London - Saxo Bank has today released its annual “Outrageous Predictions”, this year highlighting the currencies that could do exceptionally well and those that could fall to record lows, what could be one of the largest and controversial acquisitions, a political and pundit led challenge to the Fed’s authority as well as the price of commodities and investor strategies that could come into play.
Inspired by Nassim Nicholas Taleb, the Lebanese philosophical essayist, the ten predictions are an annual thought exercise to predict rare but high impact ‘Black Swan events’ that are beyond the realm of normal market expectations. Last year, three of the predictions were fulfilled. Compiled as part of the Bank’s 2011 Financial Outlook, to be released in January 2011, this year’s ‘Black Swan Exercise’ takes a look at the potential scenarios that could have a significant impact on the markets.
Saxo Bank’s Outrageous Predictions for 2011:
1. US Congress blocks Bernanke’s QE3
In the second half of 2011, the Fed is 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. Congress blocks the Fed’s authority to expand its balance sheet, and sets up an eventual challenge of the Fed’s dual employ¬ment/inflation mandate.
2. Apple buys Facebook
In interviews, Apple’s Steve Jobs has explained that Apple spoke 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 the executive. This could trigger Jobs to buy Facebook outright.
3. US Dollar Index tops 100
The economic growth trajectory in most areas of the world appears healthy for a time in 2011 but then trouble crops up in China. With the Chinese industrial base growing slowly this puts global risk appetite in a tail spin, and with the Japanese economy struggling and the Eurozone in disarray, the US dollar starts to look more appealing. The unwinding of these positions pushes the USD index 25% higher to over 100 by late in the third quarter of 2011.
4. 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. The Federal Reserve’s quantitative easing exploits fail apart from easing the balance sheet woes of American banks. 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 vanishes in 2011 and the 30-year Treasury yield drops to 3%.
5. Aussie-Sterling dives 25%
The UK returns to its traditional values; they work harder, save more, and soon enough a surprisingly strong expansion in 2011 is underway. Australia on the other hand is struggling with a weakening economy as China steps harder and harder on the brakes to stop inflation from getting out of control. Combined with the Australian property market it looks like a bubble ready to burst, and the case is for a decline of 25% in AUDGBP.
6. 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. Crude succumbs to a violent one-third correction lower later in the year.
7. Natural Gas surges 50 percent
Natural gas goes into 2011 with a supply surplus as the global downturn has meant supply has exceeded demand for two years, resulting in two years’ of double digit losses. But increased industrial demand, 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 a cold snap leads to a rapid depletion of stocks, thus a one-in-25 year move up by 50% in 2011.
8. 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. The US trade deficit widens and pressure piles on China and as investors flee to metals, gold shoots up to USD 1,800 an ounce.
9. S&P500 reaches an all-time high
The Fed continues to pump liquidity into the system in 2011. 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 US consumers start to spend as their stock portfolios improve. Corporate America doesn’t buy the euphoria that a healthy share price is a good indicator of health and continues the deleveraging process that leads to a proper recovery. The US benchmark index sees the 2007 high in the rear-view mirror on its way to 1,600T.
10. Russia’s RTS index reaches 2500
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 their money other than buy the dips on the US stock market. Investors at 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.