Saxo Bank Cygnes Noirs

8/13/2019 Saxo Bank Cygnes Noirs

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Global squeezeset to continue

Saxo Banks annual fat-tail forecasts for 2014

Outrageouspredictions


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Welcome to Saxo Banks 2014 Outrageous PredictionsWe are living through a critical phase of history, not only for humanitybut also in the markets. When the chapter on the global financial crisisand its drawn-out aftermath is finally written, it will be deemed far

greater in importance than the Great Depression. The worlds centralbanks and government policymakers are running on empty, avoidingany accountability on what has transpired and avoiding real reformsthat will allow us to move forward. Instead, they have been reducedto talking the market higher or simply going to church to pray forbetter times ahead.

The world is as lopsided as it has ever been in terms of wealth andincome distribution. And the current policy mix means that 20percent of the economy listed companies and large banks benefitsfrom quantitative easing, easy money and is going from strength to

strength. The remaining 80 percent made up of SMEs and averageworkers is facing the lowest wage-to-GDP ratio in history, an increasein austerity globally and a lack of access to credit.

2014 could and should be the year in which a mandate for changenot only becomes necessary, but is also implemented. However, thechange will come only through the failure of what has been tried thusfar and not from some kind of proactive enlightenment amongpolicymakers. The big disappointment in 2014 will be that both theUS and German economies will fail to reach escape velocity and

slow to zero growth. This will force policy changes as the strategy oftalking up the market will no longer be enough. There is a needand call for the real economy to have more focus, both economicallyand politically.

A wake-up call is necessary as the alternatives would leave us witha dire outlook indeed. Unemployment will eventually lead to socialtension, with the first major test in Europe, where there is a serious

risk that the European Union will see a massive vote against it in May.

This isnt meant to be a pessimistic outlook: looking back throughhistory, changes have always come as a result of the thorough failure ofthe old way of doing things. The lesson we should have learnt from theGreat Depression was that allowing things to fail is part of acceleratingthe path to a better future, even if the cost is alarge dose of short-term pain. Instead, we aredangerously close to having an economicmodel that, in the year of the 25th anniversaryof the fall of the Berlin Wall, reminds us more

of the failed experiment known as the SovietUnion. Lets stop running in circles, kickingthe can and pretending that quantitativeeasing is anything but an economicaddiction and finally move forward.

Best wishes for 2014.

Steen Jakobsen

Chief Economist

Saxo Bank

STEEN JAKOBSEN

EU wealth tax heraldsreturn of Soviet-styleeconomy p3

PETER GARNRY

Techs Fat Fivewake up to a nastyhangover p5

OUTRAGEOUSPREDICTIONS

Global map ofpredictions p8

MADS KOEFOED

US deflation:coming to a townnear you p7

OLE S. HANSEN

Brent crude drops to USD80/barrel as producersfail to respond p11

JOHN J. HARDY

CAC 40 drops40% on Frenchmalaise p13

Coverillustration:ChrisBurke


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this financial and debt crisis. It will be the final move towards a totalitarianEuropean state and the low point for individual and property rights.

We have gone full circle back to a Soviet Union model. The obvioustrade is to buy hard assets and sell inflated intangible assets. We wouldbuy the SPDR Gold Shares ETF (GLD:arcx), looking for it to go as highas 180, and sell an equal-weighted basket of Hermes International(HRMS:xpar), LVMH (MC:xpar) and Sothebys (BID:xnys), expecting thebasket to go from index 100 to 50.

BySteenJako

bsen,

ChiefEconomist

We have gone

full circle back

to a Soviet

Union model

EU wealth tax heraldsreturn of Soviet-style economy

In 2014, deflation and a lack of growth will create panic amongpolicymakers, leading the EU Commission to table a working groupthat will focus on different wealth taxes for anyone with savings

in excess of USD or EUR 100,000. The initiative will be in the nameof removing inequality and will see the richest 1 percent paya fairer share to ease societys burden. Several research papershave established that a wealth tax of 5 percent to 10 percentis needed to secure enough funds to create a crisis buffer tobail-in/out banks, governments and other liabilities created in

Illustration: Chris Burke

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BySteenJako

bsen,

ChiefEconomist

Anti-EU alliance will becomethe largest group in parliament

From May 22-25 next year, European Parliamentary elections will beconducted across Europe. Since the advent of the Lisbon Treaty in2009, the European Parliament has not only become a powerful co-

legislator, but must be taken into account when choosing a nomineefor the post of president of the European Commission (EC), theexecutive arm of the European Union.

European Parliamentary elections are contested by national politicalparties, but once MEPs are elected, most opt to become part oftransnational political groups.

Following the May elections, a pan-European, anti-EU alliance, whosemembers will include the UK Independence Party, euro-currencysceptic Alternative for Germany, the National Front in France andParty for Freedom in the Netherlands, will become the largest groupin parliament with a majority of more than 275 seats.

Sweeping the traditional political groups out of power, thenew European Parliament chooses an anti-EU chairman andthe European heads of state and government fail to pick apresident of the EC, sending Europe back into political andeconomic turmoil. One trade would be to long GermanBunds versus short Spanish Bonos looking for a 300-basis-point spread again.

European Parliament...

must be taken into

account when

choosing a nomineefor the post of

president of the

European Commission,

the executive

arm of the EU

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However, a small group of technology stocks trade at a huge premiumof about 700 percent above market valuation, almost defying theNewtonian laws of financial markets. These stocks are what we callthe Fat Five of the technology sector Amazon, Netflix, Twitter,Pandora Mediaand Yelp. These stocks have very inflated valuationsbased on a skewed valuation premium on growth that has evolved inthe 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 islike a new bubble within an old bubble.

Facebooks USD 3 billion cash offer for Snapchat,declined by its 23-year-old founder, is the ultimate

display of hubris that shows how exuberance hasgrown to new levels in this part of the technologysector. Snapchat has zero revenue and does nothave a business model, so the acquisition value

is not determined by incremental cash flow toFacebook, but from the potential destructionvalue to Facebook based on assumptions aboutwider adoption of Snapchat.

This creative destruction is exactly the darkmatter that should make investors cautiousabout the huge valuation premium that iscurrently being put on this small group withinthe information technology sector. To trade this,

we would create a synthetic equal-weighted

index of the Fat Five, starting at 100 on the lasttrading day of 2013. Our Outrageous Prediction is

this index will go to 50 during 2014.

Techs Fat Five wake up toa nasty hangover in 2014

The US information technology sector is trading about 15 percentbelow the current S&P 500 valuation, which is in sharp contrast to thehistorical premium of approximately 160 percent during the dotcom

bubble. We like technology stocks in general as they are the maindriver of the necessary productivity growth the economy needs tocreate long-term increases in wealth per capita.

ByPeterGarnry,HeadofEquityStrategy


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7/15Illustration: Chris Burke

US defation: coming to a town near you

Indicators may suggest that the US economy is stronger, but theFederal Open Market Committee (FOMC) remains hesitant and withgood reason. The fragility of the housing market has been underlinedby the modest increase in yields in mid-2013.

This sent sales of new homes to a year low in July, while sales remaindepressed compared with the first half of the year. Wage growthremains non-existent despite higher employment due to abundantcapacity in all industries. With Congress scheduled to perform Act II ofits how to disrupt the US economy charade in January, investment,employment and consumer confidence will once again suffer.

This will push inflation down, not up, next year and deflation willagain top the FOMC agenda. The trade for this would be to golong on 10-year US government bonds, which we see at 1.5 percent

in 2014.

Congress is scheduled to perform

Act II of its how to disrupt the US

economy in January

ByMadsKoefoed,

HeadofMacroStrategy

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Greek GDPwill turnpositive(2 percent annualised).

George Elliot predicts:

Konstantinos Tzavras predicts:

Mark Carney leaves the Bank of Englandtobecome a farmer in New Zealand as no onebelieves his guidanceany more.

Ole Srensen predicts:

OECD decides to introducea globaltax by 2015 and themarkets subsequently plunge20percent.

Twitter to hit50percent of its IPO pricein2014.

Humphrey McCarthy predicts:

Sren Mller predicts:

The S&P 500 willgo down to800and Nasdaq 100to 2,250byFebruary 1.

James Benjamin predicts:

Martiallaw declared inmore thanone western country after big-ger crediteventthan theLehmanBrothers collapseoccurs.

Paolopredicts:

Troika arrives in Italy (new politicalelections inItaly).

Germanydecides to exitfrom euro.

MichielSmits predicts:

Recession in Germany, revolution in Greece andSpain, while French President Franois Hollande isforced to resign.

JoaoCarlos predicts:

Capitalcontrols in Portugal. Bitcoinplunges tosingle-digit

value.Greece rejects theeuro and goes to the drachma.

Johann Mare predicts:

Opec decides to drop theUSD as thepricing mechanismfor oil, choosinga basket based oneuro/yen/yuan.

Norway goes into recessionon anoil priceplunge

Christian Mrk Lauridsen predicts:

ScottSchuberg predicts:

US crudeto fallto a USD60-70 range on Opec output, moreUS oil shale productionand Gulfstates/US hostility that exacer-bates therush to pump.

Winning prediction: Johann Mare

South Africa will experience huge politicalupheaval, splitting the ruling party, leading to extreme

levels of violence and resulting in high levels of indus-

trial action that, combined with a gold price of 1,100

USD/oz, results in the closure of up to 50 percent of

gold mines.

Inflation will skyrocket to double digits (about 15

percent); USDZAR will get to 22.

Welcome to South Zimbabwe .

fxtime predicts:

US defaults on bonds,causing China to re-allo-cateits treasury holdings bya t ok en 1 p er ce nt w it hwidespread ramifications.

Ian Murphy predicts:

The EU leaves the UK after it createsa re-accession treaty premised on euromembership to counter secessionism.Scotlands vote for independence forcesBrussels to show Londonthe exitdoor.

Vanessa Sabbatinipredicts:

South Africas rand back atR7 to theUSD, decides toadoptthe EUR.

PierPaolo Taddoniopredicts:

Negative Fed Funds as theQE debate moves from itsduration to how to make itmoreefficientunder Yellen .

Macro

Equities

Forex

Commodities

20competitionforecastschosen by our analysts

top

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ByMadsKoefoed,

HeadofMacroStrategy

Quantitative easing goesall-in on mortgages

A quick glance and you would think that the US economy is aboutto pick up speed, but this is merely an illusion fuelled by the FederalOpen Market Committees (FOMC) third round of quantitative easing,

which amounts to USD 85 billion per month.

These purchases have pushed interest expenses down and sent riskyassets to the moon, hence creating an artificial sense of improvementin the economy. Grave challenges remain, however, with private sectordeleveraging ongoing, a housing market that struggles wheneverrates rise, continuous declines in public sector spending and weakprivate sector employment; all of which the FOMC is keenly aware.

Housing, in particular, is on life support and the FOMC will thereforego all-in on mortgages in 2014. This will transform QE3 to a 100

percent mortgage bond purchase programme and increase forgettalk of tapering the scope of the programme to more than USD100bn per month.

Renewed weakness in the housing market will send theVanguard REIT ETF down substantially, touching USD 30,the lowest level since 2009.

Housing, in particular, is on

life support and the FOMC

will therefore go all-in on

mortgages in 2014. Thiswill transform QE3 to a

100 percent mortgage

bond purchase

programme...

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10/15Illustration: Chris Burke

ByOleHansen,

Heado

fCommodityStrategy Brent crude drops to USD 80/barrel

as producers fail to respond

Global oil markets are going through a period of transition, in whichrising production from non-conventional methods (especially in theUS and Canada) and an increase in Saudi Arabian production have

helped to ensure stable prices despite numerous disruptions. Brentcrude oil has therefore averaged about USD 110/barrel over the pastthree years with the consensus forecast for 2014 pointing towards anaverage price of USD 105/barrel.

With non-Opec supply expected to rise by more than 1.5 millionbarrels per day and the potential for another two million arisingas disruptions in Libya and sanctions against Iran ease, the globalmarket will become awash with oil. Producers will have to make a

concerted effort to cut output. Hedge funds will react to the altereddynamics by building a major short position in the market for thefirst time in years. This will help to drive Brent crude oil down to USD

80/barrel, especially as almost all producers, which are in desperateneed of high oil prices, will only react slowly. Russia and most Opecproducers will delay to balance their budgets, while the US will dragits feet because of the need for high prices to ensure the economicviability of shale oil.

Once producers finally get around to reducing production, oil willrespond with a strong bounce and the industry will conclude that highprices are not a foregone conclusion.

The global market will

become awash with oil

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ByOleHansen,

Heado

fCommodityStrategy

Germany in recession

The German economy has outperformed the rest of the euro area inthe four years following the global recession, but this outperformancewill end in 2014 and consensus, which expects growth of 1.7 percent,will be deeply disappointed.

Years of excess thrift in Germany have seen even the US turn on theeuro areas largest economy and a coordinated plan by other keyeconomies to reduce the excessive trade surplus cannot be ruled out.

Add to this falling energy prices in the US, which induces Germancompanies to move production to the West, lower competitivenessdue to rising real wages, potential demands from the SPD, the newcoalition partner, to improve the well-being of the lower and middleclasses in Germany, and an emerging China that will focus more ondomestic consumption following its recent Third Plenum. The fusion

of these issues will mean a case for a surprise drop in economic activity.

The economy will therefore see output decline, not rise, next yearagainst all expectations, while the German 10-year government bondyield will decline to 1 percent.

Years of excess thrift inGermany have seen even the

US turn on the euro areas

largest economy...

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CAC 40 drops 40% on French malaise

The quantitative easing-driven equity bubble spills into 2014, butthen equities hit a wall and tumble sharply on the realisation thatthe only driver for the market is the greater fool theory. Meanwhile,the malaise in France only deepens under the mismanagement of the

Franois Hollande government as the president and his team fail tocome up with answers for the countrys lack of competitiveness or toprovide any spark for growth.

Housing prices, which never really corrected after the crisis, finallymake like their Dutch counterparts did in 2012 and execute a swandive, pummelling consumption and confidence. The CAC 40 Indexfalls by more than 40 percent from its 2013 highs by the end of theyear as investors head for the exits.

Meanwhile, the malaise in

France only deepens under the

mismanagement of the Franois

Hollande government

ByJohnJ.Hardy,

HeadofForexStrategy

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Time has run out for them and

they are left with just one policy

tool a weaker currency

Fragile Five to fall 25% against the USD

The normalisation of global rates, which is expected to be started bytapering of quantitative easing in the US, will lead to higher marginalcosts of capital from rising interest rates. This will leave countries withexpanding current account deficits exposed to a deteriorating risk

appetite on the part of global investors, which could ultimately forcea move lower in their currencies, especially against the US dollar. Wehave 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 currentaccount deficits climb. The positive FDI flows removed their focusfrom creating quality growth through long-term spending

plans with positive returns. But with expenditure risingbecause of increasing labour costs and a general rise inlabour-related entitlements, the five countries will facedownward pressure on their currencies.

Elections in India in May and in Indonesia in mid-July may delay the introduction of reforms to haltthe deterioration, leaving these countries evenmore exposed to risk. Time has run out forthem and they are left with just one policytool a weaker currency. Sell an equal-weighted basket of the Fragile Five andlook for a plus 10 percent return.

ByJohnJ.Hardy,

HeadofForexStrategy

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Saxo Bank Cygnes Noirs