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

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.