Thursday, August 13, 2009

The fiscal tide

By Ambrose Evans-Pritchard, International Business Editor
Published: 8:26PM BST 12 Aug 2009

Britain's Uber-bear is growling again. After predicting a torrid "relief rally" over the early summer, Bob Janjuah at Royal Bank of Scotland is advising clients to take profits in global equity and commodity markets and prepare for another storm as winter nears.

"We are now in the middle of a parabolic spike up," he said in his latest confidential note to clients.

"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets."

The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice.

He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said.
Mr Janjuah, RBS's chief credit strategist, has a loyal following in the City. He was one of the very few analysts to speak out early about the dangerous excesses of the credit bubble. He then made waves in the summer of 2008 by issuing a global crash alert, giving warning that a "very nasty period is soon to be upon us" as – indeed it was. Lehman Brothers and AIG imploded weeks later.

This time he expects the S&P 500 index of US equities to reach the "mid 500s", almost halving from current levels near 1000.

The elephant in the room is the spiralling public debt as private losses are shifted on to the taxpayer, especially in Britain and America. "Ask yourself this: who bails our Government after they have bailed out everyone?"

(Answer: the government will bail out the government ... paging Dr. Faber. The government has only been able to produce green chutes not green shoots; industrial policy based on 'to each according to their needs' results in zombie companies -a fiscally juiced tide that lifts no boats. As saliently stated by Minyanville's Mr. Practical... -AM)

Libor markets have returned to normal (we are guaranteeing this market). Swap spreads have returned to normal (we are guaranteeing this market). Housing starts and prices have stabilized (the U.S. government is providing 15% tax credits, effectively paying the down payment for first time home buyers).Car sales are seeing signs of life (the U.S. government is providing cash for clunkers).The U.S. economy has stabilized because the U.S. government has effectively become almost half of the U.S. economy. But stimulus has been shown to have a zero multiplier: stimulus comes from either borrowing or transferring wealth from taxpayers, so every dollar eventually is taken back. Tax increases tend to have a minus 3 multiplier: tax increases eventually reduce growth by three times the increase. Green shoots will wither away very quickly as the U.S. government has effectively become a very large part of the economy. That is temporary. Without the ability to generate more credit, growth will turn negative.

(Socialized guts will lead to diminished glory.-AM)

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