RBS Publishes Global Stock and Bond Crash Alert

Ah, just when you thought it might be safe to venture into the markets again, RBS sends out a red alert, warning private clients to prepare themselves for a full fledged rout in equities and bond markets in the next three months, with the S&P losing 300 points, or nearly a quarter of its value, by September.

That’s a bold and pretty specific call. The technically-minded believe that if the S&P 500 were to breach 1270 (closing, not intraday), the next support level is hundreds of points lower. In addition, the impact of inflation has not been factored into asset prices. The chart below (click to enlarge) illustrates how devastating inflation is to stock valuations. The S&P 500 multiple fell from over 17 to below 8 during the early 1970s, and pretty quickly too. However, then the impetus was the oil embargo, but note that as inflation became embedded, a bear market rally fizzled and the market hit even lower earnings multiples.

Now the flip side is forecasts like this have a way of not playing out according to script. Like the Heisenberg uncertainty principle, the very act of making such a projection influences the outcome. It may be that a mere reversal of the denial about the combination of the inability to treat fragile financial markets and inflation simultaneously will provoke a selloff (but it could be a grinding loss of confidence over 6-9 months rather than a speedy affair). Or as with the 1970s, there may be a now-unforeseen shock (one shudders to think, but at attack on Iran would send already high oil prices to ghastly levels, almost certainly precipitating a global recession).

From the Telegraph:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist…

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the “Crossover” index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

“I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

“Cash is the key safe haven. This is about not losing your money, and not losing your job,” said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America’s fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

“Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point,” he said….

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. “The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation,” he said.

“The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets,” he said.

Kit Jukes, RBS’s head of debt markets, said Europe would not be immune. “Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates…

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

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6 comments

  1. Anonymous

    “but at attack on Iran would send already high oil prices to ghastly levels”

    Wouldn’t even have to be that extreme, a hurricane in the gulf would probably do it. July and August are almost here and with La Nina this could get real nasty.

  2. Anonymous

    With some peak oil observers stating the deletion may be 8-10% in the next decade, it will take quite a bit of demand destruction just to keep oil prices from rising. For oil to fall, the global economy must fall into a severe recession.

    The stock market is boxed into a horrible corner.

  3. Jojo

    hee, hee.

    CNBC has been all over this tonight. And seems many of the “pundit” guests are saying “no way Jose”, “Can’t happen”, “Wont’ happen”, etc.

    It is a gutsy call though. A lot of their clients are going to be very upset if this predicted crash doesn’t happen by September/October.

    And if it does, it will certainly throw the election into turmoil. Voters will be head hunting for sure.

  4. Jojo

    And why can’t you anonymous people choose and use a name when making your comments?

    Just click the name/url button andyou’ll get a box to fill in with anything you want. Makes it easier to reference a prior comment that way.

  5. mxq

    Yves point about the Heisenberg uncertainty principle is spot-on. The very essence of a “crash” (aka a black swan) is that you can’t predict it. 9/11, the 1987portfolio insurance run and LTCM couldn’t be seen until after the fact.

    btw…”focus on quality…non-cyclical…names”…

    isn’t that be true in any environment? Put another way, does the note to clients really have to drop a “crash” bomb to convince them of this?

  6. Richard Kline

    I have no read on whether the time frame is three months or nine, or over three to nine, but I would be flabbergasted if we don’t have an equities decline of a quarter, or even a third to the trough. There is so much not to like, nothing to like, and too many historical parallels for the kind of box the US macro economy is in for the numbers to remain where we are. We made it past a point in late May-early June where we could have had that kind of correction, so the idea that deterioration could begin to bite by mid-July is something I see as well-phased. But we may not see this hit until October, just as likely. Will it happen? Bet on it.

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