Just how outrageous are Saxo Bank’s 10 wild predictions for 2014?Posted on 29 December 2013 with no comments from readers
Every New Year the Danish bank Saxo offers its ten most outrageous predictions for 2014. They are intended to shock and be taken as extreme ideas of what might happen in the year to come, not actual predictions. But sometimes they do come true, like the gold price crash this year.
So what does Saxo offer us for 2014? Here are the ten ‘tongue-in-cheek’ predictions and our comments are in the brackets…
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.
(Absurd. But the Cypriot bank heist this year showed that individual banks can no longer be trusted. Depositors are no longer protected so take care to spread your wealth around in 2014.)
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.
(Unlikely. A renaissance of the Greek crisis is far more on the cards.)
3. TECH’S ‘FAT FIVE’ WAKE UP TO A NASTY HANGOVER IN 2014
While the US information technology sector is trading about 15 per cent below the current S&P 500 valuation, a small group of technology stocks are trading at a huge premium of about 700 per cent 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.
(Yes. The Tech stock bubble will breakdown. Twitter crashed 13% last Friday. Not an outrageous prediction in our view.)
4. DESPERATE BANK OF JAPAN TO DELETE GOVERNMENT DEBT
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.
(Perfectly possible. Japan is a huge black swan for 2014. It’s printing three times as much money per capita as the US. That’s pushed its stock market up more than 50% in 2013. Spot another asset bubble. Money printing on this scale produces a sugar rush for the economy first and then disastrous hyperinflation follows.)
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.
(Possible. But the Fed reaction would be to ramp up QE money printing pretty damn quickly. That would bring inflation fears back and boost gold and silver prices from current oversold levels.)
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 per cent mortgage bond purchase programme and – far from tapering – will increase the scope of the programme to more than $100 billion per month.
(Yes we could see that happening. QE is resting. It has not stopped and could return with a vengeance as the Fed will not tolerate deflation.)
7. BRENT CRUDE DROPS TO $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 ouput. For the first time in years hedge funds will build a major short position, helping to drive Brent crude oil down to $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.
(Possible though as a market dip in a global financial market correction, not a new longterm trend. Oil supplies remain finely balanced against constantly rising demand.)
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.
(Quite possible. This is the other side of an economic crisis in China which has become a major export market for Germany. German energy costs are also spiking higher due to a ruinous phasing out of nuclear power despite its near perfect safety record.)
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 per cent from its 2013 highs by the end of the year as investors head for the exit.
(Probably the most likely of all these 10 predictions. Why is the CAC 40 so high when the French economy is in such a mess?
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. We have put five countries into this category − Brazil, India, South Africa, Indonesia and Turkey.
(Turkey is the first to feel this impact as its political crisis unfolds this week. This looks a logical view, and far from outrageous.)
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