Bob Janjuah: "Markets Are So Rigged By Policy Makers That I Have No Meaningful Insights To Offer"

Tyler Durden's picture

Bob Janjuah is back.

Bob's World: Monetary Anarchy

Since my last note from early January I have spent the last few weeks assessing data and price action, as well as spending a lot of time talking to clients and trying to analyse the words and deeds of policymakers. In no particular order, my takeaways are as follows:

1 – Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focused on protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other "peripherals" are being forced to live with. However, it seems that eurozone leaders may be about to pour even more taxpayer money down into the black hole that is Greece, primarily to help the banks in Europe, at the expense of perhaps a decade of suffering by the Greek populace. For my part, I am now consigning the Greece/Peripherals/Eurozone story to the box marked "self-serving political debacle" and from here on in I will simplify Europe as follows: Until, and unless, Germany signs up to full fiscal union, a eurozone breakup is likely. And depending on how long we can continue to "kick the can" down the road in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decreasing debt sustainability. Ultimately this means that the end game will simply be more devastating for us all the longer we are forced to wait. Investors should be fully aware that "home" bias amongst real money investors is now "off the charts". This is not a good development for the eurozone, unless of course our leaders are preparing for break up, or at least considering it as a viable option.

2 – I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of "insider" technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are the banks so powerful that we are all beholden to them and the biggest nonsense of all – that defaults should never happen (unless said defaults are trivial or largely meaningless)?

3 – More broadly, with Mr Draghi now in situ, it is clear that I misread and misunderstood two things. First, I am simply stunned that our  policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being "told" to double up on these same policy decisions. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people. Well now, if you listen to the latest from Bernanke and Draghi, it seems that the only solution they can offer up  is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again "greedy" enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now "richer". When – as they do by definition – these bubbles burst, those who have been suckered in will realise that their "wealth" is instead an illusion, which in turn will be replaced by default risk.

Secondly, I have clearly underestimated the ‘market’s’ willingness, nay desperation, to go along with this ultimately ruinous policy path. Personally, I think this is extremely worrying – the number of clients who tell me that they know they are being forced into playing a game that will end in disaster, but who feel they have to play along and who hope they will get out before it turns, is a depressingly familiar old tale. Some such folks hang onto the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more money/more liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply side reform and the search for true competiveness and sustainable growth will be further cast aside, as the focus will be on the "easy gains" to be made in markets.

4 - Assuming that we are in yet another liquidity fuelled rally courtesy of Bernanke and Draghi, then there are some key things to remember. First, such rallies can last days, weeks, months, perhaps we could even extend into 2013. And – to give a proxy guide – the S&P could end up in the high 1500s again if this current binge lasts into 2013. The problem with such liquidity fuelled set-ups is that they can last longer and get bigger than any reasonable logic would dictate. The issue here is not what central bankers say – it now seems clear that Bernanke and Draghi will say whatever it takes to keep the market supplied with ample liquidity – but what they can do. In this respect one either believes that central bankers can do whatever they like whenever they like, or one believes there are limits. I think there are limits to what Bernanke and Draghi can do, and once we hit those limits these bubbles will burst, with increasingly greater consequences the longer we are forced to wait. Do I know when we may hit these limits? I hope that it is sooner rather than later, but I have no real conviction.

Secondly, when looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market.

Third, when this bubble bursts, I don’t think there is an easy way out. Who will be the bail-out provider? We already have extraordinarily weak and fragile government balance sheets, ditto banking balance sheets and consumer balance sheets. The big cap corporate balance sheet is sound, but it already worries about how bad the real economy hit will be when the next bubble bursts. As such, the corporate sector – which has a huge degree of "control" over the political classes – will keeps its powder dry until asset prices fall to clearing levels. When this happens they will be the biggest buyer of truly cheap assets in town, but not before then. The really dangerous thing about this next bubble is that it will likely ruin current central bank credibility, as their balance sheet expansion, accumulating ever more "toxic" assets, is at the centre of the current cycle. As a result, the central bank decision-making function is now (increasingly) deeply compromised, if not utterly at odds with its own raison d'être. This of course means that if/when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems, rather than being able to act as credible lenders of last resort. A resulting consequence is that we will, at that point, usher in a new era of central banking and policy settings, where the key will be to regain a semblance of credibility and independence. This will be good news. But we will likely have to go through the "bust" first.

5 – I am not well equipped to navigate bubbles where tactical views and secular views are all thrown into the melting pot together, where there is no visibility, where – as one client put it to me recently – we have Monetary Anarchy running riot, where the elastic band between the ‘real’ economy and the current liquidity-fuelled markets is stretched further and further beyond credulity, and where history tells us that policymakers will happily stand by whilst bubbles are being pumped up, and hope that they are onto their next job before it all comes tumbling down. It seems that the 07/08/09 part of this crisis has resulted in zero lessons learned. In fact it is much worse than that as we are instead being asked to double up on a strategy which I fear will end in failure. As such, clearly my outlook in my last note needs to be re-assessed in terms of the latest developments. Whilst equity market levels are still within the tolerance limits set out in this previous note, my timing is clearly being "stretched". Unfortunately for me, and as warned in the prior note, if my outlook set out therein is proven to be wrong, it is because I am overly cautious. I say "unfortunately" because the longer we have to wait for the "final" resolution to the global financial crisis, the bigger and more devastating the final leg lower will be. I have an extremely high level of conviction on this point.

6 – So, in terms of markets, be warned. My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears. Real assets are relatively attractive. But I am going to wait for this current central bank bubble to burst before going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters. It all depends on when and how our central bank leaders are exposed as lacking credibility and/or lacking the mandates to keep pumping liquidity into the system. The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping "mandates"). The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, "bonds are toast" in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis.

My colleague Kevin Gaynor has a more nuanced view and he feels that we may well avoid the bubble outcome, as political hurdles, political changes, growth and earnings data will all very quickly undermine central bankers and their bubble vision. For all our (long term) sakes, I hope I am wrong when it comes to fearing another round of liquidity-fuelled bubbles, and that he is right that "good sense? will prevail soon.

I will continue to use the Dow/Gold charts to continue to guide me going forward. The USD price of an ounce of gold and the Dow will, I believe, converge at/around 1, at some point over the next 2 years or so. I have extremely high conviction on this. What I am not sure on is whether we converge at 7000+/-, or at 14000+/-. Because I do believe that even Bernanke and Draghi cannot do as they wish and that there are some limits to the recklessness of policymakers, I still lean towards a deflationary resolution at/about 7000 in the next year or two. Pretty vague, I know, buts it's the best I can do right now, and what is clear is that, in the world I fear ahead, gold is a winner either way – remember, gold is a great (monetary) inflation hedge, and in a deflationary credit collapse gold works as a store of value/wealth as it carries zero credit risk.

As a "credit" guy at heart I see more likelihood in a deflationary credit (i.e., a "real") collapse rather than a real economy inflationary (nominal) collapse. Either way however, what is clear is that if Bernanke and Draghi are allowed to continue on their current policy path for much longer, then whatever the final outcome will be, it will likely leave a deep scar on us for decades. Which on a ten-year timeframe may not be such a bad thing as it should kill off monetarism and usher in a new era of monetary and fiscal prudence? In the near term, LTRO2 at month-end is the next clear focus for markets, more so than Greece. If LTRO2 is USD1trn or more, the market will take that as a signal to load on more leverage, more risk and more ‘carry’. If LTRO2 is in the order of USD250bn to USD500bn, Risk Off will be the order of the day as markets will start to fear that central bankers are having to reign back-in their current policies, and that as a result we face another period where central bankers and policymakers fall back behind the curve. LTRO1 clearly took policymakers from behind to ahead of the curve, but this is an extremely fluid situation, where doing nothing is, in reality, the same as going backwards. As the skew of expectations is to a large LTRO2, a LTRO2 take-up in between these ranges is likely to be viewed with neutrality/mild disappointment.

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Harlequin001's picture

It was inevitable...

There is but one place to go, and Bob will eventually find it I'm sure.

Gold...

GetZeeGold's picture

 

 

Holding up a few trillions in hot Bearer bonds would make anyone shrug.

 

Not sure what the problem is..........seems normal to me.

 

 

 

ElvisDog's picture

Bearer bonds are so 1980's "Die Hard". Favorite line from that movie: "We'll all be sitting on a beach earning 20%". Those were the days...

Mr Drysdale's picture

Did'nt they have 'bearer bonds' in "Beverly Hills Cop"?

That movie was the first I had ever heard of such a thing. I especially love the part when the Goons throw Murphy thru the Plate Glass window onto the street!

<sorry for the hijack>

Thomas's picture

Bob might want to try decaf.

GetZeeGold's picture

 

 

It's a double post outbreak......the good news is I got double junked.

 

Gotta luv it.

 

 

 

flacon's picture

Atlas has Shrugged, huh?

 I quit in 2009 when I left the USA. I pay no longer pay any of the following taxes:

 

 

Accounts Receivable Tax

Building Permit Tax

Capital Gains Tax

CDL license Tax

Cigarette Tax

Corporate Income Tax

Court Fines (indirect taxes)

Dog License Tax

Federal Income Tax

Federal Unemployment Tax (FUTA)

Fishing License Tax

Food License Tax

Fuel permit tax

Gasoline Tax (42 cents per gallon)

Hunting License Tax

Inheritance Tax 

Interest expense (tax on the money) 

Inventory tax 

IRS Interest Charges (tax on top of tax) 

IRS Penalties (tax on top of tax) 

Liquor Tax Local 

Income Tax Luxury Taxes 

Marriage License Tax 

Medicare Tax 

Property Tax 

Real Estate Tax 

Septic Permit 

Tax Service Charge Taxes 

Social Security Tax 

Road Usage Taxes (Truckers) 

Sales Taxes 

Recreational Vehicle Tax 

Road Toll Booth Taxes 

School Tax 

State Income Tax 

State Unemployment Tax (SUTA) 

Telephone federal excise tax 

Telephone federal universal service fee tax 

Telephone federal, state and local surcharge taxes 

Telephone minimum usage surcharge tax 

Telephone recurring and non-recurring charges tax 

Telephone state and local tax 

Telephone usage charge tax 

Toll Bridge Taxes 

Toll Tunnel Taxes 

Traffic Fines (indirect taxation) 

Trailer Registration Tax 

Utility Taxes 

Vehicle License Registration Tax 

Vehicle Sales Tax 

Watercraft Registration Tax 

Well Permit Tax 

Workers Compensation Tax

 

 

LowProfile's picture

-1 for adding nothing to the conversation and occupying a giant block of text.

And congratulations, you are now in consideration for the list!

flacon's picture

You're just lucky I didn't post a list of all 600+ government departments! ;) LOL!

 

I compiled the list and it is so long that I'm sure I would earn at least 600+ down arrows just for taking up space! :)

 

A-Z Index of U.S. Government Departments and Agencies

http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml

 

Here are the ones beginning with the letter "A":

Administration for Children and Families (ACF)
Administration for Native Americans
Administration on Aging (AoA)
Administration on Developmental Disabilities
Administrative Committee of the Federal Register
Administrative Conference of the United States
Administrative Office of the U.S. Courts
Advisory Council on Historic Preservation
African Development Foundation
Agency for Healthcare Research and Quality (AHRQ)
Agency for International Development
Agency for Toxic Substances and Disease Registry
Agricultural Marketing Service
Agricultural Research Service
Agriculture Department (USDA)
Air Force
Alabama Home Page
Alabama State, County, and City Websites
Alaska Home Page
Alaska State, County, and City Websites
Alcohol, Tobacco, Firearms, and Explosives Bureau (Justice)
Alcohol and Tobacco Tax and Trade Bureau (Treasury)
American Battle Monuments Commission
American Samoa Home Page
AMTRAK (National Railroad Passenger Corporation)
Animal and Plant Health Inspection Service
Appalachian Regional Commission
Architect of the Capitol
Architectural and Transportation Barriers Compliance Board (Access Board)
Archives (National Archives and Records Administration)
Arctic Research Commission
Arizona Home Page
Arizona State, County, and City Websites
Arkansas Home Page
Arkansas State, County, and City Websites
Armed Forces Retirement Home
Arms Control and International Security
Army
Army Corps of Engineers
Arthritis and Musculoskeletal Interagency Coordinating Committee
Atlantic Fleet Forces Command

sun tzu's picture

but htey tell us government is not big enough and we need more paper pushers to check over the forms that we have to fill out before flushing the toilet

slewie the pi-rat's picture

 

why don't you get offa the hobby-horse hi and tell us

  • what taxes you do pay now,
  • possibly where you "went" so we can jusdge your "smartz" for ourselves?

ps:  you've already taken up two whole pages, dude!

RafterManFMJ's picture

 

 

Flacon I like your tax-free lifestyle. Do you need a side-kick? I will hide in your home, perhaps sometimes in the freezer or in the bed's canopy, and keep your sharp by launching surplise attacks.

Spirit Of Truth's picture

 

RON PAUL: "US DEEP INTO FASCISM"

russia-today/ron-paul-right-us-deep-into-fascism/

RussiaToday telling us about how the U.S. is deep into fascism?

 

Imminent Crucible's picture

"There is but one place to go, and Bob will eventually find it I'm sure.

Gold..."

 

"My personal recommendation is to sit in Gold"

 

It never hurts to read the article before commenting.

johnQpublic's picture

sit 'on' gold maybe

gold commode, or throne being recommended options

Harlequin001's picture

Imminent. - Yes even if you/he is/are eight years too late,. May be I should read it again, just to see if I missed something...

just thought I'd post it again, just in case you missed it the first time...

LowProfile's picture

""There is but one place to go, and Bob will eventually find it I'm sure.  Gold..."

"My personal recommendation is to sit in Gold"

It never hurts to read the article before commenting."(Tell that to JR the DB in FL - K TNX BAI)

There's actually a bit more of it than what you posted.  Full PP, with some more bolding & separating & *** by me for emphasis:

"6 – So, in terms of markets, be warned. My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non-financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears. Real assets are relatively attractive.  


***But I am going to wait for this current central bank bubble to burst before going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters.***


***It all depends on when and how our central bank leaders are exposed as lacking credibility ***and/or lacking the mandates*** to keep pumping liquidity into the system. The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping "mandates").***


 The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, "bonds are toast" in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis."

 

This answers a question I had posted a while back about the EUR, USD and gold.  I had been wondering about the possiblitity of massive EUR printing to keep their system from imploding, which would cause a dollar rally and a serious pullback in gold (at least in USD terms!).

So, no thanks to JR the DB in FL, I finally got my answer.

The ECB will print.  They appear not to need a mandate.  The FED won't print *UNTIL* they have a mandate. 

So:  The EUR craters, the USD rallies, gold takes a hit in USD terms and the US stock market gets hammered...  Which then gives the FED the "mandate" (actually, political cover) to print.

Then gold takes off like a Saturn V, eventually to become unavailable at any price.

Until I see something that contradicts this thesis, I'm sticking with it.

Hopefully this will help make the argument to your friends and family why they should get some gold when it takes it's last 30% correction.

fonzannoon's picture

Lowprofile I agree completely with your thought process. It has been mine for a while too, I am confident since I am resolute in this thinking that it will certainly not play out this way. I think there is  a decent chance that when the twist ends in June even if the dow is at 15k Bernak goes ahead with QE3. The markets roar in approval and metals go to the moon, Margin requirements are raised similar to last year to "get the speculators out of the markets". The game goes on.

LowProfile's picture

Maybe, but this is an election year.

Can't have that RP guy gumming up the works, so they will have a really hard time printing until they have cover.

IMO.

fonzannoon's picture

I love RP but they have effectively put him on the back burner. You are right it is an election year....and the economy is improving by every metric that is not examined closely. Bernank has been vindicated in his monetary policy vigilance in the face of his detractors. So if he says that another trillion is necessary to get us over the hump despite all the signs of improvement.......I can't even finish the thought...

LowProfile's picture

Yes, and that will restrict the FEDs mandate to print.

If they print, they bring attention to that RP guy.  Can't have that.

Worst case scenario for the FED is it all falls apart before the Repugnicant primary and RP goes up against Obummer.

Harlequin001's picture

So gold takes a pull back to where, $1300?

Some of us got in below 300. Like I said, eight years too late.

Some of us are not new to the great gold bandwagon...

They will all 'get it' eventually...

LowProfile's picture

So gold takes a pull back to where, $1300?

Around there is my thinking.

Some of us got in below 300. Like I said, eight years too late.

Rub our noses in it, whydoncha (/sarc)

slewie the pi-rat's picture

how long have you had this problem?

Harlequin001's picture

$1,300... You'll be waiting for a long time. When all 's said and done once you've bought it you wil own the same quantity of gold regardless of the price. When the price fianally adjusts a few hundred dollars/ounce here and there will matter not at all...

My issue is not with you, but with those that think I should read this again as if I have anything to learn from it.

Bob is a paid stooge just like the rest of them... and is well behind the curve, just like the rest of them...

falun bong's picture

Two inexpensive straddles: one that pays off 12/31/2013 if the Dow is > 16,000 or < 10,000; and one on Gold, >$2000 or <$1400. In the money either way.

MachoMan's picture

I won't dispute your conclusion, only that it may happen in increments rather than a one-off event...  obviously there will be a last "increment" before the rocket ship, but we have no idea when that will be (I think Bob's overall point). 

I am planning for prolonged periods of bullshit.

DaveyJones's picture

"I am planning for prolonged periods of bullshit"  - at least the legal career has prepped you

LowProfile's picture

Actually, I'm thinking that gold incrementally rises as the FED prints (perhaps through $5-8k per ounce)...  And then it goes parabolic with hyperinflation.

But I'm planning for PPoB as well.

MachoMan's picture

Yep...  basically a stair-step upward...  passing the debt laden asset slinky going down the steps...

dracos_ghost's picture

The ECB will print.  They appear not to need a mandate.  The FED won't print *UNTIL* they have a mandate. 

So:  The EUR craters, the USD rallies, gold takes a hit in USD terms and the US stock market gets hammered...  Which then gives the FED the "mandate" (actually, political cover) to print.

This is what boggles the mind. I don't see any scenario that is positive for the Euro(even with a 'positive' outcome) and yet the hedgies are massively long at this point looking to explode to the upside. Forex trading is now pyschotherapy where they are looking for cathartic outcomes to build their portfolios instead of any logic.

 

fonzannoon's picture

Long term the euro is positioned to do really well. The US has made it clear they are going to dilute and inflate. The weak countries will be kicked out of the eurozone and the countries that are left will make up a very sound currency. Just my 2 cents

LowProfile's picture

My thinking as well.  Once they are done with their dilution, they will stop.

The US on the other hand, cannot stop.

fonzannoon's picture

What are the thoughts here about the Loonie? Does Canada separate themselves from the US at some point and their currency appreciates substantially vs the dollar or do we drag them down with us?

LowProfile's picture

All I know is Canada has it's own problems. http://www.crackshackormansion.com/

You might try checking correlations of the CAD with the USD, EUR and gold if you are trying to time things.

But like someone else just wrote "We could end all these conversations with 'just buy gold'".

fonzannoon's picture

For me it has become less about timing and more about (to quote Schiff 4 years ago) "Get out of the dollar!".

LowProfile's picture

Tnx, maybe.  I'm tryin' to add something, anyway...

DaveyJones's picture

maybe, but you give them more control credit than they're worth. Things will go wacky  

fonzannoon's picture

"things will go whacky"

I think that is a foregone conclusion all around. We could probably end every once of these conversations with "so just buy gold" or we can speculate to pass the time...

LowProfile's picture

Agreed, but if you've invested (wasted?) considerable time studying these (now obsolete) things called "markets" that are supposedly used for this thing they call "price discovery", it makes sense to apply a bit of timing to it.

Otherwise all your USD will be sitting around in boxes of nickles waiting for the bank holiday, and going shopping will turn into a weight lifting exercise.

fonzannoon's picture

I have given up on trying to time it. I just buy stuff when I can. To me there is a point when this hits escape velocity and I don't want to be on the outside looking in whenit happens. But I hear what you are saying.

LowProfile's picture

One thing I'm sure of:  This will take longer than I expect.

Which I hope will make the end event seem mercifully short by comparison.

s2man's picture

Good news, LP

MIT economist Rudiger Dornbusch: 'Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'

LowProfile's picture

Gawd I hope so.

Thanks!

 

Found this quote while searching for him:

"I know that most men, including those at ease with problems of the greatest complexity, can seldom accept the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have proudly taught to others, and which they have woven, thread by thread, into the fabrics of their life." --- Count Leo Tolstoy