"I think overall we have been pricing in for Goldilocks and we are closer to Frankenstein to be honest," warned Steen Jakobsen, Saxo Bank's outspoken chief economist, during an interview with CNBC, and that divergence from reality could mean markets face a 25-30% correction from a potential sudden recession scenario.
Jakobsen cited several factors including growing credit-card loans (and soaring delinquencies), a widening fiscal deficit in the U.S., doubts over infrastructure spending plans, and a potential trade war.
"All the data we've seen over the last few weeks has basically been that the consumer is maxed out, we've seen that in credit card loans as well, so I think the consumer is done spending the money."
The Saxo Bank economist appears to have noticed what we highlighted earlier in the month, that while the larger U.S. banks that dominate credit card issuance have focused on prime and super prime consumers post the Great Financial Crisis (GFC), and have enjoyed a prolonged period of low charge off rates concurrent with the Fed’s almost decade long ZIRP.
As TCW's Chet Melhotra notes, it is America's smaller banks - those not in the Top 100 by asset size - that have experienced in just the recent months a surge in charge off deterioration, which at 7.9% is on par with the last financial crisis! In other words, to find where the next consumer credit crisis hides - and will erupt next - ignore the big banks and focus on the smaller ones.
And as we also noted here, judging by the collapse in household "buying plans," the consumer is indeed "maxed out" as Steen notes.
As CNBC details, Jakobsen highlighted a "Goldilocks" scenario that he feels traders are mistakenly pricing in to markets, where fresh economic data are either not too hot or not too cold. Overall, the global economy is currently experiencing lower levels of unemployment and higher growth. Looking at 2018 in particular, many analysts hoped for strong global growth on the back of higher inflation and higher investment, but according to Jakobsen, these drivers "aren't actually materializing."
Instead, Jakobsen made a reference to the novel "Frankenstein," arguing that the economy had been skewed by central bankers, who have injected trillions of dollars into the global economy to boost growth and investment.
Estimates for the first quarter of 2018 "started at more than 5 percent expected GDP (gross domestic product); we are now significantly less than 2 percent for the (first quarter) expected, so I don't really see things happening in the growth area," Jacobsen added.
"We've been at 2 percent exactly since the financial crisis, I don't think we're going to deviate from that," he said.
And Jakobsen warns that in a scenario of a potential sudden economic recession, he sees a possible market correction of between 25 and 30 percent.