That’s the message from Bob Janjuah, RBS’s Chief Markets Strategist in his latest missive titled “Happy Christmas, Cold Turkey Time”:
We said in late Aug that S&P would get to 1100/1120 by end Oct/early Nov. We said growth would peak in Aug and then weaken (see above) into and in Q1. This is all playing out. As this plays out, I expect S&P to be in the mid-900s by y/e, and mid/low 800s by Q1 2010. Credit spreads will weaken materially, IG will do better than HY, QUALITY (strong balance sheets) will be the winner. I look for 750 Crossover by late 2009/early 2010, and then further weakness as Q1 unfolds. Govvies shud rally - I prefer BUNDS to USTs or GILTS. The USD will probably rally, but I dislike any currency where PMs are simply printing. GOLD please. GET DEFENSIVE RE RISK.
That’s right, 800 by the first quarter of next year.
Thereafter, Bob says it is all about the policy makers (PM):
MORE policy in the UK/US may help risky assets very briefly (2/4mths), but because growth weakness in the PS [private sector] is/will be a sustained feature (IMHO) for many many quarters, MORE policy will very quickly be seen as THE risk. The USD and GBP would then be at huge risk as (PM) CREDIBILITY, SUSTAINABILITY and LACK OF SUCCESS are exposed badly. Bond yields will then rise dramatically I think - NOT because of bogus CPI inflation, but because debasement/monetisation will be seen as FAILED POLICY and which will then be PUNISHED, as opposed to the current outcome, where such policy has so far been given the benefit of the doubt and ‘rewarded’.
This will lead to a truly ugly 2010 with New Lows in stocks (500-handle S&P), New/Near New Wides in HY, IG spreads another 50% wider. The EURO and the Bund are where to be in this world, as well as the HIGHEST quality balance sheets in credit and equity land (global big caps). Gold goes to $1500. THINK ABOUT IT - this is the world where USTs, GILTs, the USD, the GBP AND risky assets ALL SELL OFF…….
This will also be the time to consider going massively OW USD/GBP, as well as OW USTs/GILTS. Why? Because 2010 and beyond will then see us FORCIBLY abandon Reckless Policy (the driver of the sell off) which would then quickly be followed by a new era of DEFLATION and AUSTERITY.
Of course, it might not turn out that way:
IF the PM response to the initial weakness over the rest of 09 and early 2010 is NO MORE POLICY, then the initial knee jerk will be +VE for the USD, the GBP, USTs and GILTS. The knee jerk will also hurt equities (S&P in the low 700s) and credit spreads (again, HY/bad balance sheets do worse than IG /Good balance sheets). BUT within mths, we will ALL LEARN TO ADJUST AND REPAIR OUR BALANCE SHEETS. The NEW Normal. 3/5yrs of US/UK GDP around 1%+/- 50bps and mild deflation/low inflation. A long period of REPAIR, REFUELLING, etc. This is the LEAST WORST OUTCOME. I really really really hope this is what we get. I FEAR, and Kevin expects, the dreaded MORE POLICY route.
As for the longer term, here’s how Bob sees it:
Near term I think the battle will be between Central Bankers, who deep down, and I think privately at least, FEAR bubbles, FEAR failure and FEAR FORCED abandonment if current policies are persisted with too long and/or added to, vs Fiscal Authorities, who by definition want short-term fixes (there is after all an election cycle in the UK & in the US next yr). This is like a rumble in the jungle between the VOLCKER-ites and the GREENSPAN-ites, with GREENSPAN representing the Fiscal Authorities (he was after all surely the most politicised central banker ever). Are the Volcker-ites up to a fight? I think so. I hope so. Kevin feels and I FEAR however that they aren’t/they won’t. In which case MORE policy and then, very soon thereafter DISASTER, will follow. In this rumble the inevitable outcome is deflation and multi-yr austerity. China will be the Ref in the boxing ring. The PS and the FS [financial sector] will be the Judges (who have I fear have already made up their minds (PS) or are soon abt to (FS)
The rest of “Happy Christmas, Cold Turkey Time” can be found in the usual place (if you have the stomach for it).
Related link:
Bob’s back - FT Alphaville
