Saxo Bank

Having predicted oil prices below $80 in 2014 at the beginning of the year, Saxobank's Steen Jakobsen has a leg or two to stand on when he warns of a "massive correction" in energy stocks andthe drop in prices will rapidly become a headwind for the US economy, adding that "it will subtract 0.5% from GDP, bare minimum." He further notes that due to the strategic importance of the oil industry to America, he suspects the government will attempt (a likely highly unpopular) bailout of the Shale sector. However, as Raul Ilargi Meijer notes, there is a problem for any bailout (aside from public angst), in 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.

Uncertain times call for unconventional thinking...

The big selloff in 2015 will come from housing and housing-related investments as the marginal cost of capital rises through regulation and through “margin calls” on banks as their profit-to-GDP ratios grow too high for the economy to function properly. The dividend society is here and the true manifestation of Japanisation is not a future event but a thing we are living in right now…

Saxo Bank's Chief Economist Steen Jakobsen is predicting another 'shock drop' in the markets within a few weeks. With debt and low inflation continuing to create a nervous atmosphere behind most markets, Steen argues that we will hit fresh lows in mid-November. Steen takes the view that central bank policy is creating a 'fantasy land' for investors and he points out that the recent 'day dive' in markets was a closer reflection of reality. Steen outlines his suggestions for trading ahead of another dip in mid November with targets for the S&P 500 around 1810 and the Dax at 8000 - 7800. Be long fixed income as it is "a free put on the equity market.. and the economic cycle is not yet ready to adapt to a rising interest rate."

Anyone confused why futures are doing their best to surge in the overnight session, the answer is simple: first it was Japan reporting the latest batch of atrocious economic data, which an hour ago was followed by Europe own abysmal econofreakshow, where Eurostat just reported that in September Eurozone inflation rose a meager 0.3% from a year ago, the lowest annual increase since October 2009.This marks the 12th straight month that Euro inflation has been below 1%, and far below the ECB's goal of 2% inflation.

We actually to believe that the Federal Reserve can lift the entire front-end of the curve from 0-1% (current rates out to three years) to 2-4% over the next two years without adding massive further stress onto the deficit, and only adding to the debt? Servicing 2% interest when growth is 2% means you are doing worse than standing in place if you also have a budget deficit. Whatever the timing, the US, China and Europe are all headed for another Minsky moment: the point in debt inflation where the cash generated by assets is insufficient to service the debt taken on to acquire the asset. Productivity growth in the US last year was +0.36%. The real growth per capita was about 1.5%.

The most commonly used introduction in any Forex business for the past 3 years: "US or Non-US"

The chance of EURCHF breaking the peg at 1.2000 have increased from 10% to 25-30% based on European Central Bank monetary policy, geopolitical risk and a lack of policy choices for the Swiss National Bank. This means that being long EURCHF no longer is a safe bet and although the 70% chance of the floor being both defended and protected is still high, the tail-risk involved is becoming too concerning.

"Germany will flirt with recession by Q4 of this year," warns Saxo Bank's Chief Economist Steen Jakobsen, adding that "the US is in worse shape than most people believe." It's important to underline, he notes, that major US investment houses, and certainly every single sales person we talk to, believe US is about to accelerate in growth not slow down. Jakobsen warns though that 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. His conclusion, "it’s time to be defensive... very defensive."

From Ukraine to Gaza, geopolitical risks are weighing heavily on investors’ minds. But there are plenty more out there that may not be getting headlines.

The western world has placed many sanctions on Russia and its economy. However, Russia holds major leverage over Europe; it has oil and Europe needs it (and may just do a 'deal').

"The consensus narrative on market developments is set to implode," warns Steen Jakobsen, Saxo Bank's chief economist and chief investment officer. In his latest note, he explains precisely how to position ahead of the storm, with everything from calls on gold to German government bonds and more importantly, and their underlying rationale. As Jakobsen concludes, "Yes, the truth is often ugly, but often liberating too. We need to move away from chasing paper profit to investing in people, ideas and prospects. We should not fear the coming sell-off, but embrace and use it for creating a true mandate for change. It’s about time."

The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – whenever there is an action there will be a reaction. If the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also on markets. Simply put, Steen Jakobsen concludes, "prepare for less growth, less certainty and more geopolitical risk."

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. 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.

"...so I think the low comes in economically in Q1 and Q2 in 2015. Every single macro indicator you can find will bottom at Q1/Q2. For the equity market, I think the top is 1900/1950. But you can't both predicted the level and the timing. And I’m more confident about the timing, not the level. So my timing I’m confident, and the timing I am confident on is the fact that the second half of this year is going to see a 30% correction from the top."