just in in-tray, from the masters of the universe
Subject: GS O'Neill on Markets and Co-Ordinated Easing...
From Jim O'Neill ::
A few brief, and quick comments on yet more extraordinary developments of the past few days;
1/It has seemed quite increasingly obvious that , in response to the financial crisis, and importantly, rapidly escalating evidence that the major real economies are suffering more negatively from it, that a well timed, co-ordinated G7 PLUS monetary policy response was necessary. At 12 noon London time today, we got it. Central banks from the US, UK, Euro zone, Canada, Switzerland, Sweden, and China all announced interest rate cuts. Japan did not participate but has made a statement, showing their co-operative spirit. For the first time when they have really had to act in concert " out of the box" since post 9/11, the world's major central banks are delivering. The involvement of China in my opinion, is especially welcome.
2/ This move should not be seen in isolation. In isolation, the degree to which markets "had discounted " cuts, would warrant off the cuff comments , like "not enough" , but co-ordinated in the manner it has happened, given all the national constraints, certainly impresses me.
3/It should not be seen in isolation, as it comes straight after the comprehensive package that the UK Government announced this am. I have been amongst those that have criticised the UK for the past 13 months for being "behind the curve". This package today is impressive. Yesterday's move by the Federal Reserve Board to intervene in the commercial paper market is similarly, impressive. Both suggest, based on conversations I have had this week, with many of my colleagues internally , suggest to me that policymakers are getting ahead of the curve. That is , to say nothing of TARP being passed, and the strong policy decisions announced in a number of European countries.
4/All these measures should suggest to both market participants and many of our country's citizens that , we should have some faith in our policymakers around the world, whether they come from the most developed, or some of those in less developed stage. More specifically, they certainly suggest to me, that central bankers and politicians are prepared to do even more.
5/Now none of these impressive moves this am, suggest that the likelihood of recessions has disappeared ( our global leading indicator, the GLI suggests that a number of advanced countries may be in them), but what is clear to me, is that the likelihood of a 1929 style collapse of the world economy is very low. It was my judgement a week ago, and after these policy moves, it remains my view. I am still far from sure, that the world economy will even weaken as much as it did in 2001.
6/As far as markets are concerned, my colleagues across Goldman Sachs will continue to have plenty to write about the above and other matters, but from me;
a/money markets should start to behave something vaguely closer to normality again.
b/corporate, and bank debt, generally speaking should be looked at, loosely speaking in a more favourable light.
c/I think that the "risk aversion" behaviour that has been escalating across all markets, might calm down a little, and especially with $/Yen below Y100 this am, for a currency that spends most of its life between Y100 and Y120, I think people should be thinking about buying US$, not selling. It has this remarkable tendency to gravitate back towards the Y110 area, very often, and I cant see why this wont happen again.
d/for equity markets, there is the complex push between valuation, oversold momentum, ( both very bullish arguments) against the possibility of further disappointments in earnings, and policymakers wanting to extract a price for their friendliness. But at the prices we have this am, and given the amazing weakness of September and this week to date, a significant bounce is likely in my opinion. Within overall markets, with China having reduced interest rates twice in the past month, the forward P/E valuation now looking at sub US levels, and with continued buoyancy in domestic retail spending according to holiday reports, that is the one that looks most interesting to me for long only investors looking to employ a lot of that cash that is sitting around.
Good luck, and plenty more from me and the team around the world in coming hours, and days.
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