Saturday, June 28, 2008

Global Equity and Credit Meltdown on the Horizon?

The Prince was very intrigued by this article (check out the comments too) this morning from the Telegraph describing the rather scary warning issued by RBS research analyst Bob Janjuah.  According to the article Janjuah's report predicts that over the next three months we will see a meltdown of the credit markets mainly due to inflation and the worst equity sell-off in the last one hundred years with central bankers paralyzed on the sidelines.  This warning cannot be dismissed as scare mongering since Janjuah's predictions last year about the credit crisis were prescient and fund managers have reacted strongly to discredit his most recent predictions.  Here are some more excerpts from the report.

Some of the predictions for the markets:

The S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

The iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

On why central bankers will be helpless:

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," Janjuah said.  The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets.  "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of
higher inflation will combine to give us a big sell-off in risky assets," he said.

"A very nasty period is soon to be upon us - be prepared," writes Bob Janjuah.  Janjuah's prediction of a full-fledged crash in global stock and credit markets over the next three months is sobering.  The Prince believes that Janjuah's predictions for the credit markets are credible but he is not ready to accept the equity crash Janjuah is pushing.  Nevertheless, everyone should be re-examining their posture given the uncertainly that is hanging over the rest of 2008.  Also, The Prince does agree that central banks, especially the Fed, are not focusing enough on containing inflation.  However, given the run-up in commodity prices is there really much that central banks can do, aside from raising rates to strengthen the dollar?   The Prince, however, would not call Janjuah's report alarmist and does believe it presents one valuable view on what may be ahead.  Janjuah's recommendation that if you have to be in credit "focus on quality, short durations, non-cyclical defensive names...Cash is the key safe haven. This is about not losing your money, and not losing your job," may sound like an alarmist now but it may look prescient three months from now.

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