Ole Hansen
As the Chinese stock market bubble bursts, Saxo's Ole Hansen looks at the dramatic effect this is having on world commodities and growth.
Article / 09 November 2012 at 17:14 GMT

Friday Macro Update

Chief Economist & CIO / Saxo Bank

I'm back on the ground in Denmark after a great visit to South Africa - I will produce a full macro report over the week-end but a couple of thoughts:

  1. A lot of people starting to compare 2012 with 1987. Yes, it's scary.
  2. Other people again are comparing the fiscal cliff to Roosevelt's actions in 1937 where the stock market tanked 50%
  3. Few people seem to realise that part of the "fiscal cliff" involves higher taxes on financial transactions meaning that it is prudent to take profits now to pay capital gains at the 2012 rate rather than the probably higher 2013 rate.
  4. Greece is doomed. A headline today read: Soros to invest substantial amount in Greece He did the same in Russia in 1998 - just before they defaulted.
  5. All EU solutions are on the table: a banking union - but the new regulations probably means treaty changes - we are at the end of line...
  6. We have reduced our short-side trades over the last 12 hours of trading - changing net short in CAC40 & S&P500 to a 1300 DEC S&P Put. We've also taken profit on short EURUSD, Long EURPLN, and Long USDZAR.

We see downside potential to 1350.00 plus/minus 10 points in S&P Futures:


And every bull market has a "leadership stock" - this bull cycle it has been Apple and it does not look well....



We firmly believe there are a number of macro factors that are changing the landscape:

  1. We are reaching the "saturation point" for QE, Macro policy nonsense, politics, low interest rates, intervention in markets and the concept of extend-and-pretend....
  2. The laws of the market have been abandoned and replaced with "asset manipulation". We can discuss the impact of QE until we're blue in the face, but everyone will need to agree that it distorts relative prices: It makes money cheaper and everything else more expensive. It also suppresses volatility as there are two levels of price equilibrium: the “real market price” where the market clears, and the manipulated price that is constantly trying to be forced by policy makers. So the market swings like a pendulum from "greed" = the policy equilibrium price to "fear", which is the real market price, but then brings about new desperate attempts by policy makers to force a new pendulum swing back the other way. In between the pendulum swings, the market “conserves energy” and creates artificial volatility expectations/forward curves, which the market then misread as being indication of no trouble on the horizon and a green light to put on more risk. Meanwhile, back in Reality-Ville, systemic risk is massive and ever-expanding.
  3. We have paradigm shift in US energy costs - which will be a positive input to economic growth and reshoring of jobs to the US and Europe.
  4. QE stopped having an impact on the economy two years ago - now we have reached the saturation point of QE on assets - sure the Fed will print another 1 trillion, but the trend and talk even among policy makers (read: Bank of England) is that its impact is now limited after three year of zero interest rates.
  5. A crisis is good news - it creates the foundation for a mandate for change. A real crisis will mean a strong V-shaped recovery
  6. Social tension is rising - everywhere.
  7. EU does not work - either they go to mini-max: Fiscal compact and the already supervision or they risk a treaty change which will take years and tear Europe apart. Greece will leave the EMU inside the next six months, but in a “managed” fashion.
  8. Merkel's attempt at re-election means she needs to be more EU-skeptical to create opposition for the all- in SPD.
  9. A new one: Africa is the future - in 2013 investing in Africa post Q1 turmoil could be one of the safest bets around as foreign direct investment is increasing (China has committed in excess of USD 20 billion over three years) The GDP's across much of Africa are so small that "any" positive change will create exponential growth - the GDP of South Africa is USD 400 billion. That’s slightly bigger than Denmark’s USD 330 billion, but with 45 million more people and vastly greater resources.


We will have a volatile end to the year with people looking to take profit for tax reasons in the US, combined with, at best, a compromise on the fiscal cliff likely to be a drag on growth by 1.5% of GDP (could mean about -150 S&P500 points).

The manipulation will continue for the rest of 2012, but if we are right about the "saturation point" above then we are in for a quick turnaround once the realization is made, which will mean we’ll have to look to be nimble in resetting our portfolio for the upside rather than downside. The micro-economy is better than ever and the macro policies are bloated to an extent that makes them difficult to continue.

Happy weekend.


goldfinger goldfinger
Why have you closed your S&P if you see further downside? Especially as you have taken out a put on the same index. Also can't see why you have closed Euro$ short if your scenario is right? Surely, we should all be $ long in order to be risk averse..
benlouro benlouro
perfect view/insight. thanks again Steen
Steen Jakobsen Steen Jakobsen
When getting closer to a support level it is good practice to substitute cash skort with optionsl short. Keeping net short but with higher leverage should market fall below support levels. The EURUSD is short.term, i will resell on bounce. Market is mean reverting as seen by first chart hence there is, to me, good sense in trading range. Steen
Rcernava Rcernava
Steen I agree. I think we're going to see waves of profit taking in the markets. The TAX hikes are very real in my mind, but many believe there will be a deal brokered, I know the mind of Obama and he is clearly stating it is his mandate to cause capital taxes to revert to a higher level. As this war rages on I look for possible stone walling to happen and panic to hit markets as full blown fiscal cliff becomes possible because of break down in policy makers.


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