From Bob Janjuah
Apologies for not writing much recently but I was out/on vacation/travelling over virtually all of June and July, as well as the whole of Aug. Further, the new comment below was written in the 1st week of Sept and was set to be released on Sept 7th, but sadly my dear Father passed away on Sunday 6th, as a result of which I have been out for the last fortnight. The release of my comment was therefore delayed until I got back into the seat, to deal with questions etc. I mention my father because he was the man who helped make me the cautious guy I am. He taught me to always question the consensus, he taught about the evils of too much debt and big government, about the willingness of our leaders to 'spin' us - way before 'spin doctor' was even a label in the English language, and it was he who taught me that, over the course of human history, the masses have always looked for the 'it's different this time' angle when, almost without exception, it's never really that 'different' - the lyrics may change a bit, but the tune is nearly always the same. As the mighty Zep put it many years ago, the Song Remains the Same.
The long version of what I have to say is below - please read, hopefully enjoy, and I welcome feedback/questions/comments/abuse/support. The short version - to me - seems to be this: Either Balance Sheets matter or they don't. And if they do, as I think they DO, then the balance sheets that matter are, on one side, the Private Sector, where deleveraging and deflation forces abound, and on the other side the Public Sector, where (IMHO) utterly reckless fiscal and monetary policy is creating the New Bubble - the Public Sector Debt (or Funny Money) Bubble. And in this contest, the key question is whether the Public Sector is WILLING & ABLE to continue its reckless behaviour for long enough and in enough size to offset and then overwhelm the Private Sector's prudence. Wrapped around this debate is how far the Equity/Risk Asset bubble can continue to be blown up in the absence of any real Private Sector investment/spending/growth - ie, the 'Invest Cheap Liquidity in Assets And Hope' Bubble. I think it's about as simple as that. AND my fear (as opposed to my belief), as I have written before (see below), is that the governments of the US and UK in particular will, wrongly in my view, think they have No Limits and are liable to keep printing/monetising/borrowing at will.
HISTORY tells us that this will end in failure, with ugly consequences, the net result being MORE DEBT that needs to be repaid thru vicious spending cuts & higher taxes, a (monetary) inflationary BUST and/or a currency shocker - to be swiftly followed by a longer term Debt Deflationary bust. So, in 1 line, all I think is certain - if you think like me - is that the longer the current bubbles persist & the bigger these bubbles are blown up, the BIGGER the explosion will be when it all goes POP. And realistically, I am talking weeks/moths, NOT qtrs/years. YOU may be smart enough to 'get out' of risk in time, but the overwhelming majority will not. And at that time, there will be NOBODY left to bail us all out......Of course, if the Public Sector gets religion sooner rather than later, we may by-pass the inflationary bust and proceed directly to the debt deflation phase driven by the Private Sector's actions. I think a long period of debt deflation is almost certain, whatever the policy choices now. The only issue is how far the Public Sector will debase/damage its (our!) balance sheet before it sees the follies of its way. My fear, not hope, is that this realisation happens too late and that we get the worst case of deep monetary inflation swiftly leading onto debt deflation. NOBODY has yet been able to tell me why we should not proceed directly to debt deflation, other than some claptrap about how UK and US consumers NEED & have some God given right to borrow and consume. The masses that make up the community of analysts, economist etc that did such a good job into the 07/09 bust (!!) are of course complicit again - and shockingly they are repeating the same grievous error they made back in the 2002/2005 period when they could see no inflation and thus validated the Greenspan Fed's mother of all policy errors. When will folks stop looking at rigged CPI data for proof of inflation??? Has the 2002/2005 episode not taught us that MONETARY RECKLESSNESS, as we had back then and as we are repeating now, will show up in FALSELY INFLATED asset prices - and NOT in the prices of Goods & Services - which, if unchecked, has and will again lead to hideous bubbles which ALWAYS burst badly when policy is set by folks wedded to utterly bogus and what by now should be totally discredited policy think/policy action.
When risk assets top out - level, timing - is always difficult to predict. I think its weeks/months away, and I very much think we are in the deep tail of the risk asset rally. I know a lot a smart folks who think this can go higher and for a bit longer then I think, and I can see the argument. But nearly all the folks who I respect and have talked to for a long time agree that if it goes on for much longer then it will end in a terrible mess. As such I think its time to take off my TRADER hat, which correctly called a decent part of the 09 bounce (but by no means all if it) and put on my INVESTOR hat. With this hat on, it is clear to me that, as we get into Q4 09, and probably for the next 12/18/24 months, I DO NOT want to own 'risk' (credit - esp. HY, equity), I DO NOT want to own USDs and GBPs on a long term basis, and I DO want to look at owning assets in EUROs (and maybe also JPY and AUD). In particular, because the ECB is by far the most credible central bank left when the choice is between the Fed, the ECB and the BoE, it appears to me that the Eurozone will drop into the debt deflation zone sooner rather than later and will by-pass the the MONETARY inflation risks so prevalent in the UK and US, thus on a decent investment horizon, I want to own very long dd govt debt issued from core-Europe, esp. of course Germany and France. I think getting a 4%+ carry on a multi-yr basis on German sovereign risk and ECB prudence makes an awful lot of sense at a time where not much else really has ANY VALUE left.
So, with that cheery intro/summary, read on.....
New Comment Written Sept 4th:
So, back from hols, and one thing is abundantly clear. Whilst the last 2yrs have not been much fun for anyone, it HAS been kinda 'cool' to have been seen not just as a Bear but also a Bear who was early and kinda right all the way thru this timeframe. But NOT anymore. It is clear to me now, based on feedback/comments/discussions/body language etc etc, that something has changed.
People now desperately want to see the back of the bad times (recession, bear markets) and now want to look forward with optimism. Even some folks who have been firmly in the Bob/Kevin camp thru 07, 08 AND 09 to date are getting nervous/shifting positions. You would all be AMAZED at the reactions I have seen from many market professionals to my piece (see below) written before I went away. Of course, some folks get their dose of Bob's World from unauthorised 'usage' by the mass media - for the record, I do NOT as a rule speak to the media, I'd rather focus on clients - and as such will never see everything I write, but even some of those who get my comments in full as clients of RBS have homed in very sharply on the Stop Loss trigger I put in place below - S&P above 1022 for 4 consecutive days. YES, S&P did hold above 1022 for 6 consecutive closes, but each of these closes was pretty marginal, low volume days, where the close was well off the intra-day highs, and of course this week we have so far seen 4 consecutive closes below 1022, by a decent margin too. And that was after a super bullish ISM - could it be that 'real' expectations were/are now getting much more bullish? Or could it be that folks saw the very high Prices Paid line and fear inflation? Or could it be that some folks saw the level of the New Orders line and fear - based on history - that this is the cyclical peak? Time will tell....
Anyway, let me say 1st up that even though its all been pretty marginal, the RISK here is that over the next month or so we see risk assets go even better. This is a TACTICAL call and is NOT a change in the 3/6mth secular call, which REMAINS BEARISH. Andy Chaytor set some levels last week which I am comfortable with - there is a 60/40 chance that S&P trades up to 1120ish by end Sept/early Oct. I think the next month will be volatile and NOT straight line, but on balance the risk is that by month end/early Oct, risk assets will be better. And YES, I know that Sept is seasonally one of the weakest months, that we are already 5% off the Aug highs, and that 'everyone' - even the bulls - think we need a period of pullback/consolidation, but for me the perfect head fake will be a strong (but volatile) Sept.
I do however think that we are VERY MUCH in the tail end of the correction of the Oct 07 to Mar 09 bear move, where S&P lost nearly 60% from peak to trough, and where the correction from the Mar low would, at 1120, represent the 50% retrace. Once what I assume is a bear mrkt correction finishes, over the next month or so, I expect the Bear to return with vengeance and I retain my call for NEW LOWS in equities. That's 550 S&P!!
Please do not forget that vicious 40%/50% retracements are NORMAL in the middle of secular multi-yr bear markets. Look at the charts. Very clearly it is extremely common for sentiment to swing between extreme fear and extreme greed, and it is very common to see secular bearish trends in data punctuated by cyclical - usually govt/central bank/policy inspired - spikes, which can last weeks to months to a qtr or 2. The critical question to answer is what is the secular trend and what is the cyclical trend, and when - assuming they are different - is one giving way to the other.
Why do I remain a secular Bear? Well, for me, I have yet to see ANY meaningful evidence of self-sustaining private sector demand, which I have said for many months is the key to a sustained/secular economic recovery and asset price recovery. All I see is growth and asset price gains driven by the willing and reckless estruction of government and central bank balance sheets. This is NOT sustainable IMHO. I continue to see a private sector that wants to pay down debt, increase savings, cut costs, take less risk. And I see the period of government and central bank driven boom times as rolling over very fast from here on in. Why? Because I think balance sheets and sustainability - govt, central bank AND private sector, MATTER. If they no longer matter, I will be WRONG, and I will have to accept that the policy of 'Print/Borrow/Spend on Rubbish we don't Need' is a limitless phenomena, without consequences, which means there should never be a bear market ever again....I hope this sounds as ridiculous to you reading as it did to me when writing.....
Of course if I am wrong then additional Stop Losses are critical. For me, the next stop loss is at 4 consecutive S&P closes above 1120. I recognise that the weight of opinion/mood is against me, and that it would be far EASIER for me to roll over, get with the herd, and move to the bull camp. But I have yet to see anything that convinces me otherwise - the ISM going back up to 50 was what Kevin told me in Jan/Feb we'd see, by around August time - and critical here is the call on whether balance sheet health & sustainability matters or not. Until I see hard evidence telling me otherwise, I will run the risk of being labelled unpopular/a perma-bear/blind/stupid - take your pick, I have been called much worse...by my wife!
Kevin and I, back in Jan/Feb, said that, at that time, we were in the most risky phase of the bear market and that a 2 qtr rally in risk assets and eco data was the KEY SURPRISE/RISK. We were right. Now, in Sept, I think we stand at the most risky phase of the 'bull' market (correction?), where a 2 qtr dive in risk assets and eco data will be the key surprise/risk. Let's see if we are right, but if not, then clearly something extra-ordinary is happening and I will have to hang my head in shame and go back to school to learn how to teach, cook or drive a taxi.
It is also of course important to highlight that if I am wrong and if what the equity market is telling us is right, than govvie bond yields are going to explode higher, esp. in the UK and US, but this is a discussion for another day....
Disaster delayed? Not for much longer me thinks...SURE, the US has the advantage of a bit more fiscal flexibility and reserve currency status (for now) over say the UK, so I am fully prepared for MORE fiscal and monetary debasement in the US over the next few yrs. But even the US has limits/credibility issues, and if its not already clear it will become clear that the marginal return from such debasement is getting and will continue to get weaker and weaker. Here, the lesson from Japan post the 80s boom are clear - look at the Nikkei charts, a secular multi-yr bear market, punctuated by several vicious 'govt-sponsored' bear market rallies, none of which had any long term success, as the response of the private sector was, each time, to hunker down/tighten up/repair balance sheets in direct response to govt debasement.
My final point: the crossroads is only weeks away, and visibility is poor, thus it is extremely difficult to make big calls at this time, esp. when the call is against the growing weight of opinion. Something extra-ordinary MAY be happening and, joking aside, even if its not, precise timing is always difficult. But based on everything I know and see I would be using any further risk asset rallies over the next month or so as an oppose to sell risk/raise cash/get short, and to flip out of high beta risk low quality risk, into low beta high quality risk.
As ever, all feedback welcome.