Some longer terms messages from Bob Janjuah

Analyst Bob Janjuah from RBS put out yesterday interesting post, from which I like the second part:


I want to finish off with some longer terms messages:

- the Big Reality over the next 3/5 yrs, esp. in the bad balance sheet countries - the UK, the US, Japan, big parts of Europe - is a long period of balance sheet repair which will mean weaker grwth for longer, deflation, weaker incomes, softer employment outlooks, more savings, more taxes, and less spending. There is NO sustainable prvte sector demand, and there really won't be any for some yrs.

- delusion no.1 is that these economies will devalue and export there way out of trouble. This seems a nonsense to me as EVERYONE is looking to devalue (a race to nowhere) and EVERYONE is looking to export, but to whom??

- delusion no.2 is that we can inflate away our debts. This can ONLY wrk successfully if such a policy of inflation is unanticipated, as otherwise it gets pre-emptively priced into inflation expectations. So it has already failed as AT LEAST half the mrkts see/expect this as the attempted way out.

- delusion no.3 is that governments can keep pumping/printing/borrowing, without consequence, and for long enough to hide the private sector deleveraging/deflationary trends. Those limits are pretty much already with us (Greece), or are soon to be with us give or take a few mths (in the UK), or at best give or take a few qtrs (in the case of the US). On the basis that prvte sector weakness is a multi-yr trend, government is NOT gonna be the solution and will become/is now part of the problem as austerity kicks in (Greece 'done', UK in a few mths, then the US later this year).

- delusion no.4 is 'the weather'. What a load of tosh. Frankly I am shocked the 'mrkt' collectively has fallen for this rubbish.

Anyway, due to the above 4 delusions the mrkt - as ever dominated by FEAR and GREED - is already badly mispricing the Big Reality and risks taking this mispricing YET AGAIN to horrible bubble proportions over the next few weeks/mths. YES - we have learnt nothing!

At some point the bubble will burst. Hopefully for ALL our sakes its sooner rather then later. The longer we are forced to wait, the bigger the bubble will be and the more horribly damaging the bursting process will be. And if we are forced to wait and the bubble gets anywhere like the one that went pop in late 2007 I have ZERO idea who will credibly be able to bail us all out the next time round. Certainly not OUR governments.

The gap between the fantasy in mrkts, which is being heavily touted by most of the sell-side, vs the reality of the real economy/prvte sector, is already worryingly large but risks becoming dangerously large. I am staggerred that folks who are paid to spot such things not only missed the biggest eco/mrkt disaster of our times, but are now cheerleading the 'recovery'. It seems to me that we are once again in the zone where policymakers and their willing partners on the sell-side are convincing the 'mrkt' that nothing can go wrong again and that worrying abt debt is just foolish. The same fantasy which said that house prices could never go down and that CPDO was a brilliant idea is now reforming/taking hold so that investors are once again chasing yield with little/no appreciation for the true risks being taken.

My futile rantings are not going to chge the game, and indeed many of you may already be bored stiff with my worrisome ways, but hopefully some of you will take heed and not get too sucked in. The trick is (a) to remember this, i.e, to be fully aware of the gap between reality and delusion, (b) to retain a rock solid appreciation of the differences between 'investing' vs. 'trading', between 'debt' and 'liquidity', and between actual vs. assumed liquidity, (c) as investors to ensure that your 'balance sheet' is not unduly damaged in the pursuit of yield - be sure you understand that taking a whole heap more risk now for a bit more carry is likely to be a strategy that ends very badly once the current bubble bursts, and (d) to stay on the right side of these 'pairs' - simply put, favour QUALITY.

Those that do will I think be the real multi-yr winners. Those who don't might see/rept a few decent qtrs (q2 09 thru to some point in h2 10), but ultimately will likely suffer so much when the current bubble bursts that they'll wish they 'had'.