Nomura's Bob Janjuah Sees S&P 500 Falling 35%

Bob Janjuah, who is co-head of global macro research and head of tactical asset allocation at Nomura Securities, was

this morning. Janjuah told Bloomberg viewers that he sees the S&P 500 falling 35% from current levels. The strategist says that a Greek default in early 2012 will catalyze massive volatility across financial markets. He also said that he thinks Portugal may default in 2012 and that there is the potential for a "cluster" of sovereign defaults. In the United States, he sees below trend GDP growth of 1% to 1.25%, which is well below current Wall Street economic forecasts. He said that the recent relative economic strength has been the result of a "cyclical pop" which has been driven in part by a recovery in the Japanese economy which had been devastated by last March's earthquake and subsequent tsunami. He said that "as we head into the new year, weaker growth is going to be a focus for the markets, weaker earnings, but in particular, much higher volatility." Janjuah is modeling $90 in earnings for the S&P 500 in 2012, which is below consensus, but the major driver in stock price declines according to Janjuah's thesis will be multiple contraction. He is attaching just a 9 P/E multiple to his $90 S&P earnings estimate, which leads to a downside projection of 810 for the index. If his estimates prove to be correct, they will be accompanied by a lot of pain on Wall Street. Such an environment would be defined by tremendous volatility, and hence fear, which could drive P/E multiples to the level that he envisions. He said that he doesn't see a recession in the United States, but that it is a possibility. In particular, Janjuah thinks that there will be some fiscal drags on the economy at the beginning of the new year. Specifically, he said that he does not believe the payroll tax holiday and extended unemployment benefits will be extended into 2012. He said that under this scenario, the U.S. economy could flirt with another recession. On the European front, Janjuah said that "I think the worst is ahead of us. I think the first half of next year is going to be pretty tough for people. I do think we will have a hard default in Greece which is not in the market." He went on to say that not only does he think Greece is going to default in early 2012 but that the likelihood of another European country defaulting is "pretty high," and threw out Portugal as the likely candidate. He added, "The joy that exists today, I think its going to be short lived." Janjuah also had some very harsh words for the banking sector, which is inextricably linked with the sovereign debt crisis. The Bloomberg commentator asked him if he thinks the banks are a "cure or a curse for the global economy?" Without missing a beat, Janjuah said that "the banking sector is an enormous problem...the curse, I think." He then highlighted how western developed economies are making the same mistake that Japan did after their real estate market crashed in 1990. He said, "we lectured Japan for many years about taking the hit and moving on. We criticized Japan for keeping alive 'zombie banks'...We are pretty much doing the same in the West." According to Janjuah, this guarantees that sustainable growth is not coming back anytime soon. In his view, the bad debt needs to be liquidated and banks and even countries should be allowed to default. He said that "there is a grotesque misallocation of capital going on away from the private sector into the public sector where capital is being destroyed." Instead of subsidizing the losses through a process of tax-payer funded bailouts, money printing, more debt, and perpetual political theater, Janjuah thinks the market should be allowed to resolve it. He said, "I know its sort of considered sinful to say 'maybe we should let some banks default,' but maybe we should let some banks default. Likewise, maybe we should let some countries default." Janjuah draws a very interesting parallel between what is happening now in western developed economies and what occurred in Asia in the 1990s. He said "the comparison is Japan vs. non-Japan Asia. We still talk about the lost decade (Japan), its the lost two decades now. Asia (ex-Japan) effectively went bust in 1997-1998 and took the hit and 15 years on is essentially the world's wealth creator. So who was right and who was wrong?" Janjuah said that he is staying away from any kind of bank debt or bank equity given their exposure to the sovereign crisis as well as slowing global growth. He said that going forward, as a result of the banking crises that have unfolded in the last few years, he sees banks reverting back to behaving more like utilities. He argues that the industry won't be as self-serving as it has been in the past. This obviously won't happen overnight, but it will likely be the result of another banking crisis which catalyzes more intense populist and political backlash. Janjuah said that the situation within the banking sector has gotten so dire that "banks risk taking down governments."