Bob Janjuah’s 3 Words | FT Alphaville

Bob Janjuah’s 3 Words

Bob ‘The Bear’ Janjuah has filed his last piece before heading off for his summer hols.

The Nomura man is still forecasting a risk-on melt-up over summer (the S&P 500 into the 1,400s by September, 10-year US Treasury yield at 3.4 per cent, stronger commodity price weaker US dollar etc)

But after that he’s very bearish.

(emphasis Bob’s)

Quite clearly I see the shorter-term tactical risk-on phase as also setting up a big and painful risk-off phase over the latter part of 2011 and 2012, as positioning and sentiment clearly need to get more bullish before we can get the kind of market weakness I am forecasting.
At this point it is worth repeating something to those looking for a ‘trigger’ to the risk-off phase. I think it’s as simple as 3 words: Weak Trend Growth.

Most policymakers and many in the market are still desperately hanging on to the view that trend growth rates in DM (and EM too) have not been impacted materially as a result of the financial crisis. To me the evidence is clearly ‘in’. The only way DM (and EM) policymakers have been able to deliver even barely acceptable trend growth has been through the use of unsustainable policies which put short-term gains first but which clearly create huge longer term risks to sovereign credit quality and which leave a deeply negative scar in the minds of the private sector, which is attempting to de-lever and which knows it is facing the mother of all tax liabilities going forward. The reality is that absent a private sector debt binge (the private sector is not that stupid) and assuming we are coming to or are at the end of the line with respect to policy, then DM trend growth over the next 3/5 years will be in the 1-1.5% range.

This I think is the key. Yes, there is too much debt in the balance sheets of the DM economies, particularly at the sovereign, bank and consumer levels. But if we all had confidence that DM trend growth rates could sustainably be 150/200bps higher than my expectation, then these debts would not be a major issue. However, at the kind of trend growth rates I expect to see, debt is a major problem, as are excessive risk asset values, as well as excessive ‘entitlement’ expectations. Once the market is able to see the limits of policy, and once the market is able to see through the excuses (of ‘soft patches’), then it is inevitable that we see a significant re-price lower of earnings expectations, of incomes, of asset values, and a genuine (rather than hypothetical) acceptance that living standards, especially in the DM economies, are going to be materially lower over the next 5/10 years than current consensus expectations/forecasts. EM economies will also see weaker trend growth, but they in general have strong balance sheets, huge flexibility in taxation and labour markets, and very low levels of entitlement expectations. Hence these (and similarly positioned DM economies) will ‘outperform’.

Happy holidays.

Related link:
Bob’s on bear alert – FT Alphaville