EU summit: extend and pretend continues | TradingFloor.com

Dear All,

My take on EU Summit so far, but done from a far in Singapore with full moon and everything. Nice week-end

http://www.tradingfloor.com/blogs/steens-chronicle/eu-summit-extend-and-pretend-continues--2134051758

Steen
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Relative growth cycle - more than EU debt crisis dictates a serious look at potential for much lower EURUSD.

 

INTERNAL NOTE ONLY.

 

 

My colleague Peter Garnry was kind enough to quickly program a small excel thing which can track changes to growth by consensus using the ECST function on Bloomberg. This is the result.

 

One of my main themes over the last quarter has been a "relative outperformance" of the US economy relative to consensus. This has materialized and our call was almost entirely driven by Consumer Metric data which over the last three years has outperformed any other relevant predictor. This is now slowing down slightly, but still elevated. Meanwhile Europe start election cycle where Spain goes to the election in less than two weeks, while Sarkozy starts his re-election campaign when he is done playing Napoleon in European politics.

 

The outlook for 2012 is a "Perfect Storm" with increased austerity, higher unemployment, and weaker global growth(read: China).

 

European consensus growth by market consensus

 

Source: Bloomberg & Saxo Bank

 

European growth coming off hard and has been in almost free fall since end of July.

 

US consensus growth by market consensus

 

Source: Bloomberg & Saxo Bank

 

Meanwhile US growth have seen low and looks higher, but……there is a number of issues ahead:

 

1.       The Super Committee needs to finalize its work by this weekend in order to secure proper processing Congress. WSJ journal this morning says sources tell them some progress is being made and main point for now are: A. Limiting tax deductions replacing tax hikes. B. Getting permanent Bush tax as payment and most importantly for FX markets: C. HIA – Republicans seems fighting for repatriating capital back to the US at tax rate of 5.25% vs. presently 35% - this topic has even been on 60 Minutes, so to me it looks like "deal to be done shortly" as it plays nicely to create "Job creating program.

2.       The headwind from fiscal tightening will equal negative 1.00 pc of GDP – this is federal, state and local communities trying to cut back mainly, but also investment remains meeker.

 

Conclusion

 

 

 

A long life have taught me that everything "mean-reverts" – when I moved back from the US in 2000, the EURUSD was trading below 0.8400 – since then the US has pursued a policy a "benign neglect" and succeeded in making the US extremely weak by all definitions.

 

Clearly the US has debt issues on their own, but currencies are relative trades. To me we are entering long-term up cycle for the US dollar. The final QE/Printing of money will come in Q1 of 2012 and could cement the low, but I am willing to start overweighting US dollar relative to Europe, not Japan, and further down the road to go full in. I suggest for European to initiate the first 25% now as EUR/USD is out of touch with relative rates, funding needs, and relative dynamics of the economies.

 

There are four major components to my long-term bullishness:

 

1.       The EU debt crisis – when ECB becomes lender-of-last-resort we will see 10 figure move lower.

2.       Relative growth differences – The US is more dynamic and with only "one master" . – i.e. Congress vs. Europeans 27 members and lacking fiscal union.

3.       Competitiveness. US will able to compete on labor costs with close to 20 pc real unemployment and incoming tax incentives..

4.       HIA – Homeland investment Act – as stated above the Super Committee is trying to get a reduced tax of 5.25% in place.

 

These things are floating. My bullishness is relative, but the biggest contributors to long-term wealth tends to be your choice of currency. I have a target of 100 in DXY for next year, so a 25% rise in the US dollar during 2012 – and in EURUSD terms the expected move is changed range from 1.30/1.40 now to 1.20/1.30 on ECB rolling over, another 5-6 figures on interest rates, and then HIA II we end around 1.10-1.15 for 2012 end target. Having predicted this I will, as always, add, my own believe in me being able to predict anything remains 0.001 pc.

 

Safe travels,

 

Crisis 2.0: Q4 a toss-up, 2012 to bring the real deal | TradingFloor.com

Dear Friends,


A note on Q4 and 2012 outlook w. Update on strategic position.

Steen



http://www.tradingfloor.com/blogs/steens-chronicle/crisis-20-q4-a-toss-up-2012-to-bring-the-real-deal-390480186#.Tp_cpDVwWT8.email


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EU summit/G20 to kick off the final phase of Maximum Intervention

Dear Friends,

A travel note this time from Moscow - the final intervention phase is upon us and hope is eternal for the Grand Plan. Little does it matter in my mind as we are saturated with debt, facebook and unaccountability. Read on ;-)

Steen

http://www.tradingfloor.com/blogs/steens-chronicle/eu-summitg20-to-kick-off-the-final-phase-of-maximum-intervention-412526218
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Steen's Macro brief: Enron-i-sation - 5th final wave down could have started.

Dear All,

 

I am making a longer Chronicle later today but the latest 48 hours deserve a few comments:

 

The Enron-i-sation of Europe – finding solutions through SPV’s speak for themselves. Apart from the inability to being implemented (if German constitutional court is heard) it’s also a slippery road towards permanent aid. Hiding debt in more and more obscure vehicles (EIB et al) is similar to Enron having 1000s of SPV hiding the “real issue”. Debt is debt. It needs to be paid back or someone needs to take a loss!

-          New financial tax:  This is major game changer – this is in my opinion the beginning of the end for Europe – the “new new” in this scenario is that G-20/EU seems to have found an academic documentation that the tax may not need be applied “universally” – they mention domestic taxes in India(not freely trading market) and UK. This is simply wrong – banks are now meeting around Europe to move their operation outside the EU – this will not work, but it will be implemented by populous demand. Socialism is good as long as there is money to be taxed. Government created/printed money, banks took them and now government will tax is the logic. The suggested (not confirmed) level of taxes are 0.1 pc on shares and bonds (1 mio. EUR equals “tax” of 1.000 EUR) and 0.01 on derivatives or 1.4 pips on each side of EURUSD! This is MASSIVE tax……. And as such shows that my Maximum Intervention concept is now operating a top speed.

 

I am extremely depressed about the above – we are no longer doing two steps forward, three steps back, but one step forward and ten back. Furthermore the so called “Plan” for saving Europe is not reality. All my sources confirm, again and again, that is desperate attempts to find the right path through this mess. The people in the know, realize there are no longer any good solutions only pain. The pain from here is either 2-5 years of recession or 10-15 years. Enron-i-sation & tax makes this week the new low in solidarity, rationality and solution seeking.

 

Strategy:

 

Cash is king – and cash in UK, Switzerland, Singapore, and US even more King-ish. I remain EXTREMELY bearish on this – seeing the tax as the catalyst for the final 5^th wave down in the market, although it will take one-two-or even eight weeks before market realize it. It is not about ‘return on your money’ but whether you get your money returned.

 

 

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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Steen's Chronicle: Maximum Intervention meets Crisis 2.0 - Negative outlook

Dear Friends,

Latest thought. Steen

 

Maximum Intervention to take us to Crisis 2.0

We'll start with our conclusion: We took profit on the long risk position from August 24th  @ 1152-00 SPX – and move to a net negative position (done @ 1190-00 in SPX in the immediate wake of the FOMC) based on our disappoint that the US & EU debt crisis is moving into the next phase with little good news – Operation Twist in the US and an uncertain EFSF ratifying period in Europe.

The long position in August was based on my dominant macro theme: 'Maximum Intervention' which is a fancy way of saying: policy makers will have at least one more – and massive – go at trying to save the world through macro intervention, though in essence is more of the same: an extend-and-pretend exercise of buying more time. The call has been successful despite the serious deterioration in the political climate surrounding the EU debt crisis.

Herein lies an important lesson regarding policy makers: 'It is at the time when you least expect the risk of 'intervention' that it will happen' – the policy makers go from finding no common ground to suddenly agreeing on something new and often drastic. The history of the EU since World War II has been like that.

The first big step was taken last night at the US FOMC meeting – as the Fed moved to Operation Twist and decided to roll it mortgage bonds into new ones. The next policy responses could include the following:

• Extending Greek debt
• The Fed indicating a move towards nominal targets for inflation- and unemployment. Following up on Bernanke's 2002 speech detailing his view on how to avoid Japanisation through bigger and more explicit policy targets.
• Potential for further move from the SNB forcing the EUR/CHF rate higher (1.2500 floor?)
• A European Monetary Fund or similar (already being discussed openly)

This is all well and good – but considering an economist like me with limited knowledge and contacts can pre-announce the expected policy responses we get something similar to the Heisenberg uncertainty principle in quantum mechanics, namely: the more you know and observe the present positions and policies and the current situation, the less certain you can become of where it is all leading.

Combining these two principles – the knowledge of the inevitability of the next intervention with the uncertainty of where it will take us will likely be disappointing for the near term: We do expect Germany to come through on the last minute of the last day to "save the system". We recognise the political willingness to keep the system going is higher than generally perceived. We also know that the ECB will ultimately move to QE/money printing. But nevertheless, we also realise that time is running out on any best or even second best solution for Europe as the timeline for the politicians is far behind what the financial markets wants to see implemented.

Even with all the good intentions, which are not always obvious, the politicians need dramatically to secure a medium- and long-term solution that is in line with both the Maastricht agreement, but also the German constitutional court in Karlsruhe. This is not something that can be done overnight or even from quarter to quarter and it is an increasingly dicey proposition from a legal standpoint.

We had a unique chance in 2008, when the financial crisis created havoc and turbulence, to facilitate a "new contract" with labor markets and the banks to recreate a competitive labor units cost level and a re-solvency of the banks.

The term re-solvency is a German one, and goes to explain a process where someone drowning in debt re-sets themselves to deal with the debt and liquidity at a tolerable level to re-establish solvency.

This is exactly what is needed in today's Europe. If we agree to 'democratise the loss' as we 'socialised the debt' in 2008, then we are moving forward. What happened from 2008-2011 was an attempt to keep things going and deny the problems laid bare by the crisis with money printing, chiefly in China and the US. In Europe, we indirectly did the same thing by expanding the fiscal imbalances in order to prop up a banking system full of liabilities and non-tradable assets.

At no point have we come closer to "moving on", where we stop dealing with past mistakes and move towards new measures for securing the jobs and growth needed for getting ourselves out of this debt crisis. Only through activating the 'lost generation' of youth across Europe will we have the dynamic societies enabled to implement lasting structural changes.

We need Crisis 2.0 to facilitate these changes – when Chancellor Kohl in 1998 was asked by German reporters how he would convince the Euro-sceptic German voters to embrace the Euro – he took a long pause, clearly thinking and then responded: 'Die Realiteten': reality.

The reality is that we need to break down the walls that are impeding our progress, whether these are constitutional or otherwise. But before we reach that moment of realization and take the next leap,  I think there is an increased risk of seeing one more ugly risk off scenario  - one that actually helps to align the currently too-complacent political calendar and potential solutions with the market calendar. Maximum Intervention is the name of the game at present, but the solution is Crisis 2.0 – getting these two to meet is what the next 90 days is about.

--
Steen Jakobsen
New work e-mail: sj@saxobank.com (please use if possible)

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Steen's Macro Brief: The week that defines all weeks to come

Well, this week-end we had another exercise of extend-and-pretend with absolutely no new solutions on the table:

 

-          Germany rejects using ECB to life EFSF:  Germany rejects using ECB to life EFSF

-          Greece holds emergency meeting and the rhetoric gets tougher: Greece

-          Obama to propose “Buffet tax” : Buffet tax

 

And a little known fact: The 22. September is the day recognized by the legendary trader W.D. Gann as the most likely to reverse than any other day of the year. Today is the 19^th J  (Click on 22 September for link to article)

 

Later today I will most likely initiate a net short from net long in the Strategy Advice – the point of no return is here – Greece will escalate still with the a last minute rescue the most likely, but between now and the installment paid out in October we have major risk.

 

Looking forward to the FOMC Tuesday and Wednesday one needs to realize that there is big expectations – looking at a chart it is clear that the ‘expected’ new measures has had an impact:

 

          Source: Seekingalpha by Eric Parnell

 

The expected announcement will include: Operation Twist, something we have talked about since May, where you extend the maturity of FOMC holdings by selling more in the short-end and buying more in the long-end – The most likely sector (buying) being 10-30 years. This is a monetary experiment repeated from the 1960s where it by the way led to the “great inflation” of the 1970s – but Bernanke has already said in early academic papers that the reason for it failing last time was: too small in size and with no pre-announced target for interest rates. The usual approach from Fed and the Americans – if it does not work, it’s because it’s not big enough! J

 

The market is prone to underestimate the willingness of the Euro-zone to make things work – this week will tell if FOMC comes to rescue or we start the hard part of Crisis 2.0 – the deconstruction of capital needed to create the political will to do proper economic- and political changes.

 

Safe travels,

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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Steen's Macro brief: All on RED........INTERNAL NOTE

Dear All,

 

All eyes on Wroclaw, Poland today as the world policy makers tries one-more-time to save the world by making promises which will start sometime before the end of this decade -  it should be seen for what it is: A manipulation and a circling of the wagons in good old Western movie style:

 

 

The EU program can be found here: http://pl2011.eu/en/content/informal-meeting-finance-ministers-and-central-bank-governors-wroclaw

 

The comments are already coming out of the pre-meeting interesting to note that:

 

Former Prime Minister Brown says: 'European grossly under-capitalized' and 10 minutes before Belgium Finance Minister Reynders says: 'European banks don't have a problem with solvency" ….also note how Finland, again, does not play by book: "Urpilainen sees no collateral solution at Wroclaw meeting"..

 

All in all the hopes are high for an easy solution – market will get: "extend-and-pretend" as per usual, the market reaction Monday will be interesting – if, that's if the EU can get something done it would be positive, but it needs to be solid, big and take care of underfunded banks and access to capital markets for countries which are presently closed out: Italy, Greece, Ireland, Portugal – that number is north of 2.000 mio. EUR and not the small amount of "leverage suggested by Geithner and embraced by weak European countries.

 

I am still long on the "Maximum Intervention' macro theme, but…. This afternoon I will update the strategy note, and it's likely to force a move to neutral, but more on this later.

 

Finally,

 

Quite a few people ask me to explain the complex potential solutions/path from here in EU debt crisis. It's relative simple in my view considering we know the tendency of politicians and policy makers to opt for the easiest solution, so here comes the Steen Jakobsen guide to EU debt crisis (it's incomplete but 90 per cent explanation better than zero!)

 

There are three major ways of dealing with this crisis:

 

1.       Japanisation – do like Japan – accept deflation, slow gradual restructuring, massive fiscal deficits, negative real-rates, housing prices lower than 30 years ago and a stock market valuation at less than 50 per cent of its peak in 1987 – the slow death.

2.      The Crisis 2.0 – my favourite scenario – 'the forest fire'  - deleveraging, political- and economic changes created by necessity and need for moving forward. A deep one-to-three year recession followed by better debt to equity, more realistic future expectations, a public sector under control.

3.      Monetization – the extend-and-pretend forever solution, buying time – more of the same, patch work solutions, slowly forcing Europe towards fiscal consolidation not changing the Maastricht but the ECB charter to allow it to be lender-of-last-resort .This is what I call the final phase of 'Maximum Intervention' – bigger and bigger direct support on liquidity(as seen today) and no impact on the solvency. Solving debt with debt the main nature of this exercise.

 

Any solution 'permanent' in nature is in violation of German Constitutional Court – meaning pretty much Euro-bonds is out. (As Germany would have to be lender-of-last-resort when everyone else goes bankrupt)……Any solution temporary could fly vis-à-vis the Constitutional Court but ONLY if approved by full parliament.

 

Everything else coming to the table is talk, talk and more talk. American "experts" fail to understand the above and …. Most importantly as you have heard me say 1000x of times: 'Never underestimate the political will of politicians to make this work/survive' – Never!

 

Prodi even predicted this early on saying a Euro-crisis would force into place the fiscal consolidation: "When the euro was born everyone knew that sooner or later a crisis would occur. It was inevitable that, for a such a bold and unprecedented project, in some countries (even the most virtuous ones), mistakes would be made and unforeseeable events occur. It was also clear that the stability and growth pact was – as I have said before – "stupid", not because it was mistaken in its objectives, but because it was founded on purely mathematical parameters without any discretionary powers or political instruments to enforce it. Germany and France were the first countries to violate it, although not in a destabilising way: their finance ministers decided to ignore the objections of the European Commission (possibly because they were "too big to fail").

Due to political difficulties it was not possible to protect the euro. I was warning years ago that, through no one's fault in particular, extraordinary events could occur that would force joint co-ordination of fiscal policies. Then the Greek crisis arrived – serious in terms of the sins that caused it but easily solvable, considering the modest size of the country's economy"

Safe travels,

Steen

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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FW: Trading loss in UBS - a first warning like in 2000 and 2008?

 

INTERNAL USE ONLY – NOT FOR PUBLICATION

 

1992: Nick Leeson:  Barings… è Ending Barings life…. http://en.wikipedia.org/wiki/Nick_Leeson

 

2008 : (Januar) -  Soc .Gen. Jerome Kerviel 4.9 billion loss    è Makes tanks later 2008..   link: http://en.wikipedia.org/wiki/January_2008_Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale_trading_loss_incident

 

September 2011: UBS Loss/Fraud 2 billion è http://www.20min.ch/finance/news/story/30822450

 

Think this is random? Hardly! Next is some HF – high profiled going under (I could easily imagine one specific one in the media often) and we have an almost repeat of 2000, 2007/08 …..

 

Let me stress for good orders sake: I remain focused on ‘Maximum Intervention’ as main theme for Q4 – which means more extend-and-pretend and probably slight risk-on environment despite the odds.

 

Alan P send me this pic:

 

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10th anniversary of 9/11: Let's look forward as well as back | TradingFloor.com

Dear All,

I wrote this piece the day before 9/11 10 th anniverisary. It's a 100.000 feet perspective on how we moved towards Entitlement societies and got scared.

I hope the piece has the right message and tone on this day.

http://www.tradingfloor.com/blogs/steens-chronicle/10th-anniversary-of-911-lets-look-forward-as-well-as-back-1261429725

Sincerely,

Steen Jakobsen
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Steen's Chronicle: Why SNB floor could be important

This chart shows why SNB new floor could be of importance. I am just back from yet another trip to Zürich and I found people EXTREMELY bullish on CHF – there is talk of corporate wanting to sell etc etc but..

 

-          SNB has ‘unlimited ability to print money’

-          SNB sees deflation – hence need to monetize

-          Bias way too strong for strong CHF  - Bigger than 95 per cent conviction

-          SNB is clearly committed and feels there is no alternative plus and this is important – they have 100 per cent political backing

 

 

 

Source: Bloomberg LLP and Saxo Bank Strategy and Research

 

 

I have two strong view for 12 month plus:

 

1.       A much stronger US Dollar  è DXY in 125 (now 75.00)

2.       A much higher EUR vs CHF è 1.40/1.5000

 

 

Scenario for much stronger US dollar:

 

Based on  too low consensus on US growth, better than ‘announced’ jobs + consumer spending data, and finally US will become competitive inside next two years on unit labor costs + fat tail risk of HIA 2 being introduce- and the all of G-20 moving to QE Extreme. (see below)

 

Scenario for much stronger EUR/CHF

 

SNB have no alternative, Switzerland going into Japanisation without “extreme measures” – major change in ‘expectation curve’ when we see 1.3000 plus people will have to cover massive EUR calls selling and finally inside next 12 month we have “resolution” on EU debt crisis.

 

 

There are really only three ways to deal with this crisis:

 

1.       Accept Crisis 2.0 – deleveraging and pain, but restructure – unlikely accepted by policy makers but likely from market position.

2.       Accept Japanisation – deflation, slow-growth and no structural changes.

3.       Go to QE Extreme – betting the ‘weather’ will improve by spending money making very gradual structural changes. The Keynesian economists/advisors again getting upper hand as they now can claim (wrongly!) that the reason we did not get back on track is because we did too little, too late – similar to Japan. This is the route G-20 will move to. I see all  major nations in QE Extreme in by half-year in 2012.

 

Greece going bankrupt is not a fat fat-tail event(Black Swan) it’s the most expected outcome ever!

 

IF – Greece leaves it will lead to major RISK-ON scenario as Europe will have regained initiative, so if Euro-zone’s next development is a break-up from the weak (Greece) then it’s good for risk – if it’s a break-out from the strong (Finland or Germany) it’s Crisis 2.0 extreme. Chances? 50/50

 

Off to Spain and the Vuelta and some facts finding,

 

Nice week-end

 

Steen

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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Chicago Fed Evans - CNBC - Clearly speaking Bernanke's QE/Asset purchase case..and making "academic argument on how debt is the new excuse)

 

KEY POINT: Evans creates “connection” to why debt is the new excuse for “more” rather than “less” in action…….

 

 

Reference: Debt levels = slower growth … studies by Rogoff and recent paper presented in Jackson Hole called:  The real effects of debt  (Now the academic policy context!!!!!)

 

Below is my “short-notes” on the paper from yday:

==================================================================================================================================

 

Gr8 paper @ jackson hole!

The real effects of debt by:

Stephen Cecchetti, m s mohanty and fabrizio zampolli

Findings:

80-100 pct debt to gdp public sector harmful....

90 pc in corp debt to gdp

85 pc for household debt

 

Touches on demographics gravity on growth

Ratio of debt to gdp in advanced countries risen from 165 pc in 1980 to 310 pc today

Nice discussion how debt is deemed 'intricsic and not of value' to economic models (one debtor - one creditor)

 

Why has debt risen?

1 access to credit

2 the great moderation

3 lower real rates

4 tax incentives on debt

 

Then finally some gr8 data on pp 23-25 on countries split by

 

Household, corp and public sector debt

 

Whole document only 30 ish pages and easily read.

 

Steen

 

 

 

 

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Bernanke is playing poker and doing it well for now - Analysis of Bernanke speech at Jackson Hole.

This morning I wrote a piece called: Less QE and more radio silence please Mr. Bernanke and it seems the Chairman did listen – I wish! – and just to disclaim upfront:  I was in the camp who thought Ben Bernanke would move to full QE right away, but facts is fact and this is my take:

·         From tactical point of view (as in relative to what he may need to do later) this is good news. He is stating his concern, he is not in panic (at least publically), and he talks about having more tools if needed. This means: I will do something if market drops – I think his level is 1050/1000 then he will be back in force stimulating

·         He gains some credibility by focusing on the US debt level and that it’s solution is fiscal plans. He is using classic economy theory that when in liquidity/debt trap the only real way to gain growth is through fiscal stimulus such as tax breaks, jobs incentives and other forms of reallocation of investments.

·         He also directly moves “the ball” over to the US Congress and their need to react to the debt situation. This is good for markets and probably the best news of this speech – it plays to the political theory that the best growth conditions are created through the inability of the political establishment to conduct any form of policy. Think about President Clinton – he came in with major political program but ended up doing: Nothing – and then as a byproduct came growth, fiscal SURPLUS and earnings. This is the good news.

·         The “negative news” is that most people had looked for specific targeted help to the mortgage sector through the FED buying more mortgage bonds. This would have helped the banks under pressure such as Bank of America and others by taking risk  of their books – this is now delayed at least temporarily.

The bar was set low for this speech but Bernanke told the market he is sitting still for now, and that fiscal policy needs to play a greater role. This is no different from the ECB which also feels European fiscal policy needs to play greater role if debt crisis shall be resolved. This is a small step for mankind – as we did not get more : Extend-and-pretend for now.

From market perspective I stick to my theory of a small up-move in risk before final 5^th leg down. Being long here of course is a risk – and I have with the help of Mr. Mads Koefoed constructed this “likely” scenario of S&P over the next three months to not be totally rudderless:

Source: Bloomberg LLP and Saxo Bank

This chart uses the recent low in the market in early August and then projects the future moves in S&P by using a 2008 analogy – this leads to the chart above indicating that we will move up into late September and then we will start towards new low in end December/Early January.

This is of course not a precise science, but only a reference tool.

Finally,

We are presently working on Q4 forecasts and I have two major changes:

1.       I will adjust our GDP forecast for the US up relative to consensus based on our leading indicators which shows massive improvement in consumer spending  (some of it due to much lower gasoline prices). This also play to my number one rule of economic projections – namely: Mean-reversion. We were negative on US growth all year and was right – now we are moving to opposite side- being more positive than the consensus (which is extremely) low.

2.       We will start focusing on how the US Dollar may stand in front of a major strength period which will be based on their increase in competitiveness.

Steen's Chronicle

Less QE and more radio silence please Mr. Bernanke

26 August 2011

When talking about the impact from Quantitative Easing (QE) one has to realise that most academic studies show that the biggest “impact” from QE on markets comes from the actual announcement of it rather than the execution of it. An analysis of the two prior QE introductions point to a 50 to 100 basis point reduction on bond yields and subsequent inflation of equities via “a feel good” factor – the so-called wealth effect.
But realistically, what has been the net impact of QE1 and QE2? Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market's rise from the floor at 666.00 in March 2009. But now there's talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn't it? Or what about August 2010? – Yes!  It is almost a 100 per cent analogy to last year. It’s actually like watching the movie Groundhog Day.

The impact from another round of QE on the wider capital markets this time around is likely to be more limited than following  previous announcements.  At best I foresee two to eight weeks of relief risk-on trading, but with the market no longer willing to remain idle while policy makers buy even more time. Thus the positive tone could change sooner rather than later.  Putting numbers on the upside potential on the stock market it is important to note that the start of QE1 created a 78 percent rally in stocks, while QE2 saw a 29 percent rally, so the impact is clearly smaller from one QE to another. The most likely scenario from here on would be an upwards move to the tune of 7-15 percent (Target: 1250-1350 in S&P cash.)
QE3 could also signal the final leg of a weak USD. I anticipate the U.S. as being two or three years away from being fully competitive again as a production hub, competing with Asia. With a real unemployment rate of 17 percent and the US Dollar at historic lows the U.S.  seems to have come full circle in terms of unit labour costs meaning it can soon compete more efficiently in the global marketplace. I believe that post the next presidential election we will see labour market policies which are very beneficial to production in the U.S.  This is also a theme which Boston Consulting Group has touched on in its May report called: “Made in the USA, Again .” Due to this QE3 could present an opportunity to scale into long USD, after the grace period. The US Dollar will first weaken and (then ultimately strengthen). This in itself would be a sign of the economic world healing itself.
Looking at how precious metals will react to a new QE, the answer is simple. I think we will see USD 3,000 if not USD 4,000 for gold, and other metals should follow suit. That said, as with the USD, if this is the “end game” then the spike will be followed by risk aversion which could overall curtail the highs. At all times one has to realise this is close to the end of the trend, and for every USD 100 gold rises, the risk increases disproportionately as there is more and more speculative hangover involved.
 
There will be monetary stimulus – the question is in what form and shape. The U.S. is fast approaching a zero growth environment. Going into actual recession for more than one or two quarters is statistically very difficult for the U.S. as its population is relatively young, innovative and mobile. If we don’t get QE3 we will be faced with some version of Operation Twist in the form of support for the bond market’s longer dated maturities. This should be directed specifically to the segments which are relevant for housing and long-term funding. Effectively the Fed would then buy bonds in the 10 to 30 year sector of the yield curve with a pre-announced target rate below a certain number like 1.50 percent (currently it is trading at 2.25 percent). To finance this, the Fed would turn around and simultaneously sell shorter maturity T-bills making the exercise relatively balance neutral.

The real question however is:  is there anything the Fed can do to stimulate growth beyond keeping rates lower for longer? The answer is probably a resounding “No!” The Fed’s impact on the market is limited to psychology and monetary easing. When looking for growth an old economic rule states that when in a debt trap, only fiscal policies work, which means that when in a debt trap you need to increase the stimulus through tax cuts, public sector jobs and the like. (Note: This is not my medicine, but the Keynesian standard approach to it.)
Pre-election fiscal policy measures are in the hands of Congress with huge political opposition, but post election the story will be very different.
There is another political theory stating that the best environment to create growth in is one in which politicians have no power to pass legislation (similar to the U.S. situation for now until the U.S. elections). Think about Clinton: he had a major “programme” coming in as President, yet failed to get anything whatsoever done in his eight years in the White House which then led to the biggest growth period in U.S. history. What does this tell us? Total radio silence works as the micro-economy - investors, consumers and companies - adjust their behaviour and consumption to the new reality and then start moving forward. The last thing that we need is “political noise” and promises of better days ahead with nothing to back them up.

Steen's Chronicle: Fade the fade on QE - Tactical Long in stocks from here and new lows in European co-ordination

Fade-the-fade-from-FED-is-the-game

 

The first news that caught my attention this morning(and made me laugh so much I almost cried!)  was a  “leaked” piece by Fed via the “Senior Economic Reporter” Steve Liesman of the CNBC – Apparently he is led to – and then needing to share with us – believe we should not expect much from the Fed Chairman this coming Friday at Jackson Hole. Nice try Fed ! Managing expectations and through the PR agent for Buffet/Fed/Treasury and anyone who is playing the “political” game of “spinning” is a nice try – I will however “fade the fade” so to speak.

 

Think about it: Chairman Bernanke has used 3.000 billion US Dollars to create what? Nothing? Unemployment is still above 9.0 per cent, Housing market is still in a slump, and now the only success going for the Fed, the stock market, is falling apart with talks of interbank funding crisis, unrealized loss’ – smells like 2008 ? Certainly does. Smells like August 2010? – Yes! It is an almost 100 per cent analogy to last year.

 

Now, you are FED Chairman Bernanke – what will you do? Raise your hand and say: Sorry! I was wrong – dealing with debt through issuing more debt was wrong – I should have known better, but I was the world class expert on Japan, before I got this, my first real, job – I am extremely sorry!

 

Not likely to happen is it? No rather, when looking at what you can expect from Bernanke you should look at his academic work, at his policy response when faced with low growth, falling inflation expectations, a banking sector under pressure, and alarming unemployment numbers:  The response has always been the same: Print more money.

 

 

See, often the argument Bernanke has with Japan and the newly coined economic model called Japanisation is that they did too little and too unannounced. Meaning: QE3 is coming – whether he has the political establishment and full FOMC board behind him or not, he will move to some shape or form of QE – it’s in his genes so to speak – he may delay the “official” start and announcement of it until the S&P tanks to below 1.000, but that would happen on Friday if he is seen “failing” to give the market what it needs. No certainly, fade-the-fade-from-fed is the game.

 

I should note in the survey’s I have seen on the expected outcome from Jackson Hole, the QE option has little support anyhow – people are mainly expecting a continuation of last FOMC meeting – indicating lower rates for longer, a negative assessment of the outlook for the US economy and some underlining on their willingness to do everything needed to re-start the US economy.

 

The second highest probability in the survey is Operation Twist – and this paper called: “Operation Twist and the effect of Large-Scale Asset Purchases” from Federal Reserve Bank of San Francisco, written by Titan Alon and Eric Swanson, from April 25,2011 is of extreme essence to understand Fed and its thinking. The paper links Operation Twist of the Kennedy Administration with the QE2.

 

I did small Saxo Video on the Jackson Hole yesterday:

 

 

Link to video:  Jackson Hole precursor.

 

Strategy Update August 2011

 

Now in terms of the market and allocation it has been a while since my latest update – to recap recent “signals” – I went short in May with the note: No Silver Bullets and went to neutral in July and has stayed there since. I am now willing to go outright long again (with tight mental stop/loss below 1080 in S&P cash) based on reasons which are more tactical short-to-medium term based than an outright believe the market is cheap. It would be a 4^th wave correction – after the steep 3^rd wave down and ahead of the final 5^th wave – which I think will be the end Dirigisme (or managed economies).

 

Reason # 1: Yield is getting to low end of long-term trend – indicating some “turn around” in risk-off

 

Source: Stockcharts.com

 

Reason # 2: Market is over-sold and in-flow has started (and Bernanke can only surprise positively)

 

Source: Stockcharts.com

 

 

Reason # 3: The perceived “funding crisis” is overdone for now at least….. USD into EUR basis swap

 

Source: Bloomberg LLP

 

A Morgan Stanley Research paper pointed out that the largest European banks are >90 per cent through their funding targets for 2011 – which does not mean there could not be renewed pressure, but for now they can “live” through 2011 and the real issues is in Q1-2012. Furthermore it should be noted the LIBOR & EURIBOR is fixing higher every single day – small increments, yet higher.

 

 

Reason # 4: The rest of the arguments…..

 

-          Dividend yield above 10 year yield in the US

-          The always bullish analyst’ are all turning bearish – actually recommending selling stocks

-          Lack of understanding from Anglo-Saxons on the true dilemma in Europe. (The political will to do whatever needed in the last minute modus operandi of European history)

-          Relatively higher consumer spending in my favorite leading indicator: http://www.consumerindexes.com/

-          Growth forecast now at 1.7% for 2011 among the pundits(Ivory Tower economists) – down from bigger than 3% at the start of the year and 2.5% only in July – there is major mean-reversion in economic projections, now the market is probably too low relative to where we end up.

-          Limited risk:  You are wrong if S&P cash trades two days below 1080/1090 on a closing basis.

 

 

New low in EU commitments

 

It’s hard not to laugh, again, when reading the recent own goals produced by every single player in the EU debt crisis, but there are starting signs of a  Mexican Stand-off and this week was certainly a new low in commitments and solidarity in Europe.

 

This week I read three excellent piece on the EU which gave me plenty to think about. I will leave the link for you to read – in particular the paper from Daniel Gros and Thomas Mayer should be a must read research as they are outlining what I increasingly think will be the compromise in this standoff:

 

 

-          CEPS Commentary - August 2011: What to do when the euro crisis reaches the core, Daniel Gros, Thomas Mayers – download link:  Euro crisis reaches the core. They come up with solution which seems in line with Maastricht and which create European Monetary Fund with ECB as lender-of-last-resort. Extremely interesting and insightful.

 

-          Spiegel Online: Dutch Finance Minister on the debt crisis: “We are all threatened by contagion” – key paragraphs: “…Should the Greek government not be in a position to fulfill the terms of the bail-out program, then the Netherlands will refuse to provide any further aid”. Talking about the Finland Clause (Finland getting collateral reference): “As far as we are concerned, no deal has been made” – then he – after this interview move to state: “The only thing that helps is for everyone involved to practice verbal discipline”.

 

-          Deutsche Bundesbank, Monthly Report, August 2011:  The comment in this report clearly shows Bundesbank’s reservation for what’s going on: “With the sovereign debt crisis spreading to other euro-area member states, the Governing Council also reactivated its Securities Markets Programme (SMP). This would, it argued, help restore better monetary policy transmission” – and the whole final paragraph is about how we may need to go a “worse” place to get to a  better place is again must read:

 

 

 

I know – too much reading in this report, but all of it important in my view.

 

Keep the powder dry,

 

Steen

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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Steen's Macro Brief: Germany's and the EU-bonds, S&P predicts Greek bankruptcy this year, The Finland Clause, and dividend yield higher than 10 year

Dear All,

 

Plenty to deal with – my quick thoughts this morning. Enjoy. Steen

 

Source: FT.com

 

-          Germany continues to play hard-ball on Euro-bonds as they seek Debt-breaks Constitutionalised in the EU.

-          Greece looking at minus 5 per cent GDP this year – this while the Troika is in Athens to asses “progress”meanwhile Finland has denied further payment before they get collateral – this could stall the second payment AND is now called the Finland-clause, which both Austria and Holland is likely to join. This is major “break-down” in EU commitment and the combined Germany and Finland clause tells us its only a matter of time before the funding for banks dries up.

-          Italian banks borrowed EUR 80 bln.  Last week – 1^st time they took money in a long time…

-          Spanish and French banks CDS now wider than during the 2008 crisis

 

Source: Bloomberg LLP & Saxo Bank

 

-          The increased tension in interbank can be seen by increased deposits under ECB’s “deposit facility” where 90 bln. EUR was parked last Thursday. (This make no sense unless you DON’T want to lend out to other banks!)

-          The talk over the week-end was about: Japanisation – and the fact that US yields (10 year) broke 2 per. When Japanese yields broke below 2 per cent in 1996, they have never risen above it for any sustained period since! – i.e: decades of deflation, no-growth, no-productivity and a move from equity to bond risk in portfolio’s. The Nikkei 225 is still 75 per cent below its peak from 1989

-          Market is extremely oversold going into Bernanke-week or Jackson Hole week: 42 bln. US dollars was pulled from equity funds so far this month, biggest since February 2009 (low in S&P was March 2009 at 666) – 110 bln. Total has left equity since May and the announcement of exit from QE. On the Jackson Hole we need to take into account the way Bernanke things. Do not forget that when he talks about Japan’s lost decades he thinks it was due to inactivity, too little too late in terms of printing/asset buying. With growth forecasts now at one per cent of below for 2011 H2 it is absolutely clear to me that he will force the hands of the FOMC. He may not get full support, but he firmly believes in QE and OT(Operation Twist). His legacy is on the line, and changing course would be detrimental to his “academic image” – hence there is increased odds of QE3 – and not OT in my opinion. We constantly fail to understand how bureaucrats and politicians will do anything, and I mean anything to keep the illusion going. The lower S&P goes this week the more likely is full QE3 – and OT. Maybe even both.

-          It’s worth noting one key change last week: Dividend yield on S&P500 is now higher than 10 year US bonds. I will not make call to go long stocks yet, but clearly I would rather one basket of S&P500 stocks than a 10 year US bond for the next 10 years. (Having said that the analogy to Japan is tempting where 10 year now yields 0.99 per cent)

 

US 10 year yield 2.08 Per cent (Source: Bloomberg LLP)

S&P500 Dividend yield (Source: Bloomberg LLP)

Strategy:

 

We are entering extreme oversold condition, the EU politicians are at a new low in verbal non-sense and there is growing  tension in funding markets. This calls for desperate measures and actions and this week could set up H2 of this year. We called Q3 Maximum Uncertainty in our Q3 outlook – for now my Q4 title will be: Maximum Intervention (subtitle: end of the managed economy (dirigisme)

 

Keep the powder dry: CHF, US and German Yields are out of line with reality. Fear is the norm, and averaging into equity exposure should be the name of the game from here.

 

Steen Jakobsen

 

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

This email may contain confidential and/or privileged information.
If you are not the intended recipient (or have received this email
by mistake), please notify the sender immediately and destroy this
email. Any unauthorised copying, disclosure or distribution of the
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