Each year in December, Denmark-based Saxo Bank publishes a list of 10 Outrageous Predictions for the world economy and now that we’ve turned the page to the second half of 2014, we thought it might be interesting to revisit how Saxo is doing with their predictions and make a few comments and predictions of our own.
Saxos 10 Outrageous Predictions for 2014:
- EU wealth tax heralds return of Soviet-style economy
- Anti-EU alliance will become the largest group in parliament
- Tech’s ‘Fat Five’ (Amazon, NetFlix, Twitter, Pandora, and Yelp) wake up to a nasty hangover in 2014
- Desperate BoJ to delete government debt after USDJPY goes below 80
- US deflation: coming to a town near you
- Quantitative easing goes all-in on mortgages
- Brent crude drops to USD 80/barrel as producers fail to respond
- Germany in recession
- CAC 40 drops 40% on French malaise
- ‘Fragile Five’ (Brazil, India, South Africa, Indonesia, and Turkey) to fall 25% against the USD
The results so far
Some of these predictions are obviously too broad to be meaningfully measured after 7 months or so (prediction #1 about a Soviet-style economy for Europe being the best case in point), but others are more specific and provide an interesting lens to look at what has happened in the financial world.
The prediction that was closest to being accurate was #2; the anti-EU alliance will become the largest group in Parliament. In the elections in May, anti-EU groups wound up with nearly 25% of the seats in European Parliament and the repercussions were felt immediately in countries such as Great Britain. This group, however, is a rag-tag collection of fringe huggers that has absolutely no cohesion. As such, they represent a feeble backlash to continued European integration, not a movement to thwart a united continent.
Prediction #3 has seen mixed results as a +20% gain in Netflix has been offset by a 10% drop for Amazon and a 45% drop for Twitter (Pandora and Yelp are virtually unchanged for the year). For perspective, the NASDAQ Tech index is up ~7% this year and the broader S&P 500 is up ~8%. The lesson with these tech stocks is that the market will pay a premium for a unique idea, but only for awhile. After that, a path to profitability must be evident. Netflix has displayed a knack for creating original programming while both Amazon and Twitter have mostly managed growth without profits.
For the balance of predictions, the general result has been that the status quo has been maintained. The Japanese Yen (USD/JPY – #4) and Brent Crude Oil (#7) are virtually unchanged from the beginning of 2014, while other areas have continued to perform as before:
- The U.S. CPI is up 2.1% over the last year (#5)
- In March the Fed implemented another decrease in their Quantitative Easing program, from $65 bn per month to $55 bn (#6)
- German GDP was up 2.3% in Q1 2014 (#8)
- The French CAC 40 stock market index is up ~2.5% this year (#9)
- The Fragile Five ranged from a 1.5% decline for the South African Rand to a 6% rise for the Brazilian Real (#10) – Could it be that the Brazilian Real benefited from a FIFA World Cup bounce? (Pun intended)
How did the predictions turn out?
Any way you slice it, Saxo had a poor track record with their predictions and the common theme in their misses was a prevailing pessimism around economic breakdowns, deterioration, and collapse. From Japan and Europe sinking into a swampy malaise to tech newbies and emerging markets plummeting to earth, the predictions are devoid of feel-good scenarios of growth, prosperity, cooperation, and general good times. What is it about human nature that makes it so much easier to paint pictures of doom and gloom as opposed to raging success stories?
What does it all mean?
It’s often been said that the best way to predict the weather for tomorrow is to stick your head out the window, note the conditions, and put that down as your prediction. The same can be said for economic conditions and this means that outrageous predictions are almost certainly going to be wrong, particularly over a short time period. While the world may seem to be erratic and unpredictable, viewed up close over a short time period, it is actually remarkably boring.
That being said, extreme events do occur, such as the dot-com boom and bust, Long Term Capital Management collapse, and the most recent Great Recession, that amply illustrate the negative. On the flip side, the ascension of mobile devices, the incredible economic awakening in China, and the emergence of proto-currencies like BitCoin show the power of positive growth. With these examples in mind, what are a couple of outrageous predictions from Maven Wave?
- Negative: Global GDP falls by 10% as regional conflicts in Eastern Europe, the Middle East, and the South China Sea, all fueled in part by a waning U.S. military presence and commitment, lead to a fraying of commercial ties and an increased risk premium for global trade.
- Neutral: The current market is displaying remarkably low volatility, as exemplified by the VIX on the S&P 500 (below). In the future, the global economy maintains its perfect balance of slow growth in Europe, moderate growth in the U.S., and accelerated expansion in the developing world. As a result, market volatility not only maintains its current low levels, but falls even further, with the VIX dropping below 10% on a consistent basis.