Tuesday, December 20, 2016

"The Bears Are Dying: Even Bob Janjuah Turns (Somewhat) Bullish"

Sometimes it takes everything you've got just to drag yourself into the office.

From ZeroHedge:
For evidence that the market bears are all but extinct look no further than the latest letter from ertwhile bear Bob Janjuah, in which the Nomura strategist throws in the towel in a near-term correction and predicts that "the trends over H1 2017 should be higher (especially US) equities and yields, steeper curves, a stronger USD, and mixed performance in credit (especially in the IG sphere) and EM. Equity markets in particular are initially likely to ignore the inflation issue and focus on the idea that Donald Trump can overnight rebuild the US economy into a “4-5% nominal GDP” limo, vs the underlying current sense of a “3% and falling fast” jalopy. So for me, most likely over the middle two quarters of 2017, I can see the S&P 500 cash index up at 2450 +/- 50 points, with the Nasdaq weakest and the Dow strongest of the big three US indices."

He also forecasts that the Fed will be prompted to hike four times, raising rates by 100 bps in 2017, driven by “an overwhelming flow of inflationary and credit growth data” if Trump successfully implements his agenda early on as president, leading Fed to “see itself as way behind the curve." He expects that hikes to be back loaded into 2H17. As a result he believes the 10Y yield could go up to 4% as soon as 2H17 as “Trumponomics” may deliver greater-than-expected inflation.

However the bear is not entirealy dead: in addition to a powerful equity ramp in 2017, rising above the average Barron's roundtable forecast, Janjuah expects limited sustained GDP growth, more aggressive Fed and general tightening of financial conditions, which  will lead to next recession, with signals becoming clearer between mid-2017 and mid-2018.

He also warns that Trump will likely fail in his attempt to reflate the US economy, which will be unable to sustain an increase in GDP growth above the cost of capital.
In essence it comes down to the ability primarily of the US (other parts of the world still follow) to generate a sustainable increase in trend real GDP growth that outstrips the sustained increase in the cost of capital which we are seeing already most notably in USDs (through the rising USD, higher yields and now a hawkish Fed). If President Trump and the US can pull this off then it should generally benefit much of society. Unfortunately, I think Donald Trump is probably the wrong man at the wrong time. The world needed Trump reflation and Trumpian deregulation back in 2008-09 when unemployment, slack and output gaps were high. In 2017 I think Trumponomics is most likely to lead to a short-term boost to nominal GDP (which will be very tradable) giving way to serious inflationary concerns, which in turn will mean that the sustained increase in the cost of capital in USDs will ultimately trigger the next recession.
The next recession, he notes,  may also be triggered by shift away from central bank dominance, global normalization of monetary policy. 

He is also worried about a potential "portfolio" and "liquidity shock" in 2017 as the sell-side struggles to provide a “smooth and reliable” portfolio transformation:
[T]here is a portfolio shock in place. After eight+ years of central bank cajoling, many funds are now long the wrong assets at the wrong price – not just portfolios that own DM government bonds, but also most obviously portfolios heavy in credit assets, especially in hard currencies, especially in the IG sphere. As such, I think the possibility of a liquidity shock hitting markets in 2017 is material as the portfolio shock will require a level of risk and portfolio transformation that the sell-side will likely struggle to provide in any kind of smooth and reliable manner.
And then there are the "left field" surprises, which include global “risk hurdles” beyond the U.S. such as aggressive China devaluation and political instability in Turkey and euro area:
So keep watching for the next six months or so, or maybe for the next six quarters at an extreme – the most likely is somewhere in between. The risk hurdles are likely to come thick and fast. Aggressive China devaluations, Turkey and major political risks in the eurozone, which may well result in markets once again pricing in break-up risk, are three of many such hurdles/challenges outside of the US, alongside the US-driven ones discussed here. Stay close to the exit door and beware the complacency around inflation, the Fed and the impact of rapidly tightening financial conditions, especially in USD.
Not drifting too far from his reputation, Janjuah closes off on a cautious note:
 Over my 25+ years in this job, the one certainty I have found is that when the cost of capital rises as quickly and aggressively as it has and as I think it will continue to do so, at a time when debt levels are so high, then nasty accidents are virtually guaranteed.
Which, considering some of Janjuah's historical forecasts, can pass off as positively sanguine.
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His full note is below:...MUCH MORE