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The New Nothingness — Saxo Bank Letter

By Steen Jakobsen

The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.” – Churchill

I have noticed a very troubling trend recently – everywhere I go, I’m the optimist. This concerns me and should concern you as well as I am normally introduced as someone who has predicted five of the last two crises.

I write this on the Copenhagen-bound plane that brings me back from a visit to Slovenia and Croatia, where everyone has given up on the future. I found the same on a recent trip to Hong Kong and Australia, and on another occasion in Turkey before that.

We have zero growth, zero inflation and zero hope. That combination has left the countries of this circumstance in total apathy as zero rates are being interpreted as meaning that no reforms are needed. No inflation means no new margins as well as no new wage bargaining, and zero hope means politics and elections may change the affiliation of countries’ leaders, but not their politics and certainly not their vision for the future.

This is one of the unintended consequences of zero-bound economies and policies. This apathy has, however, reached a zenith-point that needs to be addressed. Media and policymakers continue to talk about what we can’t do, leaving no room for talk of we can do and characterising dreams as mere fantasies, things best left to children.

This new nothingness is creating a youth, a political system and an economic outlook which is based more in peoples’ heads and minds than it is in reality. Every country I visit has terrible macro policies, and features a political class who are mainly interested in maintaining the status quo (as well as a dynamic micro economy). There are always business people and students who are willing to do more and better – to go higher, longer and further – but they are drowned in this “nothingness reality”.

Here is my solution, then, which should and would work.

First of all, everybody needs to respect why God gave us two ears and one mouth: it means you listen twice as much as you talk. We are designed to listen more than we talk!

Secondly, everyone needs to be more ambitious. For yourself, your country, your company… talk about what you can do and not what you can’t do.

This is my political and economic platform (or rather my non-platform, given that I am not actually running for office); it’s simple and costs close to nothing to implement:

Promise No. 1: I promise to do absolutely nothing as your president, except support the country in everything it does.

Macro kills productivity, innovation, personal freedom, and dreams by misallocating capital and resources and by limiting ideas and expression. A rich society grows from the bottom, not from the top.

Promise # 2: The public sector will not be allowed to grow in size for the next ten years.

No one will be laid off, but the private sector needs to be able to outgrow the public sector, while the remaining public sector needs to be more ambitious. The public sector should be the best at the job it does – nothing less, nothing more. The public sector has a central role in any society, and its role is to that which only it can do.

Promise # 3: For every new law introduced, one law needs to be go away. There need to be “sunsets” built into most laws which deal with business, tax and incentives. The administrative complexity is reaching new all-time highs every single week, creating “control costs” which have no utility are unproductive.

Promise # 4: All credit and political capital should be invested in SMEs – small-and medium sized companies. 

EU studies show that 85% of all new jobs are created in the SME space. Additionally, 100% of productivity and innovation lies with SMEs. Most of this sector’s considerable contribution comes from startups, hence there needs to be a focus on incentive structures for starting a new business.

I suggest tax amnesty for first three years (most companies don’t make money before their fifth year anyway!) and propose that investments into startups be made deductible in top tax and pension schemes

This is it – It represents the reverse-engineering of my Bermuda Triangle of Economics theory which explains how today, and through zero bound rates, 20% of companies (listed companies, banks and state-owned-enterprises) get 100% of credit and political capital. This means their funding rates are 300-400 basis points lower than a normal business cycle.

Meanwhile, SMEs (the other 80% of companies) get zero credit and zero political capital.

Stocks go up as discounted cash-flows (300-400 bps below normal) result in higher valuations. Unemployment and inequality keep rising and there is no growth – no productivity, no political changes and no hope.

There is a reason why hope is at zero. The systemic failure of policymakers to understand and reverse the worst monetary experiment in history has created a situation where we need a deep crisis to shake off the mantle of this nothingness reality.

I am optimistic – technology and smart, capable, well-educated people stand ready to do their part if they only get the chance. The 80% can get us back on track in less than five years as growth, if given the chance, will be exponential and not slow.

My travels prove to me that the world is stuck in neutral. Everyone, in a sense, wants to be “half-pregnant”, wallowing in the idea that “things could be worse” while not dealing with reality.

The consequences for markets are manifold: Companies can’t continue to grow top-line earnings when their customers – the 80% – have less to spend. At this point, a zero-rate environment is one in which “financial engineering” has reached its inbuilt maximum, the pinnacle of the Excel spreadsheet maker’s art (discounted cash-flow close to zero = infinite valuation).

In addition? Zero expected returns for equity markets, a normalisation of interest rates – not based on growth but instead on the need to “normalise” zero bound – and a tectonic shift from investing in “paper money” to doing so in productivity and jobs among the 80%.

Expect the Federal Reserve to issue a margin call on asset inflation in June or September, a Grexit, and a much stronger US dollar (EURUSD at 1.10) in a final move where lack of liquidity and shortage of access to USD funding will create a “mini-crisis”.

The world only ever changes direction after a crisis, and all macro changes stem from policy mistakes.  2015 is a lost year. I think that 2016 will see us leave the nothingness reality behind, however, and I am now as optimistic as I have ever been. Why, you might ask? Because things have never been worse!

Hellerup, 17 April, 2015

Chief Economist Steen Jakobsen Steen Jakobsen was appointed to the position of Saxo Bank’s Chief Economist in March 2011. Mr. Jakobsen returned to the Bank after two years’ absence. During that time he has been Chief Investment Officer for Limus Capital Partners. Prior to his departure in early 2009, Mr. Jakobsen was with Saxo Bank for almost nine years as Chief Investment Officer. Mr. Jakobsen has more than 20+ years of experience within the fields of proprietary trading and alternative investment. In 1989, after finishing his studies in Economics at Copenhagen University, he started his career at Citibank N.A. Copenhagen from where he moved to Hafnia Merchant Bank as Director, Head of Sales and Options. In 1992, he joined Chase Manhattan in London as VP, Head of Scandinavian Sales, and then the Chase Manhattan Proprietary Trading Group. 1995-1997 he worked as a Proprietary Trader and Head of Flow Desk at Swiss Bank Corp., London. In 1997, he became Global Head of Trading, FX and Options at Christiania (now Nordea) in New York until he joined UBS in New York in 1999 as the Executive Director in the Global Proprietary Trading Group.