Saxo Bank's Outrageous Predictions 2013: Extreme complacency
This year’s Outrageous Predictions are once again a selection of mainly negative events, any of which can change the financial landscape and in some cases even the political status quo.
It is always tempting when making predictions to call for radical changes to the market landscape, but having produced this publication now for over 10 years, we hope the real value on offer to readers is to identify major events and risks that seem out of the box and “outrageous”, but are actually far more probable than appreciated and could have significant (mostly very negative) consequences on investment returns in the New Year.
Our biggest concern here on the cusp of 2013 is the current odd combination of extreme complacency about the risks presented by extend-and-pretend macro policy making and rapidly accelerating social tensions that could threaten political and eventually financial market stability. Our recent calls for a forest fire-style crisis that would be short and scary, but also establish healthy conditions for moving forward, have been met with the historically correct response: Any real change has only come about as a result of the exigencies of war.
Before everyone labels us ‘doomers’ and pessimists, let us point out that, economically, we already have wartime financial conditions: the debt burden and fiscal deficits of the western world are at levels not seen since the end of World War II. We may not be fighting in the trenches, but we may soon be fighting in the streets. To continue with the current extend-and-pretend policies is to continue to disenfranchise wide swaths of our population - particularly the young - those who will be taking care of us as we are entering our doddering old age.
We would not blame them if they felt a bit less than generous. In other words, the kind of confrontation we risk is not a military one, but rather a struggle between the mistreated young generation and the old fogies, who think they are entitled to all of a society’s wealth and to do everything to defend the status quo. In a way, it is the 1960s all over again, though a deeper struggle rooted in economics as much as politics - the 1 percent versus the 99 percent, to borrow the most common way to draw the battle lines. Occupy Wall Street was a mere amuse bouche and distant early warning of this phenomenon. The appetisers and main courses will soon arrive if we do not change our ways.
All of this leads us to believe that society will tilt increasingly towards more radicalism in Europe in 2013, where the far left and far right will both gain ground by appealing to the desperately disenfranchised voters who have very little to lose in responding to their messages. Current mainstream European politicians are running on ideological empty. And they have never shown that they understand the ‘representative’ portion of a representative democracy.
The macro economy has no ammunition left for improving sentiment. We are all reduced to praying for a better day tomorrow, as we realise that the current macro policies are like pushing on a string because there is no true price discovery in the market anymore. We have all been reduced to a bunch of central bank watchers, only ever looking for the next liquidity fix, like some kind of horde of heroin addicts. We have a proforma capitalism with de facto market totalitarianism. Can we have our free markets back please?
As you look at our list of 10 ‘predictions’, they may not look particularly outrageous in some cases, but remember that we have extremely low volatility in all asset classes due to the lack of real price discovery. In such an environment, it means that almost any move outside of two standard deviations is becoming outrageous, as it suggests that the totalitarians are losing their grip.
As we must do every year, we also need to underline that these 10 events are not Saxo Bank’s official calls for 2013. Ironically, though, they could prove far more relevant for investors because of the huge impact if any one of the 10 sees the light of day in the New Year. Before trading or investing, we all must know the worst case scenario - capital preservation is a must and your portfolio needs to be able to weather a perfect storm, or for that matter any storm.
As we leave 2012, the consensus call is for the S&P 500 to rise 10 percent next year, and not a single analyst sees the market down in 2013 – I do not remember a similar level of complacency since the year 2000, when everyone I knew quit their job in the hope of making a fortune day trading. One of the things we can learn from history is that we rarely ever take its lessons to heart.
Best wishes for 2013,