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Bob Is Back, And Asks "Has Anything Changed?"
Bob Janjuah, the only man who had anything remotely interesting to say at RBS, and luckily left, is now back at Nomura, and is a leaner, meaner, kool-aid debunking machine. His inaugural letter is attached below. One complaint: what happened to all the abrvtns? Bob, that was ur sgntre style. The English here is just 2... krct. The pipl dmnd abrvtns.
From Bob, now at Nomura
Has anything changed?
Hello all, it?s good to be back. Kevin and I landed here at Nomura two weeks ago and we will be writing for the first time this week, ahead of a period on the road, where we hope to catch up with at least some of you. As we have been out of the loop for a few months, we will focus here on identifying what we think will be the key drivers of returns in the global macro arena over the next six months or so. We will set out what we see as the key issues, where we stand on some of these issues, and then wrap it all up with some global macro asset allocation ideas and trading recommendations.
Right now the market seems to be grappling with five key issues.
Five key issues in the Macro space
1 – Policy: Fiscally, and with respect to the problem economies (the US, the UK and (part of) the eurozone), we think additional stimuli are unlikely, with fiscal tightening and sovereign credit constraints/limits instead being the most likely outcome. So, bearing in mind where rates are, the debate is centred on additional quantitative easing (QE). Are policymakers willing and/or able to do more, and would such policy be successful? QE2 by the Fed, barring the details on scale and scope, looks like a given but we believe that in the short term it is pretty fully priced in. What is not a given is whether QE2 will succeed, and it is far from certain that if QE2 „fails? we will automatically get QE3. We have no doubt that the Fed, through QE, is able to drive certain financial market assets to elevated valuation levels, which can result in asset bubbles and increasing levels of systemic risk. The Fed has, historically, proved itself rather good at this. What we think is the key instead is whether the Fed can, through QE2, drive sustainable growth rates and sustainable increases in the price of the asset that really matters in our view – residential (and commercial) real estate. Here, the Fed?s track record (and for that matter the Bank of England?s) and the track record of QE as a policy tool in general is far from comforting. Further, has the market considered the changing political risks and how this may hamper future policymaker responses? In the UK it is unclear how secure the coalition really is as fiscal pain becomes a reality, rather than a talking point. And in the US the mid-term elections look set to see a swing to the right in Congress, the result being a Congress that is likely to be even more „anti-Bernanke? than has been the case to date. Let?s not forget that just getting Bernanke a second term was far from straightforward. Based on what we see at the moment in terms of market expectations and the consensus opinion, the risk of major policy errors is already high, and rising every day.
2 – Decoupling: Economies around the world are decoupling, but they have not yet decoupled. Over time – the next few years and decades – economies should decouple further and one day, most likely after Kevin and I have retired, we will be able to use the word „decoupled?. But until then the future trajectory of growth in the problem economies should continue to have a major macro impact. And with respect to the non-problem economies (for want of a better term, the emerging economies), the West seems to be attempting a policy that forces such economies to tighten (through currency adjustments). In a world short of growth and inflation is this really such a smart move? We think it is premature to expect these economies to shift the drivers of their growth from exports towards domestic consumption. Trying to force a meaningful currency adjustment on these economies is fraught with risk from a global macro perspective. If they refuse to adjust would it lead to serious protectionism? What if they do adjust? Could that not just import more input price inflation into the West, without a corresponding boost to domestic consumption in the emerging economies, and without any meaningful benefit to exports from the West? A key concern here must be that, for example, US policymakers merely end up squeezing the profit margins of the corporate sector through higher input prices in a world where pricing power/demand on the end consumption side remains weak.
The other decoupling is in the movement of financial market asset prices – how correlated are markets? Again we feel the right term is „decoupling, but not yet decoupled?. As such, when it comes to the global macro situation we are still in the „risk on, risk off? camp, although we do see a situation where some (emerging economy) assets have differing betas and convexity profiles, and thus differing relative value profiles. But if for example the S&P 500 were to drop 25%, we are pretty sure the Hang Seng Index would also be substantially lower and European credit spreads would be a lot wider. The „risk on, risk off? phrase would likely again be consensus market thinking.
3 – Balance Sheet Recessions: The market and policymakers still seem to be debating whether the problem economies are experiencing a serious balance sheet recession/adjustment or merely a deep, but not abnormal, cyclical recession/adjustment. As readers of our previous work will know, Kevin and I are firmly in the „multi-year? balance sheet camp. Deciding which type of adjustment we are going through will likely be a major driver of policy, and doing so successfully will likely determine policy success, and thus investment strategies and returns/performance. Of course if one is in the balance sheet camp, then correctly identifying which country sits where is critical. As mentioned above, for us the obvious problem economies, the ones needing the biggest adjustment, are the US, the UK and parts of the eurozone. The eurozone is a peculiar beast because it includes both strong balance-sheet economies (notably Germany) and some extremely weak balance-sheet economies (I will not use the term peripheral European economies as Italy is not one of these problem balance sheets). Thus the additional complication when assessing the outlook for growth, policy, policy success and successful investment strategies in the region is to figure out if Germany and its stronger brothers in the eurozone are strong enough to offset the weak eurozone balance sheets, and to figure out if ECB policy is driven by what Germany wants and needs (a Bundesbank-style hard money approach), or by what the peripheral economies want and need. This alternative would result in a „soft money? and compromised ECB, in our view.
4 – Growth/Inflation: For each of these two broad camps of problem and non-problem economies, over the next few months and years we see four outcomes: growth, with or without inflation; and no growth, with or without inflation. Different economies will end up „sitting? in one of these eight outcomes, and this should drive the medium-term investor?s asset allocation decision. Generally, good growth outcomes tend to favour risk, and no-growth outcomes are not risk friendly, especially if one also considers that ongoing policy support is likely to get more muted, not more aggressive. The more inflationary the growth, the greater the investment decision should favour nominal assets over fixed rate debt. And the more inflationary the no-growth outcome, the worse it is for risk versus high quality fixed rate government debt.
It seems clear that market performance is again largely being driven by QE2/liquidity, which has led investors to chase yield (I am concerned that I am still hearing the phrase „search for yield? – have we learnt nothing?) and which has caused a decent run-up in nominal assets/risk. However, we must not confuse this liquidity-driven price action with what is going on with real economy growth and inflation, nor interpret said price action as a leading indicator of policy success. The market collectively has made this mistake too many times in the past 15 years. Surely it must be clear by now that if policy (especially very experimental and polarising policy such as QE) does not succeed in creating sustainable growth and sustainable real estate price appreciation, then all it is likely to do is result in financial market asset price distortions and valuations that are not sustainable. As a result we would again be faced with elevated levels of systemic risk. This would be a serious policy error as it would result in unsustainable financial market asset bubbles. Looking back at the preceding paragraph, it seems to me that the market is pricing in a growth-with-inflation outcome in the US. The risk here, and the cheap hedge (although it may get cheaper), is to consider the no growth with no inflation, or indeed the no growth with inflation outcomes. Deflation or stagflation – neither is a good outcome. As mentioned earlier, what is also key is whether – in either outcome – policymakers are willing or able to do more (QE3). As highlighted above, we have our concerns here.
5 – Pricing/Expectation: Nobody can know for sure whether the market has rational expectations as reflected in market prices, or indeed whether the market has irrational expectations as reflected in/by asset prices. One can have an informed opinion on risk, but not certainty. No amount of charting and analysis will give you the answer, and we are not convinced whether such work can even help better inform one on the debate between risk and uncertainty. At the micro level, and in „normal? times, such analysis is clearly critical, the deeper the better. But in what I and many others view as abnormal times, and in the cross-asset global macro space, we have our reservations. Further, if we are right that the world is in an abnormal state, and focusing at the global macro level, then attempts to understand the issues in a linear way, with linear analysis, could lead to a serious misunderstanding of the battle between risk and uncertainty.
With all that said, a major concern right now is that we, as a collective market, are again looking at the world in a linear way – a world where policymakers and policy are viewed as „ahead of the curve? and „doing what is needed?. One where we think we know the risks and have them priced correctly. And one where the uncertainty premium is priced at or close to zero (we are not at zero yet, but we seem to be trending that way). Think back to the dark days of 2007 and 2008. Whatever one?s individual views, collectively as a market we assumed a level of certainty with respect to real estate prices, with respect to the levels and cost of leverage and liquidity, and with respect to the certainty that no big financial institution would fail. We all know how that ended. Today, the equivalent „beliefs? are that policymakers are ahead of the curve, that there are no limits to what policymakers can do, and that there is a certainty that policymakers know what they are doing and that they will achieve their objectives without any risk or without any nasty unintended consequences. The seemingly complacent way the market and the global macro community are viewing the US foreclosure issue is a classic concern for us. This potentially critical issue is for now being washed over by the broader liquidity-driven fest. If the market trends of the past few weeks continue, the cost of hedging against these benign/bullish assumptions should get very cheap. Deciding when and at what levels such hedges are cheap enough should be driven primarily by the growth outcome in the real economy versus expectations, and the probability the market places – as expressed through market prices – on the growth versus no growth debate in the run-up to resolution.
Trading and positioning for the key issues
We have tried to describe briefly what we think are the issues that should be at the forefront of investor thinking, as well as setting out our concerns based on a global macro, cross-asset approach, where market pricing is the ultimate definition of consensus opinions right now. Now we move onto some conclusions and trading recommendations:
1 – Shorter term, position conservatively for QE2 disappointment (‘sell the fact’). This means tactically positioning against the trends of the past six weeks or so. We are not looking for a major reversal in the risk on trade, rather a 5%-style move lower/weaker in risk/nominal assets, a similar-sized but positive move in USD, and a reversal of some of the 10/30s curve steepening and move higher in breakevens. In this environment we think we could see the current iTraxx Crossover index in the 500/525 area.
2 – Beyond the shorter term, we think the market will want to see evidence of both the „failure? of current policy and of the limits to additional policy going forward before we get any significant correction in risk/nominal assets in particular. This is likely to be the business of H1 2011. Between then and now (and beyond the short term discussed directly above) it seems clear the market „wants to believe? and thus we think that the positive run-up in risk/nominal assets can continue. We would not be surprised to see US equities hitting the highs of 2010 in this next (three months or so) run-up. This would then be the environment where hedging against the (current) consensus, which is increasing risk bullish, increasingly „concerned? about inflation in the West, and which wants to „believe? in policy/policymaker success, should becomes extremely attractive/cheap.
3 – In terms of geography, in a positive risk asset world we expect the non-problem economies (the emerging economies, Germany) to outperform the problem economies (the UK, the US). The concern if/when we switch to a sustained (as opposed to short-term) negative risk asset world – which we think should come the latter half of H1 2011 – is that valuations in the emerging economies may be more stretched than in the problem areas, and thus the ensuing price adjustments could be more severe. In the eurozone, the key for us is, as mentioned earlier, whether the region is to be viewed as a big peripheral problem block to which is attached a strong core of Germany and its close neighbours, or whether the eurozone is to be viewed as a strong core around Germany with an attached peripheral problem. Earlier this year, when the Greece concerns were peaking, the market saw it as the former. Now we think the market views it as the latter (hence talk of ECB tightening). For us the jury is out, but if current price action trends continue then it will become very attractive and cheap to hedge against any shift back in market sentiment towards the former market perception, and we now clearly have a roadmap of how the market would react to such a perception shift.
4 – So if we put aside the very short-term trading call, we are broadly positive, on a three-month basis, that the market will continue to run with the trends since early September. Namely, pro-risk, pro-policy and pro-policymaker, with a firm belief that the Fed can and will create broad-based inflation and maybe also some growth. On a six-month basis our major concern is that market sentiment will abruptly and completely flip. Why? Because by then we think it should become clear that current policy settings are not working (in terms of driving sustainable real economy growth and sustained real estate appreciation), that „more of the same policy? will be seen as non-credible, and because we will likely be pretty much out of any other policy options. Over the next three months we think the risk reward will become increasingly supportive of an asset allocation and trading strategy that looks to pre-position for this turnaround in market sentiment.
Kevin and I will, as mentioned, be on the road a lot over the next few weeks, but we will endeavour to provide updates over the next few weeks and months, especially after we have done a tour of clients, policymakers and other sources, all of which historically have been invaluable in helping us form our opinions and recommendations.
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Yawn ..
sports guy chest bump.
Bob!!!
wlcm bk, we mssd yu.
(thanks for finding this Tyler)
Bob spelled backwards.
boB
My Man!
mby "his" got a scrtry
"whether the Fed can, through QE2, drive sustainable growth rates"
answer, no. this admins version of QE2 will do nothing productive for the mainstream economy.
I lv Bob.
BTW who's Bob? :>)
Bob is the guy with no arms or legs in the ocean. :)
His name was Robert Paulson...
What abt Bob? (Your junker is persistent!)
(Your junker is persistent!)
LOL
I'm actually considering going dark for a week and not posting anything at all. Can you imagine the poor junker checking ZH every hour looking for CD to junk and finally nothing? No (sexual) release for a week.
Talk about Blue Balls. :>)
Junks should be limited to 10 per account per month.They would then need to be used wisely...
All the junking you want WITH a comment accompanying.
Otherwise, as you say, limit on junks.
I've been so wrong in the past with these moral issues that I just don't know when Tyler is gonna jump my ass for some infraction. He (they) has (have) always been right, however.
Bob was a champion bodybuilder. You
know that chest expansion program you
see on TV? That was his idea.
BOB
" ...using steroids. I was a juicer.
Diabonol, then, Wisterol -- it's for
racehorses, for Christsake. Now I'm
bankrupt, divorced, my two grown kids
won't return my calls..."
Since ya asked . . .
"Shorter term, position conservatively for QE2 disappointment (‘sell the fact’). "
nov 2 is a long time away - from a trading perspective
Slightly off topic, but has anyone else noticed that there have been some MSM stories discussing the up coming Mid-Terms and several of the stories mentioned Nov 4th as election day.
I failed to keep the links because it just sort of slipped by without registering until your post mentioned Nov 2, which of course is the first Tuesday in November.
So is the Nov 4th "mistake" just that, bad data in the pipeline? Or is it an effort to keep people away from the polls? I've seen it on Yahoo news, MarketWatch and the NYT since Monday.
Anyone else see it?
havent seen that. unless I'm crazy its Tuesday Nov. 2
Yep, saw it on MW as "Wednesday".
I think they have it confused with Thanksgiving or to stay in theme,
I thk thy av it cnfsd wit t-day
Qui bono if "most" voters show up at the polls a day or two late?
good to have bob back!
as harwood and cnbc campaign for harry reid, unemployment passes 15%
http://www.lvrj.com/business/las-vegas-unemployment-reaches-record-15-percent-105517738.html
This morning, Harry Reid blamed his campaigning misfortune(s) on the notion that the people don't know/understand just how much He's done for the country -- au contraire Harry, the people KNOW only too well just what you've done TO the country, and that's WHY you're in such trouble!
I'm really doing my best to not be spammy, i'm only trying to keep up with Tyler's updates :)
how many of us have them? (a playlist): http://www.youtube.com/view_play_list?p=2D93C314EE324D8B
and also if you haven't yet, check out Conrad_Murray's playlist from earlier this week. its a real scorcher :D
Hump Day: http://www.youtube.com/view_play_list?p=D78860E6821CDD13&feature=bf
Chart: SPX
Dn!
http://99ercharts.blogspot.com/2010/10/spx_1499.html
http://www.zerohedge.com/forum/99er-charts
Have a great weekend!
Thx 4 shrng, 99r. BTW, hw did u cre8 yr chrt rchiv?
Surely the biggest decoupling that has to happen is northern Europe from the south. Some of us are looking forward to the next Reichsmark;)
I would just caution that he either got hired because he has a thought process that will make Nomura money, or he's being asked to sell a thought process that will make Nomura money. Just suggesting that you understand him through that lens, and that a fair amount of this writing may have to do with "I hope to influence these things to actually occur, so that Nomura makes money". Note that he's more or less in the Richard Koo camp while trying to mask that he is.
His very much signature style? :P (Love you both/all! *mwah*)
What is coming? What is the "BIG EVENT"? The market already knows about "Forecloser Fraud".
All bad news is priced in, what is coming?
Everyone keeps talking about impending doom, yet nothing is getting worse. Things just keep getting better.
I think the time to be bearish is in the past. We got through the worst. In the meantime borrowers and lenders continue to SCRUB AWAY at their respective balance sheets and free up extra money.
Growth will be slow until 2012. We should start seeing double-digit GDP by 2013 at the latest.
2011 is shaping up the be a GREAT YEAR for the Republic! America's best days are directly ahead! BE HAPPY FOLKS!
I'd like some of what you're having
what is it - acid?
NEED AN ANSWER! Not just more doom
nothing is getting worse
The debt is getting worse.
Ever see what happens to the first few Wildebeests trying to cross the Zambezi (which is full of waiting crocodiles, BTW)? We're just waiting for you to jump back in the Market(s) and show us the way across -- good luck wit dat!
Subprime problem was known about and apparently "discounted" in the markets 1H 2007.
Shall i continue?
The total fertility rate in the United States estimated for 2009 is 2.05 children per woman, which is slightly lower than the replacement level of 2.1.
No growth here.
Update: I did find some sort of growth in the news 3 more bank failures today for total of 134 this year.
Quote of the day-
"America's answer- Produce and reproduce"
Presenting the next "big event"
http://biggovernment.com/smotley/2010/10/12/november-30th-could-be-the-day-the-government-seizes-control-of-the-internet/#IDComment103986411bySetonMotley
I would bet money this guy works for the goobermint or is somehow related to the banksters. This is a troll for sure. Telling you, all is well, don't look at all that blood coming out the windows of that big slaughterhouse up ahead.
@GloomBoomDoom Trouble is, the good news is already priced in also. $5-7 Trillion in QE2 (or some other outrageous number)!!! If the Fed decides to hold off or even just go easy to start with, that priced in good news is going to get priced out rather quickly.
How is foreclosure fraud priced in? The plunge is just waiting in the shadows.
the markets are fucking farce.
beginning middle and end of story
I could care less anymore what anyone has to say, including bob
sorry bob
aah yes, indeed. I am in the acceptance stage of my grief cycle, now segueing into acting out stage.
"Kevin and I" are heading to South Beach to probe and analyze each others thesis.
--Not that there is anything wrong with that--
"Bob had bitch-tits."
Six or eight?
We have to ask ourselves would a major dollar move into Gold cause inflation in globally traded commodities.
Paradoxically I believe it would not as Gold is essentially inert - currently the FED is exporting a massively overvalued dollar to the mercantile states - this is unsustainable and what is unsustainable cannot be sustained.
As the majority of this paper capital export is being used to build infrastructure and consumption chiefly in the BRIC and oil exporting states - this drives the price of various commodities such as oil, base metals and agricultural commodities upwards.
Ben is struggling to inflate as there is a massive hole in the American balloon.
What does this tell us about the global economy - it is extremely unbalanced. Although this model worked in the past when you had excess oil (Note the price is secondary as it can be recycled) and cheap labour.
In a world of limited supplies shipping stuff across oceans as opposed to making nearly everything needed on one continent is not efficient.
Imagine if Ben decided to QE Gold as opposed to dollar debt - lets say he states that he will start the price at $4000 and will consider further action in the future.A fire would ignite under Gold sending it into the stratosphere precipitating a massive collapse in commodities as most of the inflation in this area comes from investment funds rather then the Labour price rises in the 70s.
The inter - continental wage arbitrage model is dead - there just ain't enough oil to drive growth using that mechanism.
You may say that my model is flawed as any reduction in the price of oil would help sustain the wage arbitrage model.
But capital movements would be cut dramatically and we would be back to a world of nation states and local trading blocs as the mercantile BRIC and oil states consumption would collapse.
Remember the wests oil consumption is static or falling - it is the resourse exporting countries where the demand for oil is rising.
Given that China , Japan and Brazil has little Gold they would loose a massive amount of wealth to the US Europe and India which is more friendly to western interests.
Also Globalisation as we know it would collapse under this scenario and western capital would be forced to rebuild America after 40 years of neglect in infrastructural development.
If there something of economic significance that I am missing from this hypothetical future besides the obvious economic turmoil in China and other mercantile states please elaborate
Wearing a lovely new skimpy black bra, stockings and garter belt ensemble...
I'm sure you look lovely.
This article doesn't really seem to be saying anything. Just talking about various outcomes, pretty common sense. Growth with inflation/without inflation, No Growth with inflation/without inflation. OK, thanks for spelling that out for us. They also discussed the movements but made no reference to the currency fluctuations, other than to state "nominal" returns.
Quit wasting my time.
"we see four outcomes: growth, with or without inflation; and no growth, with or without inflation."
Give me a break. My brothers dead dog could have told me that. This guy's just another clown with a job.
Try this:
Fair wages, reasonable prices, lower taxes, money that's at least partially pegged to some tangible asset or group: gold, silver, real estate, oil, rubies, or a basket of goods, with honest accounting, run by anybody who is not running things today.
The sooner we go French, the better. As bad as a corrupt system may be, the threat of coming tyranny is worse.
Thanks, Rick. I generally don't have good original ideas so it's nice to see those of others. My thinking is always too generalized to be of value. By "French" I assume you mean some mayhem in the streets. Ain't gonna happen here unless the gov't really makes a mistake that steps on more toes than the investor class. How 'bout the FCC making NASCAR rules. Now that would do it.
I like Bob better without the stupd abbrviatns. Yay! That stuff is OK for texting on your cellphone but when you're writing 3000 words can't you put the vowels in?
Doesn't everyones smartphone fill in after about two characters anyway?
This was such good news, I actually logging in to leave a message. Good to see Bob the cat landing on his feet. Thought maybe the PPT had you bound and gagged at an undisclosed location until after the QE2 fireworks. Bob had said 5 Trillion some time in first quarter of 2011 I believe. So Fed is a little early and has now really boxed itself in.
One terrible problem with the current US situation and US govt. stimulation through spending is that the only avenue for injecting the funds is through handouts for nothing. The various NIMBY factions make it impossible to actually get assets built. I can think of several long term worthwhile efforts that would be great contributors to the economy for years. How about actually building 10 nuclear plants? Never happen. Maybe running gas pipes to the 2,000 or so truck stops and getting that conversion done. Never happen. Send some money to states so that they can keep the drones employed and dues comming in for the unions and back to the party - sure thing.
Had Obama and company been serious about the New New Deal preening, they could have used his early popularity and Democratic majorities to ram through special legislation and executive orders fast-tracking some major infrastructure projects. It's what Roosevelt would have done, after all. I'm not saying it would necessarily have been the right thing to do, let alone that it would have fixed unemployment, ended the recession, brought world peace and so on. But unlike letting the hack-Democrats slap together another Congressional mudpie, it would at least have been worthy of the sort of ambition Obama was supposed to have.
Janjuah now writing about global macro ????? !!!!!! LOL LOL LOL LOL LOL LOL
That is like Paris Hilton writing about philosophy
This joker is only useful as a reverse indicator when it comes to markets.