"A very nasty period is soon to be upon us. Be prepared." -- Bob Janjuah, Royal Bank of Scotland's credit strategist
Fears of a return to stagflation have gripped the markets over the last few trading days. Indeed, the
Royal Bank of Scotland
to "brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyzes the major central banks."
(It should be noted that the Royal Bank of Scotland statement was originally released on June 11 and Janjuah has been heralding Armageddon for over a year now. Markets usually don't crash when RBS is yelling "fire.")
I have long felt that "blahflation" (blah economic growth coupled with persistently high inflation) was the base economic case for the next few years, leading to, at best, substandard investment returns as both corporate managers and investment managers will find it hard to navigate. The market and economic tailwinds of the last decade have been replaced by the headwinds of prosperity killers like inflation, increased regulatory burdens, continued weakness in our currency and the politics of trade protectionism and populism.
This is a period when only investment professionals should be active in an environment in which leading market sectors are narrowing and lagging market sectors are broadening out. On any time frame, most investors should maintain below-average sized trading and investing positions. Erring on the side of conservatism remains central to my investment strategy.
I have recently argued that the growing skepticism on the part of investors and the improving credit markets (favorable government treasury auctions, swap spreads, the performance of bank debt and bank preferreds, etc.) are forming the basis for a short-term market recovery, within the context of a dourer intermediate-term view.
I see nothing on the horizon that alters this viewpoint, and warnings like the Royal Bank of Scotland's are precisely the sort of sentiment indicator that encourages me to buy into the current weakness and emboldens a contrary stance.
Doug Kass is the author of The Edge, a blog on
that features real-time shorting opportunities on the market.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.