America's Social Security Trust Fund Will Go Bankrupt; Both Gold And The Japanese Yen Will Crash; And China's Currency Will Devalue As Bad Loans Catch Up With The Over-Stretched Banking System— All In The Course Of 2010.
By Ambrose Evans-Pritchard, Telegraph,UK | 17 December 2009
AP: Saxo Bank Is Predicting A Stormy Year Ahead For The Financial World (Link To Video)
The annual "Outrageous Predictions" of Denmark's Saxo Bank are not for the faint-hearted, though there is good news for some.
- David Karsboel, chief economist, thinks the US trade balance may go into surplus for the first time since the mid-1970s, benefiting from the delayed effects of the weak dollar.
- Yields on sovereign bonds— the goods ones, not the bonds of quasi-basket cases such as Club Med, the UK, or Japan— will plummet as deflation raises its ugly head again later in 2010. The 10-year German Bund yield will fall to 2.25%. "Bunds are the ultimate safe-haven if something goes wrong, perhaps in Greece. We may even see some safe-haven buying of US Treasuries as well, despite the irresponsible fiscal policies in the US," he said.
- The US Social Security fund will finally tip over, technically going bust. "Ever since the good years of the 1960s politicians have been taking the money and spending it instead of setting it aside for the fund, but next year it will go into deficit for the first time as US demography turns. The fund is going to need a bail-out, financed by higher taxes, more borrowing, or more printing".
- Gold will spiral down to $870 an ounce from its all-time high above $1,200 last month. "There is a lot of speculative hot money in the gold price right now that needs to be shaken out. In the long run we're bullish on gold, and think it could reach $1,500 over the next five years," he said. "In fact, we would like to see the restoration of a gold standard to prevent the sort of excesses we have seen. The world has been in a bubble since the mid-1990s. They are still blowing new bubbles to keep it all going, but each bubble is shorter and shorter. It is frightening, and is all going to end in tears," he said.
- Saxo Bank is squarely in the camp of Sino-sceptics, noting that China's alleged industrial and GDP growth does not tally with weak electricity use. In any case, growth has been built on an investment bubble creating "massive spare capacity". It says 2010 will be the year when it becomes clear that there is not enough demand in the world to absorb all their excess production. The yuan will devalue by 5%, defying near universal expectations of a sharp appreciation.
- As for Japan, Saxo advises clients to sell the overvalued currency as the yen carry trade comes back into vogue and the dollar rebound gains traction. The yen will weaken from 89 yen to 110 yen against the dollar.
- Saxo advises clients to dump 10-year Japanese bonds, doubting that current rates of 1.26% are remotely sustainable at time when the public debt is exploding towards 227% of GDP.
- "The yield is ridiculously low. The Japanese are no longer saving much, and they have hardly any economic growth," he said. However, Tokyo's TSE index of small stocks is a buy with a price to book ratio of 0.77, just about the cheapest stocks in the world.
- And lastly, if you jumped on the lucrative sugar bandwagon in 2009 as India's drought played havoc with supply, get off soon. Bad weather rarely persists. Sugar is about to crash by a third.
Saxo Bank offers its thoughts as "Black Swan" risks that could paddle up quietly and bite you, rather than absolute predictions. Take them in the right spirit.