Thoughts on EM conference in NY
Yesterday I attended the 6th Annual Goldman Sachs Emerging Markets conference in New York. My takeaway from the conference overall was that the risk-on sentiment that is driving massive inflows into EM funds is still very much present. Going forward, the conference participants generally see emerging markets as “different” from those ten years ago, and will no doubt remain resilient to the sovereign stress that is emanating from the developed world.
China. Goldman Sachs views the recent property boom as limited to that sector – the Chinese authorities are currently clamping down via administrative tightening measures – and that a broader “asset bubble” is not present. China was deleveraging going into the crisis, so its starting point was on a very different level than that of other “frothy” economies, like the US or UK.
On the outlook for China, Goldman sees 13% growth this year, followed by a remarkable 12.4% next. The inflation outlook, although tame, depends very much on Asia continuing as front-runner of the policy tightening cycle.
Jan Hatzius presented his outlook on the US economy – he sees the Fed hiking rates in 2011, as monetary policy accommodates the massive labor underutilization. I could not disagree with this assessment.
Rebecca: I would add that I see a positive probability attached to further Fed QE measures, as the fiscal stimulus inevitably drags the economy – without further stimulus growth will turn negative and drag GDP. In lieu of a heroic surge in private sector demand, which is currently driven almost solely by the upswing on a massive inventory cycle, the Fed will have no choice but to continue to “pushing on a string”. The fiscal impetus is driving this recovery.
Actually I was truly shocked that the merits of the fiscal stimulus were not mentioned more directly in his outlook. He spent (roughly) 7 slides comparing this recession to previous post-war recessions, and not once did fiscal policy come up – just Fed policy. Several slides after that, we finally get a chart illustrating the contribution to GDP from government spending. And then, I knew it was coming, a chart about the US public debt to GDP. It’s just a scare tactic, I assure you; these charts should not be taken seriously. As long as the US issues debt in its own currency, and that currency is not fully convertible (into anything), the US government does not face solvency risk!
Erik Nielsen proffered his outlook for the Eurozone. Currently, Goldman Sachs is more bullish on Eurozone growth than is the consensus. Their baseline case is that Greece’s liquidity crisis is mitigated through IMF/EU support, and that the solvency issues are repaired in a timely manner through restructuring and austerity measures. Overall, the economic impact remains mostly contained in Greece.
Of course, the risk in the interim is that the EU/IMF is too slow in approving the aid package, and a mass run on the banks ripples throughout the Eurozone (currently there is no deposit-insurance mechanism across the members of the “zone”). I queried Marshall Auerback regarding the banking sector in the Eurozone:
Rebecca: “In the “zone”, is there an FDIC-style insurance mechanism in place to shore up the banking system across the member countries?”
Marshall: “No. The deposit guarantee is handled on a national scale, which is why Ireland is basically insolvent. The deposit liabilities of its banking system are about 600% of GDP. Ireland can “write the cheque” to cover this, so it’s doomed. “
Rebecca: “Great, thx! This is not good…”
Marshall: “No, it’s a disaster. In many respects, Ireland’s problems are even worse than Greece. It truly is insolvent. Greece has problems because of self-imposed constraints, nothing more.”
Rebecca again: I still don’t see it: how “internal devaluation”, i.e., falling prices and massive wage cuts, is to drive export growth for all debtor across the Eurozone. It’s a fallacy of composition: if every country in the Eurozone deflated in order to improve competitiveness, then demand on the aggregate falls. Therefore, the Eurozone sees less rather than more export income generation.
The average country in the Eurozone earns over 60% of its export income via inter-European Union trade. Likewise, and this is why Nielsen’s base case is no contagion: the GIIPS countries (Greece, Italy, Ireland, Portugal, and Spain) account for 35% of GDP in Q4 2009. Contagion is assured if the GIIPS jointly face a liquidity crisis.
Ahmet Akarli is very positive on the outlook for Turkey. He is likewise bullish on Russia, which is consistent with the Goldman Sachs outlook for oil: $90/barrel in 2010 and $110/barrel in 2011. Finally, Hungary appears to be the apple of the investment banking eye. Hungary’s austerity measures have been very effective, and the economy gained momentum on improved competitiveness.
Rebecca: I should note that my feeling about Hungary’s bullish export outlook is consistent with that of the Eurozone overall: the forint is pegged to the Euro (within a band, that is), so its true competitive advantage can only be sustained by persistent productivity gains and wage declines.
Paulo Leme covered Latin America. For Brazil, their outlook on the BRL and its economy more generally is consistent with my own: hot! Week after week, the inflation numbers are “higher than expected”, the current account balance “surprises to the downside”, and domestic demand is outpacing GDP by leaps and bounds.
That’s all for now.
Rebecca Wilder
Can’t see Goldman’s sanguine view on the eurozone either. The volcano certainly isn’t helping. That would be like the US having Katrina and Lehman in the same week. I see they did come up with a more politically correct acronym for PIIGS. GIIPS. Now why won’t anyone buy their bonds?
Lack of cross country deposit insurance certainly explains recent interest in the dollar however.
Any analysis presented by the likes of Goldman Sachs should be differentiated by using dollar signs instead of ‘S’es: ANALY$I$. I don’t intend this to come off as disparaging in regards to this post; nor as anything aimed at GS, they are just doing what they do…trying to make money, as one should expect. But it seems worth pointing out that this type of ANALY$y$ ignores the main problem with the emerging economies. That being their inability to generate the necessary upward mobility to provide the much needed global consumer-base so as to bring some relief to the shortage of global aggregate demand. This ANALY$I$ is therefore a good example of what is happening to the development of the global economy as a whole. The likes of GS have the option of moving their investments to greener pastures as opposed to finding long-term solutions and so that ‘maneuvering’ becomes the focus of their efforts.
But of course the list of the nations that have restricted short-term capital flows from the likes of GS resembles very much the the list of nations that have had the most progress over the past couple of decades… so, there is a chance we will be seeing less and less ANALY$I$, and more of just plain analysis.
I go by what my international bond fund manager does. He owns nothing in the eurozone or britain, has sweden, norway, poland, hungary and some US in the portfolio. That’s it for the Northwest hemisphere. Then he has a big currency short on the euro and yen.
Besides, Britain has MI5, MI6 and probably James Bond after Goldman and the Eurozone has all their spooks after them too. Something to do with CDS.
Remember, the US can’t go broke but they sure can shower us with wheelbarrows full of dollar electrons! Keep the faith.
I guess it is still knight against the peasant soldiers. Knights slaughtering peasants instead of knight against knight. Whatever happen to King Arthur’s war?
“and that the solvency issues are repaired in a timely manner through restructuring and austerity measures.”
The peasants pay once again.
The US is about to drop the hammer on the EM. Across the political spectrum, contemporary “free trade” is being recognized as the “red herring” that it is: Plain old mercantilism wrapped in a cloak for the trans-nat corporate platform with a century of bad US agricultural subsidization as the unidentified political hammer. If anyone wonders what the US would have looked like had the old South won the Civil War, this is it.
There is nothing like unemployment, loss of investment money at the casino and family needs to awaken the slumbering dipsticks to where their bread is buttered. The congressional elections will give the Democrats the slack they need to liberate Joe Lieberman and the conservative Democrats from their fantasies.
The moment America realizes the extent they have been had, “progressive” policies will rule the day. The Walmart agenda will end abruptly when the great unwashed realize that Jon Kyl and the boys are trying to sink their teeth into Social Security and Medicare. IMO, that is what the confused teabags are fumbling to understand.
The US is about to drop the hammer on the EM. Across the political spectrum, contemporary “free trade” is being recognized as the “red herring” that it is:
A lot of these ‘miracle’ countries only prospered because the US needed them strategically in the Cold War. Obama’s export policy , if implemented, is going to change things quite a bit in ways we can’t quite predict now. The idea of forcing South Korea to open its domestic markets to imports was not possible during the Cold War, it is possible now.