Calling for a Bear
Something I do understand about the media; they do love to blow-up a story and with a full blown credit crisis unfolding in the global banking system its not surprising they are singing like canaries. Bless ‘em. I do however get occasionally irked when it gets to the point where there are materially affecting the outcome in a way that will make us all suffer in the long-term and that’s what’s happening now to a certain degree. This week’s Telegraph was a case in point.
RBS issues global stock and credit crash alert
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
“A very nasty period is soon to be upon us - be prepared,” said Bob Janjuah, the bank’s credit strategist.
…
Such a slide on world bourses would amount to one of the worst bear markets over the last century.
Well good lord its Armageddon upon us, or so it reads however as a regular reader of RBS financial outlook bulletins I was rather surprised by this somewhat negative assessment. If you look at the comment thread it seems to be taken by many that this is the official line being taken by the entire bank but what many don’t perhaps know is that Bob is known for being a bear and not just any old bear, he is the bearest bear of the hair bear bunch at RBS and Mr Evens-Pritchard of the Telegraph has cherry-picked even the choicest morsels from Bob’s email (not official report) as it is. His point of view is far from a consensus of the analytical teams.
The ruse seems to have worked as this article has remained top of the most read list on the Telegraph website all week. My favourite comment is :
“Love this guy he has predicted 7 of the last 3 crashes.”
So be careful what you read and always question its veracity.
Here is Bob’s original email (allegedly) :
I am pleased with the call from last Thursday, to significantly reduce shrt stk/shrt credit bets. At that point iTraxx XO was above 500, and S&P was in the low 1330s. We are now just above 450 XO and 1360 S&P.
Looking forward, nothing has changed for me. Tactically, and as mentioned above, whilst it was prudent to go from ‘10 out 10′ SHORT stks/credit to ‘2 or 3 out of 10′ SHORT at the back end of last week, I still want to retain at least some small short interest in credit and stks, because over the course of end June and early July, we will be transitioning from the zone of my tactical call INTO the zone of my VERY BEARISH strategic call for Aug/Sept/Oct.
This calls looks for S&P down at 1050 +/- 50 points during this 3 mth window, and whilst credit will relatively outperform stks, I still see XO at 650/700 during this period, HiVol up at 275/300, Main up in the 130s, and IG10 at/close to 200. Whilst I think August and September are the key risky months, the reason I’d be small shrt (now) over late June and July, when I suspect risk assets will try to rally (1405/1420 intra-day S&P, low 70s Main, mid-130s HiVol, 425ish XO, PERHAPS!) is that the risk is that the coming big sell off actually starts EARLIER rather than later.
Which is actually a very confusing way of saying that whilst mrkts will likely rally for the next 2/4 wks, we won’t see S&P above 1405 closing/1420 intra-day, and that the risks are that the Aug/Sept 20/25% sell off actually begins earlier, in July. So for me, I want to be positioned to capture the very big bear move coming over the next 3 months, and am prepared to see mrkts rally a bit in my face over the next few weeks, as a fair trade off against being positioned for a sell off that surprises by coming earlier than I expect.
I really do think much of the ‘expected’ Q3 federally induced grwth bounce has been seen in Q2. And as we get into data for June/July/Aug, both the seasonal adjustment in Crude falls away out of CPI - thus the CPI data for June, July and Aug will more fully reflect the real prices increases seen, and not some statisticians fantasy, AND the Birth/Death Adjustment on payrolls becomes less powerful (creates less ‘jobs’) - especially in July (the August release), when historically the B/D adjustment is NEGATIVE.
All of which means that I DO NOT see the Fed raising rates; instead I think the markets will call the Fed’s bluff and the Fed will be found wanting - I just can’t see them hiking rates into the peak of the election cycle. What I do think we will see is gradually weaker and weaker grwth data, heavy revisions downwards of H2 08 and 09 grwth and earnings expectations and, most likely in July and/or Aug, Payrolls at negative 150/200k yet inflation HIGHER with US CPI Headline at/close to 5%. This backdrop, and the massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike in the face of higher inflation, will combine to give us the big risk asset sell off discussed above.
My main task now is to try identify with more precision the timing and levels at which to get UBER shrt stks and credit….its when, NOT if in my view….
Cheers
bob
ps - anyone who can tell me what I am missing in the UK, with the FTSE up over 1.5%, plse feel free to fwd your shrts…at this point, all I can see and say is that the FTSE is setting itself up for a mighty big fall…..
See also : RBS stock market alert: Fund managers react
So, in a way, life reflects art or art reflects life. It’s most certainly the best ploy to pay the media so they sing like canaries. Pseudo-Hegelian principle, part 2 - create the outcry. Variation on the time worn and much loved principle of certain people up there. Let the outcry further fuel the crisis. Meanwhile, play stupid [the Fed] and send your lackeys to the FT to say we should forget Friedman et al.
Friedman was the leading proponent of the monetarist school of economic thought. He maintained that there is a close and stable link between inflation and the money supply, mainly that the phenomenon of inflation is to be regulated by controlling the amount of money poured into the national economy by the Federal Reserve Bank. Friedman’s arguments were designed to counter popular claims that inflation at the time was the result of increases in the oil price, or increases in wages: as he wrote,
I reckon we have to take most business articles in the media with a grain of salt. So often the reporting is focussed on the day to day trades rather than the big, underlying picture. And why shouldn’t it be? I often think that if they could really predict the future, reporters would make their money investing instead of reporting.
Bob’s PS is mighty interesting. And the pound seems to be weakening against the dollar.
Ah RBoS the ultimate wankers of the current property bubble.
@Chervil,
Also conversely if the analysts were any good they’d be running their own private equity fund, but to be fair they are often misquoted, must tow the company line and have internal politics to contend with.
@Sackerson,
I had a feeling you’d have an affinity for the old bear but lets face it, Bob is not saying anything that any analyst worth his salt wouldn’t say about seasonal fluctuations in the current market and with his decade-long bearish outlook he was going to be right one day. Like the Grandfather clock in my hallway is right twice a day with the weights in a draw.
@Baht At,
Everyone played their part like a perfect performance of “That Scottish Play”.
When I first started investing I was interested in the idea of diversification or risk. It seems that is very unlikely to protect you in this market. I am always surprised by the market assessment in the morning in Australia, which almost always correctly predicts where the market will go based on the results of the previous days trading on Wall Street. So much for a national stock market.
Inflation is always and everywhere a monetary phenomenon.
So there it is in one and they’re now attempting to crucify his barbs. Think there’s too much support for him just now though.