Deep Thoughts From Bob Janjuah - January 2010
First, a 'quote' - see a copy of a tremendous quote from history sent to me by a client + my reply.....
"The budget should be balanced, the Treasury should be filled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome be bankrupt. People must again learn to work, instead of living on public assistance."
Cicero - 55 BC......Happy New Year!
Brilliant....and u know how Rome got away with it for so long - they secretly reduced the silver content in the coins (aka DEBASED) more and more - until they were worthless....and then the Empire imploded, ushering in the Dark ages...
And now, the news...
The travel schedule in the last 2 mths of 2009 was even more brutal than I had thgt it would be, so apologies for not writing sooner. Kevin put a note out at the end of Dec, which you should all read. I want to now present my thgts for the year ahead. In essence, its a flip of last yr when we felt that the FEAR in early 2009 would give way to GREED over most of the rest of 2009. Clearly the GREED leg has been stronger and longer than I thgt it would be. Why? Well I clearly underestimated the ability & willingness of the Public Sector, notably in the UK, US, parts of periph Europe and Japan, to take huge risks with their sovereign balance sheets, AND IMPORTANTLY, I over-estimated the ability & willingness of the Financial Sector/Market to see things for what they are (Another Debt Fuelled Bubble/Ponzi). With that said I think 2010 will see MORE GREED & JOY in the early part of the yr (Q1), which will give way to FEAR over most of 2010 as the chickens come home to roost for the Debt Binge currently being undertaken by some critically important sovereigns.
Of course, not all sovereigns have bad and/or fast deteriorating balance sheets (as a result of highly risky fiscal and monetary paths). Core Europe, much of NJA, Oz, Norway, Brazil all spring to mind. I think that bonds, currencies, credit and equities in such parts of the world will (a) outperform their peer grp equivalent asset classes in the bad and/or fast deteriorating sovereign balance sheet zones, but (B) will do merely OK on an absolute basis. Elsewhere I think hard assets, most obviously to me GOLD and even CRUDE, will do EXTREMELY well. Over the belly of 2010 I expect to CRUDE up at $100 and Gold up at $1500. I like commodities, anything which Bernanke and King can't print at the press of a button.
By end 2010 we may finally see huge buying oppos in things like USTs and GILTs, as well as - eventually - Risky Assets. OVERALL, it all comes down to the debate between VOLUNTARY AUSTERITY (the core Eurozone route, which means deflation and wage declines, but which means bond yields and the currency do not meltdown/debase) vs INVOLUNTARY AUSTERITY (which is the route currently being followed by the fiscal and monetary authorities in the US, UK, parts of periph Europe and Japan - unsustainable debt paths, no (as yet) credible exit policy, monetisation and debasement). In the IA world, our policymakers will keep taking risks until they break the back of the camel (the market), at which point bond yields and currencies go into a tailspin, causing massive pain in these domestic economies and which ultimately will then mean a much longer period of forced austerity (higher taxes, higher savings, etc etc). A redux of the 70s and early 80s - the only problems being that the debt burdens and deficits are far far higher now, AND of course there seem to be no equivalents of Volcker, Reagan or Thatcher in sight (Andy Chaytor has happily volunteered himself, and I am happy to throw my name into the hat too, in case anyone is listening).
FINALLY, to all you perma bulls out there, and I am sure you know this, but its worth repeating - in Real AND Nominal terms CASH outperformed equities to a very significant degree over the last decade. I rkn I'll be saying something very similar in 5 yrs time (the next mega equity bull mrkt, where the Dow will go from 10k to 100k, is scheduled to start in the second half of this new decade and will last 15/20yrs....look at the historic chrts wrapped around 100 Dow, 1000 Dow and now 10,000 Dow - (:-o)
Tactical - into end Q1
The 1120 resistance in S&P is now properly broken so the next leg shud be higher. Broadly +ve risk, looking for 1225 S&P, tighter credit, flat-weakish bonds (4% 10yr USTs), USD better (sub-1.40 vs EURO), Gold in the 1k/1.1k zone......I think this is the tail end of the bear mrkt rally AND when will see the tail end of the improving data & earnings releases/improving yoy data & earnings comps. In this 'bull' phase 1120 is support on S&P, so any break below this for 3/4 consec days signals the bearish turn (see below).
However, as late Q1 unfolds and into Q2, the reality of the dire economic situation will become clear (no sustained private sector demand) and at that point all the noises from policymakers re Exit Policies and Fiscal Rectitude will be seen by the market as - well - just noise. Policymaker credibility will crater as they are then forced to reverse their Exit/Rectitude talk and (I fear) instead end up taking EVEN MORE monetary and (in particular) fiscal policy risks. I am focused here on the UK, US and Japan.
(Tell Me Why I Don't Like Mondays >>> One of my sources sent me this: As part of the Tactical view, did you know that since the March 09 lows, we have had 44 Mondays (or Tuesdays in the case of a US holiday on the Monday), of which 31 (over 70%!) have been UP days....This contrasts with all up days since the March 09 low of 58%.....Further, of all the 'USD' gains in the Dow since the March 09 low, over 80% have been seen on just Mondays!!! I find this staggering (and suspicious) - 80% of all the money gains in the Dow since the March lows have been seen in JUST 31 trading days......make of this what you will, but now that its so obvious I doubt this 'correlation' will persist.)
Strategic - 12mths/12mths+
The belly of 2010 (Q2, Q3) is when I expect to see the play out of the next phase of FEAR, driven by the issues discussed above. The key drivers will be fear and panic around unsustainable debt paths vs ongoing Private Sector deleveraging & a lack of sustainable final demand ex-Govt largesse, the collapse in policymaker credibility, ratings events, and OVERALL a significant spike HIGHER in bond yields in the UK, US and Japan - think 6%/6%+ 10yr yields in the UK and maybe even US. This will likely be accompanied by severe weakness in the currencies of these nations (USD 1.80 vs EURO, GBP sub-parity vs EURO) as well as global FEAR and a major sell-off in the credit and equity mrkts. Q2/Q3 2010 is when we will see the S&P down in the low 800s or lower, Gold at $1500, Crude at $100, the EURO XO Index up at 700/700+. We will see BUNDS massively outperform Gilts and USTs. In the 10yr, I expect the Bund/UST spread to be at least 100bps - ie, 10yr USTs to yield 100bps+ more than 10yr Bunds. (REMEMBER: None of this has anything to do with actual near term CPI-style inflation - assuming of course YOU still believe the data or believe that the official data tells even a half of the whole story - but rather everything to do with rapidly deteriorating sovereign credit risk/debasement/monetisation/shattered & zero policymaker credibility all being priced into bond yields).
In Q2/Q3 2010 the globe will recognise that the VOLUNTARY AUSTERITY and HARD MONEY/Tight Fiscal policies of the core EUROZONE are the WINNER. The icing on the cake will be SPAIN winning the World Cup with the boy Fernando scoring the winning goal in the final. I am NOT saying that the EUROZONE, esp. the periph, is going to have a party whilst we in the UK US and Japan go thru our collective nervous breakdowns. Times will be tuff for many yrs, ESP. in the periph of Europe. BUT the bond and currency mrkts of this zone, as well as places like Brazil, NJA, Oz and Norway will all (ultimately) massively outperform and allow these nations and the peoples of these nations to get thru their coming (chosen) AUSTERITY in a far better way then in the UK US and JAPAN, where AUSTERITY will be forced, and where its impact will be more painful and last longer.
There IS a way of avoiding PERDITION in the UK US and JAPAN. Go forth and CHOOSE to undertake VOLUNTARY AUSTERITY (rather then being forced into it) before its too late - this means NOW/in the next few months!!! Do Away with the shocking debasement being undertaken by our central bankers, give the power to the Volcker-ites, and put in place CREDIBLE, DETAILED and SUSTAINABLE fiscal policies. This mean risking resentment from huge swathes of the populous who have in the UK and US gotten used to public sector largesse. This means doing what's right for the long term health of our countries as opposed to doing what's popular. This means taking risks with unemployment and growth in the short term in order to create the conditions for a long term boom. We have all seen this before. As mentioned earlier, think late 70/early 80s, think Volcker, Thatcher and Reagan. The Great Times we all enjoyed over the 80s and 90s were because the RIGHT but VERY TUFF decisions were taken by these folks in the late 70s/early 80s. NOT because of anything Greenspan or Bernanke have done (in fact, these guys have done far far more harm than any good).
Those who believe we can avoid having to make such tuff decisions are likely the same people who have been long and/or cheerleading equities for 10yrs, and who believe that booms/busts are a thing of the past because we think we can print/borrow our way out of REALITY. These are likely the same folks who said that there was no US housing bubble and that US house prices would never fall nationwide on average, and who were likely still saying this deep into 2007 even though the game was already up. These are also likely the same folks who insisted that Sub-Prime was a small $20bn-odd problem which would not impact either the US or Global economy. These are also likely the same people who wish to revise history and blame it all on Lehman, when in truth the rot had set in well before Lehman. And these are likely the same people who have the hopeless view that the housing/credit bubble had nothing to do with the FED keeping rates way way too low for way way too long post the bursting bubble of 01/02. And YES, that includes Bernanke, who is of course taking the lead in setting up the current Bubble/Ponzi. It is he who most worries me, as his talk of EXIT really, IMHO, reminds me of the emperor without any clothes, and it is he who seems to have learnt the least lessons from the events of the last few years. The INEVITABLE reality however is that AUSTERITY is coming, whether we like it or not - so why not make the choice to be IN CONTROL rather be dragged kicking, screaming and with our economies in pieces??
There is a CRITICAL point here that needs clarity and stressing. IF you believe that we have only gone thru a normal little cyclical blip, which will have little/no lasting impacting, then in such cases normal conventional policy - cheap money, fiscal pump-priming - WILL work. HOWEVER, if you agree with Kevin and I, that we (the UK, US, Japan, parts of Europe) are going thru a much more secular hit to our way of living, that this is a balance sheet recession, and that there will be long lasting impacts/influences/policy changes etc, then such conventional policy will FAIL. In such 'permanent' hits, conventional policy initially helps a little, merely in smoothing off the absolute collapse, but the REAL SOLUTION is a deep rooted restructuring of our economies (UK, US etc) whereby real estate, finance and consumption STOP being the drivers of grwth, and where new industries/businesses/ideas become the next drivers of grwth. THIS PROCESS TAKES YEARS, and the more that governments interfere with policy over-reach, the LONGER this process takes. This is the lesson of history. In this context, the 'debate' about when to exit from recklessly easy monetary and fiscal policy is UTTERLY BOGUS. Why? Because there is NO WAY that the governments of the US, UK, Japan or periph Europe can keep running such non credible and unsustainable policies for anywhere near long enuff (3/5yrs) to 'succeed' and, even if they could, they will likely fail anyway as the private sectors in such economies will likely act to offset policymaker recklessness by saving more, in anticipation of higher tax burdens etc (Japan already there). As such, when policymakers claim the debate is between killing grwth now thru immediate and credible exit/fiscal tightening, vs. delayed exit/fiscal tightening to keep (fake) 'grwth' going, they are barking up the wrong tree completely by assuming that this is a cyclical blip as opposed to a much more secular shift. The REAL debate, as far as I am concerned, is between exit/fiscal tightening on a pre-emptive VOLUNTARY basis, vs. the decision to destroy any semblance of policymaker credibility and to keep running reckless policy until this bubble blows-up, thereby doing far more and far more permanent damage to our economies, and which ultimately will result in a far worse 2nd balance sheet recession/depression. This is the real choice. The grwth hit is coming ANYWAY.
The only decision is 'do we take a painful hit to grwth now but preserve the credibility of our policymakers and our sovereign balance sheet, and thereby allow our private sector to complete its period of balance sheet repair before it sparks off the next leg of multiyr (REAL) grwth, or do we take a far bigger hit to grwth in the next 6-ish mths AND blow up policymaker credibility and our sovereign balance sheets, which will likely take YEARS to recover from, if ever? (Again, think abt Japan post-89 - the UK and US are repeating these mistakes!)' At some point we will collectively realise, like we did in the late 70s/early 80s, that the US and UK cannot operate successfully as command economies where the allocation of capital is done by politicians and where the public sector - a hugely inefficient and unproductive universe - grows at the expense of the private sector. The longer we wait for this reality to be accepted, the deeper the hole and the worse it will get before we flip the other way. HOPEFULLY, the misery that was the 1970s is ingrained enuff in peoples minds that we do not have to wait yrs (as opposed to mths) before we 'get this'. Lets see. In this context, the election cycles in the UK and US are a big issue/potential trigger. Sadly I have little faith in the policymakers of the UK and US, hence why I see INVOLUNTARY AUSTERITY as the most likely path for the UK and US.
Asset Allocation - 12mths/12mths+
(My assumption is that our policymakers will fail us and we will end up with FORCED AUSTERITY - this drives my thinking below. If I am proven wrong and we see VOLUNTARY AUSTERITY adopted in time in the UK US and JAPAN, then all bets are off and I'd be a big UK/US/JAPAN long term bond bull, later followed by being a credit bull and then, eventually, even an equity bull. I'd also, in the case of VA, be a huge seller of Gold/Crude...)
Intra Asset Class (Govvies, Credit, Equities, Fx)...Generally, whatever the asset class, OW Strong and Improving B/Sheets, UW Weak and Weakening B/Sheets, and OW High-Quality ALPHA over Over-Hyped BETA...in Govvies OW Bunds over Gilts and/or USTs....in Credit OW high quality global big caps over HY....in Equities OW 'Strong Balance Sheet & Sound Policy' EM, core EUROZONE and high quality global big caps, over cyclicals, small caps, levered balance sheets and over domestic demand driven UK, US and Japanese companies.....in FX OW NJA, NOK & OZ over both GBP & USD, and OW EURO over USD/GBP. And I would be Very OW Commodities (Gold and Crude).
Inter Asset Class...OW Commodities (Gold, Crude) & High Quality Credit over Equities & Bonds. OW strong balance sheet/sound policy EM over the 'developed' world's debasers.
A Word on China
At the risk of oversimplifying: 1) Chinese domestic demand as the driver of global grwth is pie-in-the-sky thinking - just ask any Chinese policy official! Thus the bullish global grwth story HAS to, for the next few yrs, rely on the return of the US/UK consumer and US/UK final demand - which to me is an equally hopeless expectation; 2) China has a strong balance sheet at the sovereign and private sector level - the banks may be an issue but the govt has huge ability to recapitalise the Chinese banking system if/when needed for at least the 3/5yrs ahead; 3) The real debate in China is simple - creating 20m+ jobs a yr (in manufacturing primarily) Vs domestic asset bubbles. I expect tighter policy in China this yr to cool asset speculation, esp. stks and property, but I also expect target help for increases in the manufacturing base/MORE global capacity, irrespective of the global demand picture. This to me smells of huge inventory build-up in China. Thus the hopes for inventory rebuild as a driver of US UK Japan grwth are I think seriously mistaken. And further, we will see powerful Goods & Services DEFLATION this yr as a result of China's actions playing in tandem with our own problem, that of huge DEBT DEFLATIONARY forces in the so-called developed world. China really cant help us much this yr (why should they?), but can seriously hurt us if protectionism rears its ugly head.
Overall the critical driver of 'everything' will be bond yields which in turn will be driven by the outlook for/choices made re the inevitable AUSTERITY. As mentioned, my thinking is all based on the assumption that the 'wrong' choices will be made in the UK US and Japan. If this proves to be an incorrect assumption, all bets are off - this will be a NICE problem to have, notwithstanding the shrt-term pain that comes with the making of such choices.
I want to finish off with some probabilities/risky asset return guides, using the S&P as my benchmark - you all will/can of course do this for yourselves with your own inputs/assumptions.For me, the probability of IA is 60%, and in this scenario A I expect the S&P to drop 30% from the Jan 1 open. So this means an expected weighted 'return' of -18%. Scenario B is the VA path in the UK US and Japan, where I place a 10% probability and where I think the S&P will close the yr +/-2% or so (long term/multi-yr this is the most bullish scenario for me btw). So this means an expected YoY 'return' pretty much at 0% - flat. The other Scenario, C, is that I am talking utter rubbish, and that instead we get Nominal grwth in the UK US at 5%/5%+, and 2%/3% Nominal grwth in Japan. If we get strong nominal grwth in these bad balance sheet/bad policy sovereigns, the S&P (as a guide) can I think rally at best 10% this yr. I assign a 30% probability to Scenario C. Thus the expected weighted 'return' of C is only +3%. Why only +3% you may ask? Well simply because Scenario C is already largely priced in in terms of expected profit grwth, AND because under this scenario rates and bond yields will all go higher, curbing valuations too.
Of course the outcomes, the probabilities, the assumptions etc are all courtesy of that strange place known as Bob's World. And I know that as far as the market is concerned Bob's World has over the last few mths gone from being the hottest thing since the iPhone to something akin to a piece of old toast. But if I am right this yr and we get something like Scenario A rather than B or C, then EXTREME CAUTION around Gilts, USTs, JGBs, & global risky assets beyond Q1, will be warranted. And even if Scenario B or C play out, the weighted expected returns don't look that compelling at all.
OR, in other words, enjoy the next qtr, but thereafter be very very careful, and be very very selective abt where you place your bets. 2010 is about NOT losing money and will see the triumph of ALPHA over BETA. The key drivers will be the failure of grwth hopes, NOT regular CPI inflation.The grwth failure will I fear lead to MORE debasement policies, which will drive bond yields in the UK US and Japan far higher as policymakers lose credibility. Together, bond yields spiking higher for 'bad' (credit risk) reasons (as opposed to 'good' reasons such as grwth closing output gaps) + the grwth failure will mean equities are exposed as significantly overvalued and ripe for a material selloff.
My FINAL cmmt (honestly!) - the issue of timing. Many folks will disagree with me totally abt my outlook. But many more will I think agree in principal BUT disagree abt timing. I have heard that old line (of versions of it), that the mrkt can stay irrational longer then I can stay solvent, many times already this yr. I was clearly wrong on timing towards the last few mths of last yr, and it would be foolish of me to pretend I KNOW something you don't. To be honest if I had the crystal ball on timing, and this says nothing abt my desire to help RBS and all of you succeed, but I doubt if I'd be doing what I do now - I suspect I might be on an enormous yacht somewhere off the coast of Barbados. As such, I would be extremely happy to get feedback on what YOU think, both in terms of the overall view, but esp. in terms of timing/triggers. YOU can help me do my job better, which hopefully in turn means I can serve you all better.
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