Article / 17 October 2016 at 9:46 GMT

Macro Digest: The cost of capital is everything – #SaxoStrats

Chief Economist & CIO / Saxo Bank
  • This is the end of interventionism, not capitalism
  • Trickle-down wealth failed to trickle 
  • BoJ has finally acknowledged that QE doesn't work
  • Japan is readying for helicopter money
  • US to hit recession and Europe and EM will follow
 Tumbleweed tumbling down – the US hurtles towards recession. Pic: iStock

By Steen Jakobsen

This morning I was asked by a journalist if we are experiencing the end of capitalism. I found this almost funny but here is my explanation, which is really important to understand:

“We are living the opposite – this is the end of interventionism or planned economy – anyone arguing this is the end of capitalism needs to check the definition of capitalism – capitalism is about the market distributing money and goods, what we have is the opposite: An almost desperate desire by politicians to keep hiding from the issue at hand: too much debt, too little productivity and too much government."

It is true though, but not due to capitalism, that social inequality can’t continue as is, but do remember the whole concept of QE or easy money is predicated on a “trickle down effect”. In other words to make the rich richer and through that increase economic activity. Of course, and I have written about this and the broken social contract many times, this doesn’t work because of…. too much planned economics and too much intervention in the marketplace…

What is even more interesting is that we have seen “the future’”. My basic premise is that Japan leads the world in economic policies. A few weeks ago the Bank of Japan finally acknowledged that easy money, QE, will not save the economy. This is major decision but what they will replace easy money with is interesting.

First they will target their 10-year government yield to be zero percent at all times – (from negative earlier this month) – this means de facto that they are preparing “helicopter money”.

Although this is only indirect, think about what a fixed 10-year yield does to discipline of politicians. The Bank of Japan has basically told the lawmakers in Tokyo: You can now expand the fiscal deficit at no extra cost! This endless ability to produce larger and larger deficits is not impacting market rates – hence more intervention is what’s coming.

When, and I think its only a matter of time, the US goes into recession in 2017 and takes emerging markets and Europe with it, the policymakers will follow Japan.

The true recipe for growth and less inequality of course remains the same I have written about for the past seven years: The mandate for change based on investment into education, infrastructure, productivity and more market-based economies.

The world is slowing down in terms growth, inflation, equality, trade flows, and hope. The change is coming, but not due to failure of capitalism. Rather, and like in 1989, it is coming due to planned economies' inability to create our future growth

Cost of capital

Yes, this is all about the cost of capital. Not allowing it to flow according to the principle of the marginal cost of capital distorts markets and society.  One single regime unfortunately rules right now – overly easy money, ZIRP and QE will be phased out and replaced by….helicopter money!

This is not the solution but the wheels are in motion for its implementation.

What this means is:

A strong US dollar into Q1, 2017 based on a rise in the marginal cost of money , plus Fed action, plus safe haven….. It means a retest and MASSIVE channel in long-term US rates….
Source: Bloomberg
Source: Bloomberg 
The Bank of Japan is preparing “helicopter money” through guaranteeing 0% yield in 10-year JGBs (so the cost of fiscal deficit expansion is….. ZERO!).

Germany's benchmark yield is rising faster than Japan's. And what will the European Central Bank's next move be when recession hits in 2017? Well, they always do like the Japanese – only with a massive lag!

 Source: Saxo Bank

Yield curve continues to steepen in both US and Japan... reasons? Higher oil prices but also much higher inflation expectations:

5Y5Y US inflation swap.



Source: Saxo Bank 

Volatility is also coming back:



And global stock market valuations have broken below their 100-day simple moving averages:




 Source: Bloomberg


The US dollar will be strong into Q1 based on a rise in the marginal cost of money, plus Fed action, plus safe haven flows… it means a retest and MASSIVE channel in long-term US rates… expect a recession by Q3,  2017.

– Edited by Clare MacCarthy

Steen Jakobsen is chief economist and CIO at Saxo Bank

Download document

Macro Chartmania

Springmoon Springmoon
Superb analysis as always. Thank you Steen.
raddy raddy
Great article - this is very concerning.....but wise for us all to plan ahead for the impacts of the predicted recessions. I have also been very worried with the direction of my economy (Australia) for the last decade and i feel that there are challenging times coming here soon. Do you think that the US recession could easily cause a domino effect to most countries?
ResPartner ResPartner
short & straight to the point...pure stuff....


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail