Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 24 November 2016 at 14:00 GMT

Jakobsen: 'The old names are going down in flames' — #SaxoStrats

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  • Saxo's Steen Jakobsen calls Clinton defeat in March, anticipates Trump policy
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  • Elites seek 'further globalisation, further centralisation of power': Jakobsen 
  • Politics, culture represent lagging indicators; economics comes first 
  • 'Change will not come because we want it, but because we need it' Jakobsen

By Michael McKenna

The thing about outrageous predictions is that sometimes they come true.

On March 29, when president-elect Donald Trump was still somewhat the comic spoiler of the Republican primary contest, Ted Cruz still very much a contender, and Hillary Clinton the overwhelming favourite for the US’ next president, Saxo Bank chief economist Steen Jakobsen went live on CNBC stating that Clinton "cannot win the US election".

Calling the Democratic candidate “the epitome of the establishment class, of the elitist order," Jakobsen added that "Trump, on the other hand, is so far away from being a politician that he represents chaos in a world of order, and this is what US voters want."

To CNBC’s audience, Jakobsen’s view was doubtlessly an eccentric and even a marginal one, but longtime followers of Saxo’s chief economist likely knew precisely what he meant.

After all, it was back in April 2015 that Jakobsen told readers that we were in an unsustainable situation of “zero growth, zero inflation and zero hope”, adding that “2015 is a lost year [and] I think that 2016 will see us leave the nothingness reality behind”.

On March 16 of this year, shortly before his CNBC appearance, Jakobsen stated that “the social contract is broken”, explaining that “the political elite needs to recognise that voters are turning away from [the current consensus] and its elitist political judgments.”

Following Trump’s shock victory, which itself occurred in the wake of the Brexit surprise, it is our view that Saxo’s chief economist was uncommonly prescient, and was willing to swim against an enormously powerful tide of international consensus in order to be so.

With this in mind, we sat down with him Tuesday to get his thoughts on what this all means, where we are going, and what he meant when he said in May that “the world has become elitist in every way”. You have mentioned elitism in several prominent pieces and venues, and emphasised last time we spoke that “the world has become elitist in every way”. What do you mean when you say “elitist”?

Steen Jakobsen: Well, there is the social context, of course, in which a very small part of society owns the huge majority of the world’s assets. This is admittedly a simplistic version, but I think in the greater socioeconomic context, elitism refers to the idea that there is only one model.

In the US, but also internationally, you see this [political order] that is based on flipping favours between minority and special interest groups. As this order consumes itself through both lobbyism and the very nature of its setup, we end up electing politicians who reflect this… we have a system that employs frontmen, front-figures, instead of relying on a broader, better-educated, more practical consensus.

So intellectually-speaking, elitism means that we have very little room for discussion about our societal consensus and whether it is working, whether it is right. Take, for example, quantitative easing and monetary policy in general… everyone told us we had no alternative, but where did that idea come from? Where was the honest conversation about that?

We can see very clearly that QE has misallocated capital to an enormous extent, creating bubbles in both bond and housing markets across the globe. So, no, I don’t think we have had any honest conversations about this…

European Central Bank
Press conferences, perhaps. Photo: iStock  

Elitism also means that there is no room for smaller voices, no room for the discontent of the average person who may not have the most profound insight into politics or economics but who nonetheless desires to take his own stance on things

So who or what is his interpreter? A political system driven by household names like Blair and Clinton, all of these voices that have offered their “Third Way” consensus, which is of course no way at all... except one that is heading directly for a brick wall.

What we are now seeing is these old names going down in flames because their model is a non-functioning programme reliant on globalisation.

It is also a model based on fear. Fear of what?

Steen Jakobsen: Fear of the unknown, I guess – it’s not really a distinct fear of anything, really. If you step back, I mean, what are you really afraid of? While we may have too much debt, we are not facing the sorts of existential threats [we have at other points in our history]. Compared to our great-grandparents, we really have nothing to complain about. It’s a fear of change.

What we also have, though, is a discontent based on our seeing no growth, a lack of education spending, and the like. But there is this fear of change… let me tell you, as an answer to “how are you?” there is probably no worse answer than “could be worse”. And yet that’s what I hear everywhere in my travels across the world, this idea that things will never change.

But things are changing! Things are changing every day, whether we want them to or not, whether we like it or not... things are changing. And a lot of these changes are very positive. I think we can both agree that the reaction to the last financial crisis in the form of low, zero, and even negative interest rates was a creation of the group – or the consensus, really – we have just identified as “elite”. What role do you see such policies as playing in the empowerment of this elite?

Steen Jakobsen: There’s a significant element of confirmation bias at work here… they talk among themselves, they meet and gather, and they confirm in their own minds that they are doing the right things with the official excuse being that there is no ability, from the political side, to perform fiscal expansion and fiscal policy needs to work hand-in-hand with monetary policy… that’s the academic explanation.

The real explanation, however, is a lack of vision and a lack of understanding of real economics. Real economics is based on incentives, is based on the micro structure, so the way for me to activate you and your capital is to create a structure in which you feel almost obliged to invest and to make decisions that move you away from saving and hoarding capital… and that’s not really happening in this environment.

Since the financial crisis, we have been in a 24/7, 365 days-a-year state of emergency, and if you give people too much of this sense of emergency, you become the boy who cried “wolf”.

We all know what happened when the actual wolf came… and in this case, the wolf will arrive in the form of debt.

And they will be numerous, lean and hungry. Photo: iStock 
From a much broader and more philosophical perspective, though I think we’ve had two major events in recent history that changed the way we see the world – and I think one more is coming.

The first such event was the fall of the Berlin Wall in 1989, when sort of turbocharged the move towards globalisation and free trade, towards openness. The second was the attacks of September 11, 2001, which shifted the focus to security, border closure, and this general sense of an “emergency status”.

I think it is this latter shift that has fed into the Brexit/Trump phenomenon seen this year, but I am reluctant to call these votes an incident of their own. In fact, I think there is another, more significant one coming in the next two years that will be even more profound in economic terms, and that’s the end of the debt cycle.

We had one debt cycle that led into the fall of the Berlin Wall in ’89, and another that led into 9/11, and these were the product of 1980s policy, the creation of men like (then-Federal Reserve chair) Alan Greenspan.

I really think we are up against [forces that transcend individual policymakers or political shifts]… it sounds esoteric, but I tend to think the universe was designed to work this way, that we need to fail.

This is the failure we are seeing now… the elitist order is overcooked, is past its sell-by date, and that’s why we see the things we do in the political spectrum.

I am also, however, pretty optimistic for 2017. We are going to see some changes… France looks very interesting, for instance, as a possible “antidote” to Brexit/Trump, but also with regard to the populist issues surrounding the upcoming Italian referendum.

It looks from my perspective as if France wants the opposite, wants a move towards a sort of Thatcherism – small government, a focus on productivity, a focus on working weeks. As I have said again and again, this is not about the specific headlines, it’s about the fact of change itself. After the last crisis, the purported role of the low, zero, and negative rate policies was to prevent a further correction. Now what we are seeing in markets is a very mixed reaction to the two great populist events of the year, Brexit and Trump. In your view, are we seeing a correction take place in culture and politics before it does so in markets?

Steen Jakobsen: No. The two political events merely reconfirm trends that were already in place. Looking at Brexit, the UK has long been deteriorating as a global economy and a global growth engine as it was entirely reliant on banking and housing – two zero-productivity sectors. The last time the UK ran a surplus on any account was 1982.

City of London
The UK contains a great many more square miles than this most storied one. Photo: iStock  

So the weakening of the pound was inevitable. Brexit just provided the catalyst. In the case of the US, the main reaction so far has been the expectation of higher interest rates, but again, that was already in place!

As I wrote on October 17, the cost of capital is everything. And if you look at this you see the cost of capital pressured higher in the short end ahead of Trump… in the real money market, we had two rate hikes already priced in despite that the fact that the Fed (at that time) was widely perceived as planning just one.

Adding to this the inflationary forces present, which in my opinion come from the wage market and Chinese export inflation.... yes, the political event brought it to the surface, but the trend was there.

Economic fundamentals precede politics. Politics, with the exception (sometimes) of equity markets, are the last area to react. Now, the elites we refer to have perhaps suffered a few defeats this year, but they’re certainly not gone. From the International Monetary Fund to the United Nations to German chancellor Angela Merkel who promised Tuesday that she will run for election on an essentially “establishment” platform, to Tony Blair saying he will re-enter politics… this consensus, or this group, remains a force. What sort of world do these people want?

Steen Jakobsen: Further globalisation, further centralising of power, and a firm belief that they can govern and rule the world from a macro perspective, which is utterly wrong.

I believe exactly the opposite. I believe in the individual agent, the individual investor, the individual student who, if you work with them and create a framework and structure that can make them productive, you have nothing to worry about. On the eve of Donald Trump’s election the Financial Times endorsed Hillary Clinton and one of the reasons it did was because it claimed she would preserve what they called the "international order" than had been in place since World War Two and that had provided the world with peace and prosperity. Now if this international order is what produced, or is synonymous with, the elites we discuss, then how much can really change?

Steen Jakobsen: First of all, let me just say I don't think newspapers should endorse candidates at all. Their role is to look at the programmes they stand for and find the problems, the “holes in the cheese”, if you will.

I find it almost disgusting to see newspapers do this, and I can tell you one thing: if a paper endorses anyone in an editorial capacity, that is one newspaper I will skip immediately.

I couldn't care less about what people think.

I think it’s up to the individual to stand up.

That’s why these same publications had such a huge disrespect for the (US) results when they came in. I’m a firm believer that the biggest day in any economy or any society is the day when you celebrate the constitution. That’s what makes us rich. 

We didn't become rich because of Donald Trump or Alan Greenspan or Hillary Clinton, we became rich because we in the world’s richest countries have constitutional rights and equal access to things and when that is under pressure, society is under pressure… and that’s exactly what is going on right now.

A lot of people are now quoting Churchill, saying that the biggest problem with democracy is revealed through a conversation with the average voter, but I think this is absolutely wrong. We have to respect their voices.

Eventually they will reach the palace. Photo: iStock  

If you think that you can disenfranchise or disengage someone because they are uneducated or because they don't know better, you’re making a grave mistake. In fact, it’s your position as a politician or as a policymaker to explain to people what you are doing and why you are doing it –that's what makes for a successful society.

Your question is in a sense upside down. We are focusing on the wrong thing. It’s not about [political trends or turnovers] – the constitutions are what made people rich. It wasn’t globalisation, it isn’t even smarter ways of doing things, it was the guarantee of equal access. A people with access to education become a better-educated people and a more productive people. That’s how you engineer growth. You have mentioned that you are essentially optimistic in the longer run. You have also indicated that some of the things that you think economies need to do in order to repair themselves are public spending, spending on education, and research, and basically avenues for individual empowerment. What is it about the present period of disruption that leads you to believe that we may be moving towards these sorts of goals or policies?

Steen Jakobsen: The main thrust of my optimism comes from the fact that we have extended globalisation beyond what it should be. In terms of globalisation, it’s really about expanding your universe in terms of people you can sell to. What is often forgotten are the questions of how you sell to these people, at what cost, and what is the productivity component?

We have been prioritising quantity over quality, and the short- over the long-term. In the future, however, we need to emphasise quality, so instead of crowding out investment into education and quality public spending, we are supporting banks, unsustainable businesses and “too big to fail” industries across the globe.

That amount of money, if spent on education or basic research, would conservatively give a tenfold return over the next 20 to 30 years – and a hundred-fold is probably more likely.

I am optimistic because we are very nearly at zero productivity, and it is very difficult to continue in this direction as negative productivity contains the assumption that more people will be doing less, and I don’t think we have seen that at any point throughout history.

I see no limits. I see a world where there are enormous barriers to sharing knowledge, and [believe that technology could be empowered to reduce these]. Politically, right now we have a centre-left and a centre-right, and so we don’t have a real spectrum of ideas; we are afraid of ideas from the far left and far right.

I have not yet met a right-wing politician without one or two good points, and the same is true on the far left. In order to find a true middle, we need first to define the spectrum on which we are truly operating. If we focus on language skills, the [potential benefits of smartphones and their global ubiquity], and research, the resultant cross-pollination and exchange would mean that we no longer have a deficit of democracy, but rather a surplus. And you feel that the nature of the economic cycle is such that we will soon arrive at a point where solutions like the ones you describe will become part of the dialogue?

Steen Jakobsen: The only way to extricate ourselves from the present mountain of debt is to be more productive. Growth is the only way out of debt; you cannot inflate yourself out of debt, even if this is the go-to agenda among policymakers.

Ultimately, change will not come because we want it. It will not come because we decide on it. It will come because we need it.

A new dawn? Photo: iStock 

Steen Jakobsen is chief economist and CIO at Saxo Bank

Michael McKenna is an editor at Saxo Bank 
Colin Brewer Colin Brewer
another Churchill quote "Parliamentary democracy is the worst form of government every invented except for all the others that came along from time to time"
Michael S. McKenna Michael S. McKenna
One of the things we are currently seeing is a rather laboured attempt to distinguish between democracy (good!) and populism (mad, bad, and dangerous to know!)
Mattrich Mattrich
Thankyou for a great article, and not something in would find in the mainstream media.
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