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Saxo Predicts Public Debt Catastrophe, Insolvent Banks

Yes, it’s that time of the year again; Saxo Bank is out with their “Outrageous Predictions” for the coming year, and they are more contagious than ever. Here’s how the Danish analysts describe an unlikely, but possible, scenario for the United States in 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.”

Saxo Bank

I doesn’t sound too unlikely to me, and if I were to bet, I would put my money on this one; Saxo Bank goes on predicting a Ron Paul led challenge of the Federal Reserve‟s authority, the US Congress blocking the FED‟s authority to expand its balance sheet and sets up an eventual challenge of the FED‟s dual employment/inflation mandate. On the other hand, it’s probably only wishful thinking…

It’s about to become one of Scandinavia’s finest New Years traditions; the “Outrageous Predictions” by Saxo Bank.

Inspired by Nassim Taleb and his Black Swan Theory, they issue an annual report every year in December where the analysts, led by Mr. David Karsbøl, list 10 unlikely, but absolutely possible, economic and political scenarios for the year to come.

The track record so far is relatively good.

Saxo Bank have managed to get an average of four hits, on their ten outrageous predictions the last four, five years.

Last year, three of the predicted, highly unlikely, scenarios did in fact happen.

Personally, I think Mr. Nassim Taleb would object strongly against using the term “Black Swan” about these predictions.

But that aside, according to chief economist David Karsbøl at Saxo Bank, the analysis can be useful in stress testing your investment portfolio.

In other words, it is worth taking into consideration.

Okay, here it is:

“Saxo Bank – Outrageous Predictions 2011”


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 blowing, 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 employment/inflation mandate.


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 approach 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 automatically has an iTunes Store account and FaceTime chat is integrated into Facebook chat. That‟s a lot of iOS devices.


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 suddenly doesn‟t look as bad as it did previously. This is especially the case since the market was massively 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. – Outrageous Predictions 2011 –


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 „Japanisation‟ 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%.


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, 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 enters 2011 with a supply surplus as the global downturn has resulted in supply exceeding 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 profitable. 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.


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 governments 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.


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 following 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 approach 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.


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.

Heres a copy.


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