Monday , 17 June 2024

Coming Stock Market Collapse to Prompt $1Trillion QE in December

In the next 2-4 weeks I would not be surprised to see the S&P500 hit 1400/1450. In the ensuing 4 months (i.e. by the end of November), however, I expect global equity markets will fall by 20-25% from current levels and to trade at or below the lows of 2011! That would bring the S&P500 down to 1100/1000. That’s not all. In December I expect the Fed will introduce a $1 Trillion QE. Words: 921

So says Bob Janjuah, the current Nomura Fixed Income Contributing Strategist, in a post* at entitled Bob Janjuah:You Have Been Warned” posted by Tyler Durden.

Lorimer Wilson, editor of (Your Key to Making Money!) and (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Janjuah goes on to say, in part:

Herein I provide an update:

1 – The global growth picture is…weak and deteriorating – in the U.S., in the eurozone and in the emerging markets/BRICs.

  • The growth weakness is driven by a shortfall in true end global demand. We think the consensus is most off-target in its still too bullish growth expectations for the U.S. and the EM/BRICs complex.
  • The softness in the manufacturing/industrials and basic materials/oil and gas sectors is the most worrisome trend as Western service sectors are already seeing either very weak, or close to zero, trend growth.

2 – We…also think the market consensus is far too optimistic on policy expectations both in terms of the likelihood of seeing more (timely) fiscal and/or monetary policy assistance (globally), and in terms of any meaningful and/or lasting success of any such policy moves.

In particular, we think that the period August through to November (inclusive) represents a major global policy and political vacuum.

  • In the eurozone the political ‘impasse’ and the restrictions on (and lack of credibility of) policy are well known and central to the problem.
  • In the U.S., the election cycle means no major policy initiative is likely from either Washington or the Fed until later in November, at best.
  • In China, the leadership changes suggest only very minor policy inputs/assistance, most likely until the very back-end of 2012 or possibly not until March 2013.

3 – Jackson Hole may bring a bit of MBS buying by the Fed, but this will, we think, have a minimal positive impact on the real economy or on markets.

  • In fact, if it were to happen, we would view it as a very weak move by the Fed and a true representation of how toothless the Fed is – and will continue to be – until after the presidential elections.
  • Furthermore, before the Fed does it’s next major round of QE (I expect $1Trillion in December)…the market will be forced, in my view, to price IN the fiscal cliff into its 2013 growth and earnings forecasts. This is unlikely to be pleasant, and I would say be very wary of any messages that say that the fiscal cliff is either not important or is already priced in. The fiscal cliff issue is a substantial downside risk and is NOT currently priced in, according to our metrics.

4 – In the eurozone, full fiscal and political union is the only credible answer, but this is unlikely to happen smoothly or anytime soon. We may be talking years, but certainly many quarters.

  • The only likely credible ‘interim’ holding event, which I think would likely meaningfully alter the asymmetry of risk in the eurozone is full, unlimited, explicit QE by the ECB….but NOT UNTIL the eurozone inflation data are deeply and meaningfully and consistently deflationary.
  • When deflation comes the ECB will use its ‘price stability’ mandate to justify outright QE even while the politicians are arguing. HOWEVER, I think the data will not provide the ECB with the necessary air-cover until Q1 2013 at the earliest….
  • In my view, the ECB will also have to deal with the likelihood that sovereign PSIs/defaults/debt restructurings are going to be seen in Portugal, Greece (again!), Spain and maybe Italy….
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5 – The very significant parabolic push higher in the price of soft commodities… is likely to hamper both global growth AND the willingness and ability of policymakers to further debase, pump prime and print substantial amounts of money.

  • I think that core CPI will deflate, especially in the eurozone, but that headline (food) CPI will easily offset any relief from lower gasoline/crude prices and will make central bankers very nervous about further distorting the price and supply of money, for concerns about setting off a substantial stagflationary spiral….

6 – In the next 2-4 weeks I would not be surprised to see the S&P500 hit 1400/1450. 

  • I now think the correct thing to do…is to prepare for a serious risk-off phase between August and November (inclusive).

7 – I expect over the next 4 months (i.e. by the end of November) to see global equity markets fall by 20-25% from current levels and to trade at or below the lows of 2011! That would bring the S&P500 down to 1100/1000!

  • US equity markets, along with parts of the EM spectrum, will underperform eurozone equity markets, where already very little hope resides. NOTE however that investment grade cash corporate (non-financial) bonds remain a core (relative!) safe-haven.
  • This four-month coming major risk-off phase will also be very USD bullish (my expectation of a Fed $1 Trillion QE in December should eventually alter the bullish USD trend of course) and bullish core government bonds (USTs, Gilts, Bunds).
  • By late 2012, based on my Fed December QE view, my tactical call will likely turn bullish/risk-on…

I still see a very clear path to 800 on the S&P500 at some point in 2013/2014, driven by market revulsion against pump-priming money printing central bankers….

You have been warned!

* (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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