tf outrageouspredictions 2014

8/12/2019 TF OutrageousPredictions 2014

1/14

Global squeezeset to continue

Saxo Banks annual fat-tail forecasts for 2014

Outrageouspredictions
http://www.tradingfloor.com/?cmpid=OPArticleDec2013


2/14

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

PETER GARNRY

Techs Fat Fivewake up to a nastyhangover in 2014

OUTRAGEOUSPREDICTIONS

Global map ofpredictions

MADS KOEFOED

US deflation:coming to a townnear you

OLE S. HANSEN

Brent crude drops to USD80/barrel as producersfail to respond

JOHN J. HARDY

CAC 40 drops40% on Frenchmalaise

Coverillustration:ChrisBurke
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3/14

It will be the final move towards a totalitarian European state and thelow point for individual and property rights. We have gone full circleback to a Soviet Union model.

The obvious trade is to buy hard assets and sell inflated intangibleassets. We would buy the SPDR Gold Shares ETF (GLD:arcx), looking forit to go as high as 180, and sell an equal-weighted basket of HermesInternational (HRMS:xpar), LVMH (MC:xpar) and Sothebys (BID:xnys),expecting the basket 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 group thatwill 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 removinginequality and will see the richest 1 percent pay a fairer share toease societys burden. Several research papers have established thata wealth tax of 5 percent to 10 percent is needed to secure enoughfunds to create a crisis buffer to bail-in/out banks, governmentsand other liabilities created in this financial and debt crisis.

Illustration: Chris Burke
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4/14

CONNECT WITH STEEN JAKOBSEN:

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. Sweepingthe traditional political groups out of power, the new EuropeanParliament chooses an anti-EU chairman and the European headsof state and government fail to pick a president of the EC,sending Europe back into political and economic turmoil. Onetrade would be to long German Bunds versus short SpanishBonos 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

Watch Steen

Jakobsens

video
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5/14

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

that 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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6/14

CONNECT WITH PETER GARNRY:

However, in the inner circles of central banks, a neat and untestedtrick in which one simply deletes its holdings of a governments debt

is beginning to gain traction.

For Japan, it would mean that about 15 percent of government debtwould just disappear. Its a simple accounting trick that effectivelyequates to now you see it, now you dont.

Desperate BoJ to delete governmentdebt after USDJPY goes below 80

In 2014, the global recovery runs out of gas, sending risk assets downand forcing investors back into the yen. USDJPY goes below 80 in adj vu of 2011, forcing a desperate Bank of Japan (BoJ) to delete its

government debt securities in a final bid to escape the deflation trapthe country has been in for the past two decades. As nobody knowsthe outcome of this accounting manoeuvre inside the governmentsector, the decision will see a nerve-wracking journey into completeuncertainty and potentially a disaster with unknown side effects.Sounds crazy right? Well, these days, everything is possible in thename of a crisis.

Quantitative easing is essentially an unconventional back-door routefor a central bank to allow the government to maintain a largedis-saving without putting upward pressure on interest rates and

downward pressure on government expenditure. Central banks areindirectly buying government debt through their prime dealers,increasing the percentage of government debt owned by thegovernment sector. Inflation has supposedly been low because themassive debt purchases have been swapped with the prime dealersflowing into what is called excessive reserves. These reserves, dueto very low credit demand from the private sector, have not beenmultiplied and injected into the economy.

Have central banks invented the Holy Grail? Not quite. In fact, inmany developed economies, government debt is on an unsustainabletrajectory with growth hobbling along despite massive governmentstimulus. Most notable is the situation in Japan, where governmentdebt to GDP is about 215 percent and forecast to rise. With strongdeflationary pressure still present in Japan due to demographics, thedebt burden could soon be highly unsustainable.

These reserves, due to

a very low credit demand

from the private sector, have

not been multiplied and injectedinto the economy. Have central

banks invented the Holy Grail?

Not quiteByPeterGarnry,H

eadofEquityStrategy

Watch

Peter Garnrys

video
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7/14

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 2015and 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 Africa

s 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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8/14Illustration: 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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9/14

ByMadsKoefoed,

HeadofMacroStrategy

CONNECT WITH MADS KOEFOED:

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 thanUSD 100bn 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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10/14Illustration: 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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11/14

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 the euro areas largest economy and acoordinated plan by other key economies to reduce the excessive tradesurplus cannot be ruled out. Add to this falling energy prices in the US,which induces German companies to move production to the West,lower competitiveness due to rising real wages, potential demandsfrom the SPD, the new coalition partner, to improve the well-being ofthe lower and middle classes in Germany, and an emerging China thatwill focus more on domestic consumption following its recent ThirdPlenum. The fusion of these issues will mean a case for a surprise dropin economic activity. The economy will therefore see output decline,not rise, next year against all expectations, while the German 10-year

government bond yield will decline to 1 percent.

CONNECT WITH OLE S. HANSEN:

Watch

Ole S. Hansensvideo

Years of excess thrift in

Germany have seen even the

US turn on the euro areas

largest economy...
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12/14


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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13/14

CONNECT WITH JOHN J. HARDY:

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

Watch

John J. Hardys

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14/14
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