Bob Janjuah is back, and dude, he's not happy about what you've done to the stock market.
Then again, Janjuah is never really very happy. But now the great bear of the United Kingdom -- the chief market strategist at the Royal Bank of Scotland (RBS, news, msgs), to be exact -- is quite sure that stocks' bender over the past eight months is about to come to a terrible, concussive, tragic end. He's like a cop who wants to slap a DUI on your portfolio.
Should we care? Well, most bears aren't worth the kibble that's slipped into their cages at night. But give him credit: Janjuah is a little different. He made a sell-everything call on the global financial fiasco two years ago with impressive accuracy, and he hadn't been all Chicken Little about it for years before either.
His view now is almost as negative as it was back then on everything but gold. Here's why he believes the end is near, the markets could get cut in half and lumps of yellow metal will trump stocks and bonds.
Who and what matters now
Janjuah believes that only five things matter now: three players and two forces. The players are the private sector (that is, individuals), the policymakers (government officials and central bankers) and the financial sector (brokerages and big institutions). The forces are balance-sheet repair and growth, which can also be viewed as final demand.The way these forces and players interact will determine how the next act plays out. Let's take them one at a time.
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Player 1: The private sector
First, Janjuah believes that individuals get it. He says they know they borrowed too much and are reacting by borrowing and spending less, and saving more. This is expected to be a multiyear trend in the face of employment and wage fears, volatility in the economy and confusing messages from policymakers (e.g., "We have a major debt problem, so go out and borrow more!").He believes ordinary Americans are fed up with being taken for chumps and have lost faith in a system that is bound to tax them to restore losses at banks. All they see is that the policymakers and financial sector have looked after each other at the expense of the private sector. Indeed, they see no trickle-down to their lives from all the efforts taken so far, since they're not much invested in stocks, yet they sense there will be a big bill to pay anyway. As a result, Janjuah believes the private sector has changed its behavior, swinging toward prudence and precautionary savings, and away from the sort of spending that would juice earnings growth for retailers and manufacturers.
Naturally, some people -- notably 20- and 30-somethings -- will consume irrespective of their anger. So Janjuah will essentially be right only if people 40 and older make these behavioral shifts.
Player 2: Policymakers
The strategist observes that policymakers were "totally wrong" through all of 2006 and 2007, and most of 2008, then finally got it once Lehman Brothers collapsed. They then did a great job of averting a total global financial meltdown but are now reverting to type by persisting with a "systemic war footing" policy even though the war is over. Although they understand, deep down, that printing money will create a huge risk of another debt-fueled asset price bubble, they heartlessly believe that it's OK to ignore it for now."Central bankers . . . are relying on the old failed policy of more and bigger asset bubbles on the hope that it equates to real and sustained growth for the private sector," Janjuah says wearily. "This reckless policy is creating the mother of all bad balance sheets -- that of governments."
Janjuah believes there are two choices: the current path of more debt and more bubbles, which is the "worst possible outcome," as it will cause individuals to become even more cynical and thus withdraw more from spending -- or the path of austerity.
Video: How investors have adapted
As you might imagine, he believes the latter will come, whether we get the former or not, and "the more we resist . . . the worse the endgame." He adds, "Everyone should hope that the great debasement experiment will be exited voluntarily and not forcibly" due to a citizen revolt or a dollar crisis. "Forcible exit is the path to another recession before the first one has been addressed, and it will be hugely difficult to emerge from."
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