Saxo Bank Outrageous Predictions for 2014 Steen Jakobsen – My Comments

Courtesy of Mish.

Saxo Bank’s Outrageous Predictions for 2014 came out last month, but given that Steen Jakobsen, Chief Economist for Saxo Bank will be speaking at Wine Country Conference II on May 1-2, a review of Saxo Bank’s predictions is in order.

1. EU wealth tax heralds return of Soviet-style economy: In 2014, deflation and a lack of growth will create panic among policymakers, leading the EU Commission to table a working group that will focus on different wealth taxes for anyone with savings in excess of USD or EUR 100,000. The initiative will be in the name of removing inequality and will see the richest 1 percent pay a “fairer” share to ease society’s burden. The obvious trade is to buy hard assets and sell inflated intangible assets. We would buy the SPDR Gold Shares ETF (GLD:arcx), looking for it to go as high as 180, and sell an equal-weighted basket of Hermes International (HRMS:xpar), LVMH (MC:xpar) and Sotheby’s (BID:xnys), expecting the basket to go from index 100 to 50.
2. Anti-EU alliance will become the largest group in parliament: Following the May elections, a pan-European, anti-EU alliance, whose members will include the UK Independence Party, euro-currency sceptic Alternative for Germany, the National Front in France and Party for Freedom in the Netherlands, will become the largest group in parliament with a majority of more than 275 seats. Sweeping the traditional political groups out of power, the new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the EC, sending Europe back into political and economic turmoil. One trade would be to long German Bunds versus short Spanish Bonos – looking for a 300-basis-point spread again.
3. Tech’s ‘Fat Five’ wake up to a nasty hangover in 2014: We like technology stocks in general as they are the main driver of the necessary productivity growth the economy needs to create long-term increases in wealth per capita. However, a small group of technology stocks trade at a huge premium of about 700 percent above market valuation, almost defying the “Newtonian laws” of financial markets. These stocks are what we call the “Fat Five” of the technology sector – Amazon, Netflix, Twitter, Pandora Media and Yelp. These stocks have very inflated valuations based on a skewed valuation premium on growth that has evolved in the aftermath of the financial crisis. Investors have trouble finding good growth scenarios, so when some suddenly drop by the neighbourhood, they get bid up to levels that present very poor risk/reward ratios. It is like a new bubble within an old bubble.  To trade this, we would create a synthetic equal-weighted index of the Fat Five, starting at 100 on the last trading day of 2013. Ou Outrageous Prediction is that this index will go to 50 during 2014. 
4. Desperate BoJ to delete government debt after USDJPY goes below 80: In 2014, the global recovery runs out of gas, sending risk assets down and forcing investors back into the yen. USDJPY goes below 80 in a déjà vu of 2011, forcing a desperate Bank of Japan (BoJ) to delete its government debt securities in a final bid to escape the deflation trap the country has been in for the past two decades. As nobody knows the outcome of this accounting manoeuvre inside the government sector, the decision will see a nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects. Sounds crazy right? Well, these days, everything is possible in the name of a crisis. In the inner circles of central banks, a neat and untested trick in which one simply deletes its holdings of a government’s debt is beginning to gain traction. For Japan, it would mean that about 15 percent of government debt would just disappear. It’s a simple accounting trick that effectively equates to “now you see it, now you don’t”.
5. US deflation: coming to a town near you: Indicators may suggest that the US economy is stronger, but the Federal Open Market Committee (FOMC) remains hesitant and with good reason. The fragility of the housing market has been underlined by the modest increase in yields in mid-2013. Te trade for this would be to go long on 10-year US government bonds, which we see at 1.5 percent in 2014.
6. Quantitative easing goes all-in on mortgages: A quick glance and you would think that the US economy is about to pick up speed, but this is merely an illusion fuelled by the Federal Open Market Committee’s (FOMC) third round of quantitative easing, which amounts to USD 85 billion per month. These purchases have pushed interest expenses down and sent risky assets to the moon, hence creating an artificial sense of improvement in the economy. Grave challenges remain, however, with private sector deleveraging ongoing, a housing market that struggles whenever rates rise, continuous declines in public sector spending and weak private sector employment; all of which the FOMC is keenly aware. Housing, in particular, is on life support and the FOMC will therefore go all-in on mortgages in 2014. This will transform QE3 to a 100 percent mortgage bond purchase programme and increase – forget talk of tapering – the scope of the programme to more than USD 100bn per month. Renewed weakness in the housing market will send the Vanguard REIT ETF down substantially, touching USD 30, the lowest level since 2009.
7. Brent crude drops to USD 80/barrel as producers fail to respond: With non-Opec supply expected to rise by more than 1.5 million barrels per day and the potential for another two million arising as disruptions in Libya and sanctions against Iran ease, the global market will become awash with oil. Hedge funds will react to the altered dynamics by building a major short position in the market for the first time in years. This will help to drive Brent crude oil down to USD 80/barrel, especially as almost all producers, which are in desperate need of high oil prices, will only react slowly.
8. Germany in recession: The German economy has outperformed the rest of the euro area in the four years following the global recession, but this outperformance will end in 2014 and consensus, which expects growth of 1.7 percent, will be deeply disappointed.
9. CAC 40 drops 40% on French malaise: The quantitative easing-driven equity bubble spills into 2014, but then equities hit a wall and tumble sharply on the realisation that the only driver for the market is the greater fool theory. Meanwhile, the malaise in France only deepens under the mismanagement of the François Hollande government as the president and his team fail to come up with answers for the country’s lack of competitiveness or to provide any spark for growth. Housing prices, which never really corrected after the crisis, finally make like their Dutch counterparts did in 2012 and execute a swan dive, pummelling consumption and confidence. The CAC 40 Index falls by more than 40 percent from its 2013 highs by the end of the year as investors head for the exits.  
10. ‘Fragile Five’ to fall 25% against the USD: The normalisation of global rates, which is expected to be started by tapering of quantitative easing in the US, will lead to higher marginal costs of capital from rising interest rates. This will leave countries with expanding current account deficits exposed to a deteriorating risk appetite on the part of global investors, which could ultimately force a move lower in their currencies, especially against the US dollar. We have put five countries into this category − Brazil, India, South Africa, Indonesia and Turkey. The “Fragile Five” have seen dramatic growth over the past decade, which has attracted billions of dollars in foreign direct investment (FDI). But as the flow of cheap and easy money begins to dry out, these countries will find themselves exposed as their current account deficits climb.

Please take a look at the above link which has more information as well as related videos for most of the predictions.

My Comments

The only one I find outrageous is #4: A strongly strengthening Yen.

In regards to #1,  I rather doubt an EU imposed wealth-tax is on the horizon because Germany would nix the idea. Selective countries, especially France, could try it though.

Nonetheless, I like the way Saxo Bank chose to play that theme, buying GLD with a possible upside to 180 which would put the price of gold at about $1800 an ounce.

All of the rest of Saxo’s “outrageous” calls are possible, if not likely. I certainly expect emerging markets and their respective currencies to tumble in conjunction with a China slowdown.

I expect a recession in Germany. Italy and France are powder kegs of eurosceptic politics.

In my reflections on 2013, I called for “Peak Merkel” (see Reflections on 2013; What’s Important, What’s Not? What’s Ahead?)

I appreciate the fact that Saxo Bank put trading suggestions on most of its predictions. That’s not easy to do.

Steen Jakobsen is not afraid to speak his mind about trading ideas and back them up with sound logic that many would say is “unconventional thinking”….