In an excellent interview with Bloomberg Briefs, Bob 'The Bear' Janjuah, senior independent client adviser at Nomura, warns that The Fed will have to step up as U.S. risks slide into technical recession next year, because, barring an extreme outlier outcome, neither Hillary Clinton nor Donald Trump would be able to get a significant fiscal package through Congress.
Q: What's your U.S. election view?
A: I don't really think it matters a whole heap whoever wins, unless we get the most unlikely outcome where Hillary wins and the Democrats take Congress. From the perspective of a Hillary or Trump presidency doing bad things like deporting millions of people or building a wall with Mexico, I just don't think that's going to be doable. Neither Hillary nor Trump in my base case view will have the strong support of Congress.
Q: What if Clinton wins?
A: While the short-term market impact will be positive, I think it very quickly would give way to a realization that a Republican Congress is going to make life incredibly difficult. Her ability to get through any kind of meaningful fiscal package for the U.S. economy would be remarkably small. Over the course of time, I think that a Hillary victory would result in an even more abrasive relationship with Congress. If there's a clean Democrat sweep, bonds will probably sell off, curves will steepen, but equities will like it.
Q: What are the Fed implications?
A: [A Clinton] victory, assuming that Democrats do not take Congress, means very little fiscal policy, all eyes back on the Fed and that makes [Fed Chair Janet] Yellen's decision to hike a little bit harder. She will realize over time that she's the only game in town. More issuance, together with a Fed that is either standing still or even tightening at the margin, should in theory mean slightly higher bond yields. If the U.S. starts to slow down again — which I think it will, if we're involved in some kind of cyclical, normal business cycle recession — all the pressure will be back on the Fed because I don't think Washington is going to be in a position to help.
Q: What happens to U.S. rates?
A: Do I think the Fed's going to hike in December? Probably. Do I think that the Fed's going to go on a big hiking cycle? Absolutely not. A new round of QE is more likely over the next two years than the Fed hiking by 100 basis points. With Washington in gridlock, the pressure on the Fed to do more will go through the roof. The residual credibility they have will need to be used up.
Q: What's your U.S. growth view?
A: Nominal GDP in the U.S. is trending towards 2 percent. Real GDP is one point something on a trend basis, which clearly isn't enough to support earnings and jobs in a negative productivity cycle, so I worry that we may end up seeing some kind of technical recession in the U.S. next year. Eventually, we’re going to end up in a situation where asset prices will be so far out of line with the income and earnings potential of the U.S. economy that we risk a significant repricing event.
Q: What if it's Trump?
A: Equities will be negative. It could easily be 100-200 points lower than here on the S&P 500. I'm not as worried as other people: A Trump victory would see him put in a box by his own party. There's a bit more hope for some kind of fiscal package backed by the Republican Congress, but I think the market focus is going to be: "Oh my God, he's going to go after Yellen."
Q: What's the geopolitical impact?
A: A Trump presidency would probably want to have as little to do with the Middle East as possible. It would attempt to open up the Alaska pipeline properly and allow unabated drilling for energy wherever you want in the U.S. I don't worry about war, or some kind of global escalation because too many people have too much to lose. I think [Russian President Vladimir] Putin would be more wary of Clinton, though I'm not sure what she could do. The future of NATO would be a very interesting debating point. It could be very different under a Trump outcome versus a Hillary outcome. The future of Brexit could be quite different. The bottom line is that Trump seems more like an isolationist. The U.S. from an energy perspective can be more isolationist now.
Q: How do you position?
A: From a bond market perspective, I like Treasuries. I like duration in the U.S. I want to buy the 10-year in the 2-2.25 percent yield area on a one-year basis. The 2s-10s curve I was looking to steepen a bit more up to 100-105, we're at that kind of level. On a one-two year basis, because I'm in the camp that's lower for longer on growth and I don't worry about any takeoff in inflation, Treasuries at 2 point something percent when nominal GDP is 2 point something look very fair value at worst.
As Janjuah most recently noted in conclusion, globally the trends he saw pre-Brexit are still with us.
Policymakers globally need to move fast and get aggressive with properly targeted fiscal policy instead of poorly targeted monetary policy to help the real economy – relying on trickle down from the top 10% who have seen the biggest wealth gains is a failed policy. We need real fiscal policy aimed at investment, particularly in productivity, and at fairer redistribution. Otherwise extremism and resentment will keep growing everywhere, not just the UK If this requires big central banks to explicitly monetise debt stocks as well as debt flows, then so be it – if everyone does it together markets will find it hard to punish any one participant. In the context of the UK and the EU, my core view is one which ultimately sees pragmatic compromise, with changes on both sides, as both sides can see that collapsing the UK economy will serve nobody well, least of all the EU and in particular the eurozone. But contradictory headline risk and expert opinion will abound and markets will gyrate on these headlines. So for markets, in the short term I’d focus on being as flat/as close to benchmark as possible and trade intra-day volatility. On a multi-quarter basis, being long duration, especially in USTs but also quality credit (incl. EM) is still my preferred position.
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