The good and the bad news about this market sell-off

By: Editor In Chief
Wed 26 August,2015

Steen Jakobsen was appointed to the position of Saxo Bank’s Chief Economist in March 2011.

Filed Under: Business News

By Steen Jakobsen

Market price action dictates direction – traditional support levels were broken violently. Yesterday’s market was the most energised sell-off since 2008/2009.

The US dollar lead this crisis and will lead back up when the low is in.

We have reached most of Steen Jakobsen’s technical targets and below is his primitive “expected” path from here (2015 low getting established).

We will see recession by H1-2016 combined with lows in all cycles – this past week was a “starter” to a bigger menu post-Federal Reserve rate hike (September/December or not at all).

The Fed should move in September, failing to do so could delay the Fed all the way to 2017 based on the predicted recession in H1-2016.  (The Fed is now 24% likely to move according to the market down from 50% one-week ago). The reason they should move is that the market and economy need a higher nominal “clearing yield” to get going again.

Strategy for next few weeks into the Federal Reserve’s crucial September meeting

We are close to having exhausted the downside for now, however in classic fashion there should and will be a re-test of 9.300 DAX and 1825/30 in S&P before we can move up.  

I firmly believe the US dollar is leading this sell-off. All “evils” come from the way the monetary system creates debt mainly in US dollars and then recycles capital back to US capital markets. China have allowed themselves to question this recycling and FIAT money system but are allowing market based prices to dictate CNY and down the line activating the Silk Road project.

Here is a simple explanation of why I think the US dollar leads the markets:

US dollar gets stronger:

 Increases price of servicing massive US dollar debt

 creates devaluation to maintain export share

 reduces commodity prices

 reduces growth for emerging market economies

 exporters lose market

US dollar gets weaker:

commodities rise

reduces burden on debt and commodities

re-sets growth higher

We live in a FIAT economy with the US dollar as the reserve currency. Since the financial crisis started we have seen a massive amount of increase in total debt; McKinsey estimates that global debt has risen by 57,000 billion USD since 2007. I will let you think about that number for another two minutes! It has made global debt to GDP ratio rise by 17% percentage points (Average is >200% debt to GDP).

Therefore 57 trillion US dollars of new debt has kept the world economy alive, but most of that debt has been created by emerging market economies which borrowed cheap in US Dollar and invested into the domestic economy. Now as the US dollar peaked so did “debt burden” and at a time where the strong US dollar also made the commodities the cheapest in 15 years – hence no real income.

The credit cycle, as in credit spreads, hit an all-time low in the autumn of 2014 – the first sign of “cost of capital” (CoC) rising since it has been one way and its up in price of money.

The US dollar index (DXY) peaked in May, and then the stock market in July/August. The peak in US dollar coincided with a final move down in commodities driven by a perfect storm: A strong US dollar and higher cost of capital which equates to a huge margin call on US denominated debt, which all emerging market countries have, hence making whether they are net importer or exporter less relevant. Add to this a massive de-leveraging cycle in banking through regulation, and the cost of capital will remain elevated to the level seen in the autumn of 2014.

The US dollar led us into this correction and it will lead us out through the mechanics of the above.


The market would not have allowed such a deep correction in 2010,2011,2012,2013 or 2014, and the fact we did have this move yesterday partly confirms my theory that we are moving towards a status/mode where monetary policy can’t help, where central banks are increasingly acknowledging that the disadvantages of too low policy rates outweigh advantages. The early beginning of the end for pretend-and-extend?

We basically have seen the early start of a true business cycle which allows for correction, resetting of prices and a better marginal cost of capital structure – if yesterday felt heavy/bad then cheer and realize that the economy will come stronger out of this if this conclusion is confirmed.

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.

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