Mr Faber may have stolen the pixel-bite on Wednesday with his prediction of hyperinflation in the US (he even used the Z-word), but there is a manic tone to the commentary coming out of a number of avowed bears.
Here are the summary pars Bob Janjuah, the celebrated RBS strategist, dispatched to clients today:
1 – UK Rating Action – The research group put out a comment last week post the S&P shift on the UK. The key takeaways from my side: A) The UK WILL have a multi-yr austerity government soon, the only question is when. We WILL see higher taxes, far less public spending, higher unemployment etc. The UK has no more fiscal room left, so from here on in its ALL about the politics and policy is ALL about whether thru BoE QE we have much more appetite to further debase GBP. And B) I really suspect the UK action is also a case of S&P using the UK as a guinea pig (in terms of assessing market reaction) ahead of something they may do on the US, in say 3 to 6 months time. The US has a tad more room than the UK fiscally, but ultimately the issues (austerity vs currency debasement) are the same.
2 – Investing in risk only on the basis of ‘liquidity’ led to the crash of 01/02/03 (where we blew up corporate balance sheets with debt), as well as the current crash of 07/08/09 (where we blew up consumer balance sheets with debt), to which the pavlovian response has been to blow up government balance sheets with debt. JUST ‘excess’ liquidity is a terrible reason to invest in risk on any meaningful investment horizon – ‘trading’ is a different matter. But in both these contexts I hear a lot of the same tired out arguments. Investing just because retail are buying has never been a strategy I would want to follow. And as for trading, YET AGAIN I am hearing a lot of the ‘I’m just playing momentum, and will be smart enough to get out in time ahead of the turn’ trading strategy. Have the events of the last few years taught us NOTHING?!?!
3 – To support the pure liquidity led risk rally – to give it legs, to make it sustainable – we need to see real and sustained improvements in private sector demand, in earnings and in incomes. Kevin and I see no evidence of this,if anything we see more evidence of the opposite. It is also now clear that we are either at or close to the limits of fiscal ‘support’ so it is uncertain how much more debt even the public sectors can credibly get away with. At the same time, it is clear that at the moment the only ‘solution’ policymakers in Anglo-Saxon can come up with is more of the same that got us into the debacle we are faced with, namely the reflationist policy of PRINT/BORROW/SPEND/BUY MORE RUBBISH WE DON’T NEED/PUSH THE PROBLEMS INTO ‘TOMORROW’ & PRAY IT GETS BETTER – its all about avoiding taking the adjustment/the hit. As such, all this really means to me is that if the WEAK H2 09 scenario does play out as we having been saying all year, then we SHUD expect a quantum increase in the scale/levels of QE the FED and BoE may be forced to undertake, as this will be the only way, absent a real and sustained pick up in the private sector (which we CAN’T see at all) to create nominal growth.
4 – The risk here is that we are creating/storing up huge tail risks in the form of significant FX gap risks (esp. re the USD/GBP), and/or significant Rates gap risks (esp. re USTs and Gilts). Since early 2007 the Credit market has been the driver/lead indicator for markets. As the policy response has been to load up all the risks & debt onto public sector, going forward THE LEAD DRIVERS WILL BE FX & RATES MARKETS, in terms of levels, direction and volatility, and NOT the Credit or indeed Equity markets. IN OTHER WORDS, just focusing on what S&P and/or the Crossover index is doing is NOT going to be enough.
5 – So, if I look at all of this together, all I can see ahead are higher VOLS in both markets and the real economies of the world, a higher risk free rate, higher hurdle rates to investment, and more selectivity around capital allocation and investment…..this means Risk Premia MUST be higher….in this context do NOT focus on Q4 08 comps – this is utterly bogus. DO the comps with 04/05/06/07 – hey presto, you get a much uglier picture for where we are at and where we are going. Higher risk premia means LOWER PEs…..combined with profit outlook which is basically flat on 08 for 09 and 2010 at least, this means STOCKS ARE TOO HIGH.
RBS clients can get the full fat version here.