Outrageous Predictions For 2011
Mon, Dec 20 2010
by Saxo Bank Strategy Team
This year’s “Black Swan Exercise” takes a look at the potential rare scenarios that could have a significant impact on the markets in 2011.
US Congress Blocks Bernanke's QE3
As we move into the second half of 2011, politicians and pundits increasingly succeed in putting the Fed in the hot seat for having been the critical enabler of the US housing debacle and resulting bank bailout and public debt catastrophe. Meanwhile, the too-big-to-fail banks are back in deep trouble again as their troubled mortgage portfolios once again threaten their solvency. The Fed’s Bernanke rallies the FOMC to indicate a strong new expansion of monetary policy to once again bail out the troubled banks and/or local governments. Emboldened by the political and popular winds blow- ing, however, a Ron Paul led challenge of the Fed’s authority sees the Congress blocking the Fed’s authority to expand its balance sheet, and sets up an eventual challenge of the Fed’s dual employ- ment/inflation mandate.
Apple Buys Facebook
What do you do when you want domination of the electronic and mobile device consumer market and have no significant presence in social networking? Oh, and a war chest of a mere USD 51 billion? You buy Facebook, the mother lode of (yet to be monetised) social networks. Facebook is worth USD 43 billion, according to sharespost.com. In interviews, Apple CEO Steve Jobs has explained that Apple was in talks with Facebook about partnership opportunities, but that the talks ultimately produced nothing. Facebook was after “onerous terms that we could not agree to”, according to Jobs. At the Web 2.0 Summit Facebook founder Mark Zuckerberg called for Apple to ease its ap- proach to connecting Ping with Facebook, and said that Apple had to “get on the bus”. Steve Jobs might get on the bus indeed and buy Facebook outright. It makes perfect sense; Facebook doesn’t compete against Apple and it ‘faces up’ to Google, which Jobs loves since Google has become his new number one enemy. It’s a deal made in heaven... The gigantic 500+ million Facebook user base could be integrated across Apple’s consumer products and services - every Facebook user automati- cally has an iTunes Store account and FaceTime chat is integrated into Facebook chat. That’s a lot of iOS devices.
US Dollar Index Tops 100
The economic growth trajectory in most areas of the world appears healthy for a time in 2011 – at least outside of Europe and Japan. But then trouble occurs in China, where its new 12th five-year plan aimed at increasing consumption fails to function as hoped. With the Chinese industrial base growing more slowly or not at all as a result of the policy shift, the satellite countries dependent on Chinese demand see their economies facing a rough adjustment. This puts global risk appetite in a tail spin, and with the Japanese economy struggling and the Eurozone in disarray, the US dollar sud- denly doesn’t look as bad as it did previously. This is especially the case since the market was mas- sively short of the currency at the beginning of the year. The unwinding of these positions pushes the USD index 25% higher to over 100 late in the third quarter of 2011.
US 30-Year Treasury Yield Slides To 3%
The dollar devaluation policy, with its roots in the ‘currency wars’ of 2010, force emerging markets to use more of their spare dollars on Treasuries. Also, the US edges over the brink toward a ‘Japanisa- tion’ of its economy with core inflation dropping. The Federal Reserve’s quantitative easing did not have any positive effects, apart from easing the balance sheet woes of American banks. Main Street did not receive much except some benefits from slightly higher stock prices, and with a failure to clear out the system, borrowing returns only slowly and recovery does not gain traction. And then there’s the Eurozone, where the ECB, EU and IMF fail to cure the ills of the peripheral PIIGS, pushing the flock of flustered investors to the safe haven of Uncle Sam. The feel-good factor may have been on the rise in the US in the latter part of 2010, but it vanishes in 2011 and the 30-year Treasury yield drops to 3%.
Aussie-Sterling Divesd 25%
The UK returns to the values of the old days; they work harder, they save more, and soon enough a surprisingly strong expansion in 2011 is underway as the austerity-stricken country defies the naysayers. The markets have it in for the UK, giving the wide expectation that the economy slows as Prime Minister Cameron’s cuts work their way through the system. However, the large, narrow cuts will not hinder consumer sentiment and as real savings boost production the economy bounces back in the second half of 2011 to end the year as a growth frontrunner in Europe. Australia, on the other hand, is struggling with a weakening economy as China steps harder on the brakes to stop inflation from getting out of control. Add to this an Australian property market, which is at best in need of restraint and at worst looks like a bubble ready to burst, and we will see a decline of 25% in AUDGBP.
Crude Oil Gushes Before Correcting By One Third
Crude oil, now driven by fundamental investor macro expectations, gets carried away, surging to over USD 100 a barrel in early 2011 on the wave of euphoria that the US economy has broken free of the shackles. Unlike 2008, there’s no follow through to drive the spike higher and investors are left holding oil positions they cannot sustain. Crude succumbs to a violent one-third correction lower later in the year.
Natural Gas Surges 50 Percent
Natural gas enters 2011 with a supply surplus as the global downturn has resulted in supply exceed- ing demand for two years – resulting in two years’ of double digit losses. But heading into 2011 the fundamentals for Henry Hub improve dramatically. Increased industrial demand on a US recovery, historical cheapness relative to crude and coal, forward curve flattening and action on proposals to export more US natural gas reserves all combine to make passive investments in gas more profit- able. And the icing – an unusually frigid cold snap leads to a rapid depletion of stocks. Henry Hub thus sees a one-in-25 year move up by 50% in 2011.
Gold Powers To USD 1800 As Currency Wars Escalate
The ‘currency wars’ return with a vengeance in 2011, driven by improvement in the US economy rather than a need to help economic recovery. The US trade deficit widens as consumers and gov- ernments get their wallets out. As the deficit expands, President Obama’s plan to ‘double exports in five years’ increasingly becomes a pipe dream and incites the ‘man on the street’ to twist the US Congress’s arm to pursue a weaker dollar. Pressure piles on China and as investors flee to metals in search of some stability, gold shoots up to USD 1,800 an ounce.
S&P500 Reaches An All-Time High
Dr. Bernanke, using his mandate of ‘make sure the stock market keeps going up’, continues to pump liquidity into the system in 2011. Even ‘mom-and-pop’ investors realise the only strategy worth fol- lowing is to buy the dips. But the tactic actually works for the Fed, even though it’s a house of cards, and the US consumers start to spend as their stock portfolios improve and they forgive their money managers. Corporate America doesn’t buy the euphoria that a healthy share price is a good indicator of health, though, and continues the deleveraging process – margin improvements, a wary ap- proach to spending and managing the balance sheet, refinancing debt at next to zero interest rates, and so on. Next thing you know, it’s a proper recovery and the US benchmark index sees the 2007 peak in the rear-view mirror on its way to 1,600.
Russia's RTS Index Reaches 2500
It’s a perfect storm for Russia’s RTS index in 2011. The next global economic bubble starts to inflate early in the year, sending crude oil above USD 100 a barrel again. The average US investor won’t do anything with his money other than buy the dips on the US stock market, and fans of the Russian stock market realise value in their index at a 1-year forward P/E of 8.6 and price to book ratio of 1.26. The RTS nearly doubles to 2,500 in 2011. The options market says it has a one-in-twelve chance of happening – but the RTS was last up there in mid-2008.
Those familiar with the publication will know that this is a “Black Swan Exercise”, inspired by Nassim Nicholas Taleb, the Lebanese philosophical essayist, produced each year as a forward looking thought piece for Saxo Bank’s cli- ents. In the book, The Black Swan: The Impact of the Highly Improbable, Taleb stresses that a Black Swan event is a highly improbable event with three principal characteristics: It is unpredictable; it carries massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.
Saxo Bank’s 10 Outrageous Predictions might be useful to stress test a portfolio or to think about a far out-of-the- money option. Readers should also note that this is not an entirely scientific exercise, and the predictions are not designed to be anything of the sort. In past years, Saxo Bank has been right four out of ten times. Last year, it was just three, and, of course, many of the claims do not tally with the views of the Bank or the analysts.
We trust you had a prosperous 2010 and wish you all the best for 2011. Be careful out there, you might just bump into a Black Swan.