Saxo Bank Warns "This Is Not 'Different Times'"

Tyler Durden's picture

Authored by Steen Jakobsen, Chief Economist, Saxo Bank,

“L'éternité, c'est long ... surtout vers la fin.” ? Franz Kafka

Happy July 4 to all Americans. Eternity is here. Eternity in low interest rates for longer. Eternity in excess return from stock markets, eternity in no growth, eternity in low productivity, eternity in chasing yields. The chasing yield game now joined by central banks like the Swiss National Bank and recently also big investors like Pimco, who at the top of the market no longer sees the stock market in a bubble!

The main common denominator is low interest rates – so where the market and Pimco mathematically correctly uses the low interest rates for longer as an input which produces a superior return, a few of us who were around in 1987,1992, 1998, 2000, and 2007/08 know that market tends to mean-revert. This concept that if we have a superior return over a longer period, it will need to be met by a negative performance to average “out” is dead now.

Stock market bubble

We have a generation of traders and investors who see any dip as a buying opportunity and policy makers who argues everything being equal, it’s better to have a stock market bubble than disorderly markets and depression.

The illusion is almost perfect now – probably the best argued and most confidently performed illusion in my career. At least in those years I've already mentioned, there was a sense of urgency. The policy makers were less united and more independent thinking. It was simply pre-Greenspan and his belief in smoothing out business cycles.

Smoothing out the business cycle will in the short term dampen volatility, but as the market and the economy moves forward in time, the inefficient allocation of resources will increase the systemic risk, but, similar to today, the system first stores the energy, then releases a clearing process. I am reminded of a classic mechanical resonance system.

Mechanical resonance is the tendency of a mechanical system to respond at greater amplitude when the frequency of its oscillations matches the system's natural frequency of vibration (its resonance frequency or resonant frequency) than it does at other frequencies. It may cause violent swaying motions and even catastrophic failure in improperly constructed structures including bridges, buildings and airplanes—a phenomenon known as resonance disaster.


The illustration of this being the Gertie Bridge – I am sure you can make the analogy – as the market makes higher and higher returns (amplitude) and gets confirmed over longer periods (frequency) it reaches an “eternity” or a new paradigm, or “this time its different”... The system self feeds into higher and higher returns and less and less volatility until the “energy is released” when the “load”/misallocation is too high for the system to carry.

Zero bound rates

We learn in economics that the marginal cost of capital is the true allocator of capital. Whoever can and will pay the highest marginal price of money gets it – in today’s world. However, EVERYONE and I mean everyone inside the 20 percent of the economy which is the listed companies and banks get whatever credit they want and need indiscriminately of their marginal cost and risk. The land of zero bound rates.

To make the example even more clear, this afternoon I could go to my bank manager with a proposal to put 100 or even 1,000s of hot dog stands on the main street in Fredensborg(where I live) – my expected return will be infinite as long as the interest rate is zero!!!!!

To make the mistake, in my opinion, of thinking that ANY analysis can really be done when we are at zero percent is the vital flaw of Pimco, SNB, policy makers and the stock market, so I am not saying the Dow in 100.000 is not possible, neither will I second guess Pimco’s new found bullishness, I am merely applying history, maths, engineering and economics laws to the issue.

It could be me who needs to be re-educated, but to be honest, and with no false modesty, I am yet to meet a single argument or belief which is not entirely driven by low interest rates as the driver of the markets.

Having spent this week with major policy makers in Switzerland at an offsite I am not comforted. They all agree with… me! They know that the only way to align progress economically with politicians is to get a crisis mode. Most of them have “battle scars” from 1992,1997/97, 2000 et al so they know that real changes only happens during down turns.

They accept that their monetary policy exclusively goes to the 20 percent of the economy which is the listed companies. While they are concerned about how markets' valuation, they are more concerned about the lack of growth and their inability to reach their inflation targets.

Unstated but clearly on their mind, they are beginning to doubt whatever the mechanical resonance will soon show its ugly head. This comes via a strange policy approach and wording: Macro Prudential Framework, MPF. When I asked the same policy makers to explain to me this oxymoron, they all pretty much defined it as: the response to the 2008 crisis – i.e: A need to deal with the potential consequences of bubbles through regulation, channels of credit.

The conclusion:

They are concerned, but hiding behind MPF! Replace MPF with BUBBLE every time you hear a policy maker speak, you get my point. These policy makers, are veterans of trying to keep the system from reaching its own frequency, but they also realise that over time – the system mean-reverts. That’s the strength of their education relative to the market traders. Both can be right, the market and the professors, but the timeline is different.


My bigger point here is that this is not "different times", the system's low volatility will be replaced by higher volatility, the zero bound leads to bubbles by definition unless you of course believe in eternity and most importantly, mean-reversion and compounding remains the two most powerful tools in finance.


Kafka is right – and – It feels like an eternity since the market last traded like a real market, but make no mistake, exactly when you think more of the same is destined to be your strategy, things do change despite the feeling of infinity.

*  *  *

Another rational warning to ignore for the opportunity of riding TWTR up and down 10% in a day...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LawsofPhysics's picture

What exactly are they "warning" of?  Are they going to indict themselves?

kliguy38's picture

this is bullshit........i just went all in.......what am I gonna get????

NoDebt's picture

Jeez, guys, I step away for ONE FREAKING DAY to do my other full time job (actually working for money, as opposed to posting on ZH) and look at this mess of a market I come back to.

DOWN 150 freaking Dow points??  Are you kidding me?  I can't leave any of you alone for a minute without somebody setting the damned building on fire.


Carpenter1's picture

BTFD'ers will do that every time, but one time it wont be a dip. That's the fate of fools, and it never changes no matter how many times it happens to them.

order66's picture

Long BODY - only down 69% YTD

disabledvet's picture


Al Huxley's picture

Where is their gold mine located?  Or are they an explorer?

Steroid's picture

"It feels like an eternity since the market last traded like a real market"

Where there are humans there are markets. Even in the concentration camps there were markets.

We don't want that type of markets though! Do we?

joego1's picture

The Coyote know there something missing afoot.

AccreditedEYE's picture

Boy oh boy, may have to double up on my buy orders. Too funny.

gdiamond22's picture

History teaches us that we never learn from history.

The History of the Federal Reserve teaches us that they never learn from their own policy failures.

The History of the stock market teaches us that the market tends to repeat.

Therefore, the stock market will soon teach us the laws of gravity, caused by the Federal Reserve and the people will (yet again) failed to have learned from our history.


LawsofPhysics's picture

On the contrary, I would argue that the real intent (not the "for public consumption" propaganda) of creating the Federal Reserve Bank was to monopolize money creation on the planet.  To insure that a relatively few "worthy" families around the world would maintain power and control of all productive assets and productive capacity.  I'd say that in this regard, the Fed has been trmendously successful for their owners.

SmallerGovNow2's picture

Opposite sides of the same coin...

dontgoforit's picture

Galloping Gertie was a mess.  Questions?

PlusTic's picture

start buying, this shitt is never going down...

world_debt_slave's picture

Krugman had an orgasm over this video.

GoatHerder's picture

English= the wheels are about getting ready to fall of this Bitchez!

buzzsaw99's picture

the analogy is incomplete. in today's "market" goldman sachs would take out derivative insurance on galloping gertie, then, blow on it themselves until it fell down. When the insurance company which sold the security couldn't pay the gubbermint would bail them out. Later JPM would sell the scrap iron to the fed for a tremendous profit having acquired it for $2/share. THERE IS NO MARKET, THERE IS ONLY THE FED. THEY WILL OWN IT ALL SOME DAY.

disabledvet's picture

I look at this as "you give all you've got to re-inflate the bubble and then the bubble reinflates you."

Soon the FOMC will simply float away. Jury is still out on the Treasury Department. "More busted hard drives"?

I Write Code's picture

These ARE different times, they've BEEN different times for five years now, even if it ends today.

btw, we got a little volatility back yesterday and today.  are we happy?  Is Momma Yellen happy?

Yen Cross's picture


     They know that the only way to align progress economically with politicians is to get a crisis mode. "Most of them have “battle scars” from 1992,1997/97, 2000 et al so they know that real changes only happens during down turns."

   I see no mention of 2007/08?  The only change I've seen is the change in depth of the pile of horseshit and debt the Fed. and .gov have piled on us.

rum_runner's picture

Geez, dumbass newspaper guy in the film clip could have easily let his dog out of the car rather than leave it there to die.

bluskyes's picture

A dog murder disguised as a bridge collapse.

tommylicious's picture  We're getting deep here.  

gcjohns1971's picture

If an organization never learns from ANY of its failures for over a century, we can conclude they were not failures, but examples of the organization working as intended, if not as advertised.


buzzsaw99's picture

yep, there are no accidents, it's called disaster crapitalism

orangegeek's picture

great scotts batman, there's a shit storm on the horizon


to the batmobile robin!!

Quinvarius's picture

No way dude!  They have replaced the permanently high plateau with a permanently steep 45 degree angle.

honestann's picture

The predators-that-be perfectly balanced everything!

! Seriously !

The economy falls at a 45-degree angle downward.

The markets rise at a 45-degree angle upward.

The predators-that-be are ecstatic!

A perfect balance.

I wonder whether predators-that-be will care when the economy hits zero and the market hits infinity?

Maybe they should ask people who recall Zimbabwe and Weimar Germany?