Wednesday, December 17, 2008

Saxo Bank's analyses - versus mine

As Saxo Bank's reported analyses have some overlap with those that I have expressed in this Blog, I thought I ought to make it clear where there is some overlap and where there is none.

For the analyses in Saxo Bank's own words, see:

1. Iranian Social Unrest?
Certainly, says Saxo Bank (SB). As you know from my Blog, I agree. One interpretation of SB's position is that there will be a revolution. Possible, say I. More likely, the Iranian regime will launch an official external adventure (i.e. beyond simply stirring up trouble by covert means, as for the last several years). If it does happen, a revolution might in turn be rather a mixed blessing. It may help relieve the pressure in Afghanistan, Iraq, Lebanon and other countries. But will a revolution in Iran presage revolutions in Arab and other Muslim countries as well? And a revolution in what direction? Greater freedom or greater tyranny?

2. Crude Oil to $25?
According to SB, the current crisis will continue to reduce oil demand throughout next year, resulting in prices down to $25 a barrel. My view is that production cuts will start hampering falls in price. SB's view is that OPEC production cuts will be rendered ineffective by internal disagreement and subversion of any agreements to cut production. SB is right in drawing attention to disagreements in OPEC, as well as to the historical fact that OPEC members have several times agreed one thing but, in reality, done the opposite. However, we must not forget that the two major oil shocks were, in fact, caused by concerted action, and that concerted action as been sufficiently in evidence to maintain oil price levels through most of the period since the first oil shock. Verdict: yes, oil may for brief periods dip below $40 but, in spite of all the factors cited by SB, I still see $40 as the point of natural balance at present, not $25.

3. S&P 500 to 500?
SB's view is that such a fall will happen in 2009 for three reasons: corporate earnings declining because of less credit being available and because of consumers spending less; over-inflated house prices will continue to decline for obvious reasons; and, in the future, companies will have to pay more to borrow in order to invest. My view: the S&P may well fall to 500, but it won't be primarily because of these three reasons. If the S&P does fall to anything like that level, it will be primarily because investors continue to pull out. Why will investors continue to pull out in spite of historically low interest rates and low corporate valuations? Because no one know how much is hidden away by which company in which off-balance-sheet Special Purpose Vehicle, and because no one can compute the ways in which decreased consumer and corporate spending is going to play out in the corporate landscape. Again, see my caveat in the last para (below).

4. Could Italy Drop the Euro?
Yes, says SB. Yes, say I. But I also say that if Italy drops out, there will be pressure for at least Spain and Greece to drop out, and possibly certain Eastern European and even Northern European countries to drop out. Could Benelux drop out? In such an extreme scenario, the Euro will effectively be dead - or at least become the currency primarily of Germany and France.

5. Will the Australian Dollar Slump vs the Yen?
Rather precisely, the SB view is that the Australian dollar will sink to 40 Japanese yen due to next year’s continued slump in commodities. I rather doubt this, but I don't follow the Aussie dollar closely enough, I'm afraid. The Yen's own fortunes are tangled with so many things that it is dificult to say this sort of thing with any degree of confidence - at least on my part.

6. Will the US Dollar Outstrip the Euro?
SB thinks that the euro will fall to 0.95 cents versus the dollar in the New Year, before gradually rising to 1.30 cents. My view is that the fortunes of the Euro are not in the hands of the Eurozone.

7. Will Chinese GDP Growth collapse to 0% because of the seizing up of exports and the souring of comm0dities?
SB believes so. I think that China is much more likely to have a revolution (or collapse - or launch an external adventure) if the growth rate falls to anything like 5%, let alone zero. Concomitantly, SB thinks that Japan will not actually sink into recession, despite GDP growth of zero. Frankly, I don't understand what SB means, so I will leave that one with no comment.

8. Will Eastern European Forex Pegs Fail?
SB thinks so. I think so, with the caveat indicate in the last para below.

9. Will Commodities Plunge Even Further?
SB thinks commodities prices will drop 30 percent when taken across the board. Commodity prices will decline, say I, but not by this much. Ten per cent? Fifteen per cent?

10. Yen to Become Currency Peg
SB believes that Asian countries could drop dollar pegs next year, and peg instead to the Chinese yen. Forget it, say I. And if so, more fools they.

All the above analyses (including mine) leave out of consideration the one really major factor - and that is the actions of the Obama administration starting in less than a month, as well as market reactions to those actions.

Given the kind of economic team that Obama has appointed, I must say that I am not sanguine. Are these not exactly the sorts of people who have led us into the present crisis? "Ah", says a friend with whom I share this view, "but what if these folk have learnt the lessons provided by this crisis?". Regretfully, I don't see any evidence so far that any of the folk in power have learnt the key lessons that need to be learnt - though they show some evidence of having learnt some lessons, which is of course very good.

Anyway, let's hope that my friend is right. Let's hope that it is just that the evidence is not being shown at present (or it is simply my blindness that I am not seeing it). Let's hope that Obama's team does go beyond providing liquidity, guarantees, tax cuts and offers to buy up sour assets. Let's hope that there is a move on the leveraged betting that has been the proximate cause of the crisis (sub-prime was only the pin prick that cause the whole balloon to burst). Let us hope that not just one or two but a whole range of anti-cyclical measures will be set in place. Let's hope that the key decison-makers see the cultural, psychological and spiritual roots of the crisis and take steps to address those too. Because that is the only way we are going to get sustainable change. Can we do it? Can we change? Obama said we could. Let us see if he actually leads us in that direction. Because that is still the challenge. Sphere: Related Content

No comments: