Bob Janjuah, despite never leaving, is once again back:
It has been a while since I last wrote. At one point I thought I was having a period of "writer's block", but over the Christmas break I had a "Eureka" moment. I don't have "writer's block". Instead I realised that I was trying to write something "different" at a point in time where actually the key issues are, pretty much, the same as they have been for some years now. As such, I have abandoned this attempt and instead present my latest thoughts, even if you have "heard all this" before:
1 - Key Issues:
Unchanged from last year/the last few years: Too much debt, insufficient "real" self-sustaining growth, and the same old failed thinking from (Western) policymakers, which over the last 20 + years has created the biggest debt disaster in modern history. Western policy makers, at the national and G20/IMF level, still seem to have no response to solvency problems other than printing more money, loading on more debt, and hoping that "time" sorts it all out. In other words, the extension of ponzi schemes which are being used to cover up our lack of competitiveness and real productivity growth through the use of money debasement and leverage.
As ever, the bigger this effort gets the harder the fall once the inevitable collapse happens. Of course NOTHING moves in a straight line, so investors must understand and accept that even in a secular period of weak growth and bearish market moves we can still have occasional risk squeezes and short periods of "OK" data within a broader declining/weak trend. What is clear is that the financial crisis that began in 07/08 heralded the end of a policy era, and instead the collective fear amongst policymakers and their desire to protect and preserve self-interests has led to (Western) policymakers embracing some ugly version of pseudo capitalism that is best labelled neo-communism.
Turning very briefly to some specific issues:
- The worst of the eurozone mess is still ahead of us. This is in spite of the attempts by the ECB and national eurozone central banks to rule out QE with one hand, yet at the same time engaging in the worst form of policy behaviour and de facto QE with the other and with a hard Greece default likely this quarter.
- Yet again, and certainly for the 3rd year in a row, we are being told that the US is over the worst and that a sustainable recovery is here. We are expected to believe yet another 'decoupling' fairytale, only this time around apparently neither Asia/EM nor the eurozone really matter to the US economy. We are highly suspect of this line of thinking! Mini business cycles are to be fully expected - as Kevin and I have said for years. This is not the same as a real and sustainable recovery. The US economy bulls very happily downplay the "post-Japan tragedy" very overdue pop in the global supply chain, the dangerous running down of savings by the US consumer, and the inventory build-up. I have high conviction that the US economy will be seen as a risk, rather than as a saviour, within the next quarter or two. Furthermore the potential fiscal time bomb in the US will be a big issue to consider this year, especially as the temporary payroll tax and extended unemployment benefit deals reach maturity in the next few months, and also more generally as we get closer to the US elections. A complete breakdown in politics in 2012 in Washington around the deficit and debt issues may not be certain, but the risks are, to me, worryingly high.
- Investors should fully expect Fed QE3 in Q2 2012, BoE QE3 around the same time and maybe even explicit ECB QE in/around Q2 as well. I am pretty sure all of this will be bullish for risk assets, for about two to three months (the half life of QE is pretty clear I think), but in the real economy and even in markets, this latest (and last?) monetary shot will soon thereafter be seen to fail (see below), with deeply negative consequences, likely before Q3 is over;
- Growth in the Asia/EM block is and will continue to moderate, if left to its own devices. Not great, but not disastrous. Unfortunately, when Western policymakers deliver QE in Q2, then much like we saw post the Fed's QE2, the USD will weaken and global commodity prices (especially food and energy) will spike as per last year. As a result the US/Western consumer will again see his/her disposable income crushed, which in turn will crush overall growth (especially in the US, as per Q1 and Q2 2012), and Asia/EM will be forced into another monetary tightening cycle to combat inflation (as per late 2010/2011), which in turn will risk a much harder landing in Asia//EM than would normally need to be the case. This in turn will further damage global growth.
2 - Key Investment Outlook:
The secular outlook remains unchanged - for 2012, it is again Risk-Off, long core high quality bonds and strong balance sheets/short risk and weak balance sheets. This worked tremendously well in 2011, and should work at least as well in 2012. In 2012 balance sheet strength and reliable cash flows will be far more important than reaching for growth and maximisation of earnings. As per 2011, I really like Australian government bonds as well as the AUD. Ditto non-eurozone Scandinavian government bonds and their currencies.
The tactical outlook is always more difficult to nail, but as of now:
- I think we are very close (days) from a top of some sorts in equities and the risk-on trade. Depending on price action, I reckon the time to get short risk is around/by January 13th - as a proxy guide the S&P should be within 3% to 5% of current levels (1277 S&P).
- I think Q1 is going to be extremely bearish for risk, for equities, for the periphery, for the euro, for credit spreads, etc. The real pain may only be seen in March, when I expect the hard Greece default to happen. In Q1 I expect the S&P will trade down to/below 1000, and core US, UK and German government Bond yields will be closer to 1.5% than 2%.
- For the balance of H1, based on my US, UK and eurozone Q2 QE call, I would expect to see risk assets recovery hard (especially commodities);
- At some point in early Q3 a huge opportunity will present itself to those who want to get short risk, as by the Summer I fully expect the (coordinated) Western QE to result in global real economy failure. However, for now, I think H1 will contain significant volatility, so I will worry about H2 nearer the time. Suffice it to say that my S&P 800 target for 2012 still holds.
- In terms of where my outlook herein for markets may prove to be wrong, I think most likely that it will be by being too bearish (risk) too soon, by around a quarter or so, driven by a failure on my part to recognise not just the willingness but also ability of policymakers to "kick the can" down the road for a little bit longer. Let's see!
Apologies to all for not telling you anything new or very different. One day, when we collectively abandon the neo-communist experiment in the West that relies on more debt and printing money in order to maintain the status quo, then I will hopefully have a different and far more positive view of the years ahead. I look forward to this time. But for now, expect more of the same as in 2011. And I know it's a few weeks early, but as I am unlikely to write anything for at least a month, Kung Hei Fat Choi. The year of the dragon will soon be upon us.