Having correctly foreseen in September that "China's devaluations are not over yet" it appears Nomura's infamous 'bear' Bob Janjuah has also nailed The Fed's subsequent actions (hiking rates into a fundamentally weakening economy in a desperate bid to "convince markets that strong growth and inflation are on their way back"). In light of this, his latest note today should be worrisome to many as he warns the S&P 500 will trade down around 20% to 25% from current levels in H1, down to the 1500s and for dip-buyers, it's over: "I now feel even more certain that debt-driven asset bubble implosions cannot merely be 'fixed' with even more debt and another round of central bank-driven asset bubbles."
As Janjuah said in September (excerpted):
I believe there is more weakness ahead – both fundamentally and within markets – over Q4 and perhaps into Q1 2016.
I repeat my view that the Fed does not need to hike based on fundamentals, but I would not be at all surprised to see the Fed hike in late 2015, in an attempt to convince markets that strong growth and inflation are on their way back. Any such hiking cycle by the Fed would I believe be extremely short-lived and quickly give way to renewed dovishness.
While I think a US recession is merely possible rather than probable, the evidence is growing in my view that a global recession is more probable than possible.
Where is the Fed “put”, and what would such a “put” look like? It is very early in the process and lots will depend on global policy responses and data outcomes, but I am happy to declare my view: the next Fed “put” is not likely until the S&P 500 is trading in the 1500s at least (so more likely to be a Q1 2016 item rather than Q4 2015); and in terms of what the Fed could do, clearly QE4 has to be in the Fed’s toolkit. However, considering the failure of global QE to generate sustainable global growth and inflation, and considering the Fed’s starting point, 2016 could be the year when we see negative Fed Funds as a way of getting money velocity moving up rather than down.
Such a move may work, in that risk assets could react very positively for a period of time, but in the longer run any such moves would only serve to highlight the extraordinary ongoing failure by global central banks to manage economies (both into and) since the 2008-09 crash.
And in today's note, Janjuah takes it one step further:
Instead of writing in my normal narrative style, with each new note a direct follow-on from each previous one (my last note was published in October), I wanted to do something a little different. Not that my views have changed – rather I now feel even more certain that debt-driven asset bubble implosions (such as the GFC) cannot merely be ‘fixed’ with even more debt and another round of central bank-driven asset bubbles.
Policy since the GFC has resulted in a deeply unstable outcome in the global economy and across markets.
Alan Greenspan and US legislators addressed the early 2000s debt-driven asset bubble collapse (primarily in corporate equities) by driving another round of debt-driven asset bubbles (primarily in housing and the financial sector). And we know how that ended!
So I wanted to present my top 6 predictions for the year ahead, split by asset class, albeit the key drivers of my 2016 views (weak global growth, with the US at/near the centre of the storm; EM weakness particularly in China and oil/commodity producers) and how they will act across all asset classes:
1 – Rates – I like core duration pretty much across DMs, including the eurozone periphery, but particularly in the US. Before the end of 2016 I think the 30yr UST will be yielding well below 2.5% and the 10yr UST will be closer to 1.5% than 2%. The Fed may hike once or twice more in H1, but before 2016 is finished I think the Fed will be on hold/hinting at a new round of easing/actually easing.
2 – FX – The USD can do OK in Q1, but by the end of Q2/early Q3 the market will price in the Fed’s policy error (before the Fed acknowledges it) and the USD will then turn lower in a trend fashion. Until then China and the commodity/EM bloc will continue to be under pressure. We think China will keep devaluing (we could see 7 vs the USD). The Saudi USD peg is at risk, but may well hold and then get some relief if I am right about the Fed and the USD in H2 2016. In H1, and possibly in Q1, the BOJ will have to ease further to prevent further JPY appreciation, not just vs the USD, but also vs the EUR and China.
3 – Stocks – I think the S&P 500 will trade down around 20% to 25% from current levels in H1, down to the 1500s level that I wrote about last year as a target for 2016 (we are already 7% off from the 2015 highs), before a recovery (once the Fed ‘turns’). I am looking for an earnings and jobs recession in the US this year, to become clear sooner rather than later in the year. I do not want to be ‘invested’ in equities at least over H1, rather equities are a trading asset. As I am confident the BOJ will out-ease the Fed, particularly into end Q1/Q2, for H1 2016 I am happy to own Japanese equities vs short US equities, FX hedged, over H1 2016.
4 – Commodities – Further weakness ahead in H1. I look for WTI to trade below $30. And I hope the situation between Saudi Arabia and Iran remains as controlled as it can be, because the type of oil price spike that could result if things between these two nations deteriorate much further would I fear be extremely painful for the global economy. I am old enough to remember the 1970s oil price shocks.
5 – Credit – I am very concerned about the outlook for EM credit and DM high yield markets, particularly in the US. A possible safe haven is the eurozone IG credit space, albeit there is a rising level of idiosyncratic concerns even in this relative safe haven, and at some point markets may react to further instances of such risks by pricing in much greater correlated risks, à la 2007 and 2008. Liquidity will likely remain a major concern. EM and high yield markets MAY get relief if I am right about the Fed turning from hawk to dove during the belly of 2016, but until that becomes more obvious, my general recommendation is to focus on only the best, most transparent (and least spread heavy) parts of credit markets. For choice, I would rather own core duration in government bond markets.
6 – EM – Until the Fed turns I remain bearish China, commodities and EM. If the Fed turns (as I forecast), or more likely once the markets begin to price in a reversal by the Fed, which should then lead to looser USD global liquidity and a weaker USD on a trend basis, then I will look to reconsider my EM views more positively. As discussed above, that means the next three to six months will likely continue to be a major challenge for the EM world, particularly commodity producers, but of course also including China.
Let’s see how things play out – I will refer back to this note as the year unfolds, by way of an audit/sanity check. To end I wanted to highlight the two areas that would force me to reconsider my views herein sooner rather than later.
First, if we get major fiscal policy action across China, Japan, the US and the eurozone, I will have to review my outlook. As of now, I feel this is a low risk to my views.
Second, the US (and to some extent the global) consumer could surprise me and all of a sudden start levering up to consume at an annualised rate to 4% to 5%, rather than 1% to 2%. If this looks like it is happening, I will have to review. As of now I think this is also a low probability outcome, but it would be foolish to ignore this risk.
As Janjuah concluded previously, the last few months have seen markets meandering around largely sideways as policymakers attempt to talk things up in the face of intense market concerns. However, significant damage has yet again been done to the credibility of policymakers, and to the belief in normalisation, in inflation, and in the ability of risk markets to continue ignoring the harsh realities of weak growth, weak pricing power and weakening earnings.