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12-19-2008, 11:12 PM

10 Outrageous Claims 2009
Saxo Bank Strategy and Research

True to Saxo Bank’s now annual tradition, we in Strategy and Research are delighted to present our “10 Outrageous Claims” for 2009.

The primary reason for doing this “Black Swan” exercise every year is to counter-balance human psychology, which is usually skewed towards optimism. We tend to be somewhat more pessimistic in our Yearly Outlook than the average analyst in the market, and believe that it is important for the investor to always factor in the less likely scenarios (as perceived by the market).

Please keep in mind that this is more of a thought exercise than a set of outright predictions – we do not consider the chances are better than 50-50 for all of these claims.

Iranian Revolution

The Iranian economy is already under pressure. However, the single most important export good is oil, and since we expect oil to trade as low as $40 or even $35, the purchasing power of Iranian society in USD will diminish. The government will come under severe pressure as they will not be able to uphold the supply of basic necessities. There are limits as to how much the Iranian population will stand for. These limits are flexible in a well functioning economy, but with energy prices declining rapidly, social unrest and dissatisfaction are guaranteed.

Crude @ 25 USD

Crude will trade lower during 2009 as demand slows due to the worst, global economic contraction since the Great Depression. We will see production cuts by OPEC but, due to disagreement within OPEC, the cuts will not be as substantial as those required to stop crude falling from the current levels. Furthermore, oil producing and less mature countries that have grown dependent on oil revenues in order to please their populations, will desperately break any concerted efforts to keep oil prices high.

S&P500 500

S&P500 will hit 500 in 2009. The primary reason for this will be falling earnings, rather than falling P/E ratios (since the low interest rates justify relatively high P/Es). There are several reasons why earnings will continue to drop:

1. Consumers will no longer be able to extent their credit from banks, since the banks are writing off losses and need to lower their balances
2. Cost of funds have also increased in the corporate sector – and especially for debt-financed consumption
3. Total housing equity is vaporising and will no longer be able to serve as collateral for loans
4. Companies will curb their investing programs, which will hurt B2B business models.

Italy will make good on threats to leave the ERM

Italy has a long-running affection for devaluations, something which is not possible within the single-currency cooperation of the ERM. Government finances are under immense pressure and the ERM requirements will not only be violated, but they will be completely ignored in 2009. EU is likely to crack down on excessive government budget deficits in several member states, but Italy could make good on previous threats to leave the ERM completely.

AUD-JPY to 40

The Australian economy is heavily influenced by the commodity market and a large part of the country’s economic expansion in the past year has been driven by the commodity boom. We believe the whole commodity complex will be left dead in the water for the next ten years due to real demand destruction caused by the high prices over the past five years. At the same time, we are bullish JPY with the big, Japanese Current Account Deficit and overwhelming domestic savings.

EUR-USD to 0.95 – and then to 1.30

The potential problems in the Eurozone are simply not getting the attention they deserve. European bank balances are under tremendous pressure due to the outsized exposure to Eastern Europe – a region that will increasingly falter during 2009. At the same time intra-European economic tensions are increasing as witnessed by the government bond spreads vs. Bunds. Additionally, the USD is the primary medium of exchange in money markets, which ensures that as long as they stay tight, USD demand will be high. That said, the USD isn’t a sound currency and the obvious problems in the Eurozone are all priced in very quickly. Thus, a move to 0.95 will be undershooting the fundamental case, meaning a return to 1.30.

Chinese GDP growth to 0%

This is as close to recession that China will get in 2009. The export-driven sectors in the Chinese economy will be hurt significantly by the free-fall economic activity in the US. Furthermore, many of the commodity-based investments that have been undertaken over the past five years will sour with the collapsing commodity prices. Since the Chinese economy has been stimulated by overly expansive monetary policy for years, more of the thereby induced speculative excesses will also be revealed in 2009.

Pre-Ins First Out

We believe that several of the Eastern European currencies currently pegged or semi-pegged to the EUR will be under increasing pressure due to capital outflows in 2009. Several of these countries already have extremely large Current Account Deficits and their required refinancing will make them vulnerable to additional credit market disruptions. This especially goes for the Baltic currencies.

Reuters/Jefferies CRB Index to drop 30% (to 150)

Commodities might have been an even bigger bubble over the past years than equities (but not credit derivatives). We believe the speculative excesses have been so large they have even skewed the demand and supply statistics. We even doubt the consensus belief that demand has been outstripping supply for years is true. Hidden stockpiles of, especially, industrial metals will be unloaded during 2009 and that will press prices even lower.

First Asian currency to be pegged to CNY

China’s economic, political and cultural influence is growing and a return from Phony Economics to Old School economics will lead everyone to focus on the important issues. In other words: Who has the productive potential? Who holds the debt? Who has growth and savings? Most of the answers will favour China, and the Asian economies will increasingly look towards China to find new trade partners and to scale down on the hitherto US-centric agenda.