As the year draws to a close, here are 10 things that could - but probably won't - happen in the global economy
Online multi-asset trading and investment specialist Saxo Bank’s annual set of ‘outrageous predictions’ for the year ahead reveal some interesting views of where the global economy is headed.
Although the probability of any of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible - if unlikely - series of market and political events.
This year’s predictions range from problems in the EU to Japanese debt concerns and a plummeting Brent crude price.
“This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better,” says Saxo CEO Steen Jakobsen.
Jakobsen adds that when looking back through history, all changes, good or bad, are made after moments of crisis and a comprehensive failure in the old way of doing things.
“We emphasise that the Outrageous Predictions are not Saxo Bank’s official calls for 2014, but rather an exercise in feeling out the major risks to capital preservation, and [are] intended to encourage investors to prepare for the worst case scenario.”
Outrageous predictions for 2014:
1. EU wealth tax heralds return of Soviet-style economy
Panicking at deflation and lack of growth, the EU Commission will impose wealth taxes for anyone with savings in excess of USD or EUR 100,000 in the name of removing inequality and to secure sufficient funds to create a “crisis buffer”. It will be the final move towards a totalitarian European state and the low point for individual and property rights. The obvious trade is to buy hard assets and sell inflated intangible assets.
2. Anti-EU alliance will become the largest group in parliament
Following the European Parliamentary elections in May, a pan-European, anti-EU transnational alliance will become the largest group in parliament. The new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the European Commission, sending Europe back into political and economic turmoil.
3. Tech’s ‘Fat Five’ wake up to a nasty hangover in 2014
While the US information technology sector is trading about 15% below the current S&P 500 valuation, a small group of technology stocks are trading at a huge premium of about 700% above market valuation. These ’fat five’ (Amazon, Netflix, Twitter, Pandora Media and Yelp) present a new bubble within an old bubble thanks to investors oversubscribing to rare growth scenarios in the aftermath of the financial crisis.
4. Desperate BoJ to delete government debt after USDJPY goes below 80
In 2014, the global recovery runs out of gas, sending risk assets down and forcing investors back into the Yen with USDJPY dropping below 80. In desperation, the Bank of Japan simply deletes all of its government debt securities, a simple but untested accounting trick and the outcome of which will see a nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects.
5. US deflation: coming to a town near you
Although indicators may suggest that the US economy is stronger, the housing market remains fragile and wage growth remains non-existent. With Congress scheduled to perform Act II of its “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 will again top the FOMC agenda.
6. Quantitative easing goes all-in on mortgages
Quantitative easing in the US has pushed interest expenses down and sent risky assets to the moon, creating an artificial sense of improvement in the economy. Grave challenges remain, particularly for the housing market which is effectively on life support. The FOMC will therefore go all-in on mortgages in 2014, transforming QE3 to a 100% mortgage bond purchase programme and – far from tapering – will increase the scope of the programme to more than USD 100bn per month.
7. Brent crude drops to USD 80/barrel as producers fail to respond
The global market will become awash with oil thanks to rising production from non-conventional methods and increased Saudi Arabian output. For the first time in years hedge funds will build a major short position, helping to drive Brent crude oil down to USD 80/barrel. Once producers finally get around to reducing production, oil will respond with a strong bounce and the industry will conclude that high prices are not a foregone conclusion.
8. Germany in recession
Germany’s sustained outperformance will end in 2014, disappointing consensus. Years of excess thrift in Germany has seen even the US turn on the euro area’s largest economy and a coordinated plan by other key economies to reduce the excessive trade surplus cannot be ruled out.
Add to this falling energy prices in the US, which induce German companies to move production to the West; lower competitiveness due to rising real wages; potential demands from the SPD, the new coalition partner, to improve the well-being of the lower and middle classes in Germany; and an emerging China that will focus more on domestic consumption following its recent Third Plenum.
9. CAC 40 drops 40% on French malaise
Equities will hit a wall and tumble sharply on the realisation that the only driver for the market is the greater fool theory. Meanwhile, the malaise in France only deepens under the mismanagement of the Hollande government. Housing prices, which never really corrected after the crisis, execute a swan dive, pummeling consumption and confidence. The CAC 40 Index falls by more than 40% from its 2013 highs by the end of the year as investors head for the exit.
10. ‘Fragile Five’ to fall 25% against the USD
The expected tapering of quantitative easing in the US will lead to higher marginal costs of capital from rising interest rates. This will leave countries with expanding current account deficits exposed to a deteriorating risk appetite on the part of global investors, which could ultimately force a move lower in their currencies, especially against the US dollar. Five countries fit into this category − Brazil, India, South Africa, Indonesia and Turkey.
Although the probability of any of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible - if unlikely - series of market and political events.
This year’s predictions range from problems in the EU to Japanese debt concerns and a plummeting Brent crude price.
“This isn’t meant to be a pessimistic outlook. This is about critical events that could lead to change – hopefully for the better,” says Saxo CEO Steen Jakobsen.
Jakobsen adds that when looking back through history, all changes, good or bad, are made after moments of crisis and a comprehensive failure in the old way of doing things.
“We emphasise that the Outrageous Predictions are not Saxo Bank’s official calls for 2014, but rather an exercise in feeling out the major risks to capital preservation, and [are] intended to encourage investors to prepare for the worst case scenario.”
Outrageous predictions for 2014:
1. EU wealth tax heralds return of Soviet-style economy
Panicking at deflation and lack of growth, the EU Commission will impose wealth taxes for anyone with savings in excess of USD or EUR 100,000 in the name of removing inequality and to secure sufficient funds to create a “crisis buffer”. It will be the final move towards a totalitarian European state and the low point for individual and property rights. The obvious trade is to buy hard assets and sell inflated intangible assets.
2. Anti-EU alliance will become the largest group in parliament
Following the European Parliamentary elections in May, a pan-European, anti-EU transnational alliance will become the largest group in parliament. The new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the European Commission, sending Europe back into political and economic turmoil.
3. Tech’s ‘Fat Five’ wake up to a nasty hangover in 2014
While the US information technology sector is trading about 15% below the current S&P 500 valuation, a small group of technology stocks are trading at a huge premium of about 700% above market valuation. These ’fat five’ (Amazon, Netflix, Twitter, Pandora Media and Yelp) present a new bubble within an old bubble thanks to investors oversubscribing to rare growth scenarios in the aftermath of the financial crisis.
4. Desperate BoJ to delete government debt after USDJPY goes below 80
In 2014, the global recovery runs out of gas, sending risk assets down and forcing investors back into the Yen with USDJPY dropping below 80. In desperation, the Bank of Japan simply deletes all of its government debt securities, a simple but untested accounting trick and the outcome of which will see a nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects.
5. US deflation: coming to a town near you
Although indicators may suggest that the US economy is stronger, the housing market remains fragile and wage growth remains non-existent. With Congress scheduled to perform Act II of its “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 will again top the FOMC agenda.
6. Quantitative easing goes all-in on mortgages
Quantitative easing in the US has pushed interest expenses down and sent risky assets to the moon, creating an artificial sense of improvement in the economy. Grave challenges remain, particularly for the housing market which is effectively on life support. The FOMC will therefore go all-in on mortgages in 2014, transforming QE3 to a 100% mortgage bond purchase programme and – far from tapering – will increase the scope of the programme to more than USD 100bn per month.
7. Brent crude drops to USD 80/barrel as producers fail to respond
The global market will become awash with oil thanks to rising production from non-conventional methods and increased Saudi Arabian output. For the first time in years hedge funds will build a major short position, helping to drive Brent crude oil down to USD 80/barrel. Once producers finally get around to reducing production, oil will respond with a strong bounce and the industry will conclude that high prices are not a foregone conclusion.
8. Germany in recession
Germany’s sustained outperformance will end in 2014, disappointing consensus. Years of excess thrift in Germany has seen even the US turn on the euro area’s largest economy and a coordinated plan by other key economies to reduce the excessive trade surplus cannot be ruled out.
Add to this falling energy prices in the US, which induce German companies to move production to the West; lower competitiveness due to rising real wages; potential demands from the SPD, the new coalition partner, to improve the well-being of the lower and middle classes in Germany; and an emerging China that will focus more on domestic consumption following its recent Third Plenum.
9. CAC 40 drops 40% on French malaise
Equities will hit a wall and tumble sharply on the realisation that the only driver for the market is the greater fool theory. Meanwhile, the malaise in France only deepens under the mismanagement of the Hollande government. Housing prices, which never really corrected after the crisis, execute a swan dive, pummeling consumption and confidence. The CAC 40 Index falls by more than 40% from its 2013 highs by the end of the year as investors head for the exit.
10. ‘Fragile Five’ to fall 25% against the USD
The expected tapering of quantitative easing in the US will lead to higher marginal costs of capital from rising interest rates. This will leave countries with expanding current account deficits exposed to a deteriorating risk appetite on the part of global investors, which could ultimately force a move lower in their currencies, especially against the US dollar. Five countries fit into this category − Brazil, India, South Africa, Indonesia and Turkey.
