Nomura's Bob Janjuah hits the boom on the caput inwards my opinion:
"Here is what I think matters:
1 – There tin last no doubtfulness inwards my catch that the global growth, earnings, incomes in addition to fundamental story remains real subdued. But at the same fourth dimension fiscal markets, hooked on fundamental depository fiscal establishment ‘heroin’, take maintain created an enormous in addition to – inwards the long run – untenable gap betwixt themselves in addition to the existent economy’s fundamentals. This gap is getting to unsafe levels, alongside positioning, sentiment, speculation, margin in addition to leverage running at levels unseen since 2006/2007.
2 – The Fed knows all this. The Fed also knows that it was held at to the lowest degree partially responsible for creating in addition to blowing upward the bubble that flare-up spectacularly upon us all inwards 2007/2008. But real importantly, the Fed at 1 time has explicit in addition to pretty much total responsibleness for regulation of the banking in addition to fiscal sector.
3 – As such, in addition to equally discussed yesteryear Jeremy Stein inwards Feb (remember, Mr. Stein is a Member of the Board of Governors of the Fed), the Fed at 1 time de facto has a novel duel mandate based on (the trade-off between) what I’d telephone band Nominal gross domestic product (or macro-economic stability), in addition to Financial Sector Stability (or what I’d only label equally system-wide ‘leverage’ levels).
4 – This way initiative of all in addition to foremost that spell growth, inflation in addition to unemployment all thing a peachy deal, the Fed cannot at 1 time either allow, or last perceived to allow, the creation of whatsoever variety of excessive leverage driven speculative (asset) bubbles which, if they collapse, continue to threaten the fiscal stability of the US. Imagine if this Fed were to allow a major property bubble to blow upward in addition to and so flare-up anytime presently (say inside the side yesteryear side 2 or 3 years). This fourth dimension circular Congress in addition to the people of the the States would last able to house the entire blame on the Fed – likely alongside some justification – and, if the fallout approached anything similar that seen inwards 2008, in addition to so it would mean, inwards my view, the terminate of the Fed equally nosotros currently know it.
5 – Turkey’s produce non vote for Christmas, nor is Chairman Bernanke or whatsoever other fellow member of the Fed willing, inwards my view, to take maintain such a risk. Back inwards Greenspan’s solar daytime he could ever blame property bubbles on somebody else – fifty-fifty though leverage either inwards and/or facilitated yesteryear the banking/finance sector is ever at the pump of every property bubble. But this get-out has at 1 time explicitly been removed from the listing of options opened upward to the Fed going forward.
6 – So for me, ‘tapering’ is going to happen. It volition last gentle, it volition last good telegraphed, in addition to the key volition last to avoid a major daze to the existent economy. But the Fed is NOT going to taper because the economic scheme is also potent or because nosotros take maintain sustained nub (wage) inflation, or because nosotros take maintain total job - none of these weather condition volition last seen for some years to come. Rather, I experience that the Fed is going to taper because it is getting real fearful that it is creating a release of meaning in addition to unsafe leverage driven speculative bubbles that could threaten the fiscal stability of the US. In fundamental depository fiscal establishment speak, the Fed has probable come upward to the betoken where it feels the costs at 1 time outweigh the benefits of to a greater extent than policy.
7 - As role of this, the lack of sustainable increase inwards the the States (much inwards a higher house the weak tendency increase of 1% to 2% pa inwards existent gross domestic product which has been the instance for some years now) is real telling. And, spell I can’t last 100% certain, at to the lowest degree some members of the Fed in addition to other fundamental bankers must last looking alongside trouble at recent developments inwards Nihon whereby the BoJ’s independence has, for all practical purposes, been consigned to history, in addition to which has a 2 decade caput start alongside observe to QE. At to the lowest degree some members of the Fed may last worrying nigh the hereafter of the Fed in addition to the the States if they persist alongside treating emergency in addition to highly experimental policy settings equally the novel normal.
8 – The Fed volition promise that markets hear its message in addition to that nosotros gradually, through the normalization of yields (in the belly of the curve) in addition to rates volatility (higher!), motility aggressively over optimistic fiscal marketplace property valuations somewhat closer to what is justified yesteryear rational in addition to sustainable existent economical fundamental metrics. Rather than existence based on some circular in addition to self-serving ‘risk premium’ delusion, which is almost completely predicated on the bogus time-inconsistent supposition of a continuous in addition to never to last removed Fed/central depository fiscal establishment position on yields in addition to rates volatility.
9 – The lamentable likelihood is that markets – which are suffering from an astute cast of Stockholm Syndrome - volition hear in addition to react also lilliputian also late. This could hand us the large 25% to 50% behave marketplace I await to meet kickoff inwards belatedly 2013 or early on 2014, rather than a to a greater extent than gradual correction. In part, this is because markets volition non believe – until it is also belatedly – that the Fed is genuinely taking away its goodies. Further, it’s because positioning in addition to sentiment amid investors exactly ever seems to function to extremes, way beyond most rational expectations, earlier they right inwards spectacular style. Think Chuck Prince in addition to his dancing shoes.
10 - Crucially I suspect that the Fed volition last so conflicted/whip-sawed by, in addition to suitably vague inwards its answer to information that it ends upward watering downwards its tapering message a lilliputian also oftentimes in addition to a lilliputian also much, thence encouraging 1 or 2 to a greater extent than rounds of ‘buying the dip’. This would reverberate the novel dual FED mandate in addition to because nosotros are living through an enormous in addition to never seen earlier global policy ‘experiment’. Furthermore, nosotros are likely going to meet Bernanke last replaced come upward Jan 2014. I don’t genuinely think it matters who volition supplant him – anyone different is a take a opportunity in addition to a novel uncertainty for the market. In the unlikely lawsuit that Bernanke signs upward for some other term, I don't think that the coming shifts in addition to changes volition last reversed, but I tend to experience that the transition stage would last a lilliputian less fraught alongside take a opportunity in addition to volatility, equally Chairman Bernanke has credibility in addition to the confidence of the market.
11 – So, nosotros tin sure as shooting meet a dip or 2 betwixt at 1 time in addition to the terminal top/the terminal turn. But it may take maintain until 2014 (Q1?) earlier nosotros acquire the truthful onslaught of a major -25% to -50% behave marketplace inwards stocks. We also request to last cognizant of the Abe/BoJ developments. Along alongside the Fed, ‘Japan’ is 1 of the 2 major global take a opportunity payoff drivers. The ECB answer to (core) deflation in addition to the High German elections, in addition to weakening Chinese & EM increase in addition to the indebtedness of PRC & EM, volition also thing a peachy deal.
As of today, my best guess is at to the lowest degree 1 major dip approximately Q2/Q3 (we may last inwards the middle of it now) equally nosotros attempt to a greater extent than clarity approximately all of these drivers. My initial describe inwards the sand for this dip is approximately S&P at 1530 in addition to my major describe is at S&P at 1450. Influenza A virus subtype H5N1 weekly unopen below 1450 S&P, inwards particular, would last extremely bearish. But I await at to the lowest degree 1 to a greater extent than major buying of the dip come upward (late) Q3/Q4.I would non last surprised if nosotros saw the S&P non exactly dorsum upward inwards the high 1600s, but possibly fifty-fifty a 100 points higher (close to 1800!) earlier the side yesteryear side major behave marketplace begins. It depends on who says what, in addition to on the levels of extreme speculation in addition to leverage. In other words, did nosotros collectively acquire our lesson from the events leading upward to in addition to including the global 07/08 crash? My 25+ years inwards fiscal markets Pb me to believe, sadly, that the respond is almost sure as shooting NO.
What I produce know is that the longer nosotros hold back in addition to the longer nosotros position our organized religious belief inwards a ready of time-inconsistent policies the greater the fallout volition last from the forced unwind of the resulting speculative leverage extreme. This would come upward 1 time the cost in addition to availability of uppercase (i.e., rates volatility) ‘normalizes’. It would follow electrical flow policies that attempt to strength a mis-allocation of uppercase yesteryear mis-pricing the cost in addition to availability of capital. I am confident that catch is a right read of the electrical flow solid set down of affairs . And I think the Fed is telling us that they know this too. Ignoring this seemingly transparent signal from the Fed – by, for example, believing that the Fed volition non take maintain the courage to taper, or that the BoJ and/or ECB tin supplant or fifty-fifty out produce the Fed over the side yesteryear side twelvemonth or so - could examine to last extremely unsafe for investors.
We are (I think) inwards a novel volatility image now. Cash volition increasingly function King over the side yesteryear side year, fifty-fifty if I produce all the same await some other circular or 2 of dips that acquire bought during this period. Not getting also sucked inwards and/or also long illiquidity and/or overly invested inwards high-beta risks should all last avoided. Nimble tactical trading of take a opportunity should last the rule. An increasing focus on de-risking nub residual sheet/portfolio should, over the side yesteryear side 12/18 months, hopefully ready 1 upward to take maintain payoff of what I think volition last some other brutal behave marketplace inwards global take a opportunity assets over most of 2014.
If cash is also safe, in addition to so security should last sought inwards the strongest residual sheets, whether 1 is investing inwards bonds, inwards credit, inwards currencies and/or inwards stocks. And, equally a dominion of thumb, (and excluding existent solid prices inwards the US) those things that take maintain ‘gone upward the most’ over the yesteryear few years are probable to last the things that ‘go down’ the most – so equally good equally equities, EM investors also request to last real careful. "
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