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Coffee House

‘Sell everything’ – here’s the incendiary RBS warning on deflation, risk and the next crash

12 January 2016

4:27 PM

12 January 2016

4:27 PM

The advice of Andrew Roberts, head of European Economics at RBS, has today gone around the world: its time to sell, ahead of a stock market crash. The RBS European rates research team said that things all “looks similar to 2008.” It seems to cap a bearish round of forecasts: Standard & Poor’s, the credit ratings agency, has more companies on a negative outlook than at any time since the last crash. Are we due another one? The fill document of the RBS note is here (pdf). And the edited highlights below:-

I think my ‘severe downside for the world’ call is looking ok so far. The fact that we are going well is very dangerous for every investor in the world. Why? We posited a negative outcome in the Year Ahead, risks for which were very high, and massively underpriced, with consensus on its usual ‘goldilocks’’ platform. What we are now seeing is those risks now playing out. That is the problem. It is not lost on me when something goes from a forecast, to an actual outcome.

The downside is crystallising. Watch out.

Sell (mostly) everything.

Since we published this Year Ahead on 24 November 2015:

  • China stocks are down a healthy -10%, a good start to the year, more to come.
  • Brent is -$12, halfway to our $26 (then $16) target already.
  • Baltic Dry is -16%, copper -1.5%, coal -6.3%, soybeans +0.3%, wheat – 3.5%, corn -4.1%, also partly showing up what a super calm El Nino does to food prices, a much forgotten component of inflation indices. Stay limit short.
  • Emerging market I-share total return down another -13%. Do NOT try to catch this falling knife.Danger is lurking out there for every investor . . .

The world is in trouble. Our net rationale in six bullet points:

  1. The baton of growth pre credit crunch was in the western world, and passed to Asia post credit crunch.
  2. But this has been a debt fuelled build up.
  3. We have come to the end of the willingness to build up such debt, especially as demand factors start to act against this build-up (e.g. especially demographics).
  4. I showed in the Year Ahead two facts, either of which would lead a visitor from Mars to conclude, knowing nothing else, that we are in global recession: Negative world trade growth, or negative world credit growth
  1. This is a terrible cocktail. How consensus suggested a month ago that 2016 would be better than 2015 is a total mystery to me.
  2. And there is no-one left to take up the baton of growth.Hence the ex-Fed official Mr Richard Fisher’s pertinent comments this past week: “The Federal Reserve is a giant weapon that has no ammunition left.”Of course, he is not strictly correct because the Fed has limitless ammunition, it has just chosen to take its bullets home rather than deploy them. There is surely no coincidence that this ‘risk off’ bout has occurred within weeks of the Fed hike, I am firmly in the camp of those who thought ‘be careful what you wish for’, and was actually quite surprised at the calm way the hike was taken in the first week afterward.

    The key though, is the actual backdrop. What counts is that the world is slowing, trade is slowing, credit is slowing, we are in a currency war, global disinflation is turning to global deflation as China finally realises what it needs to do (devalue soon, and sharp) and the US then, against ALL THIS countervailing pressure, then stokes the fire by hiking rates.

    China trying to grab market share of (shrinking) world trade leaves every corporate facing tougher conditions, a cheapening competitor selling their wares at a lower prices. This is now starting to happen in sharp fashion. And the key for the rest of the world is simple – and always has been.

    Sell mostly everything

    Sell everything except high quality bonds.

     

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