the end of the official motorway , you can see all these brand new auto showrooms appearing. The German ones have been smart enough to be up there in the sky, and so visible, with Audi and Mercedes showrooms really capturing the wavering eye. Japanese ones, are oddly below the flyover level………………
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5. The Yen-again- and Japanese politics. I have to rub my eyes this am to really believe that I was reading a story in the FT about Ozawa possibly standing as the leader for the SDP of Japan. He sure doesn’t give up easily! No doubt this means another series of twists on the whole consumption tax saga. Meanwhile, the Yen doesn’t like life stronger than Y85 –at least for now- with persistent talk of intervention as a coming tool. Not sure what there is new to say about it. the Yen is ridiculously overvalued, as we have talked about at length. But if the BOJ don’t do anything aggressive, especially given the style of the Bernanke Fed, then nothing changing too soon.
6. The US and a BRIC like edge? What can emerge if Ben Bernanke and the Fed is wrong? What if this slowdown is sustained, and we actually move into another recession? The American Dream needs something new. In conventional terms, it needs booming private investment and booming exports. And they might happen. I find it hard to see how net exports were such a genuine real negative contributor to Q2 GDP as reported today, and I strongly suspect this will be reversed. But what if it isn’t? The scope for more conventional fiscal stimulus is hardly available. So in this light, the US needs its own BRIC equivalent. How about something real on the infrastructure front ? ( a nice mode of transport downtown Manhattan from JFK would be a sign). How about literally some forced measures to shift the auto user on masse from conventional fuels ( combined with a major hike in gasoline taxes)? Or maybe just borrow a few hundred million BRIC consumers?
Enjoy what’s left of “summer”