Steen Jakobsen Warns Of Looming US Slowdown, "I'm Long Gold... And Adding"

Submitted by Saxobank's CIO Steen Jakobsen, via,

  • US Q4 growth revised lower, 0% looms later this year
  • Europe has consistently beaten the US as regards expectations
  • Neither EU nor EM have the heft to compensate when US growth fades
Let's kick off with some data – US Q4 revisions are out today and showed a slowdown from 2.6% to 2.2%.
This makes Q3 (2014) the peak in this cycle and I expect QoQ growth in the US will hit zero by Q3 or Q4. There are several factors for this including rising real rates, mal-investment into energy but most importantly – falling earnings in the US.

Societe General – Global Quantative Research has published an excellent report titled "Global Earnings Estimate Analysis – Is the US heading back into recession?".

I have borrowed the main chart – which shows how the six month change in 12-month earnings per share coincide with US GDP – not pretty and definitely not what Janet Yellen and Wall Street promised me less than two months ago.




US quarterly GDP has been 3.0% since 1970 and 2.6% since 2000 – with big swings:

 Source: Bloomberg, Saxo Bank

I see a repeat of the growth pattern from late 2006 into 2008.

The market is focused on the telegraphed June potential Fed hike, but this week's speech by Janet Yellen clearly has got people thinking as she again introduced inflation concerns and “data watching”…. In other words, we need to again look at the actual economy and its performance which is a bad news for the happy campers in the equity market.

This chart will soon have relevance for all asset classes’ – It shows the outperformance on expectations from Europe over the US. May I add that this is exactly the opposite of the consensus two month ago, except for a few analysts. US data has consistently done worse than expected.


The point however is US data been worsening for a long time – I personally think we are in period where we yet again handover the growth engine from the US to emerging markets but via a significant new low in growth which will make Europe looks good. The expected path for me is:

Slowdown confirmation in the US over the next two months – that will kill the improvement in Europe by end of Q2 and leave it stable - not growing for the year. Meanwhile, emerging markets will come back as market realise the Federal Open Market Committee is years away from ‘talking up’ rates. 
The June or September initial hike (if it comes) will still leave FOMC 100 basis points above Wall Street on its projected long-term path for growth – and remember that this is a Wall Street that is also too optimistic about future growth. The Fed sees 3.0-3.5% on the “dots” (charts that display expectations from individual FOMC members about the direction of interest rates) while Wall Street sees 2.5-3.0% on average. 

In other words, there is room for a +100 bps correction to the sustainable long-term growth which will render 10-year rates 1.0-1.5% before we are over with this part of the cycle, which I label: Restarting the business cycle.

Restarting the business cycle as policy measures, QE and targeted “help” for banks is running if not out of time then out of impact on the economy. The inequality and low salary to GDP base simply can’t produce enough domestic consumption anywhere for the middle class to be able to afford the products the stock market listed companies produce.

The chart below is my July 2013 projection of rates – as you will note the “calendar” needs to be moved further forward… 2014 in chart is now 2015 due to Bank of Japan and the constant hope of “lift off” in rates, but the actual pricing rhythm has been relatively precise and predictive.


 Source: Bloomberg, Saxo Bank

There are a few more charts which are worthy of perusal:

Port of LA traffic has collapsed. Yes, some of it is to do with strikes and unions but…. look at size of the drop! Deeper than March 2009!



Have no illusions – US short-term rates are rising:
interest rates


The outlook for Europe remains… more of the same:






We are in a “in-between period” - where the US will slow down and ultimately hand over the growth engine to emerging markets by the earliest in Q4-2015 but firmly in 2016. The problem is that emerging markets are not ready due to high US dollar debt and waning commodity prices and Europe is still too weak to contribute net to world growth leaving a growth vacuum for new growth.

Europe will show one more month of improving data, then the global slowdown and EM and US will drag down the data to flat performance. Europe will still do better than expected in 2015 but not enough to constitute a real improvement yet.


  The wheels of commerce will move more slowly. Photo: iStock


I still only have one very strong view and that’s that 10-year fixed income will trade 1.5% even potentially 1.0% this year – everything else will lag this move by nine months. So in other words, if the low in yields comes in Q3 (as I expect) then the summer of 2016 will be the lift-off we all have talked about.

The US dollar will peak this quarter and will probably have peaked for this cycle. The weaker USD will stabilise commodities and emerging markets, creating the conditions for a hand over at the end of this year. The US dollar should be very sensitive to this relative slowdown in the US, especially as Europe is improving.

Gold remains top of my list for new investment – I’m long and adding – I have also re-sold Brent crude as the marginal cost of producing oil is still rising, meaning the global impact still is negative net-net. Jeremy Grantham makes the excellent argument that for world to benefit from falling energy prices it has to come with falling marginal cost. The opposite is the case now: lower prices, higher production/extraction costs.

The stock market…..Not time yet to call the top, but I'm preparing a special report on valuations and models, or the lack of it. The conclusion will be: There is potential for a 5-10% year but also for a 25% correction. The really totally binary, problem of course being that the market is very expensive by traditional standards, but this are hardly normal times. The expected return for reference over 1, 3 and 10 years can be seen below – the upside that first year still can carry the market higher, the downside the next 9-10 years!