Een daling van de yen?

This week there is so much to talk about, ranging from “that goal” in Sweden, to the fiscal cliff, China, Euro Zone and so on. But actually, compared to our friend in Tokyo, the rest of it is not so interesting in my opinion. As it happens, by coincidence, I am going to be making another one of my mad trips through Asia next week taking in Beijing, HK and Tokyo. It will be rather brief, but I am quite excited about it. Anyhow, in the meantime?

Recent Economic News is Disappointing Again.

So predictably, and somewhat annoyingly, just after I write something about the improved economic news in both China and the US – and therefore the world – the latest news turns less constructive, at least from the US. Both the latest weekly job claims, and the October Philly Fed disappointed this week, although in both cases it is quite conceivable that it is related to Hurricane Sandy. Of course, it is also possible that the fiscal cliff worries are behind some of the weakness given it is the dominant topic post-election in the US.

On the fiscal cliff issue, there are no signs of any real progress, although one would be pretty staggered if there were at such an early stage. I listened to an interesting presentation on the topic this week that suggested there was virtually no chance of a deal before year-end, not least because there would have to be a bill tabled the first week of December just for the technicalities to proceed. However, the same person went on to suggest that this wouldn’t in itself be a big issue as expectations would be managed that something material would transpire before the President’s State of the Union, and possibly by his inauguration. She also added that exit polls showed quite a lot of blame on the Republicans for budget stalemate issues which suggested to her, that whatever anyone might say in public, they all know they have to do something. Others I have chatted to suggest, rather more gloomily, that the conceptual ground that both camps are still being dominated by, is so firm that such a benign outcome won’t be so easy. Judging by the equity market’s ongoing decline, it is easy to conclude what their verdict currently is. I suppose it gives us the grounds for seeing if we can get an early rally in 2013?

Outside the US, the UK has demonstrated that the autumn and Q3 burst of activity appeared to, at least for now, be temporary as a number of recent indicators turned negative again. The latest employment data was also less encouraging for the first time in months.

Not too much data to report from Europe this week, although there was a lot of market focus on the Greek debt issue again, and interestingly rising focus on French economic policy. The Economist magazine, after carrying a positive piece on recent policy proposals, actually leads this week’s front cover with a picture of French bread surrounded by their flag and a nasty headline highlighting a 14-page special inside. How that piece squares with the previous week’s positive comment I don’t know, but I would bet Paris, Brussels and perhaps even Berlin will be hoping that The Economist continues its long-term habit of big highlighted topics turning out to be classic reverse-indicator moments (i.e. a famous one on Japan a long time ago).

In Asia, we had the remainder of the monthly Chinese data last weekend with a softer than expected M2 money supply release but a much bigger than expected trade surplus.

Of course, linked to my theme for the week, Japan stole the attention for the most eye-catching data release with a dreadful 3.5% annualised decline for Q3 real GDP with many fearing this could be repeated in the near future. More on this country and its policies below.

Euro Area Policy Issues.

If The Economist is right about France then a further, much more dramatic stage of the Euro crisis is yet to happen, because of course it doesn’t get more “core” than the joint founders of the whole project. It will be interesting to see whether this attention gets a lot of response or focus. I don’t have any grounds for questioning the line taken although as I pointed out, their own commentary last week was surprisingly positive about the latest policy measures. I do think there are two even bigger issues that relate to France. The first being the mindset of the elite thinkers, that in order for EMU to ultimately survive, the French have to be prepared to give up quite a lot of their pride in their sovereign control and shift towards the Germanic view of a united states of Europe, even if they can deal with their own economic challenges. There is an even bigger issue that I shall return to below.

Against all of this, I think it is quite interesting that the EU appears to have told Spain that it doesn’t expect it to tighten fiscal policy further in 2013 despite the fact the EU forecasts a higher budget deficit than Spain claims it will achieve. If this is correct, it is a most welcome and sensible development in my opinion, and reopens the question of whether Spain will now seek support from the ECB as it implies there will be no additional policy strings attached. Of course, against this, there appears to be some reluctance in Berlin for Spain to apply, for reasons which are vaguely understandable but not entirely sensible, other than just plain old German politics.

I spent a pleasant 24 hours in beautiful Rome this week where the sun was shining and it was a warm 24 degrees, it was delightful. I was there to participate in a rather secretive but well known meeting of some of the world’s most important family offices, which I always find interesting because firstly they invite all sorts of independent thinkers, and secondly, maybe it is coincidence but they are often amongst the most bearish people I encounter. As I teased the audience, their 2008 autumn reunion was quite easily one of the best reverse indicators I can ever recall. It is also often interesting because I am usually asked to sit on a panel with the same other two guys, and it is only there that we ever come across each other’s views every year (or so, as I missed last year’s get together). It is interesting because despite the general impression I stated above, my own views often scarily gel with theirs and being the sort of modest person I am, I take for granted therefore that my views are right. Each of us was asked what our best 3 ideas were and I agreed with all of theirs. My own 3 ideas were to be long $/Yen, long $/Yen and long $/Yen as I shall discuss below. I actually also liked their idea of owning European and Chinese equities.

Anyhow, the day I was leaving, there was supposedly a strike in Rome and I feared the worst having had that experience before. Maybe it was just luck, but I didn’t even get held up much at the airport, never mind anything else. I reminisced with a group of our own clients on the rooftop of the wonderful Hotel Eden that my first ever overseas business trip some 30 years ago happened to involve a visit to the same place. It remains one of the most spectacular visions in life on a clear sunny day. All of this added to my view that I don’t see too much sign of anything too badly wrong in Italy. I must also add, I saw hundreds and hundreds of Chinese tourists.

A Growing Big Picture Threat to EMU?

Despite the tone of my post-Rome trip comment and much of what I often write about EMU, especially my belief that the Euro show will go on, I do find myself worrying more and more about the “big picture” economic rationale for it. I asked James Wrisdale, on my team, to project what 2020 trade patterns might look like for each of the UK and Germany if trends since 2000 broadly continue. You end up with some pretty interesting results as can be seen in the attached table.

Let me just highlight a couple of things. In 2020, Germany will have not much more than one third of its exports with the euro area, and nearly as much with the BRIC countries. Its exports to China would be more than 15%, easily the largest, and nearly double the exports to France. Perhaps Germany will be proposing a monetary union between itself and the BRIC countries by 2020?

For the UK, oddly, they would have more export exposure to the euro area than Germany would, although that is only because of exports to Germany itself. But overall, UK exports to the region would also decline more in significance and I find myself wondering why the UK would want to be so concerned about the Euro area, and dangerously thinking that if the UK isn’t prepared to get more involved in the core Euro issues, then what is the point of being involved in the EU at all?

But most importantly I come again to the conclusion that I did earlier in the year in terms of debt sustainability. This time, because of trade patterns, the window for truly sorting out their organisational issues is quite short as by 2020, it wouldn’t be worth sustaining if it isn’t saved and strengthened. The weeks, months and the year after the 2013 German election seem like the last window of time they might have in my view.

China Issues.

So the Chinese handover period came and went and after all the fuss, it seemed to go smoothly. I am there briefly next week as I said, and I look forward to hearing the mood. What is interesting is that Chinese equities still trade poorly despite the better data and lots of quite encouraging policy noises. I tried to joke with a disgruntled China investor that perhaps there is something in the language and translation issues that their market is quoted upside down these days, but he didn’t see the humour. It is indeed quite worrying, as I remarked to a journalist who interviewed me Friday, when she remarked that everyone she had spoken to this week in London had said they were bullish on Chinese equities.

On top of the peaceful handover exhibition, there were noises about fresh tax incentives and new ideas on dividend policies but neither of these appear to have helped, yet. Neither did the news that the QFII limit for foreign investment is planned to be lifted considerably.

I also saw a number of further comments from various Chinese investing agencies that they plan to invest more towards so called Emerging Markets and not the “protectionist” West this week, which of course makes a lot of sense.

Channel 4 TV in the UK ran a somewhat worrying programme about the mysterious circumstances surrounding the death of Neil Heywood this week. If its dramatic suggestions were accurate, that might explain why markets are struggling in China as it would suggest all is not well behind the scenes, but I find it hard to believe. I shall do my own investigation next week!

London or Westminster, the BRIC Capital of the World?

On Thursday of this week, I was asked to give a brief talk over lunch to a massive turnout of the Westminster Property Association. I told them that I thought that with London being the BRIC capital of the world, Westminster is the epicentre of it, along with the City, and if our policymakers didn’t do too much wrong, then it will remain a good story. However, prompted by some of the things I heard at my table before I spoke, I reminded them that not all parts of London nor Westminster saw any of these benefits and it was important, unless they were to pursue a referendum to cede membership of the UK, to try and help others benefit from this BRIC and N11 influenced story! (In the case of property, also oddly perhaps, the benefits of the flight of property capital from the Middle East and parts of the Euro area.) One person told me that the average age of first time house buyers is now 39, which I find quite worrying. I had coincidentally read something last week that supposedly one can find 8 properties, spread across the rest of the UK, for the price of one in London. I suspect that these would have to be very carefully chosen properties but I get the gist.

Japan, Abe and the Yen!

Which brings me finally to my theme, and I will be brief. From the Plaza Accord of September 1985 all the way until I joined GS in the Autumn of 1995, I was bullish Yen, and after a brief shift to being temporarily US$ bullish, I returned to being a Yen bull from 1997 until a few years ago. I was quite chuffed with myself for understanding the Yen and it was based on pretty simple stuff, Japan’s persistent and strong balance of payments, especially its trade and current account surplus, and its associated rising equilibrium exchange rate.

All of this has reversed and recently, Japan was reported its first ever current account deficit, or certainly, its first for many decades. They have a very overvalued exchange rate, a collapsing export sector, an unreformed domestic economy, a debt challenge that makes Greece’s seem easy to solve, a central bank that doesn’t try too hard – currently – to reach its inflation target and, once again, a very weak economy. And that is without even getting into the complex issues of its relationship with China and other Asian countries, that in principle should be as good for them as those countries are for the rest of us. Anyhow, we may soon see a general election and a return of the LPD, whose probable Prime Minister has told us now 3 times in the last fortnight that he would force the BOJ, if necessary, to pursue a 3% inflation target. This is the sort of thing that many were advising Japan from overseas in the mid to late 90’s when so many people mistakenly lost of lot of money betting against the Yen. Go get all those guys out of retirement as the time has probably come. The outlook for the Yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there. I have been getting more and more negative about the Yen for the past couple of years, and I have, so far, been wrong, but it seems more and more obvious to me, that the moment is here.

Good luck.

Jim O’Neill

Chairman, Goldman Sachs Asset Management.