This week, Chris talks with Steen Jakobsen, Chief Investment Officer of Saxo Bank. We wanted to see through the eyes of a professional economist, which Steen kindly allowed us to do.
Steen agrees that central banks have largely failed in their misguided attempts to boost growth via trickle-down programs. Pretty much all the benefits of the recent years of money printing have gone to the upper echelons, with the true engines of growth and jobs — small to medium sized enterprises (SMEs) — getting very little.
As a result, financial asset prices have been driven up too high, which Steen anticipates will correct at some point in 2014; likely by 30% or so:
Here is my practical view. Since Q3 of last year I’ve been 70% in fixed income because I do believe, and I continue to believe, that we’ll see new low interest rates. In a world that cannot restart itself, it a world that believes in 'extend and pretend', you will not have any activity. You don’t have any move towards a mandate for change. So that means that history tells us the only way we get change is through the system failing. I’m not talking about a systemic failing; I'm talking about people owning up to the fact that we need to activate the SME. So I think we’ll see a progression towards helping the SMEs.
But in terms of the market, I have been very on fixed income, an increase in the exposure right now from 70 to 90% taking whatever equity I have down. Not because I’m afraid of 'doom and gloom' but simply because I think you can have a huge amount of leverage into the fixed income market here when everybody seems to believe that interest rates cannot go lower — now confirmed today by the Q1 data from the US. The world is simply starving because the world is rebalancing. The US current account deficit moved from -800 to -400. The world needs $400 billion worth of new export markets before it gets back to break even.
At the same time, Asia and China certainly are rebalancing their way from nominal growth towards quality growth. Again, the first derivative of that is lower growth, deflation, exported to the rest of the world.
So I think the low comes in economically in Q1 and Q2 in 2015. Every single macro indicator you can find will bottom at Q1/Q2. For the equity market, I think the top is 1900/1950. But you can't both predicted the level and the timing. And I’m more confident about the timing, not the level. So my timing I’m confident, and the timing I am confident on is the fact that the second half of this year is going to see a 30% correction from the top.
He also agrees that rising energy costs and overall resource scarcity are real threats to future economic growth; threats that he believes most economists and investors are blind to.
On all the above, we're in agreement with Steen.
In other areas, our predictions differ. But that's why we have guests like him on the program: to hear the rational behind contrasting views, and to learn what those moving large sums of capital in today's markets are thinking.
Despite the near term likelihood of a major correction, Steen remains quite optimistic. He believes that the correction will be a clearing event not just for overly-elevated prices, but also will serve as a wake-up call about the net energy situation that will lead to better policy decisions. We sure hope he's right, but we sadly think it will take a major price shock or supply shortage of key commodities to get the attention of our leaders.
Click the play button below to listen to Chris' interview with Steen (42m:43s):
by arthur-robey-2