Deep, Grammatically-Incorrect Follow Up From Bob (Janjuah)
Bob's World: Equity Highs/Credit Tights For 2010 Already Seen?
After putting my 1st piece out since Nov just this week, I have been sitting here and thinking...Forgive me for indulging myself in a stream of my own consciousness, but here goes:
The NAHB Index was ugly, as was the UK Inflation data, the ZEW survey, AND the ABC Consumer Confidence release....we also saw CITI BoA as well as MS all 'miss'....
And yet stocks were at/close to post March 09 highs and up over 1% on Tues in the US ....Very strange!! Whilst I have only a very small degree of doubt that the Fed/US Treasury PPT is and has been actively goosing the US equity mrkt since Obama said Stocks Were Cheap in March 09 (funny that!!), I was beginning to think that we were/are close to peak levels because at peak bubble levels the price action is most 'irrational'.
AND THEN 3 things hit me - Bang, Bang and Bang.....3 VERY SIGNIFICANT things:
1 - The Chinese are tightening policy more aggressively then even I thgt they would, and the core of the EUROZONE are playing uber Hard Money with Greece
2 - The Obama defeat in Mass is HUGE.......even a freshman can figure out that 'Obama's' defeat in Mass is a move towards a lame duck president AND, most seriously, is a move that will directly and indirectly cause de facto FISCAL TIGHTENING - the Republicans have seen some serious and seriously UNEXPECTED gains in Washington since Obama's inauguration and are now at the point where they COULD block Obama's fiscal recklessness....most seriously, the message out of Virginia, New Jersey and now Mass is that the Republicans will do really well in the mid-terms...they will do 'really well' because they are going on the tkt of anti-big govt, anti-bailouts to all, & anti-big deficits, all of which is clearly hitting the sweet spot with the US electorate....furthermore, Obama has become a guy who folks either perceive or believe (I'm in this latter camp) has merely bailed out Big Wall St & Big Corporate America, all at the expense of the lower strata of the US economy (the youth, Black and Hispanic people, the SME sector, regional banks) - Yes, that's right, the very folks who voted Obama in......all he has offered these folks is healthcare, which is now in serious risk, and benefits, where his temptation will be to DO MORE HANDOUTS (including making up more airy-fairy 'fake job creation schemes' just to keep folks, technically, off of the unemployment data) but which the Republicans can now much more effectively challenge/block, and which they certainly WILL (IMHO) block post mid-term victories. Key however is that the Mass defeat means Obama and Summers MUST now have serious doubts abt their reckless policies.
3 - The FHA is TIGHTENING policy too (!!!) re its lending in response to its SHOCKING delinquency data and its now invisible capital base - by law FHA will require a BAILOUT!!!!!! This is DIRECT MONETISATION and mrkts won't like it
SO, back to what I wrote earlier this week. It COULD be that the Austerity is coming ANYWAY & EVEN SOONER than I had originally thght thru a combo:
- of Euro uber-discipline (VA),
- pro-active China (tightening) policy shifts (VA),
- the commercial realisation that the US/UK consumer and housing mrkts are still in a deep deep hole where the fundamentals are getting worse and where lenders (are forced to) pull back even more/tighten money a LOT in order to stop the rot on THEIR OWN balance sheets (part VA, part IA), and, lastly & most importantly,
- maybe, JUST MAYBE, the People have spoken and the message is clear (clearly IA as far as policymakers are concerned). They DON'T want BIG GOVERNMENT. They DON'T want our currencies debased anymore. They DON'T want to bail-out everyone. They don't want to pay even more taxes to fund bloated government and to fund entitlement pay-outs ad infinitum. Maybe the People GET IT. They may get the fact that the West, esp. the US/UK, CANNOT PRINT/BORROW/SPEND its way out of our hole. Indeed, they may get the fact that we in the West need a deep-rooted and painful restructuring of our economies away from consumption and dissaving, towards savings and investment. If you think abt it for just one minute, it ain't that complicated. Yes it means less holidays and less consumption of rubbish we dont need. It means a painful period of higher unemployment whilst the Austrian cleansing is allowed to play out. But all of which will then create the platform for the next 20yr period of REAL growth, REAL wealth gains, REAL productivity gains & REAL innovation.
The US electorate, so far, is clearly shouting this message and Obama must be nervous. Clearly in the UK all will be clear in a few mths time. But the sense I have right now is that the political classes may be forced into austerity because its is what voters want. Wow! Lets See.
In terms of mrkts vs what I wrote on Monday, it may mean that the Q1 peak in risky assets that I was looking for MAY have already been seen this week. It is too soon to be too sure - I need to see 3/4 consec closes below 1120 S&P before I have a very high degree on confidence on this - but the distinct possibility IS there.
IF this does indeed prove to be the case, then I would expect to see a move in S&P thru 1080, 1030 and into the 950/1000 range over the rest of Q1. In this move credit does badly, esp. weaker rated credit, and govvies do well, as does the GBP and the UST. Why? Because the market will be pricing for lower grwth, and tighter money + smaller deficits esp in the UK and US).
Again, IF this is the path we are going to follow, I would be extremely surprised if we did not see at least 1 decent multi-mth counter trend rally, but I also think we see lower highs. So think S&P going form 950/1000 back up to 1080/1120 in Q2. The driver for this counter trend rally will be the mrkt belief that the grwth story can survive even with tighter policy. Lagging grwth indicators and overly optimistic fwd looking 'subjective' indicators will support this, + also lower bond yields will provide 'some' support.
HOWEVER, as Kevin and I remain convinced that the underlying grwth story for the US & UK - in fact, for the whole world - will be one of multi-yr grwth disappointment (esp. in the UK US) due to weak final demand/prvte sector balance sheet repair and due to the fact that the supposed driver for grwth for EVERY economy seems to be EXPORTS, yet NOBODY can tell who the end buyer is ( it AIN'T China!!), then the call remains that in H2 10, we will see the resumption of serious risk asset weakness, higher volatility, and strength in govvie mrkt - esp BUNDS.
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