In the latest update from Nomura’s Bob Janjuah, the traditionally bearish strategist justified his nickname, and when previewing his exposure to the market, says that “I generally want to be long bonds, especially long US duration, I want generally to be long the USD (as the least bad), and I generally want to be flat/short equities as equity valuations are not in my view supported by growth or earnings but rather only through heavily distorted markets/policy and financial engineering of EPS.”
But before laying out his full note, here is a segment which he hope all central bankers in the world will some day read as it explains everything that is wrong with both the global economy and financial system today:
The big driving forces we need to think about are globalisation, technological advancement, excessive indebtedness, stifling (but probably necessary) financial sector regulation and rapidly deteriorating demographics. These factors are largely deflationary and are here to stay, Brexit or no Brexit. Globalisation in particular has been wonderful at a global level as it has helped reduce global poverty greatly over the last two to three decades. But the price has been stagnant-to-falling real incomes and standards of living in the developed world, covered up by significant and still growing indebtedness. Fiscal policy options and flexibility have been severely hit by the choice policymakers took back in 2008 and the years that followed to bail out the financial sector – this fiscal spend has resulted in little, no or even negative multipliers in the last 5+ years. For sure, policymakers were faced with stark choices at the time, but I maintain the view I voiced at the time back in 2008-09, that the hit from the failure of the financial system should have been spread more among financial sector bond and equity investors rather than the policies of austerity and financial suppression which have sought to socialise the cost largely among the bottom 90% of the population. As such, fiscal policy has failed the real economy, particularly in developed markets, for nearly a decade. And by dumping the responsibility for the heavy lifting for growth on central banks, we have ended up with asset bubbles, rampant speculation, lack of investment in productivity and in the real economy, significant levels of financial engineering to artificially boost earnings, and merely the (now failed) hope that “trickle down” still works. The outcome has been almost unprecedented levels of rising inequality in the global economy. I suspect that it is this inequality that was behind a fair chunk of last week’s Brexit outcome and which has driven the rise of extremism across other important nations/blocs. History tells us that such trends can lead to adverse outcomes particularly where large numbers of the population feel disenfranchised from the political classes. Thus, Brexit!
Since we have said precisely the same for about 7 years, we agree.
His full note below
“Bob’s World – Bob’s World: Keep buying duration”
1 – This is not going to be a Brexit note. I am writing instead because one of my trigger levels based on the weekly closing level for the cash S&P500 index has been activated. In my last note I concluded by saying that once the S&P saw a weekly close above 2040, it would then trade in a narrow range of 2040 and 2136. This index, as a proxy for global risk-on/risk-off, has since early April stayed stuck in this range until last Friday, when post-Brexit it broke down below 2040.
2 – In my previous note I also highlighted my ongoing concerns with respect to weak global growth, deflation/disinflation still running rampant through the global economy, weakness in earnings, and the ongoing policy of FX wars driven by central banks (which I see as zero-sum in nature) providing merely temporary and illusory gains for individual nations/blocs at the expense of sustainable global growth. My view all year (and in fact since early 2014) has been to be long core government bond duration and short equities. Long-end bond yields are 100-150bp lower over the last 18/24 months in developed core markets. The Eurostoxx index peaked over a year ago and is now below the levels of 18/24 months ago, ditto the MSCI World index. Brexit had nothing to do with this view and has little or nothing to do with the fact that I continue to back this overall macro investment strategy for the foreseeable future. Central bankers, including the Fed, were in my view never going to embark on any serious tightening cycle and, as I mentioned in April, more easing/more attempts to devalue were to be expected (as we have seen), including a reversal by the Fed. Watch this space, but I suspect markets will be forced to park Brexit in the pending box if my concerns around potential recession and higher unemployment in the US become a reality. No doubt Brexit will be blamed for the world’s next set of growth concerns and be used to justify the next set of easings/devaluation attempts – but this ignores totally the fact that Brexit is a symptom and not a cause of the globe’s growth, earnings and deflation problems. And as such, my concern is that we pursue even more of the wrong policy choices that have been in place since 2008.
3 – The big driving forces we need to think about are globalisation, technological advancement, excessive indebtedness, stifling (but probably necessary) financial sector regulation and rapidly deteriorating demographics. These factors are largely deflationary and are here to stay, Brexit or no Brexit. Globalisation in particular has been wonderful at a global level as it has helped reduce global poverty greatly over the last two to three decades. But the price has been stagnant-to-falling real incomes and standards of living in the developed world, covered up by significant and still growing indebtedness. Fiscal policy options and flexibility have been severely hit by the choice policymakers took back in 2008 and the years that followed to bail out the financial sector – this fiscal spend has resulted in little, no or even negative multipliers in the last 5+ years. For sure, policymakers were faced with stark choices at the time, but I maintain the view I voiced at the time back in 2008-09, that the hit from the failure of the financial system should have been spread more among financial sector bond and equity investors rather than the policies of austerity and financial suppression which have sought to socialise the cost largely among the bottom 90% of the population. As such, fiscal policy has failed the real economy, particularly in developed markets, for nearly a decade. And by dumping the responsibility for the heavy lifting for growth on central banks, we have ended up with asset bubbles, rampant speculation, lack of investment in productivity and in the real economy, significant levels of financial engineering to artificially boost earnings, and merely the (now failed) hope that “trickle down” still works. The outcome has been almost unprecedented levels of rising inequality in the global economy. I suspect that it is this inequality that was behind a fair chunk of last week’s Brexit outcome and which has driven the rise of extremism across other important nations/blocs. History tells us that such trends can lead to adverse outcomes particularly where large numbers of the population feel disenfranchised from the political classes. Thus, Brexit!
4 – Regarding Brexit I will let others provide the detailed coverage and analysis. For my part, I believe good sense and compromise will prevail over time and I really do believe that all of Europe – whether in the EU or not, or in the eurozone or not – will be better off as a result of Brexit and (hopefully) the ensuing sensible negotiations. The core eurozone federalists (and the only sustainable eurozone in the long run is one with fiscal, political and banking, as well as monetary union) can proceed unimpeded by the UK, and Europe will as a whole survive as an open trading zone, albeit with changes. None of this will be easy or risk-free. It will take time, and we will likely see plenty of conflicting headlines (just think about the eurozone and Greece over the past five years!) over the coming weeks and months, but pragmatic compromise is a common mutual trait among most people in Europe. In markets we must remember that the eurozone and the EU have shown over the last 5+ years a willingness to talk tough and draw many “lines in the sand” but ultimately, after listening to the many interested parties, pragmatism tends to prevail. I expect the UK to be “punished” publicly and lots of talk about cast iron principles, but I also expect compromises by all. An EU which attempts to punish the UK will be shooting itself in the foot, and it seems that the real leaders of Europe understand this and for the need for the EU to change. The concept of Mutually Assured Destruction (MAD) is alive and well. But equally the UK can’t expect to get everything for nothing. Hence, I expect compromise and pragmatism, even if some media headlines suggest otherwise. It is also very encouraging to see that, after the initial tantrum, which was largely driven by the excessive run-up in markets in the 48/72 hours before the results pointing the other way became clear, markets have behaved quite calmly and rationally. Of course, one thing we need to remember is that “expert” opinion needs to be taken with a pinch of salt. Just ask yourself how many times experts at the big global institutions and central banks have told us over the last 5/10 years that growth was about to take off, that inflation and thus higher policy rates were on their way, that there would be no bailouts, that there would be no monetisation, that there would be no defaults. I have never seen myself as an expert but the “pinch of salt” warning applies as much to me as anyone! The truth is that at best we tend to make educated guesses and tend to seek comfort in the herd (including the contrarian herd), even if it proves to be spectacularly wrong. And just to clarify, I think both sides of the Brexit debate were over-hyped. The aim of the next few months and years is to avoid mutual destruction and thus to seek pragmatic compromise. I fully understand the post-Brexit concerns about growth, about the financial services sector, about the need for FDI flows to offset the current account deficit. But surely for the last few years in the UK growth has been a concern, over-concentration in financial services (and excessive inequality) has been a concern and we have been told for years that the UK needs to manufacture and export more and import/consume less. Who knows, but over time maybe Brexit will turn out to be the jolt the UK needs. Equally, the UK will need to remain an open global economy and a place where people want to live and invest. So we come back to those words – pragmatism and compromise. Divorces tend to be grounded in some reality but can sometimes generate excessive levels of hatred, anger, angst, depression and vilification at some point during the actual process. But most divorces end with compromise, a feeling that neither side won/lost overall, that the right thing should be done for the kids, and by and large better relationships in the long run. Most times people get remarried, even sometimes to a former spouse!
5 – So from here, how to be positioned? Shorter-term headline risk will be significant and lead to lots of volatility and bouts of fear and greed. Sharp ratios are set to deteriorate on average over the next few months. To me it seems like a day-trader’s market at best. Whether thinking about markets, Brexit negotiations, US Presidential hopeful Donald Trump, global growth weakness or what policymakers can/will do next it will not be easy to deliver consistent returns on a daily, weekly or even monthly basis for the balance of 2016. So I prefer to take a longer-term view, which remains unaltered by Brexit. I generally want to be long bonds, especially long US duration, I want generally to be long the USD (as the least bad), and I generally want to be flat/short equities as equity valuations are not in my view supported by growth or earnings but rather only through heavily distorted markets/policy and financial engineering of EPS. Specifically relating to tactical equity trading in the immediate short term, if the cash S&P500 index does not close over 2026 this Friday I would lean into risk-off. A close above 2040 would suggest more caution against being too risk-off too early and tactically suggest to me to be long stocks for another run up to 2100/2135, although this would be a low conviction recommendation. And a weekly close in between would force me to the sidelines to assess news flow and price action. More broadly, I expect 10yr and 30yr UST yields to trade down to 1.25% and 2% respectively over Q3, and I’d treat equities as an occasional tactical trading asset, where weekly S&P500 closes below 2040 and above 2136 define the core range around and within which to trade this asset class.
By way of conclusion, globally the trends I 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.
via http://ift.tt/29eaB6F Tyler Durden