From RBS' Bob Janjuah:
Plse refer to my most recent cmmts (26th Apr, 25th May & 27th May) for the backfill. Things are playing out pretty neatly so no change in view. However, a few observations/comments:
1 - WE have now had Ben B talk up the recovery and the outlook for rate hikes, following on from a few Fed hawks last week (even President Obama was talking up the eco recovery post the payroll release last week!!). I assume they are all rehearsing in public for some tragi-comedy skit they are abt to perform, maybe at some July 4th party. I can ONLY assume this because I cannot believe that they are being serious in any way when talking up the recovery and the prospect of rate hikes. And price action in markets is making it pretty clear that the market is fully prepared to call the Fed's bluff here.
Policy makers need to realise that YES, you can fool some of the people some of the time. But NO, you can't fool all the people all of the time. It seems pretty clear that the market is beginning to figure out how ridiculous the consensus view is for global growth and earnings, and instead is BEGINNING to price in the kind of multi-yr global growth outcome that Kevin and I have been talking abt - closer to 2.5% pa global, rather than 4.5% global.
Remember, I have used the word 'BEGINNING'.....850 S&P remains my fair value target for this yr - and I would not be at all surprised to see us undershoot even this low level on the way down. And in case you need to ask - the FED ain't raising rates for a very very long time (2012?). The world ALREADY has significant policy tightening on its way - fiscally in the UK and Europe (the most recent developments are moves towards EVEN TIGHTER POLICY), thru the strengthening USD in the US and China/the developing world (which is pegged to the USD), thru specific policy action in China, and globally thru financial sector reform/regulation.
So, Ben, keep up the rah rah if you have to, but I think you need to accept that folks are beginning to see the post-Lehman global recovery for what it was - a 1 yr wonder driven by the most extraordinary policy response ever seen in history at the global economy level. And folks are now beginning to accept that a slow down is on its way, with policy makers pretty much all-in.
All that's now left, as I have said before, is for the Fed to shift to a USD5trn or so new QE programme, likely in co-ordination with a bunch of other central banks, which in total may give us USD10trn or more of new QE. But this isn't happening until much much later this yr or, more likely, next yr.
2 - For the inflationists out there, you must accept that the true private sector trend, which govt's have fought hard against but where defeat for govt now looks clear, is one of debt deflation. BUT, there is an important source of inflation out there. Just look at recent developments in CHINA regarding the push by workers to demand and to get massive wage increases (Honda China, Foxconn). This is all part of the twin problem in China - speculative bubbles and inflation. As per my recent pieces, one way out of the global growth hole now building is for China to reverse policy and go uber easy again. Unfortunately these developments re workers and wages makes it even more unlikely that China rides to our collective rescue. Rather, I expect China to stay tight on policy for the rest of this yr. Not good at all for global growth. And watch import prices in the West - the trend will be ugly. However, CPI inflation in the West is unlikely as Western workers have zero bargaining power, and corporations have huge profit margins that can be cut into to absorb import price increases in order to sustain/grow market share & revenues. Of course the implication for corporate profits/earnings aren't that great, but the equity analyst community will figure that out...eventually.
At the outset I said that there was no chge in view. This applies Strategically where, on a 3/6mths I remain v bearish risk (equities, credit, EM etc) and bullish USTs & the USD. And Tactically, I still think the real fireworks and nastiness will be a July/Aug/Sept phenomena. HOWEVER, shrt term the key zone is, in S&P cash speak, 1040/1020. A clear break below this zone would indicate that a MAJOR sell-off is coming sooner rather than later, down to the mid-800s. It also seems to me that as part of this move, we are building up the pressure for a huge one/two day move where global stocks drop well over 5%, maybe up to 10%. This last 'call' is based on nothing more than my (ample!) gut-feel. But I know I am not alone in this regard. Let's see, but I am preparing for Flash Crash 2...sadly the excuses used to play down Flash Crash 1 have been exposed as bogus, so I wonder what the next set of excuses are - its been a while since we used the old 'rogue trader' excuse so my money is on that horse.