International | Dec 20 2018
Each year Saxo Bank ends the year with a list of unlikely but underappreciated events which could send shock waves through financial markets.
By Greg Peel
Each year Saxo Bank likes to send us off to Christmas with some food for thought. Saxo describes its “outrageous” predictions as such:
“The predictions focus on a series of unlikely but underappreciated events which, if they were to occur, could send shockwaves across financial markets.
“While these predictions do not constitute Saxo’s official market forecasts for 2019, they represent a warning of a potential misallocation of risk among investors who typically see just a one percent likelihood to these events materialising.”
So here we go…
1. EU announces a debt jubilee
Debt “jubilees”, or debt forgiveness, are not uncommon in European history. In the interwar period, jubilees were granted for 50% of GDP in France, 36% for Italy and 24% for the UK. But that was before the days of the European Union, and given the EU’s approach to the Greek crisis of 2010, one might assume those day are long gone.
But now Italy is on the verge of crisis, facing E300bn in refinancing over 2019 as Italian bond yields spike. The prediction: Italian contagion spreads and the EU lurches into recession. By the time it reaches France, a German government desperate not to let the EU fall apart has no choice but to resort to debt monetisation.
The EU extends a debt monetisation mandate to the ECB for all debt levels over 50% of GDP and guarantees the rest via a Eurobond scheme, while moving the controversial Growth and Stability goalposts.
2. Apple acquires Tesla
Elon Musk needs more capital for Tesla to realise his dream. Now that most everyone in the world owns a smart phone, Apple is ex-growth unless it can come up with the next big iThing.
If Apple wants to deepen its reach into the lives of its user base, the next frontier is the automobile as cars become more digitally connected. After all, the late Steve Jobs showed that a company needs to bet big and bet wild to avoid complacency and irrelevance.
Prediction: Apple secures funding to acquire Tesla for US$520/share, or a hundred dollars more than Musk’s infamous “funding secured” tweet. Apple has the cash. The acquisition allows Tesla to build several new Gigafactories and production facilities in Europe and China to stay ahead of the competition and dominate the future of the car industry.
3. Trump sacks Powell
Prediction: By a slim majority, the FOMC votes to hike at its December meeting. Wall Street drops off a cliff in the first quarter 2019.
Rather than reintroduce QE, Fed chair Jerome Powell slows the pace of QT (balance sheet un-off) and makes one rate cut, suggesting the clearing of bad debts in the system will ultimately prove a good thing. By mid-2019, with Wall Street in a deep funk and the US yield curve fully inverted, Trump sacks Powell.
Trump appoints FOMC “head dove” Neel Kashkari. The new Fed chair promises a US$5trn credit line to buy the Treasury’s new zero coupon perpetual bonds to fund Trump’s “beautiful” new infrastructure projects.
4. Prime Minister Corbyn sends the pound to parity
Prediction: Theresa May’s Brexit deal fails in parliament, forcing the deadline to be extended as Britain heads to a snap election. With the Conservative Part split down the middle, Labour sweeps to power.
Prime Minster Corbyn embarks on a socialist “scorched earth” campaign, introducing the UK’s first property tax, introducing a universal basic income and re-nationalising utilities and railways. Deficits widen, inflation surges, business investment stalls and foreigners flee, taking their money with them.
The pound falls to parity with the US dollar for the first time in history.
5. GE sets off US credit crunch
Prediction: As the share price of General Electric continues to slide, the company loses credibility in credit markets as investors panic over GE’s US$100bn in liabilities. GE files for Chapter 11.
With the Fed having tightened too far, a shockwave spreads through global credit markets, credit spreads blow out, painfully lift funding costs for US companies. The carnage spreads as far as a heavily indebted Netflix, setting off a negative chain reaction in corporate bonds which sparks massive uncertainty in high-yield bonds and subsequently, high-yield bond ETFs.
Unable to set meaningful spreads, ETF sponsors withdraw from the market in one tumultuous trading session. It is the first warning shot with regard passive investment vehicles and their negative impact on markets in times of turmoil.
6. The RBA launches QE
No need to go into great detail about this one for the sake of Australian readers. Suffice to say…
Prediction: Australian house prices fall -50%. The destruction of household wealth and consumer spending sends the Australian economy into recession for the first time in 27 years. The major banks’ mortgage exposure proves too great, forcing the RBA to bail them out in a Troubled Asset Relief Program (TARP) to save Australians’ superannuation, and buy securitised mortgages in a quantitative easing (QE) program.
7. Germany Enters Recession
The car industry represents 14% of Germany’s GDP. The German automotive world, however, is far behind in terms of its conversion to electric vehicles and the use of big data. When Chancellor Merkel was in China in May, she was so stunned at the country’s production facilities that she asked for Chinese help to speed up German adaption of this critical export commodity.
Prediction: By 2040, 55% of all new global car sales and 33% of the stock will be electric vehicles. But Germany is only just starting the transformation to EV and is years behind, and stiffer US tariffs won’t make things any better for German supply chains or exports.
2019 will be the peak of anti-globalisation sentiment and will create a focus on costs, domestic markets and production, and the further use of big data and reduced pollution footprint – the exact opposite of the trends that have benefitted Germany since the 1980s.
Germany enters recession in the September quarter 2019.
8. Solar flare creates chaos
One might argue we could throw in tsunami, volcano, meteor or any other sky-falling-in event that is not beyond the realms but simply not worth losing sleep over, but solar flares have disrupted radio, satellite and ground-based communication in the past. The most powerful was registered in 1859 and shut down the telegraph. In 2012, the earth missed a direct hit by a matter of weeks.
Prediction: In 2019 a solar storm strikes the Western hemisphere, taking down most satellites on the wrong side of the earth at the time and unleashing untold chaos on GPS-reliant air and surface travel/logistics and electric power infrastructure.
The bill is around US$2trn, which is actually some -20% less than the worst-case scenario estimated by a Lloyds-sponsored study on the potential financial risks from solar storms back in 2013.
9. Global Transportation Tax enacted as climate panic spreads
In October 2016, the International Civil Aviation Organization agreed on a resolution for a global market-based measure to address carbon emissions from aviation. In April 2018, the International Maritime Organization announced a target to cut maritime carbon emissions by 50% by 2050. In 2018 the price of carbon has averaged E15/t (~US$13.30) under the EU’s Emission’s Trading System.
Prediction: 2019 brings another year of wild weather across the globe. With alarm bells going off everywhere over climate change, politicians enforce a Global Transportation Tax in a drastic move that bypasses voluntary carbon trading schemes and industry initiatives in order to move more quickly. The US and China have previously contested fuel taxes on aviation, but China changes its stance as a natural progression of its fight against pollution. This forces the US to reluctantly join forces in a global transportation tax on aviation and shipping.
The tax, set at US$50/t, is ultimately passed on to consumers through higher air ticket and freight costs.
10. Productivity replaces GDP as a measure of economic progress
If a country is looking to improve people’s happiness and health, it needs to produce more per worker (productivity) than it did in the past. Since the Industrial Revolution that began in the 18th century, higher productivity has been the main driver of higher per capita GDP, ultimately improving our standards of living. An obsession with GDP has generally promoted economic policies that don’t consider the full-cycle consequences of damage to environmental and human capital resources.
Prediction: The IMF and World Bank get together and agree to stop measuring GDP, instead switching to productivity measurement. They argue that GDP has failed to capture the real impact of low-cost, technology-based services and has been unable to account for environmental issues, as attested by the gruesome effects from pollution on human health and the environment in India and elsewhere around the world.
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