A post-vaccine recovery could overheat an over-stimulated economy, causing to central banks raising rates too quickly and bankrupt over-levered corporates, according to Saxo Bank’s annual 10 ‘outrageous predictions’ for the year ahead.
The Danish investment bank detailed 10 unlikely but underappreciated events that could send shockwaves across financial markets should they occur in 2021.
However, it stressed that these were not its official market forecasts for 2021, but that they represent “a warning against the potential misallocation of risk among investors who might typically assign just a one percent chance of these events materialising”.
It highlighted how the Covid-19 pandemic accelerated the levering up of the global economy that started during the 2008-09 financial crisis, with central banks printing more money than ever before, and slashing rates to close to zero in all developed economies.
In the report, Althea Spinozzi (pictured), fixed income strategist at Saxo Bank said one potential scenario sees the policy of “near infinite liquidity provision” and the easing of financial conditions “no matter the cost”, has forced investors to take positions in riskier assets. 
She said: “As 2021 gets under way, the merciless march of lower yields has left yield-seeking investors sitting on a pile of low-yielding junk debt with terrible reward-to-risk profiles, as zombie corporates teeter on the brink of default, having only survived the pandemic months with handouts and the lower refinancing costs.
“The investors’ risky stance is justified by the prospect of an effective vaccine bringing a new boom in economic growth.”
Under this prediction, she said there is a chance that the vaccine roll-out and removal of Covid-19 restrictions results in a sharp spike inflation.
“In perfect hindsight it turns out the economy was vastly over-stimulated during the pandemic, and the ripping post-vaccine recovery rapidly overheats the economy,” Spinozzi explained.
“Inflation rises and unemployment falls so rapidly that the Fed allows long treasury yields to spike higher, taking the yield on riskier debt with it.”
Spinozzi outlined how the Federal Reserve could make a policy mistake and cause a swath of corporate bankruptcies.
She said: “By allowing financial conditions to tighten too rapidly by allowing higher longer rates, having never implemented yield curve control as they were too distracted by the sudden spectre of 4-5 per cent annualised inflation and 6-8 per cent annualised wage gains by Q3.”
Under this scenario, corporate defaults rise to their highest in years with the most over-levered companies in the physical retail space going first, followed by any companies already struggling in the solid, pre-Covid economy.
Spinozzi said: “For the first time in economic history, a strong recovery sees rising defaults.”
As a result, the Danish investment bank said investors might consider a short position in high-yield corporate bond ETFs.
Performance of high yield corporate bond market index YTD
Source: FE Analytics
Whilst Covid-19 has accelerated the increased levels of global debt, it has also accelerated the adoption of some trend towards as e-commerce and cloud computing.
As a result, it has also increased the already growing power of big US technology companies that include the likes of Amazon, Microsoft and Google.
Amongst the 10 predictions in Saxo’s report, Spinozzi also recommended investors consider a short position in monopoly tech companies such as Amazon.
In the report, she made the outlandish prediction that Amazon “buys” Cyprus, or more specifically, redomiciles to Cyprus to skirt away from rising regulation coming from the EU and elsewhere.
In this scenario, Amazon incentivises Cyprus to rewrite its tax code to mimic Ireland’s, but with lower corporate and other taxes.
Spinozzi said: “2021 sees Amazon and other online monopoly and infotech giants from Facebook and Google to Microsoft casting an increasingly wary eye on governments looking to take them down a notch for having become too powerful, and for paying very low tax rates by shifting profits to low-tax jurisdictions.
“But EU regulators quickly get wise to what is going on and move against Amazon, forcing the company to change its practices, and forcing Cyprus and other EU countries to harmonise tax rules.
“The US and other countries also move against monopolies in 2021, as these companies are punished for their hubris.”
There were a few other predictions that also stemmed out largely from the widespread impact of Covid-19.
Saxo Bank’s 10 ‘Outrageous Predictions’
Source: Saxo Bank
One prediction saw Germany bailing out France in order to prevent a systemic collapse by bailing out the French banking system, which has seen its public and private debt skyrocket because of the pandemic.
Another prediction outlines how the adoption of universal basic income, along with tech-driven job redundancies, and working from home, causes a collapse of the value of commercial office property, commercial real estate containing retail stores and city apartments, due to 100 per cent or worse overcapacity.
Under its ‘Citizens Technology Fund’ scenario, Saxo Bank said that a new fund could be created that transfers a portion of ownership of capital assets to everyone, with extra going to displaced workers, spun as a ‘Disruption Dividend’, which would “free up enormous entrepreneurial energy”.
Saxo Bank’s chief investment officer Steen Jakobsen reiterated that the 10 ‘outrageous predictions’ were not its official view on markets and politics, but more as a means of engaging and discussing important topics they raise.
“We’ve seen the fastest bear market and recovery in history, as well as central bank balance sheets and fiscal deficits exploding at an unprecedented pace,” he said.
“So our not-so-outrageous prediction is that 2021 will bring the beginning of a reality check to the idea that “extend and pretend” can stretch to infinity and beyond, even as markets have been pricing in that very expectation.”
Indeed, even if these events were not necessarily probable, assessing the full extent of what is possible could be relevant, especially considering the unexpected nature and impact of the Covid-19 pandemic in 2020.