As we approach 2014, Saxo Bank has produced its annual list of outrageous predictions for the year ahead. From Soviet-style economics in Europe to nuclear-option debt reduction in Japan, there is some serious food for thought.
Steen Jakobsen, Saxo's chief economist, says the predictions aren't meant to be pessimistic, nor are they its official 2014 calls. Instead, they are "an exercise in feeling out the major risks to capital preservation, and intended to encourage investors to prepare for the worst case scenario before trading or investing".
Last year, though, Ole Hansen, head of commodity trading, correctly predicted gold would slump to $1,200 an ounce this year; 2014 could yet spring a surprise or two.
Soviet-style economy makes comeback
Deflation and slow growth will create panic among European politicians, who will seek to introduce a wealth tax on its richest citizens. In the name of fairness and security, anyone with savings in excess of USD or EUR 100,000 will be stung for a tax of between five and ten percent. It will be the final move towards a totalitarian European state, a nadir for individual and property rights.
Anti-EU alliance will become largest group in parliament
European Parliamentary elections in May will return a majority of euro-sceptics. A pan-European, anti-EU alliance, with members including the UK Independence Party, Alternative for Germany, the National Front in France and Party for Freedom in the Netherlands, will become the largest group in parliament with a majority of more than 275 seats. The result is a failure to pick a president of the European Commission, sending Europe back into political and economic turmoil.
Tech's 'Fat Five' wake up to a nasty hangover in 2014
The “Fat Five” of the technology sector — Amazon, Netflix, Twitter, Pandora Media and Yelp — are in for a shock. Currently trading at a huge premium of about 700 percent above market valuation, these stocks are in a bubble and will shed around 50 percent of their value next year as optimism in them unwinds.
Desperate BoJ to delete government debt after USDJPY goes below 80
Recovery runs out of gas in 2014, creating a risk-off environment that sends investors to flocking to the yen. USDJPY sinks below 80 forcing a desperate Bank of Japan to delete its government debt securities to escape the deflation trap. As Peter Garnry, Head of Equity Strategy at Saxo Bank, explains, it’s a simple accounting trick that amounts to “now you see it, now you don’t”. No one knows the outcome of such an accounting manoeuvre inside the government sector - it could lead to a “nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects”.
US deflation to again top FOMC agenda
While the US economy looks like it’s recovering, there are worrying signs of fragility, particularly in the mortgage market. Wages also remain depressed, while confidence in the wider economy is going to get knocked by Congress in January. All this will mean deflation could once again be the big concern in 2014.
Quantitative easing goes all-in on mortgages
QE has sent riskier assets higher, creating an artificial sense of improvement in the economy. With the housing market on life support, the Fed will go “all-in” on mortgages in 2014, transforming QE3 to a 100 percent mortgage bond purchase programme. Far from tapering, this will increase the scale the programme to more than $100 billion per month.
Brent crude to drop to $80/barrel
The world will be awash with oil next year as rising production in the US and Saudi Arabia floods the market. Hedge funds will go short on oil for the first time in years, sending the price of Brent crude oil down to $80/barrel. Once producers finally get around to cutting production, oil will respond with a strong bounce and the industry will conclude that high prices are not a foregone conclusion.
Germany in recession
Excessive thrift in Germany for the last few years could come back to haunt Angela Merkel. Even the US has turned on the EU’s largest economy and a coordinated plan by other nations to reduce the excessive trade surplus cannot be ruled out. Meanwhile, falling energy prices in the US, which send German companies to the West, lower competitiveness due to rising real wages and potential demands from the SPD to improve the well-being of the lower and middle classes in Germany could add up to a drop in economic activity. Output will decline next year, not rise, while the German 10-year government bond yield will decline to one percent.
CAC 40 drops 40 percent on French malaise
French problems will continue and even worsen next year as the mismanagement under the Hollande regime finds no new spark for growth. Meanwhile, equities will hit a wall next year on the realisation that the only drive is the ‘greater fool theory’, explains John Hardy, Head of FX Strategy at Saxo Bank. The CAC 40 Index falls by more than 40 percent from its 2013 highs by the end of the year as investors head for the exits.
‘Fragile Five’ to fall 25 percent against the USD
Tapering in US will lead to higher marginal costs of capital from rising interest rates. Countries with expanding current account deficits will therefore be 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 are particularly at risk - Brazil, India, South Africa, Indonesia and Turkey.