FYI | Dec 11 2014
-UK housing crash, vote on EU?
-China, Japan import inflation?
-Chocolate prices surge?
-Volcano cancels Europe's summer?
By Eva Brocklehurst
There are forecasts, and then there are predictions. The former assumes some basis in evidence while the latter is more about gazing into the crystal ball. Such is the Saxo Bank list of outrageous predictions, published annually. The bank's chief economist, Steen Jakobsen, provides the saner underpinnings from which the predictions take flight. Saxo Bank considers its Ten Outrageous Predictions for 2015 are unlikely to come to pass but the risk that they do may be simply under appreciated. Hence there would be significant consequences for global market should they occur.
Firstly, to the underpinnings. 2015 is expected to be tough and potentially a year that will provide a low point in many economies and markets. Inflation has fallen to its lowest point in decades, followed by global interest rates. Energy prices are sharply lower. Moreover, asset markets are less volatile and, in Mr Jakobsen's view, this has given a false sense of security to investors. A preview of sharpened volatility occurred during one week last October and, as such, could this be a signal of what may lie in store for 2015?
Now to the outrageous predictions. Firstly, a housing sector crash in the UK. Surveys have shown that momentum is leaving the UK housing market, particularly in London. If the Bank of England raises rates could UK house prices fall as much as 25%? Japan's central bank has been printing money in an attempt to revive the economy. The danger is, and the source of the prediction, that confidence in the yen will be hit as a result of trying to import inflation and demand. Japan's inflation rate jumps to 5% and it the Bank of Japan loses control of its currency. China could take another tack to do the same thing, looking for a way to ease deflationary pressures which are the results of a credit boom. China makes a move to devalue the yuan by 20%.
Mario Draghi, the embattled head of the European Central Bank, resigns to allow a new president, Jens Weidmann of Germany's Bundesbank, to bring the ECB fully into the German camp. Mr Draghi will find greater opportunity back in Italy where President Napolitano will name him his successor. Oil prices are plunging and the West ignores the impact on Russia such that large companies, or the government, default on their debts. The prediction suggests a default such as that which occurred in 1998 may be what is needed to secure the country's future, along with a Ukranian solution of course.
Number six on the list is internet hacks damaging e-commerce such that web-based services suffer hugely. To the extent that the largest global e-commerce retailer, Amazon.com, endures a decline of 50% in the fall-out, being over valued. Meanwhile, another volcano erupts in Europe and cancels summer, as noxious sulphur dioxide clouds the skies. Weather patterns change, harvests are damaged and grain prices double. Demand for chocolate is rising as Asian appetite for the yummy product increases. With supply hampered by concerns over Ebola and a lack of investment in West African production cocoa futures hit a record US$5,000/t.
Want more? Britain has a general election in May next year and the UK Independence Party wins 25% of the vote, joining the Conservative Party in a coalition government that calls for a referendum on Britain's membership of the European Union. UK government debt yields rise sharply. Finally, after sentiment shifts on high-yield bonds investors head for the exits but liquidity is sparse and prices rise steeply. Shock waves shake Europe's already weak economy.
Saxo Bank's Outrageous Predictions are considered an exercise in finding ten relatively controversial and unrelated ideas which could turn your investment upside down, amid a chance to stress test assumptions about the future impact of extreme events.
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