Steen Jakobsen is no crystal gazer, but the chief economist and CIO of Saxo Bank every year comes up with a selection of “outrageous” predictions for the New Year. Though not the official forecast of the Danish bank, in the 2016 report, Jakobsen mentions: “The irony in this year’s batch of outrageous predictions is that some of them are “outrageous” merely because they run counter to overwhelming market consensus. In fact, many would not look particularly outrageous at all in more “normal” times — if there even is such a thing!” A strong euro, oil back at $100 a barrel and Russian rouble bouncing back 20% are among the 10 predictions for the year. Summing up his predictions, Jakobsen mentions rather cheekily: “...while we can hardly hope to be right on more than one or two predictions each year, we’d like to think that these “outrageous” calls have at the very least a greater probability of coming true than the near-constantly wrong consensus.”
Following are edited excerpts from the report:
1. A strong euro
Many years ago back in 1989, I wrote one of my first research reports and I made the call that dollar- deutsche mark should trade all the way down to 1.23. It was an outrageous call and colleagues from back then still remind me when we meet (the USD to the DM was trading in the high 1.60s at the time). Now it’s again time to call for 1.23 but this time in EUR/USD. In four of the past five Fed rate hike cycles, the dollar has peaked around the first hike indicating that the direction of the US currency is inversely correlated to the Fed rate cycle.
2. Russia’s rouble rises 20%
In 2016, oil surges again as demand growth in the US and especially China outstrip overly pessimistic estimates. Meanwhile, the Fed allows the economy to run a little bit hot as the strong USD sees the Fed raising rates at, perhaps, an inappropriately slow pace. This is a bonanza for EMs and their currencies, in particular Russia, as commodity bears are left out in the cold in 2016.
3. Unicorns back down to earth
2016 will smell a little like 2000 in Silicon Valley with more startups [valued above $1 billion each] delaying monetisation and tangible business models in exchange for adding users and trying to achieve critical mass. Remember the dotcom gospel of clicks and page views instead of focusing on revenue and profits?
4. Olympics turbo-charge Brazil
A [EM] poster child, may be, but Brazil is hardly alone in struggling to come to terms with the end of the commodity super-cycle and the Fed hike. Against this disturbing backdrop we look for the host of the 2016 Olympics to lead EM out of the current malaise with equities outperforming. Leading indicators are stabilising in China and climbing in India, and recent policy easing furthermore helps the outlook for the former.
5. Democrats retain presidency
The Republican Party goes from strength to dramatic weakness as the rifts from its civil war on its future direction play out over the next four years. This leads to a landslide victory for the Democratic Party as the Democrats execute a successful get-out the-vote campaign. Frustrated by the political stalemate and weak job prospects of the past eight years, the younger, more diverse, more liberal, overeducated and underemployed Millennials vote in droves in favour of the Democrats.
6. Brief return to $100/barrel
The long awaited sign of an accelerated slowdown in non-Opec production finally begins to flicker. Suitably buoyed, Opec catches the market on the hop with a downward adjustment in output. That move breaks the downward price spiral and price mounts a quick recovery with investors scrambling to re-enter the market to the long side.
7. Silver rallies 33%
Mining companies respond to falling prices by announcing production cutbacks of key metals such as copper and zinc. Silver is often mined as a by-product from the extraction of other metals. While production of silver from these reductions slows economic activity and demand in key markets such as China, both Europe and the US strengthen, helping to boost confidence in silver.
8. Global corporate bond meltdown
Late in 2016, the Fed will come to believe that there is no way out, and growing evidence of overheating markets - affecting labour, housing, equities and bonds - will propel a series of aggressive rate hikes. This action triggers huge selloffs in all major bond markets as global bond yields start to rise, quickly magnifying the risk premium investors demand on riskier assets, when the risk-free rate is not zero anymore. What happens next is so unusual and scary that it’s eerily reminiscent of the bond market apocalypse after the Lehman collapse.
9. El Niño sparks inflation surge
Next year's El Niño will be the strongest on record and will cause moisture deficits in many areas of south-east Asia and droughts in Australia. Global agricultural production will be affected negatively. Lower yields across agricultural commodities will curb supply at a time when demand is still increasing on the back of global economic expansion. The outcome will be a 40% surge in the Bloomberg Agriculture Spot Index, adding some much-needed inflationary pressure.
10. Inequality has last laugh on luxury
Luxury is the reflection of an unequal society. Faced with rising inequality and unemployment of over 10%, Europe is considering the introduction of a basic universal income to ensure that all citizens, regardless of whether they work, can afford to meet their basic needs. In a more egalitarian society where other values are promoted, demand for luxury goods decrease sharply.