Saxo Bank's 10 "Outrageous Predictions" for 2018: Which are Likely?
"Outrageous Prediction" Definition
Saxo Bank points out their "Outrageous Predictions for 2018 "are not their actual forecasts. Rather, they are a list of supposed “1% likelihood” events that Saxo really feels should be considered as 10% likely or higher.
In other words, they bring together a list of things that may happen, in an effort to get you to think.
Our suspicion is that the complacency and low volatility in 2017 will not repeat and may indeed have stored energy for a spectacular and outrageous 2018. Thus, a number of our predictions point squarely at the risk that this accumulation of excess complacency may have blown a pent-up bubble of volatility.
Besides our prediction of an ugly end to the complacency bubble, we place our European focus on the increasingly stark political faultline between “Austro-Hungarian Europe” and its feasible allies, and the traditional EU core.
In China, we look at the potential for enormous gains in consumption-linked equities as China transitions from an investment to a consumption-focused growth model.
We are outrageously bullish on sub-Saharan Africa and equally bearish on central banks, who risk having their independence taken away next year.
It’s safe to say that if any of our predictions see the light of day in 2018, the world will feel like a new place this time next year.
- FED Loses Independence as the US Treasury Takes Charge: Both the Republican and Democratic parties will increasingly vie for their share of the populist vote heading into 2018’s mid-term elections, and budget discipline is entirely absent with GOP tax cuts bringing a massive revenue shortfall that will only be made worse as the US heads into recession. The double whammy of a weak economy and higher interest rates/inflation will leave the Fed with no answers on monetary policy. The hapless Fed will be scapegoated by politicians for the economy’s weak performance, a bond market in vicious turmoil, and the aggravation of already worsening inequality brought on by years of post-global financial crisis quantitative easing. In order to maintain federal spending and nominal growth, as well as to stabilise the bond market and save face into the 2018 mid-terms, the US Treasury seizes the reins as it did after World War II, enacting the same 2.5% yield cap on long bonds after a massive spike in yields. Steen Jakobsen / Chief Economist
- Bank of Japan Forced to Abandon Yield Curve Control: With inflation rising and global bond yields (led by US Treasuries) surging, the BoJ nevertheless digs in its heels on the 10-year yield peg and even tries to make a show of moving the peg slightly to accommodate market pressures. The JPY is crushed all the way to 150 versus USD in an aggravated spike to absorb the pressure of higher yields. USDJPY hits 150 before the BoJ capitulates, after which it rapidly devalues to 100. John J Hardy / Head of FX strategy.
- China Rolls Out the Pretro-Renminbi: The introduction of the petro-yuan sees CNY appreciate more than 10% versus the dollar, taking the USDCNY rate below 6.0 for the first time ever. Ole Hansen / Head of Commodity Strategy
- Volatility Spikes After Flash Crash in Stock Markets: The S&P 500 suffers a flash crash of 25% (peak-to-trough) in a spectacular, one-off move reminiscent of 1987. A whole swathe of short volatility funds are completely wiped out and a formerly unknown long volatility trader realises a 1000% gain and instantly becomes a legend. Peter Garnry / Head of Equity Strategy
- US Voters Go Hard Left in 2018 Election: The Democrats pull the debate away from tax reform to spending stimulus for the masses. True populism means breaking out the chequebook for the 90%, and that means fiscal stimulus, deficits be damned. US 30-year Treasury yields rip beyond 5%. John J Hardy / Head of FX Strategy
- "Austro-Hungarian Empire" Threatens EU Takeover: The divide between old core EU members and the more sceptical and newer members of the bloc will widen to an impassable chasm in 2018 and will shift the centre of gravity from the Franco-German axis to Visegrad-and-friends.The consequences for the euro will be severe. Looking for further weight to counter the Franco-German led “core EU”, Austria and the Visegrad 4 lobby to take the union in a pro-stimulus and anti-immigration direction. They successfully manage to gather a group of 13 EU countries, including Italy (once again led by Silvio Berlusconi) and Slovenia, to form a blocking minority at the European Council. For the first time since 1951, Europe’s political centre of gravity shifts from the Franco-German couple to CEE. The EU’s institutional blockage does not take long to worry financial markets. After spiking to new highs versus the G10 and many EM currencies by late in 2018, the euro rapidly weakens towards parity with USD. Christopher Dembik / Head of Macro Analysis
- Bitcoin is Thrown to the Wolves: The rise of Bitcoin and other cryptocurrencies has been one of the most spectacular phenomena of financial markets in recent years. Bitcoin peaks in 2018 with Bitcoin above $60,000 and a market capitalisation of over $1 trillion as the advent of the Bitcoin futures contract in December 2017 leads to a groundswell of involvement by investors and funds that are more comfortable trading futures than tying up funds on cryptocurrency exchanges Bitcoin will continue to rise – and rise high – during most of 2018 but Russia and China will together engineer a crash. After its spectacular peak in 2018, Bitcoin crashes and limps into 2019 close to its fundamental “production cost” of $1,000. Kay Van-Petersen / Global Macro & Crypto Strategist Jacob Pouncey / Cryptocurrency Analyst
- Southern Africa Spring Sees South Africa Blossom: Africa always has the potential to surprise us and 2018 will see South Africa lead an unexpected renaissance that will see it and its neighbours blossom politically and economically. South Africa, however, is the main winner as the ZAR becomes the EM darling and returns 30% against the G3 currencies. It brings the world’s strongest rates of growth in South Africa and the satellite frontier economies of the region. Christopher Dembik / Head of Macro Analysis
- Tencent Outstrips Apple. Becomes World's Largest Company: China is opening up its capital markets, and the country’s enormous size and surging living standards are attracting investors from across the globe. Given this, it’s no surprise that tech-sector leader Tencent is bumping up against some of the world’s largest companies by market capitalisation. Tencent shares advance another 100% despite the company’s already enormous size and in 2018 the firm steals the world market cap crown from Apple at well above $1 trillion. Peter Garnry / Head of Equity Strategy
- It's Their Time - Women Smash the Glass Ceiling: In 2018, the trend towards increasing female representation in the boardroom level goes super-exponential, with twice as many women rising to the level of CEO at Fortune 500 companies. Perhaps the trigger for all of this was the rediscovery in 2017 of the gross harassment women deal with every day when knuckle-dragging alpha males run the show. In 2018, the chauvinist old boys’ clubs are shaken to their core by shareholders and enlightened self-reflective purges and a woman occupies the top spot at more than 60 Fortune 500 companies by the end of the year. Steen Jakobsen / Chief Economist
- FED Loses Independence as the US Treasury Takes Charge: Saxo Prediction 1 is tied to prediction 5. That is, we see a huge yield surge due to a populist hard-left resurgence. Far more likely is a modest surge in yields then a recession in which the Fed quickly cuts. The Treasury will not take over. Such a scenario is far more likely after the next presidential election as per my comments regarding prediction number 5.
- Bank of Japan Forced to Abandon Yield Curve Control: A crisis in Japan is long overdue. But is 2018 the year? And what about a financial crisis in China? Europe?
- China Rolls Out the Pretro-Renminbi: This is possible, and perhaps even odds-on. However, it's meaningless. It does not matter one iota what oil is priced in outside of something illiquid like Yap Island stones.
- Volatility Spikes After Flash Crash in Stock Markets: I expect a huge volatility spike that continues for a while. Some short volatility traders will go bust if the VIX soars for four or five days in a row or even a few days in a row coupled by a remission then another surge.
- US Voters Go Hard Left in 2018 Election: Voters going hard left in 2018 is a given in my book. However, it will not result in true populism or a 5% yield on the long bond. Trump will veto any populist bills even if Democrats manage to take both the House (likely) and the Senate (unlikely). True populism has a chance in the next presidential election. I rate the overall Saxo scenario as presented at well under a 1% chance.
- "Austro-Hungarian Empire" Threatens EU Takeover: I expect an EU crisis somewhere. It may start with the ouster of Merkel in fresh elections, a coalition breakdown, some sort of crisis with Turkey, or a collapse in Brexit negotiations. Saxo's reason is possible, but there are other interesting possibilities.
- Bitcoin is Thrown to the Wolves: I expect Bitcoin to be thrown to the wolves, but do not first see a spike to $60,000. $1,000 by the end of the year would not surprise me in the least. The implications, however, are meaningless.
- Southern Africa Spring Sees South Africa Blossom: I have no strong opinion on this other than it's essentially meaningless (other than to Africa) if it happens.
- Tencent Outstrips Apple. Becomes World's Largest Company: This seems quite possible but once again I fail to spot any meaning.
- It's Their Time - Women Smash the Glass Ceiling: There are currently 26 (5.2%) female CEOs heading S&P 500 companies. I would expect that to rise, but not exponentially. Suppose it rises to 60, the Saxo outrageous prediction. What happens? I suggest nothing.
"It’s safe to say that if any of our predictions see the light of day in 2018, the world will feel like a new place this time next year," states the Saxo Bank introduction.
Currency Crisis Awaits
As I see it, only half of Saxo's predictions mean much of anything (1, 2, 4, 5, 6). I discard Saxo's result for number 5 even though I strongly agree with the title.
A volatility spike, prediction 4, in and of itself, may not have global significance. However, if it's related to a currency crisis started by 1, 2, or 6, that's another matter indeed.
A global currency crisis of some sort its long overdue. If Saxo's predictions for 1, 2, 5, or 6 happen as Saxo presents them, 2018 may be the year.
A crushing spike in volatility would certainly accompany Saxo predictions 1 or 2.
Volatility: "Everyone in the Room is Selling Volatility"
Petro-Yuan: To understand my point regarding the meaninglessness of the petro-yuan, please see Gold-Backed Petro-Yuan Silliness: Reserve Currency Curse?
By the way, if any of Saxo's major predictions happens, gold rates to be the beneficiary. Got Gold?
Mike "Mish" Shedlock