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Ready for a 300-point Drop in the S&P 500?

Posted by: Ben Steverman on June 18, 2008

A Royal Bank of Scotland credit strategist, Bob Janjuah, rattled investors around the world today with predictions that the S&P 500, now trading near 1340, could plunge to 1050 by September, as “‘all the chickens come home to roost’ from the global boom.”

“A very nasty period is soon to be upon us — be prepared,” he said, according to the Daily Telegraph.

Bits and pieces of Janjuah’s warning to RBS clients seem to be floating around the Internet. However, RBS spokespeople said the note was for RBS clients only. They said they couldn’t provide me and other members of the media with a full copy of the report. An RBS representative implied Janjuah was definitely speaking for himself and not for the bank as a whole.

Based on what I have seen, Janjuah’s argument is that the European and U.S. economies will show a lot of weakness this summer. That will put the U.S. Federal Reserve and possibly the European Central Bank in a bind: If they raise interest rates, they would slow an already weak economy right before a U.S. presidential election. If they don’t hike rates, they would allow inflation to increase uncontrollably. Unchecked inflation would seriously disturb the world’s investors.

Janjuah reportedly wrote:

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.

If that sounds a little overblown and hyperbolic to you (“panic mode,” really?), I agree. But it seems fitting for a guy who is predicting one of the biggest stock meltdowns of all time.

Should investors take this seriously? The dilemma for central bankers that he describes is real. Janjuah reportedly predicted the credit crunch in 2007, which gives him some credibility. But some are skeptical of him, namely the mysterious StockJockey at 1440 Wall Street: “While Americans have an addiction to oil, Bob Janjuah is addicted to making high profile market predictions that draw attention,” he wrote.

In the interests of a good night’s sleep, here are a few reasons Janjuah’s nightmare might not come true:
1. The price of oil could drop or even stabilize, easing inflationary pressures.
2. While oil and other commodity prices could continue rising in price, labor costs (which make up a huge portion of corporate expenses) could remain stagnant. Rising prices and stagnant wages will be no fun for American or European consumers, but that could keep inflation in check.
3. The European and U.S. economy could be growing fast enough to allow the Federal Reserve to safely raise rates later this year. Or the Fed would risk a mild recession to get a handle on inflation.

Anyway, Janjuah’s worries can’t be dismissed out of hand. But unless he’s a psychic, there are a lot of other ways the future could unfold.

UPDATE: I notice BW colleague Lauren Young simultaneously blogged on Janjuah’s warnings from a different angle below. Check it out…

Reader Comments

george mcclure

June 19, 2008 1:42 AM

Your three hypotheticals for a recovering US economy/financial market are nonsense. 1. Demand grows, supply plateaued and will not grow. Read Scientific American. 2. This equation can only be pushed so far before people will food riot in the streets. Starving a populace out of middle class into poverty will bring dire results, and even the Federal Govt will try to avoid this. 3. "Growing"? Please inflation-adjust your figures. There is no growth. Check the number of jobs LOST last quarter.
Best Regards,


June 19, 2008 4:38 AM

interesting comment

Robert Barron

June 19, 2008 6:02 AM

Only fools or liars predict the future.


June 19, 2008 7:39 PM

Why is so hard to believe that the S&P can fall to the 1100 level? that would only be a 30% decline from the recent top of ~1500. That sounds on par for the trouble that we are having. In 1998, long term capital caused a 20% drop, so i dont think it's too far fetched to say that the housing bust + rising oil can cause a 30% decline. How it goes about it is the question. Maybe energy sector will be dragged down by the financial...


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June 20, 2008 3:42 PM

Thirty percent is an optimistic outlook. We're in debt up to our eyeballs; no end in sight to the Iraq war; the dollar continuing to weaken against other major currencies. I'm in my early 60s - we won't recover from the mess created by the worst administration in modern history in my remaining lifetime.


June 21, 2008 8:14 AM

All this "Bernanke / Paulson" Speak is continuing to ignore the 800 lb gorilla in the room: our national debt.

Over the next 2 years the principal maturity payout schedule is as follows:

Natl Debt Principal Maturity Schedule

Jun 08: $375,306,000,000
Jul 08: $259,557,000,000
Aug 08: $275,341,000,000
Sep 08: $174,022,000,000
Oct 08: $145,311,000,000
Nov 08: $179,065,000,000
Dec 08: $40,817,000,000
Jan 09: $59,672,000,000
Feb 09: $62,780,000,000
Mar 09: $38,647,000,000
Apr 09: $38,781,000,000
May 09: $82,722,000,000
Jun 09: $37,026,000,000
Jul 09: $36,893,000,000
Aug 09: $90,397,000,000
Sep 09: $36,974,000,000
Oct 09: $38,871,000,000
Nov 09: $68,069,000,000
Dec 09: $41,500,000,000
Jan 10: $56,285,000,000
Feb 10: $86,340,000,000
Mar 10: $46,997,000,000
Apr 10: $79,297,000,000
total: $2,350,670,000,000
Thes figures are easily obtained at-

These scheduled payouts to our creditors do not reflect the interest paymants due semi-annually on all other outstanding marketable securities.

ALso, the $4 trillion in non-marketable securitues (social security payouts, govt pensions etc.) are not included in the schedule either. These debts will clearly add to the staggering amount already owed.

Economic theory suggets 4 outcomes:

1. default on the debt

2. borrow more to offset the imbalance

3. raise taxes

4. print money

As the national debt limit ceiling of $9.815 trillion looms so close, it is clear that the goverment is taking the path of #4, and letting the currency depreciate.

Therefore, I believe this assessment of the U.S. economy, and the ripple effect upon the global markets is very accurate.


September 30, 2008 10:58 PM

I thought of Mr. Janjuah's prediction as I watched the S&P plummet toward 1100 yesterday.

What do you all think about him now?

Monday Morning QB

February 23, 2009 12:52 AM

Looks like Mr. Janjuah was pretty bullish on the S & P, in retrospect. Millions of investors would LOVE to see the S & P even at 900 tomorrow.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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