| Right! NOW! ha ha ha ha ha I am an antichrist I am a monetary anarchist Don't know what I want but I know how to get it I wanna destroy the pensioners that pass by I wanna BE monetary anarchy! |
(...and we will quit while we are behind.) That Sex Pistols hit could have easily served as the background tune to the latest note, entitled ‘Monetary Anarchy’, penned by Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura.
For countless years, Janjuah - formerly at the Royal Bank of Scotland - has growled during bearish and bullish market conditions, alike. In recent months, the macro strategist has poured cold water on suggestions the US is recovering, the eurozone can muddle through and, in Monday's note, pooh-poohed the latest bout of risk-on, among other things. It’s worth repeating the bulk of Janjuah’s thoughts since he encapsulates the case for the bears in no-holds-barred prose.
First, the Greek debt crisis will move from farce to tragedy, devastating eurozone capital markets. (Emphasis is ours)
| Greece (and the whole eurozone story) continues to lurch about, seemingly perpetually, from Farce to Tragedy. Policy seems to be focused on protecting and preserving vested interests, with little consideration given to the dreadful conditions the people of Greece and other "peripherals" are being forced to live with. However, it seems that eurozone leaders may be about to pour even more taxpayer money down into the black hole that is Greece, primarily to help the banks in Europe, at the expense of perhaps a decade of suffering by the Greek populace. For my part, I am now consigning the Greece/Peripherals/Eurozone story to the box marked "self-serving political debacle" and from here on in I will simplify Europe as follows: Until, and unless, Germany signs up to full fiscal union, a eurozone breakup is likely. And depending on how long we can continue to "kick the can" down the road in order to protect the eurozone banks, the eurozone will be consigned to an extended period of weak growth, which in turn means ever decreasing debt sustainability. Ultimately this means that the end game will simply be more devastating for us all the longer we are forced to wait. Investors should be fully aware that "home" bias amongst real money investors is now "off the charts". This is not a good development for the eurozone, unless of course our leaders are preparing for break up, or at least considering it as a viable option. |
We live in an era of fiscal authoritarianism - the rise of the technocrats in the eurozone is an affront to democracy – versus monetary anarchy, he says.
| I am staggered at how easily the concepts of Democracy and the Rule of Law – two of the pillars of the modern world – have been brushed aside in the interests of political expediency. This is not just a eurozone phenomenon but of course the removal of elected governments and the instalment of "insider" technocrats who simply serve the interests of the elite has become a specialisation in Europe. Many will think this kind of development is not a big deal and is instead may be what is needed. Personally I am absolutely certain that the kind of totalitarianism being pushed on us by our leaders will – if allowed to persist and fester – end with consequences which are way beyond anything the printing presses of our central banks could ever hope to contain. Communism failed badly. Why then are we arguably trying to resurrect a version of it, particularly in Europe? Are the banks so powerful that we are all beholden to them and the biggest nonsense of all – that defaults should never happen (unless said defaults are trivial or largely meaningless)? |
(FYI: this is not a manifesto penned by an Occupy movement.)
Do markets know that policy-makers are using cyclical tools to solve structural problems? You betcha. But, analysts are wary of repeating a mistake from spring 2010: dismissing the potential for stimulus to buttress a rally. And that lesson is not being lost on good ole Janjuah:
| More broadly, with Mr Draghi now in situ, it is clear that I misread and misunderstood two things. First, I am simply stunned that our policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas. It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being "told" to double up on these same policy decisions. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble which then collapsed, destroying the lives and livelihoods of tens of millions of relatively innocent people. Well now, if you listen to the latest from Bernanke and Draghi, it seems that the only solution they can offer up is to yet again misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again "greedy" enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now "richer". When – as they do by definition – these bubbles burst, those who have been suckered in will realise that their "wealth" is instead an illusion, which in turn will be replaced by default risk. Secondly, I have clearly underestimated the ‘market’s’ willingness, nay desperation, to go along with this ultimately ruinous policy path. Personally, I think this is extremely worrying – the number of clients who tell me that they know they are being forced into playing a game that will end in disaster, but who feel they have to play along and who hope they will get out before it turns, is a depressingly familiar old tale. Some such folks hang onto the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more money/more liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply side reform and the search for true competiveness and sustainable growth will be further cast aside, as the focus will be on the "easy gains" to be made in markets. |
Unsurpisingly, he reckons this policy-induced bubble is not sustainable:
| ...when looking for where the bubbles may be, realise this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market. Third, when this bubble bursts, I don’t think there is an easy way out. Who will be the bail-out provider? We already have extraordinarily weak and fragile government balance sheets, ditto banking balance sheets and consumer balance sheets. The big cap corporate balance sheet is sound, but it already worries about how bad the real economy hit will be when the next bubble bursts. As such, the corporate sector – which has a huge degree of "control" over the political classes – will keeps its powder dry until asset prices fall to clearing levels. When this happens they will be the biggest buyer of truly cheap assets in town, but not before then. The really dangerous thing about this next bubble is that it will likely ruin current central bank credibility, as their balance sheet expansion, accumulating ever more "toxic" assets, is at the centre of the current cycle. As a result, the central bank decision-making function is now (increasingly) deeply compromised, if not utterly at odds with its own raison dêtre. This of course means that if/when the current cycle implodes, central banks which have seen explosive balance sheet growth will add to the problems, rather than being able to act as credible lenders of last resort. A resulting consequence is that we will, at that point, usher in a new era of central banking and policy settings, where the key will be to regain a semblance of credibility and independence. This will be good news. But we will likely have to go through the "bust" first. I am not well equipped to navigate bubbles where tactical views and secular views are all thrown into the melting pot together, where there is no visibility, where – as one client put it to me recently – we have Monetary Anarchy running riot, where the elastic band between the ‘real’ economy and the current liquidity- fuelled markets is stretched further and further beyond credulity, and where history tells us that policymakers will happily stand by whilst bubbles are being pumped up, and hope that they are onto their next job before it all comes tumbling down. It seems that the 07/08/09 part of this crisis has resulted in zero lessons learned. |
Fine, you win. We have now donned our tin hat, bulletproof vest and have found a nearby bunker. For now, where should we sink our cash?
| My personal recommendation is to sit in Gold and non-financial high quality corporate credit and blue-chip big cap non- financial global equities. Bond and Currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears. Real assets are relatively attractive. But I am going to wait for this current central bank bubble to burst before going all in. I may be waiting 5 days, 5 weeks, 5 months, perhaps 5 quarters. It all depends on when and how our central bank leaders are exposed as lacking credibility and/or lacking the mandates to keep pumping liquidity into the system. The end of the bubble will be sign posted by either monetary anarchy creating major real economy inflation or by a deflationary credit collapse (if they run out of pumping "mandates"). The end game is incredibly binary in my view, but in between it is pretty much a random walk. Either way, "bonds are toast" in any secular timeframe (due either to huge inflationary pressures, or due to a deflationary credit collapse), which in turn means that asset bubbles in risky assets will get crushed on a secular basis. |
Ouch.
Taking stock, these are all fair points to present an extreme case for the bears, though they lack some nuance, obviously. Or maybe, Bob really does not like Mondays.