RBS Predicts Global Market Crash: What's In It for Them?

According to the UK daily newspaper Telegraph, a research team from Royal Bank of Scotland (RBS) is warning investors to get ready for a “full fledged crash in global stocks and credit markets over the next three months," noting inflation will paralyze major central banks. They forecast a 300-point drop in the S&P by September to around 1050, with contagion spreading across global stock markets, and for the iTRAXX index (high grade corporate bonds) to widen to 130/150, the “Crossover index” (low grade corporate bonds) to widen to 650/700 on renewed investor panic. Their reasoning is that the temporary momentum from America’s fiscal boost may fizzle out by July on delayed impact from the oil spike.

Bob Janjuah, credit strategist at RBS, said, “A very nasty period is soon to be upon us - be prepared.”

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 also said in order for global inflation to be lower, we may need to see slower global growth.

Maybe RBS is short on S&P, and they want investors to go short as well, while screaming “The sky is falling”? That’s right, it’s a bit insane for a financial institution to make such sensational doomsday remarks. However coming from the guy who was known for his warnings last year about the credit crisis which proved to be accurate, it might be worth listening to what he’s saying.

And if RBS is warning investors about this market crash, which would amount to one of the worst bear markets in the last 100 years, does it want normal retail stock investors to sell their portfolios and realize whatever losses they have sustained over the past year, thus pushing stocks even lower (if RBS is short, it would make sense!)? Given the volatile market conditions over the past few months, investors will have experienced a huge blow and cutting their losses now might be too little, too late.

Forex Trading

With no major economic releases or speeches on tap today, currencies have been moving sideways. The US dollar is up against the Euro, Swiss franc, British pound and Japanese yen. The British pound is a notable loser, falling for the second day against the dollar as minutes from the Bank of England June 5 policy meeting showed members decided an interest-rate hike wasn’t “urgently” needed to keep inflation under control. The minutes also revealed that David Blanchflower was the only policy member who wanted a rate change, voting for a cut to from 5% to 4.75%. Blanchflower might already have changed his mind about that after yesterday’s release of UK inflation data which showed inflation up 3.3%.

GBP/USD fell to a low of 1.9475 today, but traded above yesterday’s low. It has since moved back up above 1.9550. Shorting interest may crowd around 1.9600 and 1.9630. The pound is also weaker versus the Euro, trading near the lowest level in a week. If the BOE resists lifting interest rates higher to keep inflation expectations down, we could see more downside risks to the Pound.

Yesterday, BOE’s King wrote a letter to Chancellor of the Exchequer Alistair Darling, saying that the “path of bank rate that will be necessary to meet the 2 percent target is uncertain.”

Economic Calendar For Thursday:

Swiss National Bank rate decision (rate expected to stay at 2.75%) 0730 GMT

UK retail sales 0830 GMT

Canada CPI 1100 GMT

US initial jobless claims 1230 GMT

US Philly Fed 1400 GMT

Comments

[tvb:]

What's in it for them? It's a sad commentary (albeit, not without justification) that journalists assume that any prediction by an analyst is driven by the ulterior motives (of the institution, no less -- what's in it for RBS?) and not the actual beliefs of the individual analyst/strategist. I'm as skeptical as anyone on analysts' abilities and the usefulness of their recommendations, but surely you must believe that there are at least some analysts that actual call it like they see it?

2008 Jun 18 12:54 PM

[hook:]

"thank you grace, you're wrong" if people sell now, and then we crash, they will by definition have avoided the crash and save themselves money

2008 Jun 18 02:07 PM

[Jason Rines...:]

1) Bob Janjuah was right about the credit crisis. So was I in June 2007. A dollar collapse or what some call a black swan event is now a probability. However, a dollar collapse, depression-scenerio would be more of a cumulative effect. That we have after shocks of a market crash (this is indeed happened in Q1 just not widely understood and quickly contained before it leaked out that America's financial system was INSOLVENT) would not be surprising. The forecast numbers for a dollar collapse, including the entire West's central banking system of fiat money collapse is in years 2011-2012 if it occured.

2) The Great Depression was 70+ years ago. Thank Emperor Hirohito and 75% of entire U.S. economy spent on defense on WWII to bring us out of it. None of us were alive as adults so historical context is all we have but the parralels are there and predicated more on poor human behavior which is cyclical. Actually, I believe this time would be worse, but America and the world will go on.

The best and brightest student of the depression era is Ben Bernanke. I am not a fan of the FED, but when in February when the FED released the plan of attack to the public to first pump liquidity into the insolvent, frozen system then and then raise rates later in the year, I believe it. They are following the game plan so Bob Janjuah is wrong about the FED leaving rates alone. Bob is right that drastically slower global growth should be expected (if not global recession or gulp, depression). If I were to speculate on RBS ulterior motive then I'll say this: The losses at RBS are deeper then what most anticipated. But what else is new and how many other banks still have toxic waste off the books? His ulterior motive of 'sky is falling' could be a scare tactic in an attempt for the FED to keep rates where they are. That is wishful thinking. Paul Volker has spent much time with President Bush in the last few months. Both Treasury, FED has already been being brought to attention - YOU WILL BE RAISING RATES. How long ago was February? Oh yeah, three months ago.

2008 Jun 18 02:08 PM

[Solution:]

I thought Bob Janjuah (or may be the author) is in a panic mode more then Fed. Fed probably should do nothing by end of the year. To lower the rate ? Econmy won't come back. To raise the rate ? High oil price is already a hard brake on the growth, why need a rate hike ?

2008 Jun 18 02:10 PM

[sunx:]

According to the Greater Fool Theory,there are greater fools who believe that the markets will go higher . Someone else will always buy my stock at an even higher price than I paid for it.
Damn the torpedos of mega oil prices affecting staples like food
and our energy needs. I don't know. Who really knows.
The article is certainly worth pondering.

2008 Jun 18 02:29 PM

[sunx:]

When markets fall,they do so rather abruptly. No one can know for sure,
but I hope that my fellow S Alpha friends stay on their toes.
I remember a TV show on PBS explaining THE GREATER FOOL THEORY
Let us all make sure WE are not the "greater fools", assuming that there are those who believe that the markets will push higher
even in the face of mega oil prices that affect transportation and food. I know not the future, but it doesn't look rosey to me right
now. Although ...Warren Buffet doesn't seem to be taking much off his own table of stock holdings.
What does anyone else think???

2008 Jun 18 02:36 PM

[Ray Meadows:]

I think there is a reasonable probability that they are correct - certainly in direction if not magnitude. What they will get for this call is credibility with clients and investors that they are good risk managers, not just cheerleaders for being long. If they're wrong - well they were still being prudent about managing risk. I see little downside to their call from a client relations perspective and lots of upside.

2008 Jun 18 02:37 PM

[monday1929:]

Wall Street culture offers Zero upside for making bearish predictions. If they are right, it will be written off to luck and they may even get some blame for causing the crash. And, of course, if they are wrong or even just a bit early, they will be called nuts, or far worse. It is a remarkably gutsy call, but not that difficult a prediction to make when the major banks are (not so secretly) insolvent.
When will America get angry about the muti-trillion dollar fraud which has/is taking place?

2008 Jun 18 04:50 PM

[bruin532:]

Perhaps this will finally call for the abolisment of the FED they have no public perpouse but to serve their own needs. I'm sure bette could be done even by our Federal Goverment.

2008 Jun 18 05:20 PM

[TenDollarTommy:]

Grace, I don't see your point. You have obviously never been in a major bank trading environment. I have. Bank economists and analysts don't make market calls for traders - the p/l from RBS trading desk is not material to the operation. Second, traders generally ignore anything economists say, listening to them is a sure way to lose your butt in the market. Third, if you have an issue with what was said, attack the thought process and facts as stated, don't use "argumentem ad hominem" to try to discredit the argument, that's a fallacy in formal logic.
As a parting thought -- bruin532, you are an idiot, go back to high school or wherever you learned the drivel you spout.

2008 Jun 18 06:52 PM

[TA:]

I love when some analyst comes out and predicts the end of the world, everyone actually gives it some credence because he got lucky on a call and gets to be another 'Meredith Whitney'. It's great how people can be overly bearish yet no one calls them out on it. Be bullish and 50 people are all over you.

The analyst has no idea anymore than anyone else. No one can guess the direction of the market - NO ONE.

Today's announcement was pure noise.

2008 Jun 18 08:54 PM

[Gaucho:]

I am surprised that a collapse did not happen before this. The FED did its dance by lowering the rates .75% followed by another .5% in an emergency meeting to avoid a collapse. They are now out of interest rate ammo.
This time the bankers and the wall street BS artists have been saying that the bottom of the real-estate market will be in June July of this year. It is becoming apparent that this is just the first ledge of a huge cliff and the real-estate market will plummet much, much, more. The same BS artist that have been saying that we are not in a recession or that it will be a small recession.
The suckers out there are starting to wake up and realize that the BS by the pundits was just that, BS. These pundits make their money from the suckers, sorry investors, who put their money in the market. If they leave now how will the Wall Street geniuses make their million dollar bonuses when their companies are losing money?
A saying I once hear that rings true, “If you are going to panic then panic before everyone else does”.
People need to realize that the FEDs inflation numbers are BS and the real numbers are closer to 10%.
People need to realize that the oil prices by themselves will trigger a huge recession just like they did in the 70s.
People need to realize that the idiot president has run up 4 trillion and counting budget deficit and has no wiggle room to counter act a recession.
People need to realize that the housing market will fall another 25% before it starts to bottom.
People need to realize that the average guy has no saving because he has never seen a severe recession.
AND yet you commenter’s criticize someone who is telling it straight. You will soon realize what the term BAG HOLDER really means!

2008 Jun 18 10:27 PM

[Ex15:26:]

Ok, I have to ask....
What's your motive Grace? Why would you post for SA? You do this probably because it is your source of revenue or your passion, or both.

This guy may be talking his own book or may be genuinely warning his clients to get the heck out. I would suggest that it takes more guts to take a stand like this and warn your clients than sit in the office and cross your fingers and write a commentary that states that the US is not in an official recession. I for one disregard everything my firm's economist writes because it's as bullish as Abby Joseph Cohen in February of 2000. How refreshing that someone would come out and try to scare the wits out of everyone. If his boys make a few bucks who cares, GS trades against their clients and the street thinks that is a great thing!

2008 Jun 19 12:01 AM

[Gaucho:]

RBS IS NOT THE ONLY ONE PREDICTING A MARKET MELTDOWN


www.telegraph.co.uk/mo...

Goldman Sachs and Wells Fargo warn 'delusional' investors on stocks
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 1:58am BST 15/04/2008
"Wall Street faces the growing risk of an equities bloodbath in coming months as the credit crunch spreads to the wider economy and earnings crumble, according to a pair of grim reports issued by Goldman Sachs and Wells Fargo."...

2008 Jun 19 12:10 AM

[Pauly B:]

The three parts of the market, fundamental, technical, and psychological. We have kinda met the first two already. We are now in the getting towards the latter of the three. This prediction may be a blessing as we are now getting closer to completely throwing in the towel and the shorts will run for cover in the near future! I think the VIX needs to get a tad bit higher though. With the amount of short covering on the financials, and the amount of cash sitting on the sidelines, any bit of good news is going to cause an explosion in the markets. Oh how I long to see "trading curbs in place on CNBC."

2008 Jun 19 08:51 AM

[thannagan:]

Does anyone else hear bottom music in this?

The "housing market" will be at/near bottom when I (good credit) can buy/finance and rent out a house for neutral cash flow. (Banks will be delighted to assist me do so.)

2008 Jun 19 09:47 AM

[notsosmart:]

theme for these times-"your guess is as good as mine".

2008 Jun 19 10:20 AM

[Bear Stocks...:]

Whether the S&P500 goes to 1050 or not, here are a few short-selling candidates to profit now -- SNCR, AXL, PPC, ARGN, TMX, NCMI and ABR. During the 2000-02 bear market, the S&P500 index went down as low as 776. So at 1050 how can it be the worst crash in 100 years?

2008 Jun 19 11:35 AM

[jjason:]

So why don't we make short selling illegal? There is nothing productive about short selling. It is time to end it as an investing strategy.

2008 Jun 19 11:44 AM

[Walter Morton:]

RBS analysts saying we are about to plunge into a financial abyss is not exactly shocking news. A number of authors (Stephen Leeb, Warren Brussee, James Kunstler, Peter Schiff, etc.) have been predicting since 2005 that we should expect shocks and a downturn in the US economy for a rational list of reasons including:

1) An 830 Billion Trade deficit.
2) The falling value of the dollar since we left the gold standard in 1972.
3) Lack of investment in infrastructure and education in the USA.
4) Increasing world population demand of all commodities.
5) Dependence on oil in the face of declining oil production and rising exploration costs.
6) Outsourcing manufacturing, production, skills, and technology.
7) High USA per capita debt, low individual savings.
8) Increased competitiveness in foreign markets.
9) Growing debt from expenses of the Iraq war.
10) Aftermath of dotcom tech stock boom / bubble.
11) Aftermath of real estate investment boom / bubble.
12) Falling confidence in financial instruments & institutions (i.e. Bear Sterns)

You can look to the Wall Street Journal, The Economist, or The New York Times to find ample numerical support for these 12 issues and pressures on the economy. What you will not find is a "tried and true" investment strategy being argued by RBS or any of these authors for what to do in June 2008 because the world has never seen an economic scenario exactly like the current one. Analysts cite Bernanke and The Great Depression (1928-1933) and the "stagflation" of the 1970's but the global economy was not as dynamically linked in those earlier times by electronic media, instant trading, etc. Also, growth in population, manufacturing, and modernization has shifted strongly to Asia in the last 50 years. The food supply and energy supply has never been under greater demand pressure. A different world order is emerging and the USA's position of unchallenged dominance is unravelling.

What to do? Taking all your money into cash dollars in a safe in your basement is a bad idea, because in many scenarios (inflation, hyperinflation) the U.S. dollar will devalue radically never to return. Some would argue that investing in gold is the best safety play, but it is unclear whether this venerable instrument of antiquated wealth will respond as it has in the past by holding value while paper currency falls. Commodities seem a good safe haven since the world needs food & fuel and based on simple supply & demand metrics, there will be need for all commodities into the 21st century, but it is also possible a global depression could curtail growth and suppress commodity value. Another safe haven in the past has been the material security of real estate. But the real estate bubble continues to deflate and if a depression comes, real estate prices could be in free-fall for years to come, taking prices back to 1978 levels. Some (i.e. Peter Schiff) suggest that investing in diverse, growing foreign economies that are not tied to the USA is the best course. That could work if the global economy "de-couples" with Brussee likes TIPS, but TIPS rely on the US Treasury accurately calculating inflation to pay you back in (still a fiat currency) dollars.
Where does that leave the investor? Some ideas that appear sound are global diversification into assets that are either:

1) backed by a material resource (Gold, Oil, Wheat, etc.)
2) are required for human civilization (energy, food, infrastructure.)
3) technologies of increasing / emerging importance (solar, wind, bio.)
4) Not directly tied to the strength of the USA dollar.

Though it is one of the oldest common-sense rules of investing, there has never been a better time to remember: "Don't have all your eggs in one basket."

2008 Jun 19 02:16 PM

[climbera5:]

We face two major headwinds, credit crisis and oil.

The Fed has done all it can do to avert a major meltdown but trouble still lies ahead. We won't know the full extent of the mortgage write-downs until housing prices bottom (see Citicorps announcement today). If the Fed raises rates, this only makes housing less affordable, thus extending the subprime/mortgage losses. So I don't see rates going up anytime soon. (Yes, we want and need a strong dollar but I see that as rhetoric for now. The bigger fire is with our bank's health.)

Depending upon your school of thought, inflation comes from rising prices and/or printing money. Rising prices from the effects of oil and commodities may be countered if, and I say if, we can dissuade speculation through regulation. $140 oil is not sustainable so demand will drop naturally. So either from regulation or reduced demand oil should drop back to $120 or below. This will spell some relief for the markets but it will be brief. The ripple effects of higher production and commodity costs will be felt throughout, reducing consumption and profitability. Markets will adjust downward and may sprial downward faster if we cannot control the falling dollar or oil prices. I just don't see a compelling arguement for the bulls.

And we know the solution to printing money - raise taxes, exit Iraq, cut government spending. Good luck with that.

2008 Jun 19 02:22 PM

[climbera5:]

Excellent analysis Walter.

2008 Jun 19 02:27 PM

[Did U Think...:]

Grace,
First off, you are one beautiful young lady. A cross between Angelina Jolie and Lucy Liu. I hope you are not offended by that as it was meant to be a compliment.

But don't let that beauty blind you to the fact that this is the biggest bubble in history by far and the crash could thus be the greatest in history. Do not believe that we are any smarter or better protected against systemic financial collapse today than we were back in 1929.

If we don't crash this year it will be next year before the mortgage debt relief act of 2007 expires. Those who need to jingle mail will be rushing to get it done before Dec 31st 2009.

2008 Jun 21 12:32 AM

[semar:]

Well, if the market will fall as RBS does we (currency speculators) will profit from this more then sure, shorting again the dollar and the yens, although yen-equities correlation had dropped recently

2008 Jun 21 07:28 AM

[Walter Morton:]

Recession, at least regionally, is already a fact in the USA. If we are to look to any historical models, the US economy and large parts of the world economy now resemble Japan circa 1990, when a decade of bullish bubbles and growth in financial markets was followed by 10 years of recession from 1990-2003, with many Japanese real estate investors losing 4/5 of their net worth. (The Japan model is one George Soros favors for comparison, the American economy is much larger which could make things better -- or worse.) So rather than a "crash" of the S&P 500 to 1050, consider the S&P gradually moving down to 600 over the next 10 years. That would roll back the clock to 1995 when the S&P was 600. Not so impossible.

2008 Jun 21 12:45 PM

[SanFranJeff:]

Looks like the RBS Investment team clearly knew what they were talking about. Everything predicted is coming to fruition. The predicted 90 days, it took 120 days, but everything else appears to be right on target!

2008 Oct 10 05:01 PM

[prof prabir...:]

The crash is the result of breach of trust committed by the borrowers who have taken the public money with a promise of good return. I blame the intellectual idiots who proclaim themselves to be good finance manager.
The logic is simple, when the same population is still consuming the products why the market will crash? Either you are not investing in the sector that you promised or you are just trying to black mail the STATE to come to your rescue. In this process you can rectify your financial error.
prof prabir Kumar Pattnaik

2008 Oct 16 12:01 PM