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Generational Dynamics Web Log for 19-Dec-2008
Ten "outrageous" predictions for 2009 from Saxo Bank

Web Log - December, 2008

Ten "outrageous" predictions for 2009 from Saxo Bank

How many will come true?

Copenhagen-based Saxo Bank has provided the following list of "rare but high impact" predictions. Here they are, with my comments:

"Saxo Bank’s Outrageous Claims for 2009:

1) There will be severe social unrest in Iran as lower oil prices mean that the government will not be able to uphold the supply of basic necessities."

I agree, but this is hardly a big deal. Iran is facing a growing generation gap, as well as numerous internal problems. However, Iran's stock markets are doing much better than stock markets in other countries.

"2) Crude [oil] will trade at $25 [per barrel] as demand slows due to the worst global economic contraction since the great Depression."

I agree that it will at least be close. This is an interesting one.

Oil was selling for $147 per barrel just a few months ago, boosted by China's seemingly unending thirst for every drop of oil it could get. By the Law of Mean Reversion, the price of oil had to crash, and remain low for years, and that seems to be happening now.

There's an amusing twist to this situation. You may recall that last summer, many ideological pundits were blaming the high oil prices on "speculators." As I explained at the time, that was impossible, since there was no evidence of hoarding oil, and it would be necessary for millions of barrels of oil to be hoarded to make any real difference in price.

Well, the amusing twist is that speculators are trying to hoard oil today. Here's the story:

"Oil Tankers Camped Out in Hope of OPEC Slashing Production

According to Bermuda-based shipping company Frontline, owner of one of the world’s largest fleets of oil tankers, between 20 and 25 oil supertankers have been chartered for floating storage over the last few weeks – equivalent to something in the region of 50 million barrels of oil.

The host of very large crude carriers (VLCCs) are camped out at various locations across the globe including: the U.S. Gulf of Mexico, the North Sea, in India and also in Malaysia. Royal Dutch Shell, BP and Koch Industries are among the companies thought to be stock-piling reserves in hope of a Christmas bonus, if OPEC price cuts send prices rising once again.

More sensational – yet unconfirmed – reports have estimated that there are in the region of 300 vessels floating, like sitting ducks, outside of the port of Fujairah in the United Arab Emirates alone.

In addition several state oil companies, from countries such as Iran, are thought to be behind the surplus storage activity. The speculation has stemmed from three of Iran’s supertankers: Noah, Dena, and Manah, having all been at, or near, the country’s Kharg Island loading facility since before the beginning of December – according to AISLive ship-tracking data. ...

The increased activity in tanker markets, according to Jens Martin Jensen (acting Managing Director and Chief Executive Officer of Frontline), can be directly attributed to the oil market's contango structure –where near-term futures contracts are cheaper than contracts further into the future. Such an upward sloping forward curve provides producers with the incentive to sit upon crude supplies so to secure higher anticipated returns in the future."

So what the pundits were claiming the speculators were doing last spring is actually what the speculators are doing today, hoping that the price of oil will go back up. But the speculators are failing.

The real reason for the fall in the price of oil and other commodities is the collapse of world wide transportation and trade, and that's related to the rapid collapse of the Chinese economy.

The price of oil is still plummeting, and may reach $25 per barrel, as the Saxo Bank predicts.

Let's go on to the next prediction:

"3) S&P will hit 500 [roughly equivalent do a Dow Industrials index of 5000] in 2009 because of falling earnings, vaporizing housing equity and increased cost of funds in the corporate sector."

As I've been saying since 2002, Generational Dynamics predicts a stock market fall to the Dow 3000-4000 range, or lower, since the stock market has been overpriced by 200% until recently. However, the timing (end of 2009) cannot be predicted.

"4) The EU is likely to crack down on excessive government budget deficits in several member states, and Italy could live up to previous threats and leave the ERM [European Exchange Rate Mechanism] completely."

This is a political prediction, reflecting the weakness of Italy's economy.

In 2004, I posted an article on how euro zone countries could withdraw from the euro, and return to their national currencies, based on a report by JP Morgan. As far as I know, that mechanism still holds today.

"5) The AUDJPY [Australian dollar to Japanese yen exchange rate] will drop to 40. The decline in the commodities markets will affect the Australian economy."

For the last couple of years, the Australian dollar versus Japanese yen exchange rate was about AU$1 = 100 yen. Starting in August of this year, the Australian dollar started collapsing, and is now at 60 yen. The Saxo Bank prediction is 40 yen.

Australia's problems are related to the falling commodities prices and, once again, that's related to the collapse of worldwide transportation and trade. In particular, Australian firm Rio Tinto, the second largest mining firm in the world, is laying off 14,000 workers.

"6) EURUSD [euro to US dollar exchange rate] will fall to 0.95 [$0.95 per euro] and then go to 1.30 [$1.30 per euro] as European bank balances are under tremendous pressure because of exposure to the faltering Eastern European markets and intra-European economic tensions."

The exchange rate reached almost $1.60 per euro last year. Since then, the dollar strengthened to $1.25 per euro, and has weakened again to $1.40 per euro. The Saxo Bank prediction is that the dollar will strengthen further against the euro.

This is counter-intuitive to a lot of pundits, who have been predicting inflation or hyperinflation for the dollar.

Generational Dynamics is able to make broad predictions based on generational trends, but specific exchange rate predictions are not possible.

Several months ago, I wrote "What's coming next: Understanding the deflationary spiral," in which I explained what's going on with currencies, and why the dollar and the yen were getting stronger, while the euro was getting weaker.

Pundits have been predicting that the US dollar would experience inflation or even hyperinflation (like the Weimar republic experience,) but that has never made any sense, because of the collapse of the credit bubble.

The dollar and the yen have, in fact, been strengthening against other currencies (the yen more than the dollar), which is what we'd expect from the trend prediction. The Saxo Bank prediction says that the trend prediction will continue.

"7) Chinese GDP growth drops to zero. The export driven sectors in the Chinese economy will be hurt significantly by the free-fall economic activity in the Global Trade and especially of the US."

The rapid collapse of the Chinese economy makes this prediction almost a sure bet.

"8) Pre-In's First Out. 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."

Eastern European countries are highly dependent on Russia for energy.

"9) Reuters/ Jefferies CRB Index to drop to 30% to 150. The Commodity bubble is bursting, with speculative excesses so large they have skewed the demand and supply statistics."

Commodities prices are falling rapidly.

"10) 2009 will see the first Asian currencies to be pegged to CNY. Asian economies will increasingly look towards China to find new trade partners and scale down their hitherto US-centric agenda."

Putting any long-term faith in China's economy is definitely counter-trend. China's economy is collapsing rapidly, and will continue to do so.

Furthermore, China is becoming increasingly politically unstable, and is approaching a civil war.

In the end, the ten "outrageous" Saxo Bank predictions aren't really all that outrageous (except for the last), since most of them generally follow trends predicted by Generational Dynamics for years.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.)

Also, for those interested in discussions of short-term technical analysis, led by an international investment expert, check out the Chartists Forum thread. (19-Dec-2008) Permanent Link
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Generational Dynamics Web Log for 19-Dec-2008 Ten "outrageous" predictions for 2009 from Saxo Bank

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Generational Dynamics Web Log for 19-Dec-2008
Ten "outrageous" predictions for 2009 from Saxo Bank