Bob Janjuah, the famously bearish strategist who jumped from RBS to Nomura last year, is out with this third big note since joining the firm.
He’s telling clients to “Fade Jackson Hole” on the belief that at this point all the good economic news is priced in, and that neither Bernanke nor Obama have any more bullets to fire.
Is the US now on a path to sustained growth driven by sustained increases in domestic consumption, domestic capex, domestic job creation and domestic (real) wage increases? Or are we going through a redux of late 2009/early 2010? Think back a year – the market talk and statements out of the Fed (Bernanke included) was of sustained growth, exit from QE and even rate hikes! In Q2 2010 growth faded badly and we ended up with QE2. My message now is where would the S&P 500 index have ended in 2010 had QE2 not been forthcoming? I strongly believe QE2 added over 250 points to the S&P based on where it closed the year.
I make this point for one simple reason. If growth fades in Q2 and Q3 2011, as we fear and as we saw in 2010, then we think the hurdle rate that has to be cleared before there could be any more fiscal or monetary boosts (QE3?) is now much higher than in 2010. This is partly because we feel President
Obama and Bernanke’s credibility will be damaged if QE3 is ever seen as necessary, partly because of the net hawkish changes to the FOMC voting member now versus 2010, partly because of Ron Paul in his new role as Chair of the Domestic Monetary Policy Committee, partly because of the Tea Party, which is looking to use their new power in Congress to reduce fiscal deficits, but mostly because we think the US electorate are clearly losing faith in its policymakers and policymaking institutions. We
think confidence will hit new lows if, over the belly of 2011, the growth story fades, equity markets correct 10-20%, and/or if the unemployment rate inches upwards rather than falls.
And in terms of a specific trading recommendation…
Tactically we are now bearish and look for at least a partial reversal of the post- Jackson Hole QE2 inspired rally. Many technical and sentiment indicators are suggesting a 5% to 10% correction in equities (S&P500 from 1300 to 1220s). As I stated in my previous two pieces we were expecting risk assets to rally from mid-November through to early Q1 2011. My initial target on the S&P500 set in November when it was in the mid- 1100s was 1220, and once we cleared and closed over 1220 for four consecutive days 1300, 1330 and 1350 were/are the next obvious targets. It has touched 1300, but has fallen well short of 1330 and 1350 – for now anyway. February may see the S&P500 grind up to 1350, and I expect the bulk of the tactically bearish repricing to occur in and around March and April. If it goes to 1350, and assuming that we do not have four consecutive closes above this level, my March/April target for the S&P500 (as a global risk proxy) is for a minimum 10% sell-off down to 1220, although my central forecast is for a correction of up to 20%, looking for the S&P500 to trade down to mid-1000s in during March/April. If there are four consecutive S&P500 closes above 1350, then we may be seeing markets enter melt-up phases (see below).
As for the other big themes of the letter, Janjuah is optimistic that European governments are moving towards a structural solution to their problems (and thus extricating the ECB from the task of having to be the bond buyer of last resort), and he foresees a soft landing in emerging market, unless governments turn on the inflation spigot, in which case they’ll blow a bubble, and eventually get to a hard landing.