August 15, 2011

Goldman’s O’Neill Says No, It’s Not 2008 All Over Again

Fears about global economy overlook the policy response, says GS Asset Management chair

JimJim ONeill, Goldman Sachs Asset Management chairman O’Neill, chairman of Goldman Sachs Asset Management, asked In a Saturday opinion piece whether parallels being drawn to the recession of 2008 were valid, given the state of the markets and global economic turmoil. And, he asks, are the G-7 and European economy in for a stretch of weakness like that endured by Japan?

O’Neill’s short answer is: No. He’s optimistic.

“Generally speaking, collectively, we remain quite sanguine about the world,” he wrote. “We think that the markets are excessively worried about the U.S. and, while there is less agreement amongst us about Europe, we are impressed by the policy response.”

In terms of equities, he added, he believes that there are “very attractive” valuations on offer, including in the US financial sector. In fixed income markets, “while there is little value, the strength of the U.S. and European policy response has been such that markets have momentum from the policy support, at least for now.”

Focusing on the differences rather than the similarities, O’Neill drew attention to the uptick in the weekly jobs report, as well as a stronger auto market, as indicators that all is not yet lost. He also cited a "large and quick unintended tightening of overall U.S. and OECD financial conditions" as the cause for 2008’s speedy descent into global recession. Those conditions do not prevail today, he added.

The purchase of the European Central Bank (ECB) of Italian and Spanish bonds to forestall contagion, he said, is another indication that policy is having an effect on financial troubles in 2011 that was not present in 2008.

While some denigrate the ECB’s efforts as too little, too late, he was of the opinion that the opposite interpretation could be true and that the ECB did not need to purchase all that much to have a "powerful impact."

Other concerns are the sudden attention paid to France’s credit rating and what actions Germany may take. Despite public outcry to the contrary, he expressed the opinion that Germany would take whatever action is necessary, as it has in past crises. Switzerland, too, concerned over the speedy increase in valuation of its franc, is moving to control the currency’s value and thus make it less of a hedge against disaster at the expense of its own people.

China, the last piece of the puzzle, is a ray of hope, he explained, because its officials are moving toward allowing a faster appreciation of the yuan—good news for all, he added. "We are far from out of the woods especially given the Euro Area complexities," he concluded, "but it seems to me that things are not as bleak as many still think.”

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