Although he says these are not predictions, he warns they are possible outcomes of the current economic turmoil that all investors should consider before building their portfolio for 2014. EU wealth tax heralds return of Soviet-style economy
One disaster scenario, Jakobsen says, is that European policy makers are forced to squeeze the wealthy in order to survive.
“Panicking at deflation and lack of growth, the EU Commission will impose wealth taxes for anyone with savings in excess of USD or EUR 100,000 in the name of removing inequality and to secure sufficient funds to create a 'crisis buffer',” he said.
“It will be the final move towards a totalitarian European state and the low point for individual and property rights.”
“The obvious trade is to buy hard assets and sell inflated intangible assets,” he added.
Anti-EU alliance becomes the largest group in parliament
Following the European theme, Jakobsen says another concern is that as anti-EU feeling spreads across the continent, the majority of sovereign states elect anti-EU parties (such as UKIP in the UK or the Party for Freedom in the Netherlands) as MEPs.
This anti-EU transnational coalition could then form a majority, which Jakobsen says would cause serious implications for the continent’s economy.
“The new European Parliament chooses an anti-EU chairman and the European heads of state and government fail to pick a president of the European Commission, sending Europe back into political and economic turmoil,” he said.
Tech’s “fat five” wake up to a nasty hangover in 2014
Turning to the US, Jakobsen is concerned that some of the S&P’s largest tech stocks are entering bubble territory.
“While the US information technology sector is trading about 15 per cent below the current S&P 500 valuation, a small group of technology stocks are trading at a huge premium of about 700 per cent above market valuation,” Jakobsen said.
“These 'fat five' – Amazon, Netflix, Twitter, Pandora Media and Yelp – present a new bubble within an old bubble thanks to investors oversubscribing to rare growth scenarios in the aftermath of the financial crisis.”
Desperate BoJ to delete government debt after USD/JPY goes below 80
Huge stimulus from the Bank of Japan, among other factors, has caused the country’s equity markets to soar this year.
Performance of index over 1yr
Source: FE Analytics
However, Jakobsen says all this liquidity could de-value the yen so far that the BoJ is forced to take unprecedented and emergency actions.
“In 2014, the global recovery runs out of gas, sending risk assets down and forcing investors back into the yen with USD/JPY dropping below 80,” he said.
“In desperation, the Bank of Japan simply deletes all of its government debt securities, a simple but untested accounting trick, the outcome of which will see a nerve-wracking journey into complete uncertainty and potentially a disaster with unknown side effects.”
US deflation: coming to a town near you
Many market experts, such as Investec’s Alastair Mundy, think that the Fed’s recent QE programme could cause uncontrollable inflation.
However, Jakobsen says inflation is by no-means a foregone conclusion, especially as the US’s fiscal debate is still unresolved.
“Although indicators may suggest that the US economy is stronger, the housing market remains fragile and wage growth remains non-existent,” he said.
“With Congress scheduled to perform Act II of its 'how to disrupt the US economy' charade in January, investment, employment and consumer confidence will once again suffer. This will push inflation down, not up, next year, and deflation will again top the FOMC agenda.”
Quantitative easing goes all-in on mortgages
Jakobsen’s next disaster scenario is also QE-related. He says one possible outcome of the current artificially inflated housing market is that the Fed is forced to increase, not reduce, its asset-purchasing programme.
“Quantitative easing in the US has pushed interest expenses down and sent risky assets to the moon, creating an artificial sense of improvement in the economy,” he said.
“Grave challenges remain, particularly for the housing market, which is effectively on life support.”
“The FOMC will therefore go all-in on mortgages in 2014, transforming QE3 to a 100 per cent mortgage bond-purchase programme and – far from tapering – will increase the scope of the programme to more than $100bn per month,” he added.
Brent crude drops to $80 a barrel as producers fail to respond
The crude oil price has already been very volatile this year, however the economist says it could get a whole lot worse.
Performance of crude oil in 2013
Source: FE Analytics
Jakobsen is fearful that the supply and demand dynamic for crude oil will swing in favour of the former, causing its price to drop significantly.
“The global market will become awash with oil, thanks to rising production from non-conventional methods and increased Saudi Arabian output,” Jakobsen said.
“For the first time in years, hedge funds will build a major short position, helping to drive Brent crude oil down to $80/barrel. Once producers finally get around to reducing production, oil will respond with a strong bounce and the industry will conclude that high prices are not a foregone conclusion,” he added.
Germany in recession
Although Germany has usually been the strongest economy in the eurozone, Jakobsen says that one possible outcome in 2014 is that it disappoints.
“Years of excess thrift in Germany have seen even the US turn on the euro area’s largest economy and a co-ordinated plan by other key economies to reduce the excessive trade surplus cannot be ruled out,” he said.
“Add to this falling energy prices in the US, which induce German companies to move production to the West; lower competitiveness due to rising real wages; potential demands from the SPD, the new coalition partner, to improve the well-being of the lower and middle classes in Germany; and an emerging China that will focus more on domestic consumption following its recent Third Plenum.”
CAC 40 drops 40 per cent on French malaise
The French economy has already shown signs of weakness so far this year, however Jakobsen is fearful that issues only become worse over the next 12 months, causing serious implications for its equity market.
“Equities will hit a wall and tumble sharply on the realisation that the only driver for the market is the 'greater fool' theory,” Jakobsen said.
“Meanwhile, the malaise in France only deepens under the mismanagement of the Hollande government. Housing prices, which never really corrected after the crisis, execute a swan dive, pummeling consumption and confidence.”
“The CAC 40 Index falls by more than 40 per cent from its 2013 highs by the end of the year as investors head for the exit,” he added.
“Fragile five” to fall 25 per cent against the dollar
Emerging markets have been very out of favour over the last few years, with the majority of investors favouring developed western economies.
Performance of indices over 3yrs
Source: FE Analytics
However, Jakobsen is still fearful that the likes of Brazil, India and Indonesia will be hit even harder next year when the Fed does eventually taper its asset purchasing programme.
“The expected tapering of quantitative easing in the US will lead to higher marginal costs of capital from rising interest rates,” he said.
“This will leave countries with expanding current account deficits exposed to a deteriorating risk appetite on the part of global investors, which could ultimately force a move lower in their currencies, especially against the US dollar.”
“We have put five countries into this category – Brazil, India, South Africa, Indonesia and Turkey,” Jakobsen added.
