And now for some good old fashioned Bob Janjuah, albeit with proper grammar (damn you Nomura proper English sylesheet... damn you to hell): "No change. Deeply bearish with respect to global growth, and on a secular basis I am very strongly risk-off – my 2012 target for the low in the S&P500 remains 800/900, with the risk of an "undershoot? to the 700s. See my last note for details/targets. I would highlight only my view that the global policy making community, based their "actions? over the last month, are doing a wonderful job in meeting my 2012 "target?. Namely that, in 2012, the current set of developed markets (DM) policymakers will be exposed as "emperors with no clothes on?, and their policy choices over the last few years will be seen as the central problem, rather than as some mystical bazooka solution which can somehow reconcile the chasm between a lack of growth and productivity on the one hand, and the enormous debt and debt servicing costs and unsustainable entitlement culture costs that we face in the DM world on the other." And for the shorter-term: "The implication therefore is that in 2011, the October equity lows MAY NOT be the lows for the year. So based on what I can see now, and with a S&P500 1310 “stop loss” as mentioned above, I am now looking for another major risk-off phase between now and year end, with a December target for the S&P500 back down in the 1100s for sure, and possibly even the low 1000s." In other words, Bob as we love him best: nearing his all time bearish zenith... Or nadir, depends on one's perspective.
Fudge, Fantasy and Fiction
I always ask readers to refer back to previous notes – regular readers will know that I write on an “on-going narrative” basis. The same applies here, with a link to my last note Bob's World: Still Overreacting? Below I want to update some of the key messages from this previous piece:
No change. Deeply bearish with respect to global growth, and on a secular basis I am very strongly risk-off – my 2012 target for the low in the S&P500 remains 800/900, with the risk of an “undershoot” to the 700s. See my last note for details/targets. I would highlight only my view that the global policy making community, based their “actions” over the last month, are doing a wonderful job in meeting my 2012 “target”. Namely that, in 2012, the current set of developed markets (DM) policymakers will be exposed as “emperors with no clothes on”, and their policy choices over the last few years will be seen as the central problem, rather than as some mystical bazooka solution which can somehow reconcile the chasm between a lack of growth and productivity on the one hand, and the enormous debt and debt servicing costs and unsustainable entitlement culture costs that we face in the DM world on the other.
We all have reams of commentary on the latest eurozone “deal” to digest. I want to keep my contribution to a minimum. In summary, this latest round of eurozone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set-up an even worse final outcome. With respect to the Greek debt “write off”, the bank “recap”, and the structured credit technology being applied to ESFS, my takeaway is fudge, fiction and fantasy. The eurozone leadership know they can’t really put in any meaningful amount of new money to fix things, yet are lacking in courage when it comes to forcing proper debt write offs and debt relief, ditto forcing genuine bank recapitalisation and financial sector restructuring, and we have a humiliation and tragedy of epic proportions when we consider that the ESFS leverage “plan” seems to rely on convincing a largely poor country where GDP per head is close to USD5k to bailout out a bloc where GDP per head is larger by a factor of x6/x8.
I spend a fair bit of time in China. Chinese policymakers on the whole impress me with their ability to understand what the real issue are. If my experience and read of China is right, Mr Regling is going to come back to Europe with lots of kind and supportive words, but little or no real hard cash. China wants military technology, nuclear technology, access to European corporates (ownership!), and it wants Europe fully on its side vs. the US with respect to human rights, the currency/the trade surplus, and in terms of IMF, WTO, and UN “status”. It does not want to buy eurozone government bonds for the sake of it (bunds are the major exception) and I suspect the first question Mr Regling will need to address is something along the lines of: “If your bond/ESFS deal is so good, why aren’t the financial markets biting your hands off for a piece of the action?”. After all, financial markets are pretty good at spotting give-away bargains when they present themselves! So in reality we are continuing with the policy of creeping fiscal union and kicking the can down the road, hoping that somehow growth with magically appear and bail out all (not just eurozone) heavily indebted nations. I think such hope is extremely misplaced. This latest bailout relies on the market not calling what I see is a huge “bluff”, because if the market does call it, the bailout simply won’t be credible or even deliverable. It is instead akin to a self-referencing ponzi scheme, and I can’t believe eurozone policymakers have even considered going down this route. After all, we all have recent experience of how such ponzi schemes end, and we all remember how eurozone officials often belittled and berated US policymakers for their role in the US housing/CDO/SIV financial bubble.
In terms of the secular outlook, I wanted to do something different, so I have included below a classic Greed & Fear chart. The chart looks at a 90 year history of the Dow, rebased in terms of the price of an ounce of Gold. I am not including this chart to specifically support my secular bullish Gold view or my secular bearish equity view.
Rather, for me, this chart speaks to long-term trends and turns in the Greed & Fear equation, which is a principle driver of market returns. I find this chart stunningly clear and simple in its message: Over the next year or so the Dow can, in Gold terms, hit a ratio of 1. Think about that. Of course I know many folks dismiss such “chartlology” (I have too much respect for the world’s technical analysts to call my work technical analysis), and I know many folks look at Gold as some barbaric relic. So readers should feel free to dismiss the message from this chart. Personally I think this chart is telling us something very profound – and worrisome. Especially if one shares my view that the latest eurozone “solution” simply clarifies one thing – that full fiscal union in an immediate time frame is OFF the agenda. As a result of which, eurozone policymakers are now all-in and have merely succeeded in giving us an extremely worrying outcome whereby the future of the eurozone now becomes a binary bet on survival vs. breakup/ shrinkage. I am convinced markets will soon reach the same conclusion, so this latest plan had better work, because if it doesn’t there is no more credible policy response left. All proposed “solutions” so far are internally inconsistent and unviable as sustainable fixes in my view. The only sustainable fixes are proper default/restructuring and the ejection of some existing members, thus leading to the creation of a neueeurozone (which seems to be not on the cards for now), or full and immediate fiscal union, which for now only remains a distant “hope.”
Whilst the timeframe of the moves has been faster than I expected, both the direction and the extent of the market moves in October have been largely in line with my previous calls. The S&P500 hit a low of 1074 in early October. For some months now I have been forecasting a move in the S&P500 into the low 1000s in October 2011. The S&P500 at 1074 comes pretty close! The 10 year yield targets for both USTs and Gilts were also hit, and the Bund target was only just missed. Beyond this October low I also forecast an “up to 20%” rally in risk assets in Q4 2011, from an S&P500 low in the low 1000s, up to/towards 1200 – see my previous notes for both targets and drivers. Whilst this rally since the October lows has been much faster than I expected, and reached (on the S&P500) 1285 on a closing basis as opposed to my 1200 target, because the October low was 1074 and not in the low 1000s the actual percentage move in the subsequent rally has been pretty much in line with my +20% targeted move higher, as have the drivers for the move (which can be summarised in one word: Hope). The key question now is “what happens next?”
At this juncture, and for as long as 1310/1320 holds on the S&P500 (on a three to four day consecutive closing basis), I strongly believe that we have begun, or about to begin, the next major risk-off phase, which should culminate in my secular targets being hit in 2012. The sharpness of the rally from the October risk lows suggests strongly to me that what I thought would be a process that plays out over a year may well now be a process where the timeframe has been accelerated by a quarter, maybe two quarters.
The implication therefore is that in 2011, the October equity lows MAY NOT be the lows for the year. So based on what I can see now, and with a S&P500 1310 “stop loss” as mentioned above, I am now looking for another major risk-off phase between now and year end, with a December target for the S&P500 back down in the 1100s for sure, and possibly even the low 1000s. As I expect to see a series of ongoing lower lows and lower highs all the way through to the eventual secular super cycle lows in 2012, if my call for the remainder of 2011 is also proven correct then the S&P500 can get much closer to 1000 in December than in the move to the October lows just seen.
In this next risk-off phase expect the USD and core government bond yields (USTs, Gilts, Bunds etc) to do well, expect credit spreads to widen and commodities to sell off. I also expect peripheral eurozone government bond markets, including France, to again perform very poorly. If this risk-off call into 2011 year end proves correct, I would expect to see the current iTraxx Crossover index widen from the mid/low 600s back up to 900, and I’d expect to see 10 year yields in USTs down at 1.75% or lower, Bunds at 1.5% or lower, and Gilts sub-2%. Using the DXY Index as a measure of the USD, I’d be looking for it to move back to and probably above 80.
It is important to highlight that markets should expect at least one further round of (perhaps globally coordinated) monetary easing, including QE3 in the US, likely around year end/early 2012. I have been highlighting this event all year and my view remains unchanged. This may well act to put a floor on risk assets and maybe even give a boost to the risk-on trade at that time, but it will be a purely temporary (two month?) fillip for paper assets and will do nothing except damage (a la the Fed’s QE2 move) to both global and DM/US growth. This in turn will expose us to a very difficult risk-off phase over H1 2012, when my secular super-cycle target lows in risk asset valuations should be hit.
It is also worth stressing again that generational geo-political changes are underway to both the global economy and global markets as a result of the Great Financial Crisis. Europe is the centre of the storm right now, but in 2012, perhaps driven by the eurozone ills, these changes will become more evident and more significant, paving the way for a major new global currency accord between deficit nations and surplus nations in late 2012 or, more likely, 2013. Until then expect the naked emperors to continue to play their fiddles, to little or no avail. Eventually however the geo-political changes should lead to effective and sustainable outcomes, but until then, the name of the game is preservation of one’s capital and a hope that China doesn’t land too hard in 2012. Unfortunately the risks are, in my opinion (different from the “house” view) rising rapidly that we may see a hard landing in China. I hope my worries are misplaced, and for now I still have the same view that I have had since late last year: China”s GDP growth rate in the current 5 year plan, which began in March 2011, is forecast to trend down to (and average) around 6%pa to 7%pa. This growth rate is however uncomfortably close to the pivot point between a soft landing and a hard landing (5% or below) for China. As mentioned earlier I have more faith, based on my own interactions, in China policymakers than in the majority of DM policymakers, but the task ahead in China is no doubt a challenging one. The bailing out of the rich eurozone will not I feel be a high priority in China as the domestic situation will require full focus and attention.