Saturday, July 26, 2008

Jim O'Neill's View on world economy

Jim O'Neil, head of Goldman global economic research team, a die-hard MU fan, recently shared some interesting views about the world economy on the Bloomberg. He is considered a rock star of Goldman Sachs.

(Business week). A partner and head of global economic research at Goldman, O'Neill has won respect for prescient calls such as the one that accurately forecast that the euro would rise from $1.25 in February, 2004, to $1.30 a year later. He predicted the yen's rise in the mid-1990s and also makes calls on other currencies such as the Swiss franc and the Canadian dollar. At Goldman, a market leader in the $1 trillion-a-day currency market, O'Neill is a rock star. "He has certainly been the top foreign-exchange economist anywhere in the world in the past decade," notes Gavyn Davies, a former BBC chairman and onetime co-head of Goldman's global economics group.

He said crude oil at US $ 140 will hurt worldwide economy. Recent slide of the crude oil is a good news for equities.

On the overall, Euro will have much slower growth. He said US $ rebound to $ 1.20 - US $ 1.40 will not hurt the US economy. He has been watching US trade in the last 27 years said the US export sector has been truly amazing and stronger than ever. It is even stronger than Germany. He thinks the US economy will rebound with the stimulus taken by the policy makers.

On China, they have an interesting call: no slow down post-Olympic, consumption will continue to be strong. He was impressed with the recent YoY retail growth of 23% or 15% inflation adjusted, it is truly amazing. China will be able to maintain 10% GDP growth with low inflation projection of 4% in 2009. 90% of the people he spoke to skeptical about that. When that happen, it will be a very pleasant surprise. I buy into his number on the basis of lower crude oil and food prices(temporary peak), China government will continue to guide the economy around 9-10% to create enough employments.

Some will argue that those looking at export sector are looking at the wrong variable as 70% of the GDP is coming from personal consumption, no matter how strong is the sector -- it will not be able to offset the weakness -- as their wealth has been destroyed due to housing troubles and business are afraid to lend to each other. No credit growth, no economy expansion.

However, the employment data is still very solid compared to year 2001 recession, millions of jobs destroyed after dot com bust but after many months of the housing and credit crisis broke out, the jobs destruction is not that frightening. As long as people still have a job, they got to eat, pay utility bills, using transportation, seeing a doctor and etc. Pessimist will think the worst is yet to come, that's why the data is not reflecting that.

More economists begin to revise their outlook especially with the surprise stronger durable goods.

July 25 (Bloomberg) -- Orders for U.S. durable goods unexpectedly rose in June, and sales of new homes were higher than forecast, easing concern that the economic slowdown will worsen.

Bookings for goods made to last several years gained 0.8 percent and posted the first consecutive monthly rise since July 2007, the Commerce Department said today in Washington. New homes sold at an annualized pace of 530,000, exceeding the median forecast of 503,000 in a Bloomberg News survey. A private report showed consumer sentiment rose from a 28-year low.

``At the end of the day, we are going to avoid a severe recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut.

Morgan Stanley economists raised their forecast for second- quarter GDP growth to 2.4 percent from 2.2 percent after the durable-goods report.

For me, I welcome more pessimism to offer me lower price while I know the fundamentals are still OK. I'm however may be preaching to the wrong crowd, those still reading blogs probably are already believers -- the world is still beautiful.

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