'Emperors With No Clothes’ Driving S&P to 700 – Bear

Having last month predicted the S&P 500 could hit 700 in 2012 Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura in London is warning the euro zone debt deal will help him achieve his target and bring misery to millions of stock holders.


“Policymakers will be exposed as 'emperors with no clothes on', and their policy choices over the last few years will be seen as the central problem, rather than as some mystical bazooka solution which can somehow reconcile the chasm between a lack of growth and productivity on the one hand, and the enormous debt and debt servicing costs and unsustainable entitlement culture costs that we face in the developed market world on the other,” said Janjuah in a research note on Monday.

Describing the latest shock and awe move by EU leaders as nothing more than a “confidence trick” Janjauh believes last week’s deal has possibly set up an even “worse final outcome.”

“With respect to the Greek debt write off, the bank recap plan, and the structured credit technology being applied to EFSF, my takeaway is fudge, fiction and fantasy,” said Janjuah.

Without any meaningful new money to help fix things Janjuah believes the best option available to policy makers to sort out Greece and those who owns its bonds is “forcing proper write offs” and debt relief while forcing the banks and financial services sector to restructure.

Describing the plan to leverage up the European Financial Stability Fund (EFSF) as a “humiliation and tragedy of epic proportions," Janjuah positively cringes when pointing out the plan involves asking a country with an average GDP per head of $5,000 (China) to come to the rescue of an EU where GDP per head is 6-8 times higher.

“Chinese policymakers on the whole impress me with their ability to understand what the real issue are. If my experience and read of China is right, Regling (head of EFSF) is going to come back to Europe with lots of kind and supportive words, but little or no real hard cash,” he added.

“China wants military technology, nuclear technology, access to European corporates (ownership!), and it wants Europe fully on its side versus the US with respect to human rights, the currency/the trade surplus, and in terms of IMF, WTO, and UN status,” said Janjuah.

The Chinese will be asking Regling, why if his deal is so good, are private investors not demanding part of the action, according to Janjuah.

“In reality we are continuing with the policy of creeping fiscal union and kicking the can down the road, hoping that somehow growth with magically appear and bail out all heavily indebted nations. I think such hope is extremely misplaced. This latest bailout relies on the market not calling what I see is a huge bluff, because if the market does call it, the bailout simply won?t be credible or even deliverable," he added.

Having called for the S&P 500 to hit 800-900 in 2012 with a downside risk to 700 Janjuah said the strength of October’s rally has taken him by surprise but will end very quickly.

“I strongly believe that we have begun, or are about to begin, the next major risk-off phase, which should culminate in my secular targets being hit in 2012. The sharpness of the rally from the October risk lows suggests strongly to me that what I thought would be a process that plays out over a year may well now be a process where the timeframe has been accelerated by a quarter, maybe two quarters,” said Janjuah.