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

 

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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.

Recommend Recommend Comment

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A Couple of big moves: Coldest wintet in decades coming? Russia revisit of 1997/98?

Of course it has been the week of US dollar strength and stock market highs, but in other markets something is also happening..

 

We could be in for coldest winter in many years: (Hat-tip: Mr. E)

 

http://www.seattlepi.com/news/us/article/Remnant-of-Typhoon-Nuri-headed-to-Aleutian-Islands-5876589.php

 

http://www.bloomberg.com/news/2014-11-06/harsh-winter-outlook-made-a-bit-more-dire-by-early-snow.html

 

http://www.ndbc.noaa.gov/station_page.php?station=46070

 

Natural Gas have moved higher on the news…

 

 

 

A Ruble continues to weaker – weaker by 2% alone today – world keeps ignoring impact from this at their own peril

 

 

 

 

 

 

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

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Macro Digest: Simple views from a simple man. Tactical note.

In a week where ECB meeting and Non-farm is important, an even more important number is released tonight: HSBC/Markit PMI. While the official PMI from China "refuse" to go below 50.00 forming flat-line for three years now, the more "independent" HSBC/Markit should confirm our friends from Fathom Consultings view that China is REALLY heading to 5% growth.

 

From The Daily Shot:

 

Greetings,

 

China's official manufacturing PMI report just came out – and it's weaker than projected. The print was 50.8 vs. 51.2 expected. Orders backlog looks especially weak

 

Source: Fung Group

 

Fathom Consulting in London is calling for China's growth to slow to 5 percent over next year or so. Not sure I fully agree, but it's certainly possible.

 

Source: Reuters

---

 

China PMI "official" vs. HSBC/Markit: https://twitter.com/Steen_Jakobsen)

 

The world is now reduced to:

 

·        Japan QE Infinite (Helicopter money next) – BOJ is buying more than 100% of issuance from Ministry of Finace now!

·        ECB can't move needle, but can talk...

·        Fed now voicing EUR concerns again (MNI news).... US housemarket cooling, shale gas industry bankrupt

·        German/EZ GUARANTEED recession (just updated SENTIX ECO vs. growth showing -2% by Q2 if nothing changes)

·        Dis-inflaton/deflation trends accelerating to downside w. commodities, energy (which is excellent lead for "anchored" inflation expectations..)

 

Yes,  world should rejoice, take stocks & us dollar higher making sure EM engine is killed totally.... the "surprise" will be that China gets desperate before ECB does, as China clearly have voiced their unhappiness with Japan's policy of devaluations.

 

World only has two engines of growth: EM and US... both is running out of fuel.....US corporates enjoyed 14 years straight years of weaker US dollar – in S&P 500 46% of sales is from overseas, profit has risen 3x faster than sales since 2009, 2y money up considerably in price è End of financial engineerin? Good news is – soon there is NO alternative but for companies to invest – but there are only two things which is certain:

 

-      Volatility will rise

-      Government bond prices will continue down (10 Yr US to hit 1.5% - and November is in our models indicating significant lower yield – so be forewarned)

 

 

Being the simple man I am  - I have only one trading view: Lower yields (since Q4-2013), one economic view: Dis-inflaton/deflation will be the catalyst for asset sell off as Fantasy-land is replaced by Reality-land, one FX view: US dollar will peak in Mid-November……one timing view: LOW in this economic/inflation/Nonsense is Q2-Q3 2015

 

Derivative views of that being: Sharp sell-off in UK housing (and Middle East, Norway, Australia – where lending to mortgages is close to 70% of lending in many banks), Low in inflation expectations by Q1 early (signal buy on Gold and metals)…….

 

Working on Outragous Predictions 2015 – input very welcome.

 

"Hmmn…. What is he talking about – QE? Queen Elizabeth?"

 

Nice week of to Portugal to speak at our good friends Banco Bes' investment seminar with the honorable John Hardy.

 

Safe travels,

 

Steen

 

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