Christopher Helin Fisk Service garage , S a n F r a n c i s c o 1934
Interesting – if not outrageous – remarks today from Steen Jakobsen at Saxo Bank in Denmark, always good for some fresh insights, and a statement from him that I would like to decorate with a few question marks. As WTI oil looks threatening to break through $60 a barrel with another 5% loss today, let’s first take a look at Saxo’s, and hence Steen’s, Outrageous Predictions, via Tyler Durden. We can take it from there.
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.
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. And we at Saxo Bank remain 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.
That’s the intro, now let’s get to the predictions themselves, and I’ll give my version.
10 Outrageous Predictions…
• Russia defaults again
Possible, but I wouldn’t want to rule out Russia’s preparedness for what is happening today. They’ve seen the neocons coming from miles away, and they surely have considered today’s reality in their planning. But, again, a default is possible. If Putin thinks it’s a smart thing to do.
• Volcano eruption decimates crops
That’s not really a prediction, it’s more of a crazy wager made at 11.59 pm on New Year’s Eve after a few bottles of bubbly.
• Japanese inflation to hit 5%
That would not only mean a great success for Abe, Kuroda and Abenomics (which has been an abject failure to date), it would also mean they find a way to get the Japanese people to start spending like a bunch of Jewish American Princesses, and I really can’t see that. So a no for me.
• Draghi quits ECB
Absolutely. Draghi is stuck between desperate spend spend spend forces on the one side and the Germans on the other. It’s clear he would love to do the former’s bidding, but the Germans really don’t want anything to do with it, and that’s not because they’re traumatized over what happened 80 years ago in Weimar, a silly argument thrown around far too easily. They simply don’t believe in letting debt take over an economy and hold it hostage, which is what the rest of the world is doing.
Interesting question is who’ll succeed the future Italian president. Another Goldmanite like Mario would appear useless, it would just lead to another case of being stuck in a Mexican stand-off. So a more Berlin-friendly chair? Germans have no room to move, if they go for broad asset purchases, they’d be voted out of office and voted down by their domestic court system.
My guess would be that if and when Mario leaves, the EU has a big problem, because a replacement that everyone can agree on will be hard to find, And that in turn may be a danger to the union itself. Which it should be too. It’s an unholy union between partners that are far too far apart from each other.
• Corporate bond spreads to double in 2015
Entirely possible. What’s happening today with oil is already affecting other commodities, and will spread to stocks sooner rather than later. Bonds can’t be far behind, be they sovereign, corporate or just plain junk. Wash out, bloodbath, pick your favorite term.
• Internet hacks smash online shopping
Perhaps. Hackers seem to be more focused on ‘loftier’ goals for now, but who knows? Who knows where the main hacker communities are located in the world to begin with?
• China devalues yuan 20%
I’m guessing Saxo means a deliberate move here, as in an announced one. And I’m not sure they’d need that. They can do it by stealth. It matters of course whether you mean devaluation vs the USD, or another currency. They probably mean the USD, and then it’s not so hard. I wouldn’t be at all surprised if the euro loses another 20% vs the USD in 2015, the yen seems a given, so why not the yuan? Lots of dollars will be looking for a way ‘home’. The question becomes: can the Fed still drive the dollar down?
• Cocoa futures hit USD 5,000/tonne
Now I’m outta my league. I’ll have to pass. I do know, of course, that chocolate has been threatened for a while, but that’s the extent of my ‘expertise’.
• UK house sector to crash
Along with quite a few others. Central banks have focused on housing in Australia, New Zealand, Canada, the US itself, and all these markets are facing a lot of pressure. The UK may be even crazier than all the rest, London surpassed Hong Kong as the most expensive city only recently. Which is where my thoughts turn to all the Londoners who’ve been chased out of their own city by the insane dreams of Cameron and Boris Johnson. They are the ones who should be chased out.
• Brexit in 2017
That’s not really a 2015 prediction, is it? But, you know what, let’s make it a broader issue: I bet you there’s going to be a lot more pressure, from multiple sides, on the European unity. Which is good: Brussels is a power game gone horribly wrong over the backs of nice, sweet, decent ordinary people all across the ill-fated ‘union’.
And we’re not done yet. Steen Jakobsen also did an interview at CNBC, in which he has an 11th prediction, namely that the US might bail out its energy sector. I find that curious, because I’ve said a few times recently that I don’t think that’s going to happen. But first, Steen:
An economist who correctly predicted the fall in oil price this year has told CNBC that the U.S. government could look to bail out its energy sector in 2015 as the commodity’s low price starts hitting the country’s economy. “The U.S. energy sector is clearly important,” Steen Jakobsen, the chief economist at Danish investment bank Saxo Bank, told CNBC Wednesday. “They are paramount to the long-term strategic issue that the U.S. will be self-dependent on oil.”
[..]Jakobsen believes the [US energy] headwind could soon become a tailwind despite gas becoming cheaper at the pump for U.S. citizens. “It will subtract 0.5% from GDP, bare minimum,” he said. “There’s a precedent here, back in the 80s we also had an oil crisis and that led to bank recoveries.” He added that oil companies are in for a “massive correction,” similar to the downtrend seen in mining stocks, explaining that exploration was getting “hugely expensive” with energy majors having little free cash flow available. The S&P 500 index has clocked gains of around 11% so far this year but the energy sector within the benchmark is currently down nearly 12%.
One of Jakobsen’s “outrageous” predictions this time last year was for the commodity to drop below $80 per barrel which was achieved in November with oil now trading at around $65. BP sounded the alarm on Wednesday morning by saying that it is implementing a cost-cutting program due to the tumbling prices. Any potential bailout for the sector, or even the banks that lend to them, would prove vastly unpopular in the U.S.
Dennis Gartman, commodities investor and editor of The Gartman Letter, told CNBC that any bailout is simply inconceivable “We bailed the banks out and the public’s anger has been very real and very long standing,” [..] “Bailing out the oil companies would be even more seriously hated.”
BNP Paribas’ Global Head of Commodity Strategy, Harry Tchilinguirian, was equally in incredulous at the possibility of the U.S. government stepping in. “In the event that oil prices fall further into 2016 and hurt smaller un-hedged independent operators as their free cash flow declines and their ability to raise finance is curbed, it is possible to see closures or consolidation in the sector,” “But is this reason enough for the government to intervene?” Christian Schulz, the senior economist at Berenberg Bank, agreed that U.S. oil producers, and their lenders, could get into trouble if lower oil prices remain but said they are not “systemically important enough” to be bailed out by the government.
I don’t think public anger would be the major issue, and I also don’t think the industry is not “systemically important enough” (that seems a bit ignorant even for a ‘senior economist’, the entire edifice runs on oil).
I think the problem, the reason why America cannot bail out its oil industry, at least not overtly, lies elsewhere. Bailing out the US housing industry is one – expensive – thing. Bailing out Wall Street banks is another – closely related, and infinitely more expensive – , but still close. The latter involved bailing out foreign banks, but they’re still primary dealers, or in other words, part of the ‘family’.
Oil is a whole different piece of cake. The Fed or Treasury could try and lower exploration costs, or something in that vein, but in the end the only measure that would be really effective is raising revenue, and that can only be accomplished with higher prices. And since oil prices are set globally. that in turn means that bailing out US oil also means bailing out Russian, Libyan, Venezuelan oil. And that would be hard to defend in today’s American political climate, helping Putin and Maduro get back on their feet.
It’s of course a ‘curious conundrum’, to find that by helping your own you also help your ‘enemy’. But it is, from where I’m sitting, a very real issue when it comes to oil. On top of that, there’s of course the fact that the US shale oil industry is already falling to leveraged bits, and has never been a viable industry, just a land speculation Ponzi. And how or why could the US bail out that kind of scheme out, and at the same time, don’t let’s forget, save the whole financial world from the fall-out of what’s happening to oil? What to do when that plunge starts to infect stocks and bonds, which seems an inevitable next step?
I am of course ready to stand corrected, but I simply don’t see what Steen Jakobsen suggests. Oil is too shattered an industry within the US, and also, though in a different way, globally, to be bailed out and saved by the Fed’s bell.