. . . so says Bob Janjuah, chief strategist at RBS, who is convinced — now more than ever — that the policy-sponsored excess liquidity-enabled buy fest is over.
I now think we have begun the 3rd and final leg of the multi-yr bear mrkt which began in 2007 and which SHOULD, hopefully, finish late this yr, but which COULD (hopefully not) drag on deep into 2011. This new bear leg SHOULD see S&P trade sub-1000 this mth. After which we can bounce a little (back up to 1080/1100) over late Q1/early Q2. However, this I think will then be followed by a move down at least into the low 800s in Q2/H2 10, and depending on how policymakers behave, potentially down towards/to New Lows
And I think the USD will do OK and Gold won’t – assuming of course the US IS on an austerity path. Look for the iTraxx XO index to trade in the hi-500s in the next few weeks, and if the move to low-800s S&P is correct, XO will be north of 750. At the same time we’ll see old economy 10-yr govvie yields well below 3% – 2.5%? And of course volatility, esp. in risky assets, will rise significantly, with market liquidity falling significantly. I will be forced to chge my mind if S&P reverses in the next few days/wk or so and manages to break out and close above 1120 for 3/4 consecutive days.
What then is driving Bob’s thinking?
Partly it’s the attack on the European periphery, but also the people:
Dear Readers, it seems to me that the events of the last few wks now tend to imply that we ARE headed towards Austerity in the US, something which is already clearly the case in China and the Eurozone. The UK will hopefully make this leap over the next few weeks/mths, before its too late – hopefully. The QE announcement by the BoE last week was a decent step in the right direction. But we need fiscal solutions too – clear and credible ones. We in the UK shud not desire/be happy to be in a Gang of 2, with Japan. Surely policymakers in the UK know that this is NOT a club we want or shud be part of. After all it has ‘failed’ Japan for over 20yrs, and in any case, we do not have the domestic savings or current acct surpluses to afford such reckless luxuries (QE, excessive deficits/debt) for another qtr or 2, let alone another year or 10.
In Austerity the game is up for deficit primed grwth and for uber easy money. Grwth and bubble gains in risk assets are relegated to the backseat of the bus. Balance sheet repair and prudence are the new drivers of the bus, in turn driven by The People (the private sector). Policymakers will do what The People want, or risk losing THEIR jobs. In Austerity deflation rules, as do Govvies, very High Quality Credit and only the highest quality big cap global equities/best earnings streams. Currencies do OK. Commodities (gold, crude) don’t.
Let’s see what happens. But clearly the events of recent weeks SEEM like a game changer. Time will make it all clear but for me the odds have definitely shifted in favour of Austerity sooner rather than later and in favour of the view that we HAVE already seen the equity highs and spread tights for the post-March 09 risk asset rally.
Now, aside from all that bearish stuff, Bob has some interesting observations on Greece — surprisingly he’s a long-term buyer of Greece sovereign debt.
Here’s why:
Spreads CAN go much wider then even now as the implementation is challenged. But ultimately Greece and the Greek people will need to decide if it/they want to be in the Euro or not – this is in essence the issue of ‘are the people of Greece and its Govt willing to repay?’. I think the answer is a defo YES. So I think that in a years time, Greek govvie debt will be trading 200+bps tighter then now, although it COULD get to 500/500+ over Germany in the next few mths. The EUROZONE project is NOT going to fail because of Greece. In fact, a EUROZONE break-up is only really likely if Germany/the Core DO bailout the periph on a soft/open-ended basis, so that’s why I don’t think it happens. Spain and Portugal will have to undergo severe AUSTERITY too. More deflation. BUY GOVVIES.
If Greece is either unwilling and/or unable to repay, then IMHO Greece must be allowed to default/restructure within the Eurozone, much like when US states go bust. I am confident however that if this very low probability event happens, the EURO and the EUROZONE would see significant credibility GAINS – the project is far far stronger than its weakest link. The way to utterly destroy the project is to allow the weakest link to dictate policy – this is why I can’t see any soft bailouts nor any softening of the austerity that much of periph Eurozone is going to have to go thru if it wants to remain in the club. The credibility of the whole EUROZONE project is ANCHORED by German/Core HARD MONEY – if this is allowed to be watered down, then I would see this as the death knell for the EURO and EUROZONE.
Related links:
A second helping of Bob – FT Alphaville
The S&P is heading for 800 - FT Alphaville
Bob’s back – FT Alphaville
Stopped out – FT Alphaville