This article is based on an interview conducted by Claudio Grass, the Managing Director of Global Gold based in Switzerland, with Mr. Steen Jakobsen. Mr. Jakobsen is the Chief Economist and Chief Investment Officer at Saxo Bank, where he has served for a total of 14 years, including two years where he left to act as Chief Investment officer of Limus Capital. He is a renowned economist and trader with more than 25 years of experience in the fields of proprietary trading and alternative investment. The topics covered in the interview range from monetary policy to business cycles and precious metals.
Current monetary policy has made the public more aware and more critical of Policymakers
Mr. Jakobsen previously described the western central banks’ policies of quantitative easing (QE) as “unconventional”. He has always made an analogy that doing quantitative easing and easy monetary policy is like breaking your arm: putting a cast on it protects the arm from further damage, but keeping the cast in place for 5 years results in a loss of 90% of muscle power which is exactly what quantitative easing does to the economy. He points out that there is no empirical or practical indication of any link between low interest rates and easy monetary policy and the ability to regenerate growth. According to Jakobsen, growth is driven by the optimism and willingness to invest in real people and real jobs. What QE does is simply that the individual gets paid through and by the virtue of quantitative easing with paper money. Bonds can be bought with zero interest and houses are acquired with a yield less than 1.5%. This situation creates bubbles and makes the business cycle worse. Jakobsen argues thisis ironic because this whole exercise from the central bank, of course, is meant to minimize and counter against the downswing in the business cycle.
People are becoming more critical of our current monetary system. In the past six years, central banks have promised us growth within six months’ time. They and the whole monetary and financial system have lost credibility. The banks’ profit to GDP is the highest in history in an economic environment where we have the highest amount of unemployment since WWII. There is something very wrong with the way the system works and this is all due to the overemphasis on trying to minimize the business cycle. The real conclusion of QE can only become visible if we experience the full business cycle. In Jakobsen's view, we have never been allowed to have a down cycle since 2008. But now, there is finally going to be a down cycle because central planners can’t print more money. As Jakobsen puts it: “Now is the time for the real economy to take over”.
Jakobsen is a firm believer in the business cycle, and sees a seven-year cycle in play. The last peaks in the cycle were in 2000 and 2007. Before that, it was in 1993, and before that, it was in 1986. There are exactly 7 years between the peaks and the lows that followed and that is why he is so optimistic about 2015. We will see a new low for everything next year, which could trigger a significant improvement towards year-end. Mr. Jakobsen believes that things are so bad they can only get better. Take Russia, for instance. Today it is minutes, maximum days away from having capital restrictions. Capital restrictions are also in place in Cyprus and in Iceland. This suggests that the world is turning inwards and not outwards. But, according to Jakobsen that creates more crises and not less crises, and that is good news!
The West is over-indebted, growth is near zero and there are no growth impulses on the horizon. There are not many options left. Politicians would prefer to create inflation. But Jakobsen believes the only solution is haircuts. The investor will take a loss but everything will be better the next day. He clearly and firmly believes that a haircut for Greece and a haircut for Portugal is exactly what they need because underneath all of this, their competitiveness is now at a level with Germany for the first time since the introduction of the Euro. He goes on to explain that they have taken the internal devaluation, but they are still being front-loaded with interest on debt which they pay off in the first six months of every year.
Central banks understand that interest rates cannot go up. At zero interest rate you can carry debt for a long time. But Mr. Jakobsen argues that the real challenge is if the central banks become successful in raising interest rates. That, he says, will cure everything. However,every single goal stated by central banks and policy makers actually makes things worse. According to Jakobsen, what needs to happen is to have low interest rates for a considerable time and have the real economy take over. If the haircuts do not take place, the world will face a huge risk where a collapse in the long-term debt cycle would take place.
Focus on the micro-level!
From a business cycle point of view, Jakobsen believes there could be a potential recovery. He says:
“As you know, I go to over 30 countries and what really makes me positive is that wherever I go, whether Argentina, South Africa, Australia, Indonesia, wherever, I always meet smart business people, people who want to do the right thing, people who work hard. And this is in countries which are perceived to be negative on a macro-scale. So, what I am really arguing for is different, I think on the micro-level. I think entrepreneurs on an individual basis are strong enough and know what to do in a crisis and do what is right, maybe not the first day but over time you will. So I think the seven-year cycle is more relevant for me, because I think it takes seven years, maybe four years for all the policy mistakes to run out of steam and then the real economy takes over. It is really my firm belief in the little guy, the little business man, the SMEs. Don’t forget, if you have a debt, someone else has a credit, right? Of course, what we’ve seen over the business cycle is that the total levels of society remain the same but if the levels come down through the haircut, we will be in a better position.”
Jakobsen is famous for his many travels and describes himself as a “traveling economist”. He is quite positive about what he has seen in 2014. Although he has always been perceieved as “negative” in recent years, it appears this is the first year where Jakobsen is being perceived as naively optimistic. His observation is that people are willing to sacrifice for the first time after six years in this business cycle. The huge number of elections in 2015, with the UK being the most prominent one, as well as Sweden, Greece, Turkey, is going to have a huge impact. People are not going to vote for their money but where they want their society to go, he says. There is a discrepancy in a social sense, i.e. in the non-ability to accept the inequality in society.
Mind how Jakobsen focuses on the business cycle and the micro-economy activities, rather than macro economy and policy making. Jakobsen considers 2014 as a big micro-year and it has been confirmed by all the people he met. He is very clear on the point that government and central planning is not helping the world. To illustrate that, he explains his Santa Claus anecdote which he always refers to in his speeches towards the Christmas season. In it, he explains what he writes in a leter to Santa:
“Dear Santa Claus, I will be a good guy next year, despite being fifty years old. I’ll be a good guy next year, just grant me one wish: I want you to take all the world’s politicians. I want you to take all the world’s policymakers. I want you to take all the world’s chief economists like myself and then I want you to make a call to the Prime Minister of Australia and I want you to borrow a big plot of land. You put in golf courses, tennis courts, nice restaurants, swimming pools, hookers, whatever all these guys always use anyway. And then I want you to seal this place for four years and I promise you, Santa Clause, the world will be growing at 3.5% with 1.5% inflation. Unemployment will nowhere be higher than 1%. And the world will be better off. And my proof is always 2 things: Belgium was without a government for two years. Every macro indicator improved during those two years. And the other one is the US during the Clinton administration. Clinton was president for eight years. Except for smoking cigars, he didn’t do anything politically because he was in no position to challenge the Congress, which means he had a lot of ideas but never implemented anything. So he had eight years of doing nothing. And that is the only time since WWII that the US had a budget surplus. If you ask me to become president, I will promise one thing and one thing only: I will promise you, I will not do anything for the four years I’m in office. I will help you go sell your stuff, I will help you talk to people, I will meet people on the street, but I will have no initiatives. And I will make one law clear: For every new law I introduce, should I introduce a new law, I will take away two old laws.”
Gold will likely go higher in 2015
Being the Managing Director of a bullion service provider, Claudio Grass explains that gold is one of the safest assets. In contrast to most other assets, it is something that has been highly valued for thousands of years and if owned and stored correctly lacks any form of counterparty risks. Gold is a form of monetary insurance, especially in the current environment. What is Steen Jakobsen’s take on this viewpoint? In fact, he partly agrees. As an economist and as a practical guy he has a hard time with the argument of having the safest storage of value in an asset you dig out of the ground. As an economist, he would rather invest in people and in things one believes in than in gold. But having said that, of course the reality is that gold is the one asset that survived over time and throughout history and not only decades, but centuries and thousands of years. So he buys the argument.
Does Jakobsen own gold? “Absolutely”, he says, explaining he does so because of the need to own gold as an insurance. There are going to be serious questions raised to the central banks and the role they play in the economy today. Effectively, the central bank bosses are the generals of the economic wars through the currency devaluations we see. It is easy to find things to dislike in the currency space but it is very difficult to think of things to be long, except for probably the Swiss Franc, gold and maybe once in a while the Norwegian Krone when it is very weak. Gold always becomes a first refuge and a solid one.
When it comes to gold manipulation, Jakobsen admits not being a fan of conspiracies. Having done this job for 30 years, he argues that at a certain time of the day you can place EUR3 billion and it doesn’t move the market, and another day you can place EUR20 and it can move 5 figures. According to Jakobsen, it’s all a function of liquidity. Do the central banks buy and sell? Absolutely. Do the minters and producers who have the inside scoop take the opportunity to make some extra money, that absolutely too. However, Jakobsen, based on his long experience, argues that “over time, justice prevails in the sense that gold eventually will trade at a price that is relatively close to the market forces”.
On the matter of the referendum on the Swiss Gold Initiative, which was rejected, it is Jakobsen's belief that it is irrelevant how much gold is held by central banks. He argues that if the vote had gone the other way, it would have raised the question whether the central banks should back more of their money with gold. The price actually showed it was irrelevant. People expected gold to sell off dramatically as the votes came through. But it didn’t. We should not confuse the need to hold physical need with some form of a gold standard, says Jakobsen, explaining that there is a practical reason why someone wants to be long gold. What has really depressed the gold price was the low inflation and the strong Dollar which, according to Jakobsen, will be turning in 2015.
Jakobsen argues that in the current economic environment that what a metals trader needs to focus on is deflation. When deflation bottoms out, which is something likely to happen during Q1 of 2015, it will be the biggest buy signal for metals. Jakobsen's base scenario is that Q1 and Q2 will become the worst part of the business cycle with the lowest inflation expectation, the lowest growth, the lowest ability to do anything and increasing volatility at the same time. But he believes that as this low energy, as these low interest rates and as the terms of trade for Europe improve, we will see a better second half than we’ll see a first half. And underneath that, the inflation expectation should pick up. Jakobsen sums up his outlook for the near term saying:
“I think right now, gold is overall driven by a strong Dollar and negative inflation expectation. I think both will very much stabilize by the end of December and as we come towards the end of Q1 we’ll see very clear signs that the crisis is getting deeper but that inflation expectation is coming back. I am increasing my exposure into metals and commodities; I am already quite exposed to commodities through aluminum and mining. I’ve been buying very slowly into mines. I think actually metals, mines and people's real jobs are coming back. And that is good. Low demand is good for inflation… so for the first time in many years I’m actually seeing a better end to next year than I am seeing an end to this year.”