Since the Federal Reserve announced the start of its third round of quantitative easing (QE3) in mid-September, financial markets across the globe have largely returned to risk-off mode. While this bearish development may be surprising to many investors, one market strategist who correctly predicted that the markets would not continue to rally despite further money printing by the Fed was Bob Janjuah, a long-time market observer and current strategist at Nomura.
In his latest report to clients, posted this morning on Zero Hedge, Janjuah wrote that “If I look out 6-18 months, during which lots can happen, my bias for markets in the long-term timeframe remains very bearish. I worry about excessive debt in the West, I worry about anaemic growth globally, and I worry about both the markets’ Pavlovian fixation on continued (but increasing unsuccessful and non-credible) policy stimuli and on the willingness and ability of policymakers to actually continually deliver/surprise to the upside.”
The Nomura strategist did note, however, that “I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.” In such a scenario, he acknowledged that equity markets could have one last “parabolic spike” that takes the S&P 500 Index “briefly into the 1500s” before heading substantially below its current level near 1,380.
Janjuah went on to argue that the confidence that investors have in the Federal Reserve and European Central Bank is likely to unravel in the not too distant future. “I am so concerned at the number of times I have heard from participants that growth and earnings, and/or jobs and incomes, and/or debt and deleveraging now no longer should matter that much as Bernanke and Draghi will make it all better,” he contended. “I am the first to point out that we are living in a policymaker-fuelled bubble that will likely end very badly.”
While he did not discuss the implications of his forecast for gold in this most recent report, on several occasions earlier this year Janjuah reiterated his bullish outlook on the yellow metal in conjunction with his bearish predictions for cyclically-sensitive asset classes. As such, while gold could temporarily succumb to broad-based liquidation, declining faith in the ability of policymakers to effectively stimulate their economies is likely over the longer-term to benefit the one form of currency that carries with it no government obligations.
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In conclusion, Janjuah stated that “Investment decisions based largely on the greater fool theory and predicated by the assumption that central bankers can sustainably and credibly misprice money, supporting a significant misallocation of capital, without any major negative consequences, are in general not good investments…Look at what has happened since mid-2007 until now, the last time this type of ‘investment thesis’ was exposed! Back then policymakers told us there was no housing bubble, and were asleep at the wheel when it came to the significant leverage bubble that banking and finance had become. Now of course Bernanke and his ilk are trying to convince us that QE is a good policy and that we should trust them to do the right thing at the right time to head off any new bubbles or the take-off of inflation. What else should we expect? Personally, I have little confidence in policymakers, based on their track record.”