Macro Digest: The morning after......Post match analysis on FOMC vs. The Market

Dear All

 

Below the full FOMC text – In my opinion these two paragraphs are the key ones:

 

·         .... The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

 

·         The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

 

#1 – Tighter monetary conditions clearly concerns them – the only reason for forward guidance as per Vice-chairman Yellen is to "direct market" to FOMC central projection – this got out of control and we now effectively have not only a put on the stock market, but also a put on the bond market. The whole financial market is now "government controlled" – Price discovery has been reduced close to ZERO – as even the term-premium (expected rate expectations) is ignored and considered invalid by Fed and its merry men.

 

# 2 – The wording is mild, but it's a real concern. I have no doubt inflation, or lack of, played bigger role than anything else in taking decision to not taper. An economy with weak inflation, is an economy with excess capacity – An economy with excess capacity is not an economy healing and creating jobs – hence – Fed also de facto yesterday stated: the unemployment rate is invalid to use as gauge for future monetary policy but also as statistical indicator. (Free advice to Fed: Watch hours worked and Hour wages – as those two multiplied is what goes into GDP……just saying J) – Don't forget also that FOMC exact wording is: "Substantial improvement…." – when talking about tapering and changes to monetary policy….

 

 

We have been sceptical on tapering and the notion monetary policy had moved towards "normalization" – below my recent comments to this, incl. the higher probability direction post-FOMC:

 

S&P – we have looked for around 1770/1800 – there is some tech. resistance around 1725/30…but market will "have a party next 48 hours" taking market to extreme overbought..

Gold – We see 1525 by Q4….peak in this cycle.

10 Y US – 2,25% by Q4 – and serious potential for new lows in 2014….(Q4)

US Dollar Index – We target 78-79,00 and see weak US dollar into end December based on "non-tapering" but just as important we need for weaker US Dollar in EMG makes it path of least resistance…..

 

In general we see peak in hope, assets, dreams, illusion between now and Q1-2014 – 2014 looks ugly in our forward looking models (see notes)

 

Supporting Link:  

 

Enjoy it while it lasts- next is pain an a mandate for change   (Our first look into 2014 and 2015 w. supporting charts on fixed income, US Dollar and the economy)

 

Jakobsen: More QE expected over next two years (Short video explaining why we saw more QE not less before FOMC/Tapering meeting)

 

Jakobsen: Why I'm moving 80% of my portfolio to bonds (Video on why we took step to increase our Beta allocation to 80% fixed income when we hit 3% in 10 Yr. US bonds.

 

 

Statement Following September Meeting --

2013-09-18 18:04:51.76 GMT

 

 

The following is the full text of the statement following the Fed's September

meeting:

Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.

 

The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

 

The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

 

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

 

Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

 

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to

1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H.

Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L.

Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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

 

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Enjoy it while it last..........

 

 

Dear All,

 

This weeks Stress Indicators attached, and below a summary of my outlook plus expected path from here.

 

Steen

 

 

·         Monetary Policy: We expect the policy makers central banks to engage in more QE not less, hence we see repricing of risk HIGHER into end of September, early October, but then economic slow-down will start to materialize. (See below)

 

·         FOMC/Fed in September (17/18^th).  Tapering will probably happen in September but its size and time frame will be limited. Consensus right now: 10 bln. USD of reduction in "support" – Probably 5 bln. in Treasury and 5 bln. in Mortgage backed. The "new information" will be the 2016 Fed projection which is released. I expect Fed staff to lower significantly the immediate growth and keep the long-term projections (otherwise the debt to gdp explode!)

 

·         Economics: We see zero bound growth in Germany and US next year based on fiscal constraints, worse employment situation, falling disposable income(higher rates, energy prices, lower house prices), significantly lower EMG growth, and geopolitical risk and non-reforms. Furthermore the EMG crisis is a function of much lower current account surplus' which for Asia and BRICs have fallen from surplus' of 5-7% prior to crisis to now zero. This raises marginal cost of capital but also lower export markets for countries like Germany.

 

·         Strategy wise- Beta – The conservative part of the investment)  I have moved 80% to fixed income despite consensus of higher rates in market. This is NOT a short-term call but 3% in US Dollar over next 12 month could offer higher potential return than being fully invested into a market place which at best is fairly priced, at worst is in a bubble which the central banks is finally starting to acknowledge.

 

·         Fixed Income call:  Now/soon may be the most opportune time to purchase longer duration fixed-income securities in the past two years. Bond yields began to move higher in early May when signs of growth firmed up, the Fed turned hawkish, but long yields rose sharply after Ben Bernanke's maladroit comments regarding the possibility of tapering. The change in the 10-yr bond (on a daily close basis) was from 1.6255 on May 2 to 2.9937 on September 5 -- an almost 85 percent rise (basis-wise) in four months. This was the largest CYCLICAL increase in the last 50 years. Although some factors exacerbated the rise in yields (e.g., the preference of President Obama for Larry Summers as replacement for Bernanke), the fact remains that this large increase in rates was NOT justified by any measure insofar as paltry improvement in CYCLICAL (growth) factors are concerned. History also shows that after bond yields peaked, the subsequent fall in rates ranges from 27 to 45 percent cent (the median being 36 percent). If indeed we have seen the peak at circa 3.00%, then a 36 percent fall will bring yields to the area of 2.25% on the basis of CYCLICAL factors alone.But if we add to that the collective evidence of a likely slowdown in 2014, there is no reaon why we can't see yields again in the range of 1.5%-1-25% by late 2014.

 

 

·         Strategy Alpha:

 

1.      We expect lower US Dollar based on need for EMG countries through their link to have some easing of conditions – The US Dollar index (80% EURUSD) could fall to 78-79,00 from 82.00 now. 

2.      Long Gold. Re-pricing of tapering and its impact will make case for lower rates for longer putting pressure on "real rates" down, which is main driver of gold. Long Gold via options. See 1575 by Q4 after our 1200 call in Outrageous Predictions was reached.

3.      We also like Corn unlike last year the crop estimates too high and agriculture is setting up nicely for bounce.

4.      Long MXN – Mexico remain the "best of the worst"stories in EMG – hit 13.50 now trading down to 13.10 – should we be right on Fed then this could trade significantly lower.

5.      Stocks. Been long risk deep into September now only long through options. The perfect set-up for us would be high in S&P around 1770/1800 before we fall back. The re-pricing could give new winds, but the calendar in Q4 is fully loaded with geo-political risks: German election, Italy w. Berlousconi, budget process, FOMC, Syria and generally September and October two months to avoid.

 

Below some supporting charts:

 

 

Fed overconfidence on growth:

 

'

 

The important Current Account trend:

 

 

Forward looking models indicate US growth will bottom in Q4-2014/Q1-2015

– followed by robust "real recovery"

 

Labor market could be turning up – recent data seems to confirm this…..

 

 

 

Our expected forward looking interest rate cycle… peak around now

…NEW LOW potential in 2014……

 

 

 

 

US Dollar move..

 

 

S&P 500 ……

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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

 

Please visit our website at www.saxobank.com

 

The end of the Euro as we know it - Panel

 

This is the panel debate at Friday's Saxo # Tradingdebates which I participated in:

 

http://video.saxobank.com/secret/8687264/68ddfa5deb3cfffec488146eeb7c6cdd

 

My CEO's Lars Seier Christensen's & President Klaus' keynote speeches:

 

http://video.saxobank.com/secret/8687201/d278241318ef7432480ea050dd905f4b

 

http://www.tradingfloor.com/topics/tradingdebates

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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

 

Please visit our website at www.saxobank.com

 

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Macro Digest: Market is ripe for risk, surprisingly (Stress Indicators)

Dear All,

 

This weeks look at Stress Indicators is now online  (Please if possible you link as its gives you better charts….plus PDF attachment with all the indicators for your "consumption".

 

http://www.tradingfloor.com/posts/market-ripe-risk-surprisingly-1725178060

 

Upon running Saxo Bank's Stress Indicators this morning I was very surprised to see that most indicators are now very clearly in a risk-on mode. I would have expected the Syrian conflict, high oil prices, the Italian banking mess and the anticipation of upcoming tapering of asset purchases by the Federal Reserve to have done more damage to these indicators.

AUD versus JPY - ultimate risk indicator
AUD versus JPY is the 'ultimate risk indicator' because it is the one currency pair that captures: China (AUD), Asia (AUD, JPY), growth, carry trading and trade volumes. 

Fisher-Gartman risk index
Note that the Fisher-Gartman risk index is making new highs. This risk index is like many others predominantly designed to use daily data points which always means rate spread and VIX volatility. The conclusion which can be drawn from this index is clear, particularly on a day where US Congress votes on intervention in Syria and where we are one week away from one of the most defining moments in Federal Reserve Chairman Ben Bernanke's reign (the Federal Open Market Committe meeting on September 17-18) and it's apparent that the market could not care less.

This leaves us with two interpretations:

1. Our old mantra of the potential for year-highs here in September based on markets resetting the outlook for growth and hence the amount and timing of Fed tapering. (1770/1800 should be the 'ideal' target if this is for real.)
2. Misalignment of perception and reality of the market. The one indicator which is 'off' in our sampling is real rates, which are setting new highs every day. Considering that the world, at least the financial world, has barely survived on zero interest rates since the Lehman Brothers collapse in 2008 (exactly five years ago this month), then this is deeply concerning.

Fed's bigger issue - lack of reaction to forward guidance
We have already seen the housing market cool, and certainly Friday's non-farm payrolls data was a major disappointment for the 'green shooters'. The Fed uses the wording "substantial improvement" of the economy (unemployment), but I do not think that even the Fed believes that lower unemployment rates via less participation constitutes real improvement.

See Mike Shedlock's piece: Just how distorted is the U.S Unemployment rate number?

The Fed's bigger issue though is its inability to get the market to react to its forward guidance, hence I expect vice Fed chair Janet Yellen to force through an extension of "low for even longer...", extending the zero-bound calendar for rates by one year to 2016 (Mid-2015 the consensus for now - Fed Chicago link). I also expect Fed staff to bring the Fed's growth forecast down from 2.45 percent for 2013, closer to Wall Street's consensus of 1.6 percent, combined with a worst very light touch of tapering (i.e: USD 10 billion - with USD 5 bln each in mortgages and Treasuries).

 10-year Treasury note yield index

Source: Saxo Bank and StockCharts.com

Fixed income market set on tapering
It is apparent that the fixed income market has already decided that the Fed will go ahead with a slow unwinding of asset purchases but also that the Fed's forward guidance should not be followed. This is evident because short-term rates have risen relatively more than long-term rates. We are testing a very long-term trend in the US 10-year yield.

I have taken a stance as per my video on being 80 percent in bonds, but it's a 12-month call based on considerable cooling of of the economy, as higher rates, lack of reforms, spending cuts, fiscal constraints, and less China growth will get both the US and Germany zero-bound in 2014.

Peak in September for green shoots
I remain probably alone in thinking that we are seeing a peak here in September for green shoots, the gap between perception and reality of Fed's action but also for flow out of fixed income. The big fixed income names have seen their AUM drop dramatically, but with 10 year rates @ 3.00% - I feel the "relative" value is in fixed income with the added bonus of having a "free put" on the stock market going into a September and October which generally tends to test our nerves:

See also Zerohedge: 1987, 2008 and 2013?

Finally, we have been constructive on the US dollar but feel it's time to change direction for a test of 78.00/79.00 in DXY - the US dollar index. The catalyst, if possible, could be the above-mentioned 'QE not tapering is coming' - or more directly, the emerging market crisis which has left USD-based EM countries in dire need of relief through a cheaper US dollar. World growth needs a weaker USD and it will probably come via the terms of trade. If not, the current account trend we have spoken so often about - Asia and EM from 5-7 percent CA surplus to zero-bound CA - will go negative before improving.

It's a hard call to make, especially against Europe and EURUSD. For now though, as the recent September BIS FX survey shows, 87 percent of all FX trades are based on the US dollar as being one of the currency pairs. Alas, the path of least resistance seems to be a weaker rather than stronger USD.

US dollar index - cash settle

_{Source: Saxo Bank and StockCharts.com}

Safe travels into the September 17-18 FOMC meeting and the coming Syria conflict.

Steen Jakobsen

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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

 

Please visit our website at www.saxobank.com

 

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Guest blog: Mike Shedlock - The Unemployment distortion...

My friend Mike shedlock done gr8 job here on the real state of uemployment..

 

 

http://advisorperspectives.com/dshort/guest/Shedlock-130909-Uemployment-Distortion.php

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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

 

Please visit our website at www.saxobank.com

 

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Fed talks, the price of higher yields....the great roll back of tapering is about to begin....

The big push back from Fed is starting(See Dallas Fed comment below)---....

 

Fed loves to talk about price of their action - clearly they have their answer:

 

Forward guidance main premise is:.... market believe in the Fed guidance… - Reality? Clearly they don't! 

 

Fed will adress this in September 17/18 meeting with increased target & numbers a thing Yellen has been trying to get in place……

 

The EMG crisis (or really the extension of their collapsing current account surplus') will be catalyst/excuse for lowering tapering and then unwinding it in Q1/Q2 of next year. The EMG crisis will hurt Europe and Germany the most. The big Middle Income Trap for Asia will mean globally lower growth, less excess capital to re-invest in Europe & the US, and finally ultimately a much weaker US Dollar (terms of trade reaction)…..

 

Real rates and mortgages rates increases will be major headwind to the economy, but more so to pension and banks...the marginal cost of capital continues to rise through this cycle…….

 

The price of 100 bps rate increased will have severe impact (5,9 and 28% of GDP for US, Europe and Japan) according to one estimate by Natixis economist Patrick Artus in his report (which is a must read) : "Has the Japanese trap closed everywhere" : http://cib.natixis.com/flushdoc.aspx?id=71057

 

 

 

 

 

Conclusions:

 

We are seeing the beginning of the end for the mild recovery – next is a dramatic global lowering of growht outlook combined with the yearly national budget talks… (Low growth makes budget deficits bigger, much bigger…)

 

Both US and Germany headed for zero bound growth – Germany via export sector and US through abrupt stop to improvement in housing, consumer demand and employement (We believe participation rate is about to rise….) plus for both of them significant higher real rates in the real economy………

 

Buying 142.00 Dec calls here on Bunds.. Lottery ticket 17 ticks. Moving my portfolio to 80% bond into and after the FOMC. There could be one more major test of high and even new highs in equities as market realise we are getting more QE not less in 2014. Our models sees 2014 as testing year: low in growth, value and lack of reform….

 

Nice week-end,

 

Steen Jakobsen

 

 

Subject: Dallas Fed President Fisher Says Fed Must Ensure QE Doesn't Disrupt Financial Markets

 

Fisher Says Fed Must Ensure QE Doesn't Disrupt Financial Markets

2013-09-05 19:28:31.34 GMT

 

 

By Jeff Kearns and Thomas Black

 

Sept. 5 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher, who has opposed additional stimulus and votes on policy next year, said the Fed must ensure its bond buying program doesn't disrupt financial markets.

 

"We have to make sure that the actions we take are taking into consideration financial stability," Fisher said today in Dallas. "This is one of the arguments we had: If we go down this path, what will the cost be?"

 

Fisher spoke after the yield on the benchmark 10-year Treasury note climbed to a two-year high of 2.98 percent partly on speculation policy makers will decide to begin tapering $85 billion in monthly bond purchases at a Sept. 17-18 meeting.

 

The key question with asset purchases -- which have pushed up the Fed's balance sheet to $3.64 trillion -- "is preserving financial stability," Fisher said in response to an audience question after a speech to the Dallas Estate Planning Council.

 

He said he "lost the argument" last year on whether to push on with record easing.

 

"Now the question is, how do we put it to an end?" he said. "This doesn't go on forever."

 

The Fed has pledged for more than a year to press on with asset purchases until achieving sustainable gains in the labor market. The central bank announced a third round of quantitative easing in September 2012 to reduce longer-term interest rates, stoke economic growth and combat unemployment.

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Steen's Chronicle: Germany must provide a vision for the rudderless ship of Europe

Germany must provide a vision for the rudderless ship of Europe

Steen Jakobsen, Chief Economist & CIO, Saxo Bank

 

Web version: http://www.tradingfloor.com/posts/germany-must-provide-vision-rudderless-ship-europe-1430270853

It may be simplistic to claim that the German elections on September 22 will determine the future of Europe and the euro, but in many ways both are at the end of a very long road. What will Germany's new coalition look like? Will we see a renewed mandate for the alliance between Angela Merkel's Christian Democrats and the Free Democratic Party, or a return to a grand coalition between Merkel's bloc and the Socialists?

Either way, Germany must step up or down to a flurry of vital decisions in the fourth quarter. Both Greece and Cyprus must be addressed, while Portugal will likely need additional financing. We can add to this a business cycle that will reveal further weakness when the apparent "green shoots" seen this summer prove to be a false recovery.

Unavoidable European truth
Europe faces an unavoidable truth. Low growth, rising unemployment and an ageing population can't be escaped easily and certainly not with frozen credit markets, a lack of productivity improvements or structural reforms. Nowhere are Europe's hidden troubles clearer than in Germany, where one of the major focal points in this election has been the 7 million "working poor" – workers who can't cover more than their basic needs.

Germany is the richest country in Europe, yet faces huge social and economic challenges, even if its numbers appear robust in aggregate. The realisation of Germany's predicament is the main change to the nature of this crisis. From 2009 to 2012, it was mostly a Club Med crisis. But since the end of 2012, it has stormed through historically strong northern countries, such as Germany, the Netherlands and Finland. Germany has outperformed, but the ranks of the working poor are a sign of a sluggish economy.

Pressure on euro makes adjustment process tough
The Eurozone is heading towards a record current account surplus since the launch of the euro in early 2002. Sure, German exports have been strong, but the main driver here has been the collapse in demand at the periphery. As long as this trend continues, it puts upward pressure on the euro, making Europe's adjustment process tougher in a world of mostly weaker currencies.

Strong euro hurts periphery
Indeed, looking at the trade-weighted euro, we see that the currency remains strong thanks to the current account trend shown in the chart above and thanks to European Central Bank President Mario Draghi's ability to backstop EU peripheral debt and stave off the "tail risk" of an anticipated EU break-up.

Germany and Europe need to figure out a more effective way to restructure Europe going forward and to get credit flowing again, not to mention reducing the overall debt load. The strong euro is doing the periphery no good as competitiveness can't return except through the brutality of extremely high unemployment - the young can't find work while the shrunken cadres of the already employed defend their wage levels against reform.

This should give further impetus to Germany's need for change. Yet Germany is a reluctant leader. One of Merkel's predecessors, Helmut Kohl, was once proactive in Europe, shedding tears as he held forth on the "House of Europe". But the rot set in when Kohl bent to France's demand to delay the implementation of the Maastricht disciplinary stability and growth pact. Thomas Mann, the German novelist, said after the Second World War that "we want a European Germany, not a German Europe". Now, thanks to Kohl giving in and Merkel's lack of interest in the European vision, we have a Europe that never established a proper foundation.

A question of euros and cents
Europe needs a stronger commitment from Germany, but has a leader that does not want to bear the responsibility for making important decisions. Merkel's relationship with Europe is passionless – a question of euros and cents, with her actions increasingly aimed at domestic considerations. Add to this the fact that she quotes philosopher Karl Popper, who promoted the idea of piecemeal social engineering and dictated that change should only be done a little at a time, and a picture emerges of a chancellor who is more comfortable with economic briefings than defining major change to a political and social agenda.

Merkel's favourite statistics tell us more: Europe is 7 percent of the world population, contributes 25 percent of global output and makes up 50 percent of social welfare. It's not just about how the pie is divided, but about growing that pie. The likely new German government under Merkel will not change its course voluntarily. The fundamental situation will make the change on its behalf. Germany is growing old faster than most countries, it has rising social tensions and an export industry that is facing headwinds as success stories like Asia are coming in for a dramatic slowdown.

Rudderless ship
I would not be surprised to see Germany flirt with zero growth next year and this will be the true test. When a country's tailwind turns to a headwind, it's good to have a plan or a vision, otherwise you become a rudderless ship. It's time for Merkel to realise that former chancellor Helmut Schmidt was wrong when he said: "People with a vision should go see a doctor". Germany needs a vision for Europe as well as for Germany. Otherwise, it will leave the country much worse off – even in Merkel's euros and cents.  

On Friday, September 13, we bring together former Czech president Václav Klaus and Nigel Farage, the leader of the UK Independence Party, as well as business leaders and financial analysts to discuss the future of the Eurozone and the single currency. The event,#TradingDebates - The end of the Euro as we know it, will be hosted at Bloomberg's European Headquarters in London.

I invite everyone to participate or follow the debates via Twitter: http://twitter.com/saxomarkets using the hashtag #TradingDebates.

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

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

 

Please visit our website at www.saxobank.com

 

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