Entertaining Predictions for 2011

Every year around this time in December, Saxo Bank, an online Danish investment bank, entertains us with its predictions for the upcoming year, and this year is no exception. Saxo Bank just announced its predictions for 2011, and, as usual, they are outrageous, contradictory and illogical. Of course, they have to be outrageous to be entertaining particularly when their success rate is only about 30 per cent, which is close to the rate of success of an average person making predictions at random from a prepared list of possible events.

Saxo Bank’s predictions are inspired by the black swans of Nassim Taleb’s book, Saxo Bank says, which is a book about events that are highly improbable (which Nassim Taleb calls “black swans”) but their occurrence could have significant impacts. These predictions may be improbable but have potentially massive impact on the market and even the economy in general, Saxo Bank believes, and suggests that its clients might use them to stress test portfolios, or to think about far out-of-the-money options. What is particularly interesting, however, is that many people do believe these predictions and follow them as gospel thereby rendering them some value. As such, and despite their contradictory and outrageous nature, these predictions tend to affect the market ever slightly as Saxo Bank suggests. This is the herd effect that so many analysts talk about and take into consideration in their technical models about the market. Whatever the case may be and for whatever their worth, ladies and gentlemen, with the holiday spirits and the New Year upon us and without further ado, we present to you Saxo Bank’s ten predictions for 2011.

* US Congress will block Bernanke’s QE3 (the third round of Quantitative Easing)

* Apple will buy Facebook

* US Dollar Index will top 100 (It is currently fluctuating between 75 and 80)

* US 30-year Treasury yield will slide down to 3 per cent

* Aussie-sterling will dive 25 per cent

* Crude oil will gush up (perhaps to $110 a barrel) before correcting by one third

* Natural gas will surge 50 per cent

* Gold will power up to $1,800 and more as currency wars escalate

* S&P 500 will reach an all-time high

* Russia RTS Index will reach 2,500 (Currently fluctuating around 1760)

These predictions are not based on any scientific analysis and Saxo Bank offers very little “logical reasoning” for them that we mention a few below.

The reason why the US Congress is likely to block Bernanke’s QE3, Saxo Bank says, is that a few politicians in the US, e.g, Ron Paul, have been increasingly critical of the Federal Reserve’s policies of quantitative easing, bank bailouts and the endless public debt, and may succeed in blocking any future rounds of quantitative easing of the Federal Reserve that Ben Bernanke, the Fed’s Chairman, signaled he would do once again to bail out the troubled banks and/or local governments. Meanwhile, it is likely that some large, too-big-to-fail banks may need such bail-outs as their troubled mortgage portfolios continue to seriously threaten their solvency.

The dollar will strengthen and its index will top 100 in 2010 because “The economic growth trajectory in most areas of the world appears healthy for a time in 2011 – at least outside of Europe and Japan. But then trouble occurs in China, where its new 12th five-year plan aimed at increasing consumption fails to function as hoped. With the Chinese industrial base growing more slowly or not at all as a result of the policy shift, the satellite countries dependent on Chinese demand see their economies facing a rough adjustment. This puts global risk appetite in a tail spin, and with the Japanese economy struggling and the Eurozone in disarray, the US dollar suddenly doesn’t look as bad as it did previously. This is especially the case since the market was massively short of the currency at the beginning of the year. The unwinding of these positions pushes the USD index 25 per cent higher to over 100 late in the third quarter of 2011”, Saxo Bank says.

Crude oil will reach over $100 a barrel in early 2011 “on the wave of the euphoria that the US economy has broken free of the shackles”. They further reason that “Unlike 2008, there’s no follow through to drive the spike higher and investors are left holding oil positions they cannot sustain. Crude succumbs to a violent one-third correction lower later in the year”.

Natural gas enters 2011 with a supply surplus as the global economic downturn has resulted in supply exceeding demand for two years. But heading into 2011 the fundamentals for natural gas will improve dramatically, Saxo Bank explains. It also predicts an unusually frigid cold snap that will lead to a rapid depletion of natural gas stocks. And thus, natural gas will experience a one-in-25 year move up by 50 per cent in 2011, Saxo Bank predicts.

As for gold, the ‘currency wars’ return in 2011, the US trade deficit widens, and as it does, President Obama’s plan to ‘double exports in five years’ becomes increasingly unlikely pressuring the US Congress to pursue a weaker dollar. That, in turn, puts pressure on China, and as investors flee to metals in search of some stability, the gold shoots up to $1,800 an ounce. Note that we offer no comment about the obvious contradiction between this prediction and the strong dollar prediction above: Here they say that the dollar will weaken, but above they say that the dollar will strengthen.

And finally, the S&P500 will go up to 1,600 and beyond because the market will keep on going up as Bernanke, using his mandate of ‘make sure the stock market keeps going up’, continues to pump liquidity into the system in 2011, Saxo Bank says. Here too, we offer no comment about another clear contradiction: Here they say that Bernanke will continue Quantitative Easing and above they predicted that the US Congress will block any further quantitative easing that the Fed might attempt.

We offer no comments about these predictions and/or their logic (or lack of) except that they are entertaining. Happy New Year.

* With contribution from Bruce H. Pugesek, President of Voyageur Research

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