Bob's (latest) World is here.
They told me it was fixed
From Bob Janjuah of RBSNomura
1 – My secular views remain unchanged. I see no (fundamental) developments or market (price action) developments that warrant a change of view. My very negative view of the latest (late October) round of eurozone "shock and awe? appears to have been quite accurate. All those European policymakers and sell-side commentators who told us on 27-28 October to great fanfare that the solution was now finally in place and that it was now "all fixed?, seem to have gone extremely quiet. The October deal was, as I said in my previous note, a confidence trick that has failed. And as a result it has made things a lot worse. At some point I hope that enough lessons will have been learnt, and we can finally move into the long endgame – hard (non-voluntary) default in the eurozone. Q1 2012 and the €80bn payment to Greece should be the focal point.
2 – My short-term view is also proving correct. Since the 27-28 October meeting, it has been a bad month for risk, especially in the case of peripheral eurozone debt, French debt, credit spreads, and the euro itself. Also as forecast, the dollar has done well, as have core government bond yields (bunds, USTs and Gilts). I expand further on my short-term view in point 2 below, as there are some very short-term risks to the views I set out in my last note regarding the very back end of 2011.
There are two points I want to focus on a little:
1 – Eurozone solutions: With the late October "deal? now in tatters, and with subsequent developments in Italy, in Greece, and in the market pricing of French risk, the future for the eurozone now seems to be all about the ECB and outright monetisation. It seems amazing that the same folks who insisted that Greece would not default, that the eurozone was solvent and was just going through a CDS-trader-driven liquidity squeeze, that kicking the can down the road was a viable plan, and who trumpeted the late-October deal, now think ECB monetisation is the solution. I would urge extreme caution, again. In my view, the eurozone can either go down the path of full political and fiscal integration, which clearly means a smaller neue-eurozone and default by the nations that don?t fit in with this hard-money Germanic ideal or it can take the soft-money Latin/UK/US-style soft-money route, where the ECB agrees to unlimited monetisation. It is clearly a case of "either, or?, but not both. These are two divergent policy paths.
Germany appears to be adamant that full political and fiscal integration over the next decade (nothing substantive will happen over the short term, in my view) is the only option, and ECB monetisation is no longer possible. I really think it is that clear and simple. And if I am wrong, and the ECB does a U-turn and agrees to unlimited monetisation, I will simply wait for the inevitable knee-jerk rally to fade before reloading my short risk positions. Even if Germany and the ECB somehow agree to unlimited monetisation I believe it will do nothing to fix the insolvency and lack of growth in the eurozone. It will just result in a major destruction of the ECB's balance sheet which will force an ECB recap. At that point, I think Germany and its northern partners would walk away. Markets always want short, sharp, simple solutions. This is why the begging bowl is out for ECB unlimited monetisation. But, as in the immortal words of Messrs Jagger and Richards, "you can?t always get want you want?.
I firmly believe that any conditional or finite monetisation would actually be the worst idea (most of the downside, very little of the upside, of infinite monetisation), but probably the most likely "compromise? if Germany were ever to "give? on this issue.
2 – Macro Divergence: While (to date) my risk-off call after the late-October deal has been the correct strategy, there are clearly growing divergences between credit/bond markets and equity markets, and also between optimism on the US and pessimism on the eurozone. On a secular basis I am convinced of two things. First, credit and bond markets are far better lead indicators than equity markets. Second, Europe will experience a hard default, worsening global growth and global financial conditions. In this context it is important to note that the global economy is now more closely coupled than at any point in the past three years. So I will happily position against optimism on the US economy, especially as what Kevin and I think we have seen over the past two to three months is the overdue and entirely forecast post-Japan tragedy cyclical bounce in the growth data. This bounce has now peaked, in our view, and moderation has resumed or is about to. And now the US?s own fiscal/debt problem is about to take centre stage again.
Having said all that, on a shorter timeframe a case can be made for a largely technical bounce higher in risk assets – based on price action rather than any genuinely positive fundamental developments. As such, I want to further refine my short-term view and, in particular, tighten up on my stop loss triggers. Using the S&P 500 as a proxy guide, I am looking for the S&P either to break and close (for 3 to 4 consecutive days) above 1285, or to break and close below 1230. I think the period a week either side of Thanksgiving will give us clarity on this. A break above 1285 – while doing nothing to alter my secular bearish view – would suggest 1320/1350 by year-end is possible. A break below 1230 would suggest 1150/1075 is likely before year-end. I still put an 80% probability on the break to the downside and 1100s S&P/perhaps low 1000s before year-end. In other words, the short term view detailed in my last note – which also calls for 10 year UST yields at 1.75%, Gilts sub-2%, Bunds at 1.5%, the iTraxx Crossover index up at 900, and the USD DXY Index above 80 - remains my core view. But it would be foolish of me not to tighten my stops and not to highlight the risk to my short-term outlook.
And to reiterate, as far as I am concerned, nothing has changed my very bearish secular view on global risk for 2012, which targets the S&P 500 in the 800/900 area, with risk of an undershoot to the 700s.