Article / 06 March 2015 at 12:23 GMT

Stress Indicators: Face facts – 2015 is another lost year

Chief Economist & CIO / Saxo Bank
  • The market is buying the US rate hike story once again
  • CTAs & hedgies are playing momentum and forgetting Japan
  • Draghi looks backwards, the real economy looks ahead
  • US and EM growth engines will slow down in 2015
By Steen Jakobsen

It’s the first Friday of the month and we're all watching for the nonfarm payroll despite all of us acknowledging that the Federal Open Market Committee's policy is entirely driven by non-economic factors like its need to create a “margin call” on the market. Vice-chair Stanley Fischer is clearly concerned about the elevated valuations although chairman Janet Yellen is still pretending to believe in labour market data. 

Looking at the recent data and even the projections among some of the Fed governors it’s hard to see the evidence for a hike in June. However, the market clearly buys the propaganda machine of the Fed and its mouthpieces on TV and in the printed press.

Federal Reserve Bank of Atlanta - GDPNOW
GDP slowdown
Despite the “evidence” the Fed will probably still hike in June or September and then be on standby for rest of 2015 and probably 1H 2016. The market is again buying the hike. Commodity Trading Advisors and hedge funds alike seem to have a great propensity to sell bonds but they're all playing the momentum and forgetting the lessons from Japan. 

Needless to say, I remain with my sub 1.5% 10-year US growth sometime between Q2 and Q3 which coincides with my JABA model's projected cyclical low for US (and the global economy).

JABA forecasting model from Q1-2014
growth excl inv
 Source: Steen Jakobsen's Q1 JABA model outlook 2014 

The projected 10-year move – (From March 2014 projection and JABA model)
 Source: Bloomberg, Saxo Bank
Overall, I called the European recovery early and was very alone in early January (CNBC video). Now I am scared to death by being joined by EBC President Mario Draghi who pre-QE implementation called for a victory lap for “his policies”. I never tend to celebrate anything really, but I certainly never celebrated a victory before a game was played despite having won the pre-match press conference. 

Just as former Fed chief Alan Greenspan was, Draghi will ultimately be seen as someone who was out of touch with the reality of the economy. He is the quintessential central banker who conducts policies with 20/20 rear mirror vision. Remember that only a year ago Draghi declared that deflation would never happen in Europe! 

Draghi et al also devise their economic outlooks through a rear-view prism. Meanwhile, the micro economy and its agents continue to look through the front window. The consequence is that most of the ECB staff projections for this and next year are pure fantasy. 

The US, as shown above, is slowing down and China just downgraded its GDP to 7% (in reality it's below 5%, if not 4%). Emerging markets are being hit by weak commodities and massive US funding and their currencies are making multi-year and multi-decade lows. Hardly the stuff that Europe’s export engine needs! 

The lead-lag of this dictates that Eurozone data should start to weaken in April and that this trend should continue into Q3 as well, by which time the world will again understand that 2015 is another lost year for growth. The year of recovery will be 2016. The fact of the matter is that both of the world's primary growth organs –  the US and emerging markets – will slow down in 2015. End of story.

Meanwhile “market liquidity” is getting smaller and smaller and the systemic risk is increasing as banks (guaranteed by the ECB) own more government debt than ever before in history. The following chart is from a NATIXIS Economic research report: “Has the global financial system become safer?”.

 18% of GDP worth of bonds is owned by the bank up from 10-13% range pre-financial crisis. 

More importantly, the “sole buyers” of risk today are lesser-regulated “institutional investors” – watch this chart, especially on equity. Never before has the institutional segment owned more stocks – talk about chasing momentum!  And remember this increase in ownership happens at a time when the expected return in a normal business cycle would dictate exactly zero return for the next 3.5 years and only a small upside for the next 10 years.

The next problem for financial markets is exactly these institutional investors. Negative yields are bad for banks, but worse for insurance and lifer insurers. Don’t forget that 70% of life insurance companies in Japan went out of business during that country's depression. Getting a cash premium means having to pay for it – negative deposit rates – while your portfolio valuations for fixed income and stocks simultaneously make all-time highs that protects them for the next six months.

But – and it's a big but – beating this target one, three, five or even 10 years from now will be impossible as both new premiums and expected returns are zero! Keep a close eye on this sector if Japan is a lesson (and it is!) 

mkt cap
Note how US inflation expectations are rising…

growth input
us stocks
75% BETA: 100% fixed income and cash – US 10-year mainly now….(some TIP and HYG)
25% ALPHA: Short EURUSD, EURSEK, Wheat…….

The full batch of Stress Indicators is attached. 

It’s perfection, or rather excellence, in the words of Michael J. Fox: “I’m careful not to confuse excellence with perfection. Excellence I can reach for, perfection is God’s business”. Are you listening Mario, Janet, Mr. Market? 

Safe travels,


– Edited by Clare MacCarthy

Steen Jakobsen is chief economist and CIO at Saxo Bank – the home of social trading

thewickedwiz thewickedwiz
Well, I would love to hear your views now on the USD which you had said would turn down in last quarter of 2014.The market seems to think US is in a different league and it would have been wise to hold on to the greenback.
Brian Spurlock Brian Spurlock
This comment has been redacted


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