Saxo Bank CIO Warns "It's Time To Be Defensive... Very Defensive"

Tyler Durden's picture

Via Saxo Bank's Steen Jakobsen of,

Lee Iacocca, one of the true greats of the motor industry and a prolific author on leadership and management, once noted: "What is wrong with changing your mind because the facts change? But you have to be able to say why you changed your mind and how the facts changed."

My biggest call all year has been for lower rates globally, and in particular lower core country (Germany, Denmark and US) yields led by this magic trinity of factors:

1. China and Asia rebalancing growth away from nominal to quality growth


2. US current account deficit reduced by 50% (see chart below)


3. A Europe where Germany will pay the price for the first two factors with a lag of six to nine months.

The headline call was and remains that Germany will be close to recession by Q4-2014 or Q1-2015 setting up a desperate European Central Bank and an anemic Europe once again close to zero growth instead of the “escape velocity” everyone and their dog promised you and me in December and January.

US current account and the missing $400bn worth of exports:

current account

Source: St. Louis Fed

This past week we went through the important floor of 1% on the 10-year German Bund yield and I took profit on my long-held position :


Source: Bloomberg

This was a position I established back in Q4-2013. Feeling “naked” I did some additional work and heavily supported by our Saxo JABA model we have changed the asset mix and also our yield call:

Highest conviction call remains for lower global yields (low in Q1-2015), but for the rest of 2014 I see US yields falling more than their European equivalents – this will lead to bunds underperforming the 10-year Treasury and will set up the second call:


USD will weaken significantly from mid-Q3 into Q1-2015. The market remains overexposed to the dollar and US equities relative to the norm. Furthermore, with mid-term elections on November 4 the coming budget talks will have a hard time producing the convincing and long-term results needed.


Bunds will not be able to follow the Fed's repricing (away from early 2015 hike) and growth in the US (it’s not the weather) as Q2 gets revised back down to 2.25-2.50%. Another difficulty for Bunds will be geopolitical risk and a lag of global earnings for S&P- 500 companies which reduces margins and cash-flow. Average GDP in the US for the last five years has been 2.0%......

am at present almost square in fixed income – alpha model – from very long, but will use any correction in US bonds to activate medium-term long. (Again, that Bund yields will continue to fall but by less than US rates remains the new call…) hedging any US dollar exposure back into JPY and EUR. The pair EURUSD could trade 1.4000+ and USDJPY below 97.00.


Source: Bloomberg

Global growth is slowing down – World Growth in 2014 was expected in January to be higher than 3.1%. Today, my learned colleagues have revised their “guesstimates” down to 2.53% - a “small” drop of 0.6% - which is not only worrying but also puts at risk the coming budget talks – certainly in Europe but also in the US.

World gdp

Source: Bloomberg

These are, of course, relatively bold calls considering the market and the consensus have short EURUSD, long USDJPY and overweight US stocks as their main risk vehicles when VaR (value at risk) is allocated.

It’s important to underline that major US investment houses, and certainly every single sales person I talk to, believe US is about to accelerate in growth not slow down. Q3 could be ok but the real damage will come in Q4 as the lead-lag factor of geopolitical risk, lack of reforms and excess global supply leads to low inflation. Despite recent Fed optimism about an exit strategy the fact remains that few institutions are worse than the Fed in projections as even its simple target goals show :

Fed forecasts

The Fed is simply terrible at predicting……here is its “score” on inflation target:

pce ^ cpi

Why would they be right this time? They won't. Q2 will be revised down to 2.5-ish in a third correction – the standard correction is 1.5% from the first to the third reading:

gdp revisions

….and largely ignored they US consumer remains on strike despite “lower” unemployment:

retail sales

Source: St. Louis Fed

No hope and a distinct lack of alternatives is ruling the markets. Our major call is:

short the US dollar index and long commodities soon as well as the weak dollar and US yields (which will soon fall) set up great value trades .

cry index

Source Bloomberg, Saxo Bank


Yes, it’s time to be defensive…very defensive.

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stutes33's picture

Lotta fancy charts- unfortunately they dont matter.  This time its different. 

john39's picture

looks like they are working out who the fall guys will be when the crash happens:

wallstreetaposteriori's picture

When the market crashes this time... I wonder if they will hold Bernake, Obums, and Yellen accountable like the banks...  I think these 3 should be fined like JPM and BAC

papaswamp's picture

Nope, they will blame the Russians.

ilion's picture

"Recent Russian sanctions to ban imports of certain agricultural products from European Union will have a severe impact on European agricultural industry. For the European consumers it will at first be quite pleasant - products unsold to Russia will oversupply the local market and will lower the food prices. It will generate a certain feeling of relief among working class members of the society which make up majority of the population.... "

Full article here

BKbroiler's picture

I can't wait for the damn crash and deflation that follows.  The biggest losers this time around will be the banks, because no one can save them at these levels.  The losers will be everyone with debt, and the winners those with savings and no debt.  Those who lived within their means and saved their pennies will finally have their day.

Bernoulli's picture

That would be nice, but kind of sounds too good to be true...

Hope you're right.

BKbroiler's picture

Well the first thing to happen would be people losing their jobs.  This affects the 2 groups different ways.

Once the debtors they lose their jobs, they won't be able to pay the mortgage, and the bank will take their houses and cars (again). So they'll be homeless, with no job, and wrecked credit.

Once the savers lose their jobs, they'll have their house, and the money they saved, in conjuction with the money they're saving on deflated goods.  This should last at least long enough to eat and pay the property taxes for decade or two while things get sorted.

That's my guess. I'm in the second group so it's a biased model. 

Stan522's picture


Perhaps the banks will lose, but that's not how the Vice Chairman from the Federal Reserve is calling it. We have here is Stanley Fischer, from the Federal Reserve making a speech where he states openly to the fact that the United States is setting up the ability for your bank to confiscate, all or some of your money in the form of Bail-in's.......


Here is his quote and the full speech can be found in the link below that. He made this speech on August 11.

Bank Bail-ins are coming to the United States

"As part of this approach, the United States is preparing a proposal to require systemically important banks to issue bail-inable long-term debt that will enable insolvent banks to recapitalize themselves in resolution without calling on government funding--this cushion is known as a "gone concern" buffer."

OpenThePodBayDoorHAL's picture

CBs everywhere, not just Japan but now also Denmark and the US, buying equities. They are the classic "buy and hold forever" buyer. As they ramp that up, and print the money to do it, look for Dow 36,000 (and $30 loaves of bread).

This is their only trick and they will keep trying it until the bitter end.

That end, now being debated at the IMF, is an instant jubilee of all sovereign debt.

ebworthen's picture

"We're going to need a bigger boat."

Jaws is down there somewhere, lurking, waiting.

ShorTed's picture

Hooper drives the boat, Chief.

tawdzilla's picture

Bad news is good news still right?

camaro68ss's picture

Because its bad news, it's good news for DOW 20,000. Just sit down grab another beer, keep the buzz going and chive on.

Zeena's picture

interesting virus you have there.

debtor of last resort's picture

OT, Ebola update.

Dutch tv, prime time news, Liberia. Patients are being send back to their villages because there are not enough facilities. 90% of incoming patients die. There's in one facility capacity to burn 25 victims per day; that's not enough. Food distribution problems arise, boat's and planes are avoiding Monrovia. Big fucking mess.

drinkin koolaid's picture

I've said this so many fucking times now I just cut and paste. "We are in a SECULAR bull market in stocks, which last at least 25 years. The low was March 6, 2009. This bullshit market is going massively higher." I have been arguing this since 2009. However, I never buy into strength and currently it is an assinine time to buy after the huge rally from Oct. 2011 lows, especially with Sep/Oct selloff season here. Any major selloffs and I hope that I'm not too much of a pussy to buy after a decent selling climax.

Rational Advisor's picture

Take away the $4+Trill in QE and the equity markets re-set much much lower. 20%, 30%, 40% I don't know exactly. But we are in a cyclical, FED induced Bull Mkt in equities. Bond prices higher, yields lower, equities lower.
Sorry to burst your bubble.

NOTaREALmerican's picture

Wow, lots of charts.  

blu's picture

Look at all the pretty colours.

Europe is screwed and tattooed. I give them under a year (mid-2015) for the place to become one gigantic asylum for the monetarily insane.

I sorta don't get this guy's "weak dollar" call. The Bernank was fighting deflation printing greenbacks, the dollar is being drained from the global economy as QE ends and the developing economies are going to be buying dollars at premium just to transact business. Unless Yellen has some kind of Road to Damascus moment the dollar is set to become the most valued toilet paper in the world.

Fuku Ben's picture

Gutless pussies

The best defense is a good offense

q99x2's picture

When the justice department put bankers above the law FRAUD became a permanent part of the statistics. How long can that continue before reality breaks the system in spite of the numbers.

smcapmachine's picture

saxo and ZH - blind leading the blind.

Solarman's picture

Yet, he nailed the bond call.

Grande Tetons's picture

Give Stevie Wonder enough darts and he will hit a bullseye. 

Zeena's picture

Are hollow-point rounds considered defensive or offensive? Cause in one case, I'm very defensive. In the other, meh, not so much.

cougar_w's picture

I find them really offensive.

Mercantilist's picture

Nice to read someone who "gets it." just like being long US equities has been a great bet,  being shorts the US has been a easy call too.  Besides you can't just look at the interest rate differential and assume Long  USA; more importantly you need to look at the supply—demand situation.   The only thing that props up the US is a global financial panic - and even that isn't assured. 

Againstthelie's picture

US current account and the missing $400bn worth of exports:

Sorry, I only see the opposite in the graph: the account deficit is 400 bn less, so either 400 bn of MORE exports or 400 bn of less imports or a mixture of these two factors are the reason.

But a shrinking account deficit of 400 bn can not be the result of 400 bn less exports.


Or what am I missing here?

Omen IV's picture

So the economic activity of multiple key countries continue to decline but the market goes higher and higher - CB can print and buy the indexes in each market with their new money  created indefintely - since no money is needed for the economy anymore,  since no growth and declining consumption and therefore no inflation - so no valuation metric need to be applied at any point in time since it may not be the way to value the market anymore - you don't need to be experienced or have an education about anything  anymore

the indexes could go to any number over time ?


I Write Code's picture

There is no defensive, only Zul.

Zul will print more money to produce more demand even if nobody is working.  China gets a trillion dollars in IOUs, we get a billion iPhone6, everybody is happy.

BTW Zul seems to be losing control of things, the market is melting upwards, bonds are melting upwards (interest rates downwards) and that was not supposed to be happening about now.  The Gatekeeper (QE) is going to meet the Keymaster (ZIRP) and then Gozer arrives.  Choose the form of your Destructor!

Leboob's picture

C'mon fellas, use some logic here:
--Europe weak with yields staying low indefinitely
--US growth limpish causing Yellen concern, who will most likely lean towards cautionary approach of raising fed funds
--S&P earnings remain strong as companies continue to exercise stock buy backs and hold off on cap ex contributing to lower inflation

Translation: true Goldilocks scenario (strong earnings, cheap cash, low inflation) spurring this market higher, much much higher

fibonacci's claus's picture

Anyone heard of basal III bonds???  anyone?  Buehler?  Buehler?  Buehler?


Ben Shtein my hero   :O)

looks like a whole lotta debt is going to be processed.  Burn the bad banks.  Blow up some major currencies. 



kw2012's picture

CNBC and various media will keep the nee iPhone front and center for months, and 90% of America won't see what's coming