Outrageous predictions 2015: ‘I still see Germany reaching recession, and pretty soon’

Transcript

Cocoa prices going through the roof and internet armageddon. Could that be where we’re headed in 2015? According to Saxo Bank’s annual outrageous predictions, they’re certainly possibilities worth considering. World Finance speaks to Steen Jakobsen, Saxo Bank’s Chief Executive, to find out more.

World Finance: Well Steen, there is a reason your predictions are called ‘outrageous’ – how much of a success rate have you had with them? What have you successfully predicted?
Steen Jakobsen: We don’t set out to do 10 calls that become right. We are setting out to say, these are 10 things that will upset you. But the ratio is we get two, two and a half calls right every year. But not always necessarily in the following year! But 20-25 percent of our calls become over the next 24 months, in the last 12 years, correct.

World Finance: Why do you compile this list each year if they’re so unlikely to happen?
Steen Jakobsen: We have in today’s markets so much consensus – I receive research from my brilliant colleagues at 25 institutions, I would not be able to tell you the difference between any of the 25. We are so one-sided, we have only one instrument we can buy: equities.

So we are saying simply, ‘Why don’t we just ask the question, what can go wrong with this?’ To have a negative prediction, but a positive or constructive discussion on why or why not an idea should happen. I actually want you to say to me: it is very very unlikely to happen.

Maybe the world is so outrageous and always surprising that it’s impossible to make an outrageous call!

The funny thing is, what people hate the most about the outrageous predictions, the one they hate the most, is the most likely to happen.

World Finance: Now Steen, a number of your predictions actually don’t seem that outrageous at all: UKIP for example is doing surprisingly well, and cocoa demand is already outweighing supply. So are you playing it a bit safe this year?
Steen Jakobsen: Maybe the world is so outrageous and always surprising that it’s impossible to make an outrageous call!

Of course, some of these calls are likely. I mean, I think you’re underestimating for instance the volcano activity in Iceland. If that happens it will have a material impact, not only on agriculture prices, but unfortunately, it will probably take the summer away from your personally.

The cocoa call is probably the least controversial here; but again, a 100 percent increase is still 100 percent, right?

World Finance: Looking at your 2015 predictions in more detail now, and why do you think China will devalue the Yuan? Why is 2015 the year for this?
Steen Jakobsen: Because their capital balance is negative if you take away the amount of dollars they’ve borrowed.

The Chinese have become the single biggest issuer of dollar debt. As dollar is increasingly strong, it puts a heavy burden on their ability to repay into a context where they are moving from nominal growth to quality growth, China is basically going from 10 percent to 2.5, 3 percent growth over the next 10 years, into an environment where they have no ability to do what a planned economy’s supposed to do: to create jobs.

The only lever left is the one that everybody else is using, and of course their main enemy always being Japan, that will be the one they want to focus on, they will move their currency significantly higher to rebalance their capital account and to create the jobs needed in a planned economy.

World Finance: Well last year you mentioned oil prices, and this year you haven’t made any predictions. Why is this?
Steen Jakobsen: We totally know that having got the oil call right last year will make it impossible for us to make a call on oil. And if we had made an oil call this year, people would have thought it was our forecast. So I like the fact we are getting a lot of credit for calling the oil market right, but it was an outrageous call! It wasn’t necessarily our forecast.

So, it would be a total waste of time for us to predict what will happen next year.

I think, personally, that the contango shows you the market is yet to re-price the full impact of low energy. The contango is $8 between January oil next year, and 17. That needs to come down to two to three when this is over. But I will be buying oil before I sell it.

I would say that Japanese inflation going to five percent is very unlikely

World Finance: You’re also fairly negative in 2014’s predictions about Germany, and the country hasn’t had a great year, and has been called the ‘sick man of Europe.’ So who do you think will be the ‘sick man of Europe’ for 2015?
Steen Jakobsen: France and Germany again. But I have good news for you: I think that the second half of next year will be the first time since the introduction of the euro where the Club Med, the peripheral countries, will be more competitive in labour costs than Germany. I think eastern Europe – certainly Poland and other countries – will contribute to a more brave, bold pace, better economic growth scenario for all of Europe.

So I still see Germany reaching recession, and pretty soon. I mean, they’re already there – they’re 0.1 of a percentage point in the last quarter away from a true recession. But the point is that Europe is changing. And that is the whole point of all these calls.

People need to understand, over the next two to three years, Europe will be stronger in southern Europe than in northern Europe, simply because we had no reforms; no reforms led to an internal devaluation in the wages and disposable income in southern Europe. Now if you want to open a factory, I would advise you go to Portugal. Great infrastructure, great people, and extremely cheap living and labour costs.

World Finance: What would you say is the most outrageous prediction you’ve made for 2015?
Steen Jakobsen: I would say that Japanese inflation going to five percent is very unlikely. But on the other hand, why would believe if they get a little bit of, if they get inflation is only going to be two percent, I think if inflation comes back to Japan it will not be two percent, it will probably not even be five. It will probably be seven or eight.

The fact that you can issue and use bazookas I think as the economists call it. It is the most imprecise weapon in the arsenal of the military, and so is their monetary policy.

World Finance: Finally, what would the economic landscape look like if all your predictions proved true?
Steen Jakobsen: Like 2008! In 2008 I think it was the best year we ever had. I think we had eight or nine out of 10 right. And we were not celebrating, by the way, the fact we had so many right.

But you know, if it’s a real bummer year. And maybe you should apply also the rule of seven. 2015 is seven years away from 2008, 2007 is seven years away from 2000. Maybe the most outrageous call is that the world is so simple, every seven years we have a crisis.