Janjuah thinks stocks aren’t cheap enough

Nomura’s Chief strategists says go for the barbell trade, gold and bonds. It has worked for David Rosenberg and it is a trade I recommended back in September 2009, so why not. The interesting bit is that Janjuah says that equities have been an “appalling investment” in real terms since the Internet bubble burst. Yet, he sees them as still overvalued.

My thesis has been that this is a

”fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks’ inherent insolvency becomes a problem.”

That means economic policy becomes more important than ever in the investment world. And the degree of policy uncertainty only increases as bailout and deficit fatigue battle it out with liquidity uber alles and financial repression as the policy response of the day. Gold/Bonds has been a good play in that environment.

Will it continue to be? Bob Janjuah says it will.

Video below

8 Comments
  1. David Lazarus says

    I liked what he said. Yes stocks are overvalued and single digit PE are coming. Something that I said here sometime ago. The solutions he proposed were sensible and practical. Until something is done to put a floor under the crisis it will burn the house down.

    1. Plan B Economics says

      We’re still a fair distance from the peak gold-to-S&P 500 ratio. Either S&P 500 goes to 290 or gold goes to $7275 (or some combo of both).

      http://seekingalpha.com/article/288542-s-p-500-to-gold-ratio-has-not-yet-hit-historic-low

      1. David Lazarus says

        Gold could still climb higher especially as economies collapse. Though governments could ban the private holding of gold as they have in the past. Then gold becomes much less valuable. I was not really considering the gold price.

        I think that the value of the S&P will fall to 600 quite easily, maybe lower. Companies will find it impossible to get the easy gains from downsizing that boosts their returns temporarily. Eventually the real state of the domestic economy will impact on companies especially those wholly dependant on domestic trade. Those companies will be the first affected. Multinationals will be able to hide their losses for a bit longer but they will eventually succumb to market worries about them even if they have high overseas earnings. When the domestic corporate sector collapses then the government will find revenues falling even further and eventually deficits rising again.

  2. Tyler Durden says

    Talks alot of sense. Dave, you are right busts- they always end on single PEs. Regarding QE3, what do you think of the purchase of real assets rather than paper?

    1. David Lazarus says

      It all depends on the haircuts that they buy them with. If there is no haircut then the Fed should be charged with a control fraud. If there were a substantial haircut of 50% to 70% then that would be fine. The Fed would eventually make a profit on the deal. To buy duff sub prime real estate at peak prices would just clean up bank balance sheets in the process of turning the central bank into a bad bank. The banks have to accept the losses so it really has to be at significant haircuts. To pressure banks further they need to close the Fed window so that banks have to mark down their books to sensible levels rather than extend and pretend their balance sheets.

      1. BlueJacket says

        David
        would (then) QE2 not be characterized as control fraud? As well as the $16T in Fed loans globally…

        1. David Lazarus says

          QE2 was buying treasuries back which they know full well what they are worth. So for QE1 and QE2 no they are not fraud. They are a simple purchase of a liquid asset for a known price.

          QE3 may include more illiquid assets like mortgages or Mortgage backed securities. This poses a whole new problem. If they buy them at face value then that would be clear fraud. If there was a serious haircut below the likely value of the bonds then again no. The bank would be selling the asset to the Fed at its real value or less and would have to accept an immediate loss in the accounts. If the Fed tried to “help” the bank by giving it generous terms so that it could re-capitalise then that would be fraud, as the Fed would never make back the value on those bonds unless kept till maturity, and that presumes no defaults and full repayment by borrowers.

          It would depend on the losses that the bank makes. If the losses on the deal are minimal then possibly not but if the assets are really worth a fraction of the face price on the MBS or mortgages then yes it should be classed as fraud.

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