RBS’ Chief Market Strategist Bob Janjuah is one of the more bearish prognosticators in global finance. He takes a fairly anti-fiat currency position and couches what he sees with the present financial crisis as the era of the destruction of fiat money. This is bearish for bonds and bullish for gold.
Let’s put Janjuah in the inflation camp of the inflation-deflation debate (I am in the deflation camp along with the likes of David Rosenberg). Now I haven’t seen Janjuah making hyperbolic claims of hyperinflation which I don’t find particularly credible. However, he does underline the weaknesses in fiat currency and the seduction of central banks to print money as a remedy for economic woe. These are credible arguments that have investment implications in the face of the euro-zone crisis.
His basic premise – with which I agree – is that this financial crisis has been mitigated by socializing the private sector losses of 2008 onto the public sector. Unfortunately, the losses are of the magnitude that what was credit revulsion in the financial sector has now become sovereign debt revulsion in 2010. The trigger for this shift was the Dubai crisis in November 2009 (see New Citigroup maven Buiter warns of sovereign debt delusion).
Therefore, in the first instance, there is the German-Greek tension within the eurozone. The Greeks want a much weaker euro in order to alleviate economic distress associated with their sovereign debt crisis (see “Twenty-first century competitive currency devaluations“). The Germans want a strong euro for historic and cultural reasons. The Greeks are winning this battle right now as the Euro is plummeting. He expects the Euro to eventually hit US dollar parity as a result.
He also believes the U.S. Federal reserve wants inflation, something we laid out here last year in “Inflation: The strategy that dare not state its name.” Long story short, Janjuah believes this is bullish for gold and he would not be surprised to see gold at $1500 before year end. Given his euro bearish call that also means gold at 1500 euros per ounce – a fall of over one third from present levels.
I would also point out that he believes the S&P is well above fair value which he puts at 850 based on long-term earnings potential. This is not far off what Jeremy Grantham has been saying. Nonetheless, given the liquidity in the system, Janjuah believes like marc Faber that stocks could go higher still.
Where I disagree with Janjuah is on Treasuries. I have outlined my Scylla and Charybdis deflation/inflation view, so I won’t spell that out here. But, the huge amounts of debt we see in the developed economies private and public sectors are a deflationary force that cannot be overcome by printing money. The Fed might want inflation. However, the question is whether they can get it. At the first sign of economic weakness, deflationary forces will gather strength and send Treasuries higher and yields lower. That’s exactly what we saw during the Euro crisis last week and what we have witnessed every time there was any bout of economic weakness or market volatility. Unless we resume a robust growth path, yields are likely to remain low. That’s my medium-term view.
In any event, Janjuah has some provocative views and the Bloomberg video interview below is quite informative. It runs just over ten minutes.