This morning we were graced with an update from one of RBS’ eccentric Bob Janjuah.
Bob launches into a 10-point diatribe, covering every angle of the economy from commercial paper to Paul Volcker to the bailout of Greece. His opinion of the global economy is certainly not optimistic, but temporarily he can’t bring himself to be an outright bear. And according to Janjuah, we’ve all been had:
“So if (as it seems to me) – even though we are agreed on the weak sustainable grwth outlook for the UK US Japan & Europe – that I WAS wrong and that Kevin is right on Austerity and the Reflation Trade, that policymakers will simply keep on behaving recklessly by loading on more debt and blowing more and bigger bubbles until the point of market and/or taxpayer revulsion, then this has some very clear ‘asset allocation’, and other, implications….”
So what does Bob’s world look like? Let’s take a look.
'Paul Volcker - it seems to me you were used by President Obama as a tool of political convenience post-Massachusetts. It seems to me that there is no real policymaker will to implement genuine reform/regulation - the lobbyists and the financial sector's players seem to have taken care of that. As you are one of my heroes, can I please suggest that you tell the President to find another tool, and please go enjoy your well earned retirement away from the beast that is Washington.'
'Reform/regulation is all the chatter post SEC/Goldman. I have no view on this specific issue at all, but I do see this whole issue as having a broader side-effect - it serves Washington as a smokescreen against that chrge that prgress on real reform and regulation has been at a pace that would embarrass a snail on sedatives. As the policymakers in the West have clearly decided that MORE debt and MORE bubbles are the only way forward, whereby wealth is transferred from those who have been prudent and saved, to those that have been reckless and who have levered up and speculated, via inflation, then we should not be at all surprised at the lack of zeal on the issue of reform and regulation.'
'Citizens of Germany, Finland etc - Oh Dear! You have, IMHO, been sold-out by your leaders domestically and at the European level. All your hard won wealth, success and competitiveness is now, it seems, going to be used as a CASH COW to bail-out countries that had decided to go down the easy money/debt/don't pay any taxes route. Is this what you really signed up for when the European project was being put together (assuming you had a choice!!). You should feel deeply disappointed in (and perhaps even disgusted by) your policymakers as you, your wealth, your competitiveness and your successes have been SOLD OUT for the sake of bailing out a country which historically has been a serial defaulter. Be prepared for the next guy coming cap in hand.'
'For me, if I am right abt what I have written so far I have, long term, ABSOLUTELY NIL desire to own any EUROS or to own any BUNDS....why own BUNDS when you may as well own Greek Govvies - same risk, big pick up!?!?!!?...This is what the EURO and EUROZONE has become - the Greek bailout ensures that everyone in the club will be 'dumbed down' to the level of Greece. A truly sad day for Germany/Northern Europe.'
'On this, it seems that the market is going to wait for Greece to actually get some IMF/EU cash into its coffers before it is convinced. Once this cash turns up, certainly 'out to 3yr debt' - the bit covered by the IMF/EU - looks likely to rally. How long it rallies for and how far is a moot point. I think it is virtually certain that Greece will not be able to deliver on its fiscal promises and therefore what this all really comes down to is 'at what point does the German electorate and domestic leaders other than Merkel say 'No Mas''. Nobody knows for sure. But to me the biggest nonsense around is that the whole EUROZONE project will fail if Greece is NOT bailed out and allowed to default. On the contrary, the failure of the EUROZONE is GUARANTEED if Germany 'opts' out. And the credibility of the EUROZONE would be GREATLY ENHANCED if Greece were allowed to default/restructure. After all, membership of ANY club only has value if the club rules are adhered to. Any club that does not enforces its own rules and which instead 'forgives' (BAILS OUT!) those who knowingly and repeatedly break these rules is, frankly, a JOKE and an embarrassment and not a club worth joining UNLESS you are looking for handouts/'arb-ing' the club (and its rules).'
'More generally, it is clear to me that in the UK, US, EUROZONE (x-periph!!) & JAPAN, owning govvies is a total disaster on anything other than on a short term trading horizon. The global policy solution to the Credit Crisis is now clearly MORE DEBT, MORE FX DEBASEMENT, MORE BAILOUTS and MORE INFLATION, so why own any govvies other than for trading purposes. The same applies to the currencies/fiat money of these 'blocs'. I think the next big trend in govvie mrkts in the UK US EUROZONE is to expect bear flatteners - the shrt end of curves will wear all the inflation repricing risk, whereas very long (10yr+) maturities will do relatively better. I think we could see 2yr US UK EUROZONE out by 200bps over the next 6/9mths, with 10yrs out by perhaps 'only' (!!) 50/100bps. The bigger risk is parallel shifts higher in yield curves across the curve. Urgh!'
'On bonds, and whilst the real underlying prvte sector trend is one of deflation, policymakers have decided this is undesirable and therefore INFLATION is their sole motive. They also feel they can, over the long term, fool the investor community into believing their 'talk' of exit and into believing that some uber-narrow and 'convenient' measure of inflation is enough to fool us all into to think that there is no inflation risk. Thus they can carry on debasing and adding debt ad nauseam. All fine of course until inflation becomes TOO OBVIOUS to deny. At that point - and this may be mths/qtrs off - this game ends horribly badly with deflation the end trend, but not before a horrible inflation/stagflation spike. And at which point we will all again see the exploded bubble we have (again!) been part of, wittingly or not. When this bubble bursts, I really do think 08 will look like a picnic. I will also be curious to see who the scapegoat is next time, as clearly policymakers will not of course accept their central role. After all they have a 'great' track record on this issue.'
'My loathing of paper 'assets' out of these economies also applies to credit and equity. Clearly however some excess credit spread provides some inflation offset/protection - esp. in HY and distressed, and in equity land there is also some inflation protection, up to a point. So net net I can see SOME reasons to hold such risky assets - after all, the WHOLE POINT of Western policymaker 'policy' is to blow up these speculative bubbles, with total disregard for both the fundamentals and for the inevitable consequences of exploding bubbles. HOWEVER, once the inflation genie really takes hold - and it may be some mths/qtrs away - risky assets like credit and equity will get crushed too. Our work last yr told us the sweet spot for equities re CPI in the US was between abt 1.5% (headline annualised) and 3.5% - a very narrow window!!'
'IF I am going to be forced to own paper assets I want to focus on quality, on global big caps (debt & equity), and on strong balance sheet developing economy stks, where the focus should be on DOMESTIC grwth/growing domestic demand.'
'What I really want to own in a world of reckless policy, debasement, more debt, inflation etc, are PHYSICAL ASSETS like Gold, Oil and PRIME PROPERTY. I can see GOLD @$2k/oz in the next yr or so, Oil north of $100, and when I say Prime, I really mean SUPER PRIME - location and quality are key.'
I still hope, for the sake of the long term, that I am wrong and that Voluntary Austerity and Deflation will be enacted sooner rather than (too) late(r) in the problem economies. However, it is clear that over the last 6/9 mths I have let my view and vision get coloured. I let my HOPES (for Voluntary Austerity) and my still total BELIEF that this is the only way forward for long term success, colour my judgement. I have been blind to the reality - that our leaders and their buddies care little abt the long term and that all that seems to matter to them are short-term 'fixes', short-term popularity gains, more bubbles and more debt, whatever the consequences for inflation/stagflation and fiat money. We seem to be stuck in an era where policymakers only understand more debt, more deficits, & more debasement.
This IS gonna come back and savage (forget 'bite') us real hard unless our policymakers turn abruptly towards Voluntary Austerity/Deflation. As I've said before, we do NOT have the luxury of time here - it is simply not feasible to continue on the current policy paths for much more than a few qtrs. We do NOT HAVE years. And the longer we wait, the worse the unwind will be.
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