Stock markets in the US and Europe are in for a correction, while the euro is set to rise, according to Saxo Bank’s Chief Economist Steen Jakobsen, nomatter what happens between Greece and its creditors. Steen also looks at the impact a rate hike from the US Federal Reserve would have on USD and what currencies could gain once the Fed decides to move on rates, noting that "the consensus has it wrong on the timing of US rate hike," as the credit cycle topped in June 2014. He believes that commodities and metals in particular offer opportunities for investors.
As he warns, "Change is Gonna Come..."
- The consensus has it wrong on the timing of US rate hike
- The marginal cost of capital is still rising
- We need to accept a new period of lower growth is coming
- Bonds market is rising without the economic growth to support it
- The credit cycle peaked in June 2014
- WTI crude will rise to set up excellent energy returns
- Gold is still set to outperform this year
First, my analysis of the Federal Open Market Committee. There remains only one question of relevance for the future cost of capital. Will the US Federal Reserve do a 'one-and-be-done' (or maximum two), or will they start a traditional rate hike cycle?
Last week's
FOMC gave us a clear indication. They believe they will hike twice this year (September/December) and then go slower at 100 basis points per year.
In the chart below, yellow represents the slower hike cycle now in place. It’s of course still above the Wall Street consensus, but even Wall Street is beginning to understand that Fed hikes will not be based on economic data alone, but on an almost desperate need to normalise the monetary policy.
Source: Bloomberg
I personally think both are wrong. For me, the higher and more aggressive Fed in the balance of 2015 will 'kill' the nascent growth pulling US and Europe back towards zero growth, which will give us one more look at all-time low interest rates before we start a new secular change.
Of course, the more direct play is to wait for the Fed to hike twice and then go short the 'cost of capital' as in short equity and bond vs. long commodities and emerging markets with a weaker US dollar.
But I still see total move of +100 bps from the low in Germany and US yields to top in 2015 – then a selloff/recession, then the REAL START of a new cycle based on the true improvements coming into the micro economy.
What will this entail?
Better lending demand; monetary aggregates rising; the Silk Road closer to being online; big and improved current account balances; lower energy prices; the moving of money from non-productive 'paper money' in Wall Street to Main Street; the reversal of the 80/20 rule I have so often mentioned.
The reason this recent move higher in yields is 'false' is that it’s only the 'term premium' which is going up. Or in plain English: it’s the inflation compensation in the bonds market which is rising without the economic growth to support it.
Interest going up on higher demand and growth is fine, but interest going up as monetary derivatives is often dangerous. Please remember, we're coming from zero inflation, zero growth and zero reform. The move from zero-bound will be full of false starts and disappointments.
If you're going through hell, keep going...the move from zero growth will hurt. Photo: iStock
The consensus and Fed position is now roughly like this:
- Fed: Two hikes in 2015 – then 100 bps per year from there onward.
- Wall Street consensus: One hike this year and then 125/150 bps next year and then 100 bps onward. (Why is it the sell side always sees next year as the time to 'change' – never this year?)
Part of the difference in the future path is based on your premise/assumption of long-term growth potential. US growth used to be 3.0-3.5%, but now it’s more likely 2.0-2.5%. This has a big implication on the Fed and the analysis of it.
Of course if 'new lower growth' is accepted at 2.0-2.5% the threshold for hiking is also equivalently lower!
One and done, or two strikes and out? The surveys say...
Source: Bloomberg
The more pertinent question, however – and the major risk to Fed's expected slow and gradual rate hike cycle – is lack of trading liquidity.
Citibank did an excellent job of putting it into context this morning:
Citibank US Economic Views: FOMC Edition
The above chart shows how the value at risk of the the eight biggest market makers has gone from $1.4 billion before the crisis to less than $400 million. This is one of the 'quantitative' charts I have seen on this illusive 'risk capital'.
VaR is the grease which keeps the trading engines humming. We are basically playing a game of musical chairs, but not the traditional version with one chair missing when the music stops...but four chairs missing.
This makes for more volatility and excessive moves when investors move their money across asset classes. Trust me – there is simply too small a market to cater to a world of finance where every mom and pop have a major portfolio in ETFs and mutual funds and where everyone, like in 2000, is either a major real estate developer or a 'major trader/investor'.
For example, more than 5,000 hedge funds have been started in China
in the last three months.
5.000! There are only around 8,000 hedge funds active at any time in the rest of the world!
Source: Charles Schwab cartoons
Let's take a look at some more charts.
This shows a test of the 50-day moving average support line – we had nice bounce today, but the 'marginal cost of capital' is rising:
As expected, we see signs of a classic seasonal mean-reversion in US data:
Citigroup’s Surprise Index supports the mean-reversion theory – a nice bounce and timely for a Fed September hike:
The Merrill Lynch Option Volatility Index is a new chart. The 2013 spike was the taper-tantrum – keep an eye on this one for the 'musical chairs in bonds':
Financial stocks didn’t like the slightly higher probability of a September hike:
Reflection of credit cycle? The peak was in June 2014 – a year ago!
Macro forecasting
I'll c
lose with my latest bigger macro calls. Here's a reminder of the main points of my major strategy change as detailed in an article on May 18:
The headlines for the next 6-7 months say:
- US, German and EU core government bonds will be 100 bps higher by and in Q4 before making a final new low in the first half of 2016. The US 10-year yield will trade above 3.0% and bunds above 1.25%.
- Energy: WTI crude will hit US $70-80/barrel, setting up excellent energy returns.
- The US dollar will weaken to EUR1.18/1.20 before a retest of lows and then start multi-year weakness.
- Gold will be the best performer in commodity-led rally. We see it at $1,425/35 an ounce by year-end.
Steen Stress Indicators
think this dude has it backwards...
I think there's a 50/50 chance you're right
All this banker paper helps GDP. Good thing humanity is benefiting too from the colorful charts, you know, better life and all. Thank you bankers.
Well fuck me to tears would you look at all those charts? Man this guy must know WTF he's talking about. This Steen fella must know his shit. What'd he say again?
Dude's an idiot.
Long rates are rising because people are finally waking up to the risk.
"I think it's stuck in granny gear..." FIXED
I had an old pickup years ago with a granny gear. You could put it into granny gear, then without hitting the throttle at all, just move your foot to the side and let the clutch pop all on its own, and it would just chirp the tires and start crawling down the road without stalling. Top speed was 15mph.
.
If commodity markets were heading higher by year end, they'd turn up now, 6 months before. I thinks he's right, but a little early. In Sept., when the FED disappoints, markets will fall enough to give the counterfeiters cover for QE4. They absolutely have to prop up markets(and invested retirement accounts) ahead of their 2016 staged event, aka Prez. election.
"stocks are going to fall" LMAO. what an idiot. Yeah and Chuck Norris is a pussy!!
lol, saw this on cnn money just now:
http://money.cnn.com/2015/06/22/investing/fitbit-stock/index.html
FitBit is now worth more than GoPro....
GoPro: Produces and innovates perhaps the most modular and best quality fun-camera on the market. Grabbed market share legitimately over time.
FitBit: Produces a band that has already been replaced with a smartphone app.
lol... there's no bubble.
You didn't get the memo? Bullshit > real stuff.
I wouldn't be in a hurry to argue with him. Saxo bank, with headquarters in Denmark, and a big office in London, is about the only bank that ever makes correct predictions. Also, they run a wonderful on-line trading platform that can be very useful to anyone what wants to have a paper position in Silver or Gold or FX. It's very good, because it works, they don't make mistakes, and your account guy will actually answer the phone if you do think something is wrong. Also, they're not going to go broke; they're very conservative.
I saved this Steen article from last year, 6/2014:
http://www.zerohedge.com/news/2014-06-02/steen-jakobsen-expect-30-stock-...
Steen said that stocks would take a 30% hit sometime in the second half of 2014.
At the time of publication, the Dow was at 16,743. A 30% correction would mean that it should have dropped to around 11,720.
At the end of the year - Dec 31 - the Dow was at 17,823, for a gain of 6%.
Steen was about as wrong as could be on his prediction.
Disclaimer: I'm the first one to admit that forecasting is hard.
This guy is always predicting stuff that doesn't happen.
He still gets paid a shitload though...so the joke's on us, I guess.
you could take the opposite side of the bet on every point. hell, that's prolly what hes doing.
Falso statement. He's a good analyst. I'm already short the S&P500 and Long Dec. Silver.
it's like the fourth time zerohedge posts the same paper and predictions from this guy. enough already.
The FED, ECB, BOJ and SNB all respectfully disagree. And because they can print money to buy stocks I think they will be right.
These third world economists need to take a course in Q99X2 economics and we'll show them what the power of software can do.
"The US dollar will weaken to EUR1.18/1.20 before a retest of lows and then start multi-year weakness."
Weird call on EUR. On BB, Saxo's 6/8 forecast is: 1.02 (Q3 15), 1.00 (Q4 15), 0.98 (Q1 16), 1.00 (Q2 16) and 1.05 (end of 16). At what point are we supposed to hit 1.18/1.20? Intraquarter? Maybe this is a new epiphany and BB is outdated.
I guess history must show that the market tanks when rates rise... right?
I think the pundits, are the smartest guys in the room when it comes to Greece. Its not because they got it RIGHT. Its because they've been getting paid to write or pontificate and spew the same shit for 4 to 5 years. Great gig if you can get it.
Substitute "Correction" for Greece and here's another dude who says the same thing over and over again and gets paid for it.
Hey Zerohedge/Tylers half the comments on this site have more insight than most of the pundits you guys put on here. Time for some new blood.
who trusts anybody on anything anymore
For the record, ZH reported last week that Jan Hatzius (Goldman) has pushed back his forecast for the first rate hike from September to December (and speculated that in September he would push it back futher into 2016). And isn't the rule whatever Goldman wants, Goldman gets?
"yellow represents the slower hike cycle now in place."
Did I miss something? Last I checked Yellen raised nothing. There is no cycle in place.
There is nothing but jawboning that they *might* raise rates later this year. Are we really to the point where theoretical future possibilities count as an actual policy?????
The US dropped into recession in Q2. There was litterally nothing more than QE producing even the appearance of normality...and the continued systematic distortion of the economy by government regulation, banking laws, and Federal Reserve Policy have, like a cancer, consumed more of the economy's healthy tissue despite the nominal end of QE.
What planet is this guy on?
The time to raise rates was March.
It should have been mouth-pieced as the first step of many...
...while privately understood as a face-saving measure, that would be 'one-and-done' in nature.
It is now too late.
When investors come back from their summer vacations, it will be to see a train-wreck.
Who told you investors are coming back from their vacations ?
The ones I know are now completely out.Only dumb money, and pension funds are still in.
I liked her comments on productivity during press conf. She said it was not advancing the way they would like to see it--truth is productivity is decreasing.
if productivity is decreasing, and corp profits declining, and jobs really not improving (think outsourcing and automation) they should either be throwing in the towel right now or printing a hell of a low more to give to people vs banks to try to stimulate.
I think the problem is gettign ahead of what might be the final economic decline, rather than getting ahead of inflation and strong growth.
If they give people more instead of banks then people will buy stuff. That is not the way it works in the new normal. They don't want us to buy stuff, they want to keep all the stuff and they will screw us out of everything we already have. They just want to delay the inevitable collapse long enough to have stockpiled enough weapons and ammo and brainwashed enough slaves to use them on the rest of us. They think they can take it all and keep it. Better get ready for a big messy problem.
I include myself in the following.
All economists are wrong except the ones who tell us what we want to hear.
We are wrong as often as they but we never take that fact into account.
Carry on.
There is an easy way to raise rates and not collapse the Bond Market and not collapse the economy.
I will not reveal it again...until AFTER THE COLLAPSE which is what I want.
Why help them continue with Fraud? I want this to end.
The dollar is up on "exit."
The FedRes has been setup as the exclusive scapegoat for what is to come.
They will raise rates this Fall or early Winter.
The first rate increase starts the clock on the dollar and DC US economy. A ticking time-bomb without a time display, so we have no idea when zero is.
Got gold, guns, grub, and ground?
Liberty is a demand. Tyranny is submission..
"If you're looking up at the collapse, your under it."
Raising rates into deflation? Not a chance.
Read the above line until y'all get it.
Replace "desperate" with "existential threat"
and you'll see why the FED will do what we all
consider to be "crackers"...
Oh, and they are clearly late on rate hikes.
I'm thinking a panic may result...
Beware of the American CURSE >>>> https://biblicisminstitute.wordpress.com/2014/07/17/is-america-cursed/
Beware of the American CURSE >>>> https://biblicisminstitute.wordpress.com/2014/07/17/is-america-cursed/
Why does Figure 8 chart show data stopping in 2013? This is 2015. Syrely there is moar data.
It's always interesting to see a bank list of the top fronts (agents) of The Great Red Dragon.
Unfortunately, because so many people continue to do business with them; Sometimes The Dragon Wins.