Time For Another Truthfest From Bob Janjuah
After not having written at all since early Nov, I am now onto my 3rd note in less than a mth. Apologies for this. But no doubt you will all have figured out that I don't have much value to add whenever the whole world is busy gorging on yet another phase of policymaker sponsored & excess liquidity enabled 'buy fest', which is YET AGAIN designed to fool us into mistaking YET ANOTHER Ponzi Bubble for a real, genuine, sustainable and broad-based economic recovery.
During such phases, which have become all too common thxs to the failed policies of Greenspan, Bernanke and Washington which put lobbyists, pork-barrelling & Wall St ahead of Main St, and which confuse an S+P bubble for real wealth gains, I am not a guy many folks want to hear from. 'Lucky' for me it seems like the rally out of the March 09 lows is now over, with S&P topping at 1150. If this view is right it is gonna get far more difficult for the bulls from here and no doubt I will once again start receiving invites to parties/events etc, sometimes from people I have never heard of nor know, all because of my reputation as a bear.
Using the S&P as a global risk proxy, the great bear market (which began in 2007) saw the move from the all-time high of 1576 to the 09 low of 666 as the 1st of what I think will be 3 big legs. We then had the post-March 09 hope, deficit & liquidity fuelled rally which has seen us go from 666 to what I think is the top of this leg, 1150, mid/late last month. I now think we have begun the 3rd and final leg of the multi-yr bear mrkt which began in 2007 and which SHOULD, hopefully, finish late this yr, but which COULD (hopefully not) drag on deep into 2011. This new bear leg SHOULD see S&P trade sub-1000 this mth. After which we can bounce a little (back up to 1080/1100) over late Q1/early Q2. However, this I think will then be followed by a move down at least into the low 800s in Q2/H2 10, and depending on how policymakers behave, potentially down towards/to New Lows. Specifically, if policymakers choose to shun austerity and favour recklessness, then whilst it may provide very shrt term relief, the end game will be much much worst for risky assets. Credit will follow equities weaker, esp lower quality weak balance sheet credit, ditto EM. Old economy govvies are the asset class of choice. And I think the USD will do OK and Gold won't - assuming of course the US IS on an austerity path. Look for the iTraxx XO index to trade in the hi-500s in the next few weeks, and if the move to low-800s S&P is correct, XO will be north of 750. At the same time we'll see old economy 10-yr govvie yields well below 3% - 2.5%? And of course volatility, esp. in risky assets, will rise significantly, with market liquidity falling significantly. I will be forced to chge my mind if S&P reverses in the next few days/wk or so and manages to break out and close above 1120 for 3/4 consecutive days.
What is driving my thinking that the post-March 09 rally may well be over and that the next leg of the great bear mrkt may well have begun? Well, since mid-09 most clients I speak to regularly have gradually got more bullish, based largely on the view that Policy will remain effective AND will remain uber easy/get even easier if needed, and that there would be little/no consequence to easy policy. Well, guess what? I think that game is now over. Partly because the Market is doing/did its jobs (periph Europe). However, in the UK and US the Market seems again to have failed to do its job of seeing a delusional debt fuelled Ponzi Bubble for what it is. The real vigilante this time seems to be The People.
2 weeks ago my Monday note (http://strategy.rbsm.com/Tools/Content/ContentViewer.aspx?ContentID=136292&clid=3579&menuKey=317&source=ContentList) talked abt the need to give power to the Volckerites and to go for Voluntary Austerity (as opposed to Involuntary Austerity). My note released Thurs a.m. Ldn time that same week (http://strategy.rbsm.com/Tools/Content/ContentViewer.aspx?ContentID=136292&clid=3579&menuKey=317&source=ContentList), pre Obama's Big Speech, highlighted my read of the Mass. result (massive) and highlighted my view that Obama must now be seriously worried abt his reckless policy path (unsustainable debt/deficit levels, supporting Summers, Geithner & Bernanke).
Well, IMHO, the events of that Thurs (afternoon time in Ldn) and of the last few days in Europe signal in a massive shift 'my way'. The key takeaways:
1 - Forget Volckerites, Da Man himself is centre stage!!! Geithner and Bernanke are now exposed and vulnerable. Summers must be seriously upset. The Print/Borrow/Spend + Bail-Out policies of these guys is a disaster for the long term success and health of the US. And such policies may now be seen by Obama as his biggest political liability, which he can't continue with. I was most unsurprised when one of my sources indicated to me that Volcker himself was critical in getting Bernanke's affirmation by the Senate - he may have made some calls. The message seems to have been that NOT affirming Bernanke would have been a disaster (hmmm..happy to debate, but not now), but wavering Senators may have also been given assurances over how the Fed and the Fed Head will behave going fwd. Lets see.
2 - Hopefully the events of that Thursday are a sign that we are abandoning such disastrous policies and are moving towards Voluntary Austerity, a period of Austrian cleansing during which we will see eco/grwth pain, but which will allow major and much needed balance sheet repair, a massive economic restructuring, and which will create the platform for the next 15/20yr period of real economy and equity mrkt success (surely even the most ardent equity bulls will accept that equities have been a dud investment for the last 10yrs). The bad news is that the cleansing leg has 3/5yrs to go, the good news is that 2015 thru to 2030 could be phenomenal.
3 - In this context it is a waste of time getting too hung up over the 'detail' of Obama's budget proposal. Without being disrespectful to anyone, this proposal is not worth the paper its written on in a yr with such critical issues afoot AND when critically important mid-terms loom. What IS clear however is that TAXES are gonna go up, and that Obama will continue to try and put in place an 'as European as possible' welfare state/benefits/social security system, in order to appeal to the votes of the folks who got him into office but who are suffering disproportionately during his reign. The reality is however that so many accounting fudges are in use in terms of the Budget (No 1: Fannie and Freddie ARE US Sovereign debt/liabilities) that it is clear the US government is either at or close to the limit in terms of how much more reckless it can be. And if it can't be more reckless, it must therefore be becoming more austere (think abt how fiscal policy wrks..)
Dear Readers, it seems to me that the events of the last few wks now tend to imply that we ARE headed towards Austerity in the US, something which is already clearly the case in China and the Eurozone. The UK will hopefully make this leap over the next few weeks/mths, before its too late - hopefully. The QE announcement by the BoE last week was a decent step in the right direction. But we need fiscal solutions too - clear and credible ones. We in the UK shud not desire/be happy to be in a Gang of 2, with Japan. Surely policymakers in the UK know that this is NOT a club we want or shud be part of. After all it has 'failed' Japan for over 20yrs, and in any case, we do not have the domestic savings or current acct surpluses to afford such reckless luxuries (QE, excessive deficits/debt) for another qtr or 2, let alone another year or 10.
In Austerity the game is up for deficit primed grwth and for uber easy money. Grwth and bubble gains in risk assets are relegated to the backseat of the bus. Balance sheet repair and prudence are the new drivers of the bus, in turn driven by The People (the private sector). Policymakers will do what The People want, or risk losing THEIR jobs. In Austerity deflation rules, as do Govvies, very High Quality Credit and only the highest quality big cap global equities/best earnings streams. Currencies do OK. Commodities (gold, crude) don't.
Let's see what happens. But clearly the events of recent weeks SEEM like a game changer. Time will make it all clear but for me the odds have definitely shifted in favour of Austerity sooner rather than later and in favour of the view that we HAVE already seen the equity highs and spread tights for the post-March 09 risk asset rally.
On a few other topics:
1- China/US - 'Agreeing' to sell arms to Taiwan, talk about meeting the Dalai Lama....these are BAD developments and important ones....I fear the outcome for the West, esp the US, but also the UK, if the idea is to flex muscles in the direction of China. I am sure the US would not take too kindly to China agreeing to sell serious military hardware to Vene or Iran, nor would it take too kindly to the Beijing authorities hosting a global fundraising conference for global jihadists. NO, I am not saying Taiwan is the same as Iran/Vene, and of course I do not think the Dalai Lama is in any way comparable with al-Qaeda. But what I think is NOT the point. It is all about the Chinese leadership, and I reckon they must be seething. We in the old West need to be very very careful here. China funds the US to a meaningful degree. Imagine if China decided to stop buying US govt/agency debt. And then imagine if it decided to sell 300/400/500bn of such debt, say on the same day as the next big auction. The word UGLY comes to mind. My real fear is that PROTECTIONISM might become THE central issue later this yr as a result of all of this. Not good at all.
2 - Greece/Eurozone - something occupying many peoples minds. My views - not necessarily the House view (plse talk to Jacques Cailoux & Harvinder Sian) - are simple. The Core must not bailout the periph on any open-ended basis as then they themselves would be at serious risk. Surely there is no way that Germany is gonna give up its balance sheet for a 3rd party? East Germany was one thing, Greece is quite another. Any 'bailouts' HAVE to be based on very strict & transparent and credible conditions/deliverables where any failure to deliver/comply HAS to be followed by the withdrawal of any such 'bailout'. The way forward for the periph - as is BEGINNING to be demonstrated - is to show willingness and ability to repay, and this is all about putting in place and then successfully implementing AUSTERITY budgets. Nominal wage declines and deflation. BUY GOVVIES. I am a long term ACCUMULATE on Greece sovereign debt. Spreads CAN go much wider then even now as the implementation is challenged. But ultimately Greece and the Greek people will need to decide if it/they want to be in the Euro or not - this is in essence the issue of 'are the people of Greece and its Govt. willing to repay?'. I think the answer is a defo YES. So I think that in a years time, Greek govvie debt will be trading 200+bps tighter then now, although it COULD get to 500/500+ over Germany in the next few mths. The EUROZONE project is NOT going to fail because of Greece. In fact, a EUROZONE break-up is only really likely if Germany/the Core DO bailout the periph on a soft/open-ended basis, so that's why I don't think it happens. Spain and Portugal will have to undergo severe AUSTERITY too. More deflation. BUY GOVVIES. And of course, the UK and US are in many ways in at least the same or bigger mess. Yes, the UK and esp. the US have currencies that can share the hit. But the idea that we can devalue our way to real wealth is laughable. Our own AUSTERITY is here/is coming. BUY GOVVIES.......NOTE: If Greece is either unwilling and/or unable to repay, then IMHO Greece must be allowed to default/restructure within the Eurozone, much like when US states go bust. I am confident however that if this very low probability event happens, the EURO and the EUROZONE would see significant credibility GAINS - the project is far far stronger than its weakest link. The way to utterly destroy the project is to allow the weakest link to dictate policy - this is why I can't see any soft bailouts nor any softening of the austerity that much of periph Eurozone is going to have to go thru if it wants to remain in the club. The credibility of the whole EUROZONE project is ANCHORED by German/Core HARD MONEY - if this is allowed to be watered down, then I would see this as the death knell for the EURO and EUROZONE.
3 - DATA - US data improvements PEAKED in late Q2/Q3 last yr. The rate of improvement has declined ever since and is trending weaker now. The Q4 GDP number was totally in line and full of largely non-repeatable items (as austerity kicks in). The ISM last week was a mild surprise, but folks need to remember the US (and UK) are service/shopping/consumption based economies with manufacturing very much a very junior part of our economies - and non-Manu ISM was poor again. Unless you believe that something extraordinary is happening in the US/UK around sustainable (non-govt funded) prvte sector final demand (and I see no evidence for this) then the only reason to be bullish 'grwth' and risky assets is if you think that (the US and UK) governments can become even more reckless with policy at no cost whatsoever. IMHO the clearly is NOT the case.
4 - Closely connected to the above is a point on data, mrkts and timing. Unlike most supposed uber-bears Kevin and I both expected and warned hard in early 09 that we were due a multi-mth eco and mrkt bounce. We were abt 4/6wks too early on this call, but the call proved bang on over Q2 and much of Q3. HOWEVER, we both expected the eco and mrkt bounce to peak in Q3, to be then followed by the next swoon weaker. It wasn't much fun taking flak from more than a handful of folks over late Q3 and Q4 - 'perma bear' was abt the nicest cmmt I got from many at the time. Well we can now see that Kevin was right on grwth - except for the part where governments increased/extended their bailouts, in the auto and housing mrkts in particular, beyond Q3 and into Q4, and apart for the call that the big inventory rebuild qtr would be Q3 when it turned out to be in Q4. All of this is now basically over. And as for mrkts, on the basis that global stk mrkts have now, over the last few days/weeks, given back ALL their gains from the last 6/7mths, then maybe we more right then we all thgt. I make these points for 1 reason in particular: All our client feedback/polls points overwhelmingly to the view that very very few people participated in the March to Jun/July rally leg - this was all abt shrt covering. The consensus only turned bullish post-July. Well, in global equities, we are now back to/close to those levels.It is also of course 'pleasing' to note that the 'reasons' for the sell-off are the 2 reasons we have been speaking abt for many many mths - A) where is the sustainable prvte sector final demand? and B) 2010 was always going to be the year of SOVEREIGN RISK. And clearly our big call that credit would outperform equity seems pretty validated too.