Every year Saxo Bank roll out their Ten Outrageous Predictions for the coming year. Here we run through their 10 off-the-wall predictions for 2019. These aren’t forecasts but they are possibilities! They should make you more alert to the risks in the investment landscape as we enter 2019.
The theme of Saxo Bank’s prediction this year is “enough is enough”. You’ll be familiar with many of their arguments if you’ve been reading our blogs over 2018. Rising debt and aging demographics have driven the unrest that we’re seeing around the world. They remain a big influence in 2019.
Their Chief Economist – Steen Jakobsen – sums this up in their introduction:
“Don’t think society can [continue to] be non-productive, greedy and focussing only on short-term solutions.”
Remember, these are only Saxo Bank’s predictions. Any quotes in the following are taken directly from Saxo Bank.
Good luck for the New Year!
1) Apple buys Tesla
Not as outlandish as you might think. Apple has $237bn in cash burning a hole in its pocket and mobile phone sales growth is slowing. Do they stick with “boring” financial engineering: buying back shares, or do they make a bold move into electric cars?
We all remember Elon Musk’s tweet about “funding secured” to take Tesla private that landed him in hot water with the US regulator. Saxo Bank think that Apple would pick up Tesla at $520 a share in an all-cash deal.
The new Apple-Tesla combo lets the car company expand into Europe and China to dominate the electric car industry (look out Germany – see #5 below).
2) Trump punts Powell
On the scale of outrageous predictions this one is closer to reality. The Federal Reserve Chairman, Jerome Powell, hasn’t been in Donald Trump’s good books since his appointment. Saxo Bank think that another interest rate hike “will push equities off a cliff” at the start of 2019. Powell then decides not to restart quantitative easing and gets the boot from Trump.
A new Fed Chairman more aligned with Trump’s interests (especially with his ambition to be re-elected in 2020) buys $5 trillion of the US government’s bonds to fund Trump’s infrastructure plans.
The end result is US GDP growing at 7% but inflation of 6% and the Federal Reserve holding interest rates at 1%.
This obviously does nothing for poor savers and increases inequality and social unrest.
3) IMF and World Bank stop measuring GDP and focus on productivity
We have commented on this before, most recently in this Chart of the Week. The argument is a good one: GDP doesn’t capture many of the low-cost, technology-based services and doesn’t take into account the environmental impact of growth e.g. the effect of pollution on health.
The change to a focus on productivity (output per hour worked) is complex as there are many different inputs and impacts to consider. Basically, for a country to improve people’s lot (health and happiness) it must increase the output per worker hour.
4) Global Transportation Tax (GTT) implemented as climate panic spreads
Wild weather, hot summers, droughts and flooding around the world finally trigger panic in capitals around the world. World leaders get together to slap a tax on global shipping and aviation (industries that enjoy substantial tax breaks) that is linked to carbon emitted.
Higher taxes get pushed through to the consumer in higher air fares and increased cost of goods as shipping costs also rise.
In a change of leadership, China joins other nations in making the tax mandatory, forcing the US into line. Tourism, airline and shipping industry stocks fall sharply.
5) Germany enters recession
“Auf wiedersehen, Mutti! Tariffs on German cars and a lack of digitalisation leaves Germany limping into a recession before the end of 2019. As well, Merkel declines to run for chancellor again, setting up a power struggle in German politics at a time when the country needs stability and a major transformation of Europe’s most powerful economy.”
The German car industry makes up 14% of German GDP but is a long way behind others in terms of converting to electric vehicles. 55% of all new global car sales in 2040 will be electric but Germany is a long way behind. Add in “peak anti-globalisation”, tariffs on German cars thanks to Donald Trump, and a weak German Chancellor on the way out, and the stage is set for a German nosedive by the third quarter or 2019.
6) Australian housing goes bust, launches quantitative easing
“The debt-fuelled surge in Aussie house prices has led to one the longest rallies in the world, with prices gaining a monstrous 6,556% (373% after adjusting for inflation) since 1961. The “Australian Dream” was financed through an epic accumulation of debt as interest rates collapsed, with household debt standing at 189% of disposable income.”
In 2019, Saxo Bank think that an over-valued property market, lending squeeze and global slowdown will see house prices halve, pushing the economy into recession.
Australian banks will be deemed “too big to fail” and will be bailed out.
7) EU forgives debt
“From Ancient Babylon to 1930s Europe, debt jubilees have been far more common than most of us may realise. As demonstrated by economists Carmen Reinhart and Ken Rogoff in their seminal work “This Time is Different: Eight Centuries of Financial Folly”, restructuring and write-offs have also played important roles in resolving financial crises.”
Saxo Bank think that Italian debt will be the trigger for debt forgiveness in 2019 as Europe seeks to get ahead of the next crisis. In the end, rather than see the European project fail, Germany and the rest of the core European nations back debt forgiveness (also called “debt monetisation”).
We’ve pointed to this endgame before. But it won’t come before a good deal of pain…
8) Solar storm strikes US - damage bill hits $2 trillion
The sun enables life on earth but it’s not a benign ball of flaming hydrogen. From time to time it flings actual matter out into space. Previous solar storms have disrupted telecommunication networks.
In 2012 the Earth had a narrow miss, avoiding a solar flare by a few weeks. If a similar solar flare hits the Western hemisphere of the Earth in 2019 – as Saxo Bank predict – it would knock out satellites and power grids. That means no GPS, causing chaos in both the air and on the ground.
The cost of launching all those new satellites and getting the grid back up and running? Saxo Bank estimate $2 trillion.
9) Corbyn sends GBP/USD exchange rate to parity
“After serving in the most challenging and thankless prime ministerial role since Winston Churchill, Theresa “The Cat” May finally runs out of her proverbial nine lives and her Frankenstein of a Brexit deal is dead on arrival in the UK parliament as the March 29 Brexit deadline rolls into view.
This forces a delay of the Article 50 expiration date and snap UK elections. The Conservative party splits down the middle over Brexit with a third of their number mounting a doomed charge of the “Sovereignty or Death” brigade. Labour sweeps to a resounding victory and names Jeremy Corbyn as prime minister on the promise of comprehensive progressive reform and a second referendum on a “to-be defined” Brexit deal.”
With a strong mandate he embarks on a “scorched earth campaign to even out the UK’s gross inequalities”. Re-nationalisation leads to more government borrowing and a wider deficit. Inflation rises and businesses run for the hills.
Sterling gets crushed. The sterling-US dollar exchange rate (cable) falls 20% to parity: one dollar equals one pound for the first time ever.
10) Corporate credit crunch crushes Netflix
The demise of Netflix starts with General Electric (GE). GE loses credibility in the credit markets as investors panic over its $100 billion in liabilities that are coming due just as the company’s cash flows are falling.
The cost of insuring against default by GE rockets to over 6%.
GE loses control and files for bankruptcy.
The shockwaves ripple through the system, hitting Netflix, with its $10bn of debt. As funding costs double the company is unable to keep producing content.
This chain reaction in corporate bonds spreads uncertainty into high-yield. Saxo Bank see a Black Tuesday coming as exchange traded funds get hammered as their illusion of liquidity is laid bare. Panic selling leads to funds withdrawing from the market in a single session bloodbath.
“The fallout in the ETF market becomes the first warning shot of passive investment vehicles and their negative impact on markets during turmoil.”
Credit for these predictions goes to Saxo Bank. For more on their predictions, including short summary videos for each one, visit Saxo Bank’s Outrageous Predictions page