After a five month absence, Bob Janjuah is back.
Bob’s World – Bubble Still Building
From Nomura
Since I last wrote markets have largely followed the path I set out in June. At the time I was looking for the risk sell-off that began in May (and which was sparked by Fed Chairman Bernanke’s tapering comments) to result in the S&P falling from 1687 to no lower than 1530 in Q2/Q3, and then I expected the S&P to rally (driven by the Fed’s inevitable subsequent concerns on tapering, which I felt would see the Fed heavily water down its tapering message) all the way to the high 1700s/1800 in Q3/Q4.
By way of review: The Q2/Q3 sell-off stopped with an S&P low print at 1560 in late June; the Fed got so concerned about tapering over Q3 that it not only heavily watered down its tapering message, it abandoned it (for now!) altogether; the subsequent rally I expected has seen the S&P trade to a Q4 2013 high (so far) of 1775. Overall, my forecast set out in my June note turned out to be accurate.
Now that my Q3/Q4 targets have been hit an update is due:
1 – As per my June (and earlier) note(s), from a TIME perspective I still see end Q4 2013, through to end Q1 2014, as the window in which we see a significant risk-on top before giving way, over the last three quarters of 2014 and through 2015, to what could be a 25% to 50% sell-off in global stock markets. From a LEVEL perspective, my 1800 target for the S&P into the aforementioned ‘peak’ time window (Q4 2013/Q1 2014) has pretty much already been hit. As I expect marginal higher highs before the big reversal, and while my target for this high in the S&P over the next five months remains anchored around 1800, an ‘extreme’ upside target could see the S&P trade up to 1850. Put it another way – before we see any big risk reversal over 2014 and 2015, we need to see more complacency in markets. I am looking – as a proxy guide – for the VIX index to trade down at 10 between now and end Q1 2014 before I would recommend large-scale positioning for a major risk reversal over the last three quarters of 2014 and over 2015.
2 – The major themes are unchanged – anaemic global growth/mediocre fundamentals, what I consider to be extraordinarily and dangerously loose (monetary) policy settings, very poor global demographics, excessive debt, an enormous misallocation of capital driven by the state sponsored mispricing of money/capital, and excessive financial market/asset price speculation at the expense of any benefit to the real economy. In the context of growth surely I am not the only person surprised at policymakers, especially in the UK and the US, where seemingly the only solution to massive financial market and economic failures is to resort to more of the same of what caused the original problems – namely debt-driven consumption, debt-driven asset price speculation, and the expansion of the ‘Ponzi’ that best describes our modern day economic ‘model’. Personally I do not think the recent mini outbreak of growth optimism is sustainable, primarily because this optimism is based on more leverage and more asset price speculation, which in turn is based upon a set of policies (easy money) that are not credible nor consistent over any ‘real economy’ time frame that really matters. Shorter-term speculation/trading gains are a different matter of course!
3 – Between now and the end of Q1 2014, when I expect to see a major higher high in the S&P in the 1800/1850 range, I would also caution that we could see an interim sell-off that may surprise. Specifically I feel that between now and year-end, especially over the rest of November, we could see a risk-off period that, for example, takes the S&P from 1775 to perhaps 1650/1700, or even as low as the 1600/1650 area. The key here is that, I think in the very short term, markets have priced out pretty much all the risk in markets, and have priced in pretty much all the ‘good’ news. As such I feel sentiment and positioning are currently very vulnerable, especially to any unexpected bad news out of China, out of the eurozone, out of Japan/’Abe-nomics’, and in particular on the confirmation of Janet Yellen by the Senate. If we do get a decent risk-off period in November, I would buy this dip on a tactical basis into the 1800/1850 S&P high target I have for Q4 2013/Q1 2014.
4 – Beyond Q1 2014, the longer term will all likely be driven by the growth data and the credibility of policymakers and what seems like an all-in ‘bet’ on QE as the solution to our ills. It is easy to argue that the major real impact of this policy has merely been to make the rich – the top 10% – ‘richer’, at the expense of the remaining 90%. It seems pretty obvious to many that while the last five years has all been about policymakers being ‘reverse hijacked’ by financial markets and financial market players (the ‘top’ 10%), the next five years HAS to be about a rebalancing towards the ‘real economy’ and the bottom 90%, at the expense of the top 10%. This shift in policy emphasis will not be a happy time for financial markets and speculators while the transition happens, but in the very long term will be seen as a major positive event, in my view. Certainly, the alternative (and current policy) of waiting for some mythical wealth trickle down impact to take us back to the seemingly good old (debt driven) days of the 00s is, in the long run, a delusion that is also likely to result in another financial market and economic failure to rival the very failure we are still, five years on, trying to address!
5 – As mentioned above, the VIX index at 10 would, to me, indicate that the time is then right to get seriously positioned for a major risk reversal, but until then any Q4 2013 dip (as per 3 above) would to me represent a buying opportunity into my expected high in Q1 2014. As a stop loss for this Q4 2013/Q1 2014 high, consecutive weekly closes in the S&P500 above 1850 would stop me out.
To answer the question I get asked the most right now: What in terms of financial assets, would I own NOW if I had to hold it for a year? My answer remains strong balance-sheet corporate credit spread (yields may be expensive, but spreads are not), Italian government debt, and the USD (esp. vs JPY). As one never knows, I’d also have small speculative ‘long-risk’ positions in bank equity, via options, just in case the speculative bubble takes longer to peak and peaks at levels even higher than forecast above.
Regards
Bob
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