Goldman's Jim O'Neil On The True State Of The Chinese And US Economies


Jim O'Neill

Good stuff in the latest letter from GSAM chairman Jim O'Neill who remains pretty sanguine about both China and the US.

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China

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 organization for the various national organizations 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!).

The US
 
So, I went to the States thinking that the US is doing better than many realize 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.

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New Study Says It May Be Too Late To Prevent The Global Warming Nightmare Scenario


Joeri Rogelj

We've ignored the climate change gurus for too long, and now it's probably too late to avoid dangerous levels of global warming.

This is the dire conclusion reached by Joeri Rogelj and other scientists in an article published in Nature Climate Chinage (via Science Magazine).

Using the latest data, Rogelj's team modeled 193 proposed emissions plans that were intended to keep global warming below 2°C. They found that most of these plans are already obsolete.

The only plans with any hope of preventing dangerous global warming are those in which global emissions peak during this decade.

The three plans that are "very likely" to work all require heavy use of energy systems that actually remove greenhouse gases from the atmosphere.

"The alarming thing is very few scenarios give the kind of future we want," study co-author Neil Edwards tells Science Magazine. "What we need is at the cutting edge. We need to be as innovative as we can be in every way."

Don't miss: These 20 cities are most exposed to rising sea levels >

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Here's Where Qaddafi, Mubarak And Ben Ali Stood On The Demographic Pyramid


While the US and Europe have remained fixated on the simmering sovereign debt crisis in Euroland, the Arab world has been experiencing waves of demonstrations, protests and civil wars that have seen the fall of three major regimes thus far in 2011, with several others struggling to find equilibrium.

The underlying forces behind the Arab Spring are complex and vary from country to country. But a key factor is demographics, as a glance at the population pyramids below suggests.

A common denominator of the three is an aging ruling party unable to control a population bulge of young adults afflicted by high unemployment, food inflation, corruption, an absence of political freedoms and generally poor living conditions.

The three pyramids above differ somewhat from one another, especially the pattern of contracting growth in Tunisia. But the three exhibit the common demographic of young adult males in the numbers necessary to mount a successful overthrow of the government.

Earlier this month I posted a commentary on Boomer Demographics: The Shift Ahead, which was an outgrowth of my presentation at the Retirement Industry Income Association (RIIA) 2011 Fall Conference.

My focus on demographics, as in the Boomer piece, has generally explored the financial implications of an aging population on government debt and the slow-motion ripple effect on markets and the economy. I'll have more on this topic next week in some commentaries on world demographics, especially Europe. But sometimes the impact of demographics can be sudden and explosive, as we've seen in the Arab Spring.

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Rick Perry: My Campaign Took An 'Ass Kickin'


rick perry ad campaign

A reenergized Rick Perry ventured to Washington today, telling a group of about 50 K Street insiders that he is stepping up his game after taking an "ass kickin'" this fall, according to the National Journal's Chris Frates.

Perry, who is struggling to regain momentum after his campaign's initial "love fest," kept himself in the game with this week, reporting strong fundraising numbers and putting up an improved performance during Tuesday's debate. But his fundraising has reportedly taken a hit, and the Texas Governor still has a tough slog ahead as he tries to claw his way back to the front of the 2012 Republican field.

Frates reports that today's meeting, which took place at the offices of the National Association of Wholesaler-Distributors, attracted a big crowd of Washington lobbyists, giving Perry an opportunity to press flesh with conservatives who have not yet settled on frontrunner Mitt Romney.

Participants told Frates that Perry's grasp on policy wasn't quite up to snuff, but that he delivered his remarks much better in person than he has in the debates.

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What To Do If Wells Fargo Mailed Your Statement To The Wrong Person


wells fargo

We doubt this was a Halloween prank: Possibly tens of thousands Wells Fargo customers in Florida and South Carolina received portions of other customers' bank statements in the mail Wednesday, Brendan Kearney reports in The Post and Courier.

According to Kearney, the bank "had not heard of a problem," however, the bank's customers obviously felt differently as complaints continued flooding the news outlet today.

While any report of a data breach is horrifying for consumers, Wells Fargo's customers should be on especially high alert, says Luke Landes, a personal finance expert who blogs at Consumerism Commentary. Both their personal identity and bank holdings are at risk of being compromised by thieves. 

Landes, who's been a Wells Fargo customer for almost 25 years, took a look at his recent statement for Business Insider, citing what information it stated. In print was his name, checking account and routing numbers, including a list of all the companies where he'd done business in the last month.

"Having the routing number and the checking number is like having a key to your account," he says. "If a signature wasn't checked, that would make it easy to debit your account."

If you were one of the customers involved in this data breach, here's what you need to do: 

Change your account number. Rather than put a hold on your account, making it difficult to get by day-to-day, or closing the account altogether, which could delay direct deposit or automatic bill payments, just change the account number, 1-2-3.

"For some, this may be the customer's last straw, but I wouldn't close the account unless I had problems with the bank already," says Landes. "Changing your account number gives you more security, despite the work."

Put a credit alert or some kind of lock on your card's account. Also known as a "security freeze," this will keep the credit bureau from releasing your credit information without your consent.

Keep a close eye on your money. Obviously, you should start checking your account more often than you normally would to ensure you'll find anything fishy.

Many of the Wells Fargo customers received statements from people they actually knew, so if the guy down the block knew Fido's name, for example, that might make it easier for him to take your money more discreetly.

"They would also be able to call the bank and get more information about the account," Landes says.

Thinking of ditching your bank? Here are three things to consider.

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S&P Did Its Own Stress Test For Europe, And It Looks Pretty Grim


heavy hitter

Standard & Poor's GlobalRatings team has updated its own European sovereign stress tests, and the results aren't pretty.

In fact, if Europe as a whole stops growing or if Spain and Italy need a bunch of help from the EU and IMF, everyone looks sunk.

 

Base-line scenario:

Their base-case scenario still assumes positive — though lackluster — growth in the eurozone of 1.0% to 1.5% over the next year. In this case...

- The IMF and the EU would be able to support 100% of Greece's, Portugal's, and Ireland's borrowing requirements.  They would also be able to support up to 10% of Spain's and Italy's.

- They would not be able to support 30% of Italy and Spain's borrowing (along with 100% of PIG borrowing), however. In fact, they would be €287 billion ($398 billion) short.

- This scenario corresponds with S&P's current long-term ratings, under which Germany and France are both AAA, Spain is AA-, and Italy is A.

 

Double-dip scenario:

But if the eurozone sees a double-dip recession, then the prognosis looks much more grim. In this scenario, S&P subjects Italy, Spain, and Portugal to a "substantial" level of stress, Ireland, U.S., and Latin America to a moderate level of stress, everyone else — including Western Europe — to a "modest" level of stress:

- France, Spain, Italy, Ireland, and Portugal would all see sovereign downgrades of one to two notches.

- 20 out of 47 banks tested could fall below a 6% tier 1 capital to liabilities ratio. They would need about €78 billion ($108 billion) to be recapitalized to a 7% level.

- This would correspond with 60-85% of the Portuguese, Italian, Spanish, and Greek banking systems.

- The EU and IMF would not be able to provide adequate support under this scenario, which would probably equate to 100% of borrowing costs for Portugal, Ireland, and Greece, and up to 30% of borrowing for Spain and Italy.

 

Worst-case scenario:

But the team also analyzes an even worse scenario — not only do countries see a double-dip recession, they also see an interest rate shock:

- France, Spain, Italy, Ireland, and Portugal would all see sovereign downgrades of one to two notches.

- With higher popular angst, government willingness to adopt reforms could be inhibited. If that happened, more sovereigns (even than those listed above) could be downgraded.

- 21 out of the 47 banks tested would fall under a 6% capital requirement, and it would cost about €91 billion ($126 billion) to recapitalize them.

- This would correspond with 60-85% of the Portuguese, Italian, Spanish, and Greek banking systems.

- Short term borrowing costs could rise by 150-200 baisis points for many borrowers.

- There would be a shortfall of €287 billion ($398 billion) between the EU rescue funds' (EFSF and ESM) and IMF's joint lending capacity and the amount of funding needed to support the PIIGS. That amounts to 2.7% of aggregate GDP for eurozone member states.

In both scenarios, S&P expects government borrowing to skyrocket as budget deficits and bank recapitalizations "balloon."

In sum, the IMF and EU are incapable (at least in their current capacities) of maintaining a firewall around Italy and Spain in all but the best-case scenario.

Of course, S&P has promised to revise these projections based on the outcome of upcoming EU summits.

Their conclusion is terribly ominous (emphasis added):

Although our [adverse] scenarios take into account various debatable assumptions, we believe that they illustrate the likely general direction under given conditions. Beyond the likely downgrade of a number of sovereigns if such events came to pass, our scenarios suggest that current support mechanisms may not be sufficient if conditions deteriorate beyond current expectations.

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OVER: Obama Announces Complete Drawdown Of Troops From Iraq By End Of Year


Obama announces Iraq withdrawal

Obama just gave a briefing in the press room announcing the full withdrawal of American troops from Iraq by the end of the year.  There are currently 41,000 troops in Iraq.

Said Obama:

"As promised the rest of our troops in Iraq will come home by end of year.  After nine years, America's war in Iraq will be over."

Obama says Iraq and the U.S. "are moving into a new phase.  It will be a normal relationship between sovereign nations....This will be a strong and enduring partnership....This will be a strong  and enduring partnership...we’ll help Iraqis strengthen institutions that are just, representative and accountable."

Obama said he would continue discussions with Iraq PM about how to continue training Iraqi troops.  The White House later notes that 4-5000 private security contractors will stay in Iraq after troop withdrawal.

Obama also says that the drawdown reflects bigger changes: "Tide of war is receding."

Obama says after troops come home, fewer deployments and more time training will improve military.  Also, notes that returning troops will help with national jobs problem: "Our troops in Iraq will definitely be home for the holidays."

After the briefing Obama did not take questions; as he left reporters shouted questions about Iran, which he did not address during the remarks. 

So, in terms of the upcoming election Obama can now campaign on the fact he ended the war in Iraq. 

On th other hand, as NBC's Richard Engel noted, Iraq is now on its own and "the American training wheels are off" and they are suddenly very susceptible to Iran.

Video of the President's remarks below.

Previously:

ABC News' Jake Tapper just tweeted that at 12:45 President Obama "will announce complete drawdown of US troops from Iraq to zero by end of 2011."

In 2008 Obama campaigned on the promise he would end the Iraq War.

Last summer Obama announced the end of combat operations in Iraq, however, 50,000 combat troops remained behind at that time to train Iraqi forces and protect U.S. interests. 

At the time Obama promised to have all troops out by the end of 2011, keeping the timeline that President George W. Bush has negotiated with Iraq in 2008.

Iraq had hoped to keep them longer and reportedly the Obama administration had also wanted to keep a presence there, in large part to counteract the influence of Iran.  However, according to some reports, Iraqi PM Nouriel al Maliki refused to guarantee American troops in the country immunity and the deal to leave some troops in the country reportedly fell apart over that detail.

Fox's Ed Henry notes that earlier this week Sen. John McCain said that a full drawdown would be a "victory for the Iranians."  So that gives you a sense of how the GOP is going to play this news.

Visit msnbc.com for breaking news, world news, and news about the economy

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