Stress Indicators - What stress?

 

Crisis update: Russia CDS slight down but Greek yield continues higher – although a far cry from "Crisis 1.0" in 2011/2012.

 

 

Greek stocks down 33% YTD vs. 3.0% for STOXX50.

 

 

Interesting divergence between the US and World Markets – US making new highs but Global markets is considerable below prior highs (Late summer)…also stuck below 50 SMA, but January and new money is soon arriving. Listening to CNBC US show it seems its only a matter of how high the market goes next year J

 

 

 

Saxo's Euro growth predictor – new low (meaning biggest stimulus in years!) – the lead/lag is NINE month – i.e prepare for July/September European rebound in growth…

 

This is THE problem for markets and FED in 2015: Inflation and its "leading indicators" continues to make new lows……Fed's dual mandate is under attack from dis-inflation now…..

 

Meanwhile in Central Bank-land – Balances are shrinking not rising if you exclude BOJ – Again – The world "perceives" marginal cost of capital as low to lower, while reality  is high to higher…..

 

 

 

Since April US Real rates risen from -1.50 to -0.80 – or 70 bps rise – Hmm… but that's fact – who needs facts?

 

Another fact – Inbound containers is for some reason falling hard in the US after steep rise in Q2 and Q3 – indication Q4 is going to be tough?

 

Finally,

 

A full PDF attached. I wish you all a Great Happy New Year and I got feeling 2015 is getting really exciting if you like volatility.

 

Steen

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

Putin's Annual Outlook speech - v. interesting....

Putin classic... he is making seriously good initiatives (I think he has been listening to my speeches in Moscow!) on...

SME focus
Start up tax benefits..
Tax amnesty ....
Better tax regime..

But then...

Foreign policy comparing opponents to Hitler....
Crimea Temple mountain for Russia
"respects" Ukraine sovereignity

Call on TAX on fx... No doubt we are getting close to CAPITAL restrictions in Russia but v. interesting speech..

LIVE FEED: http://rt.com/on-air/

Subject: (BFW) *PUTIN CALLS FOR `HARSH' MEASURES TO FIGHT RUBLE SPECULATO

(BFW) *PUTIN CALLS FOR `HARSH' MEASURES TO FIGHT RUBLE SPECULATO RS

+------------------------------------------------------------------------------+

BFW 12/04 09:32 Russia Won't Opt for Isolation, Putin Says in Annual Address

BFW 12/04 09:27 Putin Says U.S., EU Support for Ukraine's 'Coup' Was Cynical

BFW 12/04 09:13 Putin Says Russia Showed It's Able to Defend Compatriots This Yr

BFW 12/04 09:44 *PUTIN CALLS FOR `HARSH' MEASURES TO FIGHT RUBLE SPECULATORS

BFW 12/04 09:43 *PUTIN CALLS ON CENTRAL BANK, GOVT TO COORDINATE CLOSELY ON RUB

BN 12/04 09:42 *PUTIN CALLS TO DECREASE INFLATION TO 4% IN MID-TERM

BN 12/04 09:42 *PUTIN CALLS FOR ECONOMIC GROWTH ABOVE WORLD AVG IN 3-4 YRS

BN 12/04 09:39 *RUSSIA SHOULD TURN `OFFSHORE' PAGE IN HISTORY, PUTIN SAYS BFW 12/04 09:38 *PUTIN CALLS FOR FULL AMNESTY FOR REPATRIATING CAPITAL

BN 12/04 09:35 *PUTIN CALLS FOR FULL AMNESTY FOR CAPITAL RETURNING TO RUSSIA

BN 12/04 09:34 *PUTIN CALLS TO FIX TAX REGIME FOR NEXT 4 YRS

BN 12/04 09:33 *PUTIN SAYS BUSINESS NEEDS MORE FREEDOM FROM BUREAUCRACY

BN 12/04 09:30 *PUTIN: SANCTIONS ARE STIMULUS FOR RUSSIA TO REACH GOALS FASTER

BN 12/04 09:28 *RUSSIA REMAINS OPEN TO INTL INVESTORS, COOPERATION: PUTIN

BN 12/04 09:27 *RUSSIA DOESN'T PLAN TO CUT OFF RELATIONS W/ U.S., EU: PUTIN

12/04 09:26 *RUSSIA WON'T OPT FOR ISOLATION, PUTIN SAYS

BN 12/04 09:25 *RUSSIA WON'T BE PULLED INTO ARMS RACE, PUTIN SAYS

BN 12/04 09:25 *NO ONE WILL GAIN MILITARY SUPERIORITY OVER RUSSIA: PUTIN

BN 12/04 09:24 *PUTIN SAYS OPPONENTS OF RUSSIA WILL FAIL LIKE HITLER DID

BN 12/04 09:21 *PUTIN: U.S., EU SANCTIONS AIMED AT CURTAILING RUSSIAN ECONOMY

BN 12/04 09:20 *PUTIN: U.S., EU WOULD HAVE SANCTIONED RUSSIA W/OUT UKRAINE

BN 12/04 09:18 *RUSSIA PROVIDED $32.5-$33.5B TO AID UKRAINE ECONOMY, PUTIN SAYS

BN 12/04 09:16 *U.S. INFLUENCES RUSSIA'S RELATIONS WITH NEIGHBORS:

PUTIN BFW 12/04 09:15 *PUTIN SAYS U.S., EU SUPPORT FOR UKRAINE 'COUP' WAS CYNICAL

BN 12/04 09:15 *PUTIN SAYS U.S., EU SUPPORT FOR UKRAINE `COUP' WAS CYNICAL

BN 12/04 09:13 *RUSSIA RESPECTS ALL COUNTRIES' SOVEREIGNTY, INCL UKRAINE: PUTIN

BN 12/04 09:12 *CRIMEA IS RUSSIA'S TEMPLE MOUNT, PUTIN SAYS

BN 12/04 09:11 *CRIMEA HAS SACRED MEANING FOR RUSSIA, PUTIN SAYS

BN 12/04 09:10 *CRIMEA IS `SPIRITUAL' SOURCE OF RUSSIA'S STATEHOOD: PUTIN

BN 12/04 09:10 *CRIMEA IS STRATEGICALLY IMPORTANT FOR RUSSIA: PUTIN

BN 12/04 09:08 *PUTIN: RUSSIA SHOWED ABLE TO DEFEND COMPATRIOTS THIS YR

BN 12/04 09:06 *RUSSIAN PRESIDENT VLADIMIR PUTIN STARTS ANNUAL ADDRESS


+------------------------------------------------------------------------------+

Putin Calls for Full Amnesty for Repatriating Capital to Russia
2014-12-04 09:41:57.569 GMT


By Olga Tanas
Dec. 4 (Bloomberg) -- Capital being repatriated to Russia shouldn't be subject to claims by tax and security authorities, President Vladimir Putin says in annual speech to parliament, officials in Kremlin.
* Putin offers one-time capital amnesty, proposes 4-year
moratorium on increasing tax burden


Link to Company News:{4458Z RU <Equity> CN <GO>}

For Related News and Information:
First Word scrolling panel: {FIRST<GO>}
First Word newswire: {NH BFW<GO>}

To contact the reporter on this story:
Olga Tanas in Moscow at +7-495-771-7705 or otanas@bloomberg.net

To contact the editor responsible for this story:
Paul Abelsky at +420-2-2442-2101 or
pabelsky@bloomberg.net

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Macro Digest: ECB is about to do biggest policy mistake in its history & FED is 1-1 on dual mandate

FOMC has a dual mandate: Employment & inflation. On employment they seem to be doing well, on the inflation less so:

This is non-farm with 12-mth average – US has created just north of 200K job on average in this "non-lift-off" business cycle, but looking at employment to population the US has gone NOWHERE since 2010. Call it a success, but then on inflation:

 

 

 

Whether measured and projected against 5Y5Y forward or 5Yr break-even the incoming "alert" is that US inflation will come off further, and hence far away from its intended 2% PCE target. The actual mandate reads:

 

 

 

So….. why this e-mail? Well similar to Europe, the 2015 projection of expected return will be driven by whether market takes the "success" of the labor market as being more significant than the "failure" on inflation / dis-inflation. As stated in my latest Steen's Chronicle I think it's the dis-inflation/undershooting of inflation which will be the main driver, and as such negate the positive input to disposable income from lower energy….in other words inflation expectations will bottom in Q1 EXACTLY when ECB is most likely to ignite their too late, too desperate move to full QE.

 

I firmly believe European growth will come back in H2-2015 and strongly so: A combination of easier monetary policy, lower energy, lower EUR will add up to significant boost to spending and investments 9-month from now, co-inciding with weaker stock markets as money will be moved from non-productive paper investment in the 20% of economy into the 80% (SME's) ending in capacity and industrialization of mainly PIIGS and Eastern Europe. The biggest play in 2015 will be finding the entry point for long Emerging Europe: Polen, Bulgaria, Romania, Hungary and Czech. Fact is production is coming back to the mentioned names as seen here in difference between German and Hungarian Industrial Production. Micro prevails – again!

 

 

 

This is how the JABA model sees 2015 – low in Q1/Q2 follow by 9-month rule impulse from low rates….

 

 

Note the LOW in early 2015 is REPLACED by recovery in H2. The ECB is about to make the biggest timing and policy mistake in its history – instead they should continue to do what they do best: Nothing….keep talking doing nothing.. the economy heals through supply side and micro, not macro.

 

Safe travels,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

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Macro: Stress Indicators - Sign of ?

It's been a while since I ran the Stress Indicator batch, which was borne under the financial crisis. It's remarkable and true reflection on how perverted our monetary system has become, but look for yourself here is few interesting chart from the selection:

 

US Real Rates: Let's talk about hike in US rates – It's alrady happened (Please don't tell the stock market) Result: 65 bps higher than beginning of the year.

 

Europe vs. US.

 

I was pretty much alone in calling for near German recession this time last year, and now I am it seems again on the other side: I think Europe will surprise to upside in 2015, mainly in H2-2015, and I think US will disappoint…again its already happening (Please don't tell EURUSD & Stock market). I have seen "considerable" improvement in Club Med + Eastern Europe's competititveness on my travels in November. Germany and France will big losers, Rest of Europe will pull ahead next year as Germany finally lose its net gain from introducing the EURO.

 

 

Japan CDS – maybe the most important chart this morning: How ANYONE can believe that exporting a countries problem through its currency to other countries will solve anything is a mystery to me! Japan is diplomatically put "borrowing" growth from a world growth which is tanking. No one can afford someone else's growth that was 2014 challenge, 2015 will be final chapter in currency manipulation and it will end in years like in 1997/98:

 

 

Biggest USDJPY moves:

 

 

Gasoline prices collapsing. We know this is key ingredients of consumer surveys: I.e: explains why SURVEY data better than real data in the US:

 

 

Europe will see low in Q1/Q2 – this has been reliable indicator:

 

This week sees nine central banks calling for lower yields – deflation now the new issue for all involved. Ironic as less than 2Q ago everyone was in denial. The end of macro policy is fortunately close……

 

Safe travels,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

MACRO update: ''A great deal of intelligence can be invested in ignorance when the need for illusion is deep” - Sam Bellow

Just back from four cruel weeks of travelling: Bucharest, London, Sydney, Melbourne, Lisboa, Porto, Madrid, and Zürich . Housing bubbles everywhere to be seen and all denied by local policy makers and economists. The big sell-off in 2015 will come from housing and housing related investments as marginal cost of capital rises through regulation and "margin calls" on banks as their profit to GDP too high for the economy to function properly. The dividend society is here and true manifestation of Japanisation is not a future event but a thing we are living and right now….

 

From tactical point of view I live in a very simple world:

 

 

Core trading view:

 

10Y Bond yields(US) will continue lower into Q2-2015.  I see acceleration to down-side and mainly in the US where 10 Y could hit 2.00% and bottom out at 1.5% by Q2 as GDP comes off relative to "lift off" consensus.

 

 

·        European factors:  Lower than anticipated growth in Germany (China rebalancing, lower US current account deficit and EZ overall) – Impact from Russia crisis only beginning to impact real economy and of course the deflation which ECB promised us would never happen…….

 

·        US factors:  Energy sector moving towards default and closing down capacity – subtracting 0.3-0.5% from GDP plus lackluster housing market despite record low mortgage rates plus contraction in monetary aggregates……

 

·        China – Despite RRR cut the economy is already at 5.0% in real terms and without reform in health care(why people save money), competition (anti-corruption) and deeper capital markets (sort of happening) the marginal change will continue to be negative.

 

·        Emerging Market – Strong US Dollar is the last thing the EM market needs. It's a de facto tightening of monetary policy at a time where "export markets" continue to weaken.

 

The world is barely surviving at an average yield of 1.5/2.0%  - Market forget that we have two drivers of growth: US and Emerging markets (EM). EM is under pressure as we end 2014 forced into the defensive by lack of reforms, but also a much stronger US Dollar, which means the "mean-reversion" trade is for 2015 is for WEAKER US dollar to rebalance towards EM growth as the path of least resistance.

 

I have no doubt EM becomes major buy sometimes in Q2 when world is off the concept of ever stronger US dollar based on a growth lift-off which is never coming..

 

EEM (iShares MSCI EMG) vs. S&P 500 ----  S&P lead by 11%+ (reversal in 2015?)

 

 

The never ending illusion of "lift off" for the US economy

 

Again the revision data for US GDP shows Real Personal Consumption expenditures increased 2.2 percent in the third quarter – A much better (the only reliable) indicator of growth as inventories, investment and trade generally adds up to zero over a full year…. In other words where RPCE goes US economy. Too see why this is please see composition of GDP in the US here:

 

 

US growth has been 2% plus or minus since the financial crisis started, this year it will be 2%- next year? 2% nowhere close to the 3-4% expected by the markets  building on "surveys" and feel good factors. Trust me as someone who spend too much time travelling this year, the world is worse off, not better.

 

I meet frustration, lack of access to credit and almost desperation when the question is on asset allocation, but….2015 looks like a year of change… FOMC will definitely continue to sell the "pipe dream" of normalization, BOJ is done and toast. That anyone believe printing money will leave Japan better off is a mystery to me. Compare the FX policy of Switzerland and Japan. One has ever rising currency, Switzerland, which forces its "Mittelstand" (SME's*) to be fleible, productive and acquisitive, the other Japan, have tried to intervene in its currency in order to avoid changes and reforms.

 

No, if there is any reality left in the world the market will realize by its mistaken support for long USDJPY positions that productivity gains, competitive edges is driven by the "need" to change not from isolation from cause and effect, but that's also a 2015 story.

 

In closing I have very little positions – the stock market is on a mission to kill the shorts, which will probably succeed, the FX market believe in Santa Japan, and ECB continues to do nothing but talk, but for now it's enough to sell the product which is risk on at all costs.

 

The correction will be deeper and deeper as market is dislocated through zero interest rates and an investor crowd which is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on….. low interest rates.

 

Let's hope ECB plays ball for the market to buy some more time, for now we play musical chairs, and when the music stops more than one chair will be missing……

 

Positions:

 

75% of risk is long FI (mainly US Fixed income)

10% risk in equities, mainly mining plays (Alcoa & Fortescue) – looking to add VALE and others in sector on inflation expectations hitting rock bottom in Q1….

5%  long Silver… bought on sell-off…

5%  Natural Gas – preparing for long and cold winter…..

5% Upside optionality in EUR c USD p

 

How bad is things? Well, let me give you my starting slide from the presentations done in November:

 

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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Outrageous Predictions 2015 - The early look and what do you think....

Dear All,

 

I have written the foreword for 2015 Outrageous Predictions below but would love to see you engage in offering your most "unlikely big impact event to upset our lifes in 2015"……

I hope you have a nice week-end,

 

Steen

 

Outrageous Predictions: A reckoning's coming

URL link: https://www.tradingfloor.com/posts/outrageous-predictions-a-reckonings-coming-2541920

·        False sense of security enveloping markets as 2015 looms

·        US wane and China rise creating volatile superpower clash

Get ready for our Outrageous Predictions 2015

·         

Outrageous Predictions is back, and we would like you to be a part of it! Send us your "outrageous prediction" for the upcoming year (or quarter) to have a chance to be included in our successful publication. If your prediction is chosen to be the best, you can even win one of our VIP prizes.

 

How to send in your prediction

 

- Comment on Steen Jakobsen's opening piece in the section below

- Squawk on our Outrageous Predictions page or
- Click here to tweet your prediction with #2015OP

By Steen Jakobsen 

Standing on the doorstep to 2015, we are experiencing near perfect conditions for momentum and equity investment. Inflation has fallen to its lowest since the 1980s, interest rates have followed, and energy is relatively stable.

Corrected for inflation, oil at $80/barrel today equals $20-40/b in the 1970s.

Low volatility has given investors a false sense of security that could lead to the biggest upset in 2015.

Central bankers meanwhile have become the generals in an economic war in which the final tool in the box - competitive currency devaluations – merely exports problems overseas.

Nowhere exemplifies this better than Japan after the latest bazooka launch by Shinzo Abe threatens to become an out-of-control, inflation-stoking missile. Japan may have bought the global markets a further quarter or two of protection but the real world will have its say.

Wither Japan in 2015 if Shinzo Abe's policies spiral out of control? Photo: Thinkstock

We saw it for one week of mayhem in October. If that's anything to go by, we are in for a rollercoaster ride in 2015. Tangible assets and production sit at all-time lows. Paper money investment has crowded out productive capital while societies are dominated by hairdressers and bankers. We're losing the art of manufacturing.

Meanwhile the power of the US of A is waning as China rises and when the superpower pecking order changes, volatility and war ensue.

Nothing is ever given and Outrageous Predictions remains an exercise in finding ten relatively controversial and unrelated ideas which could turn your investment world upside. By imagining the most negative scenarios and events you will have a better chance of navigating the turmoil.

And we at Saxo Bank remains convinced higher volatility and a potential move towards a mandate for change is upon us as macro thinking enters a final fight to the death before we can again put our faith in people, ideas, education and change rather than hollow promises.

2015 will be a tough year but potentially also the year we look back at as the nadir. As Winston Churchill famously said: "If you are going through hell, keep going". 

-- Edited by Martin O'Rourke

Steen Jakobsen is CIO and chief economist at social trading leader Saxo Bank

RECOMMENDED  COMMENT 

20h

Juhani Huopainen

Japan: After the IMF-recommended sales tax increase is completed, economic growth fails to pick up, markets realize that Bank of Japan's asset purchases will not be increased and JPY and Nikkei plummet. The drop in value is deemed to be proof that Abenomics has failed, and the narrow support for the current monetary policy in the board of BoJ is lost, and BoJ will first decrease asset purchases. USDJPY crashes to 100, where it was at the beginning of 2014.

Europe: signs that France and Italy would be moving toward leaving the euro area force Brussels to abandon the enforcement of the two- and six packs, which put limits on the budget deficits, breaking the EU-level macroprudential framework. In retaliation, German demands for tighter monetary policy become louder, and chancellor Merkel will be forced to stop QE-plans and markets begin to expect a rate increase, forcing yields higher, which only aggravates the debt- and deficit problem. EURUSD rallies as hopes for QE is lost.

19h

Konstantinos Tzavras

EURCHF 1.05

17h

Rodrigues

Be fearfull when others are greedy. I see the biggest crash in history following this gigantic mooney priting bubble. After the bubble blows i see a New Word Order where mooney looses value and people start trading goods again. In my outrageous prediction i see the end of capitalism as we know it. I m not giving numbers to tradable instruments cause i see them ending and markets freezing with no value at all. Am i beeing to outrageous? :)

16h

thewickedwiz

Hi presume you mean JPY soars (third sentence)

16h

djoshuaelliott

At least 1 country will leave the Euro in 2015

14h

fxtime

Gold reaches $2500 as Russia invades Estonia and Latvia !

12h

MrScalper

Ole Hansen's outrageous prediction for 2015 to come true once again

11h

Dinastarsky

First semester :Everything is fine ; Oil continues to slide lower, a boon for the USA and China, Europe is upset by social protests, France - Italy see their Govt Bonds rates jump much higher , the shorting of their bonds is an easy trade, so Euro goes down to 1,18 $ , as a consequence of social unrests continental europe , the GBP is stronger , a wave of entrepreneurs leaves France for the UK. The US $ jumps up to 96 on the DXY index , Gold-Silver lose another 10%, Russia slowly digest eastern ukraine while China reinforces its power in Asia. the JPY reach 145 Yen/ $ ;
Second semester , the situation gets sour ; after a wide unrest in Japan, the citizens are running on banks to withdraw their cash , exchange it for US $ , and they dump their japanese government bonds , the BOJapan interest shoot up but to no help, total freeze of financial system in japan, Mr Kuroda dumps its mountain of US T bonds , the US economy start to tank . Hedge funds are betting on a DJ-SP crash.

11h

benlouro

Equities: 
Best - PSI or IBEX up more than 20% in 2015
Worst - India lower more than 10% in 2015
Bonds:
Best - long US 10Yr for target Yield 1.50%
Worst - short High Yield all over 
Commodities:
Gold at 2000 usd
Crude at 50usd
Sugar up more than 100%

8h

aidamarklough

This comment has been redacted

5h

Adam Courtenay

The US economy will falter and the USD plunge

 

3h

Nostress

ECB will do whatever it takes, QE... :P

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Australia: The (un)lucky ones? Travel report from Down-under

 

• Australian economy overly dependent on banking and mining
• Chinese investment, housing bubble insulated Australia from the global crisis
• 2015 likely to see a move from dividend-paying blue chips into resources

By Steen Jakobsen

 

Australia is in every sense an amazing place but as an economy, it pretty much has all the wrong incentives and structures in place. Nowhere is this more visible than in the housing market, where "negative leverage", the use of super funds assets and a massive banking sector creates a bubble which to my eyes is equivalent to the one we saw in Spain and the US before the GFC (as they call the global financial crisis down here).

Negative leverage is the ability to take losses on rental properties and deduct it from your income. A super fund is the Australian equivalent of a 401K , which can be used to buy a second home, and the banking sector is presently seeing a record level of profit-to-GDP (while the ASX 200 index is now is 42% banking). Sydney must be the most overbanked city in the world, you can hardly walk 200 yards without passing a bank branch.

 

 Lesser-known landmarks of Sydney. Photo: TK Kurikawa \ iStock

The ASX is probably a good place to start an analysis of Australia's economic conditions. Banks, as noted, represent 42% of the index. Information technology is less than 1% and materials (with the main export being iron ore) represent less than 16% of the key Aussie index. 

 

I have to admit that I was surprised to learn this. Australia has become a "dividend yield-dependent" nation. Investors are long on blue chip names with high dividends; it's a presumed-to-be safe play, but it also reflects an economy that remains a "one trick pony". The bigger trade for 2015 may be a move out of these dividend plays into resources (specifically mining).

 

Why, you may ask?

For three reasons:

1.) A need to rein in the banking sector's dependence on mortgages, creating a need for the macroprudential framework to be changed.

2.) Marginal cost of capital will rise due to both this and the increase in capital requirement needed to rebalance profit away from dividend yields into a more secure (and supportive in the long term) banking system.

3.) There is a great deal of pressure on the overall funding cost of Australia due to its rising current account deficit and now also its budget balance (which has moved from a balanced 2017/18 budget outlook to an accumulated loss of $A100 billion even before the expected December budget update).

 A move out of financial stocks and into the mining sector 

could reward Aussie investors in 2015. Photo: iStock

 

The Reserve Bank of Australia, will need to cut interest rates to 2.0% (if not 1.75% or 1.50%) as the Australian economy absorbs the impact of a slowing China, a 40% fall in iron ore prices (year-over-year), and budget deficits that are growing each quarter due to smaller tax revenues.

The problem, of course, is that any indication of lower rates will further fuel the housing bubbles. The RBA will need to step up the so-called "macroprudential framework" and increase capital requirement for the banking sector. The fact that banks are making record profits (and awarding record bonuses to management) is not in and of itself the problem. The macro problem is that too much money remains on their balance sheets and in the hands of their shareholders. 

 

From the mid-1980s to 2007, the Australian banking system's asset-to-GDP ratio rose from 50% to over 200% The money stays in a closed loop between dividend-paying banks and their shareholders. The spill-over into the real economy decreases with every earnings report.

That's why RBA needs to play a rebalancing role. They want to make the banks stronger (rather than simply more dividend-intensive), hence the macro prudential move to more and stricter capital requirements (plus a change to mortgage lending). Mortgage lending is close to 60/70% of total lending now in Australia, and the banking system remains highly dependent on wholesale deposits to fund its activities.

We are soon releasing our Outrageous Predictions for 2015, and don't be surprised if you see a call for a 20-25% drop in Aussie house prices. This would force a crisis in Australia, but it would be a crisis that I think would represent a positive and much-needed mandate for change. 

 

Australia remains one of the most complacent places I visit during my travels, and there are some good reasons why this is so. Its geographic isolation makes it '"immune" to outside forces; the political agenda and business is relatively domestically driven; and the number of foreign CEOs is limited (partly due to immigration rules, partly due to high taxation). 

 

Together with Poland, Australia is one of the few countries not to experience a recession through the GFC. It achieved this, however, by first riding the Chinese Tiger's massive investment expansion from 2008 to 2012, then continuing the ride through the creation of (or at least through allowing) the housing bubble as China slowed down.

 

 

As the Chinese economy began to burn lower, Australia's housing bubble was seemingly permitted to take up the slack. Photo: Liufuyu \ iStock

While the data show that Australia's 2014 growth is in "dwelllings", the ascent of the housing market (and its associated services) is directly proportional to the big drop in mining investment. The "dwellings " category is up 4% year-over-year while mining investments are down 4% for the same period. Private consumption and consumer confidence is sliding and tax revenue is coming up short (meaning the December budget will see a shortfall of at least $A10 billion, if not $A15 billion). 

 

Yes, a perfect storm is coming to Australia in early 2015, but do not lose hope.

A mini-crisis is exactly what Australia needs. I have said it before and will say it again: Australia in 2014 reminds me of the UK in 1979. That year, "a Lady with a handbag" took over the political leadership of the UK (and Europe). She was handed an economy that was over-unionised with high labour costs, a weak currency, budget deficits, and political leaders without vision or guts. Does this reminds you of something? Yes, indeed.

Australia needs its "Eureka!" moment because if there is one country in the world which can deal with its own problems, its Australia. The nation features strong social welfare, a robust education system, great resources, and risk-taking business people, but it needs to get its incentive structure right. 

 

It needs to stop making investment in paper money, bricks and mortar more attractive than investment in people. Reduce the red tape, reduce the government's role in the economy, and free up (and protect) the massive cohort of small- and medium-sized companies that constitutes 80% of the economy and 100% of all new jobs. 

 

Australian SMEs are being short-changed on credit and in terms of political capital. This is the way to balance out an economy which has never been more one-sided, more dependent. Australia has one customer (China), one major industry (banking) and one big cost problem (the highest labour unit cost in the world and an economy which is stuck in the 1970s in terms of labour market conditions and welfare transfer).

At this point, reality has arrived, and things are so bad that it's actually good. I am a big buyer of Australian assets in 2015, a year in which I see the AUD bottoming out at $0.80 to the dollar (and trading in a $0.80 to $0.90 range), where I see yields in 10-year AUD bonds go to 2% (the best investment from now to cyclical bottom in Q2/Q3), and where the banking sector will sell off, and where I foresee low commodity prices creating massive discounts on names like Fortescue and the other mining giants.

The idea is to set up a pair trade where you go long on resources and short the dividend blue chips. By mid-2015, you close the short dividend plays and open a net long commodity play as the world is healing due to both the passage of time and the most powerful tool to reset an economy: doing nothing on the macro front. In this area, less is more.

As Winston Churchill famously encouraged us, "if you are going through hell — keep going".

Steen Jakobsen is chief economist and CIO at Saxo Bank – the home of social trading.

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