Saxo Bankâs Outrageous Predictions 2008 If youâve read Saxo Bankâs yearly Outlooks over the last few years, youâll know we donât hold back in our annual attempt to predict the black swan sightings in global markets for the year ahead. Remember though, these predictions are made more in an attempt to provoke thought than at accuracy! This year, we have to mention our predictions are a bit on the pessimistic side â so letâs hope that weâre very wrong with the gloomiest of them. 1) Ron Paul elected President of the United States Weâre starting with the most outrageous first! One would imagine that a party with the least popular president to inhabit the White House â ever â wouldnât stand a snowballâs chance in Texas of getting a new candidate elected to the presidency. But Ron Paul is no George Bush Jr., even if he is a Republican like Bush and is from Texas like Bush. His libertarian, anti-war platform is about three standard deviations away from the platform of any other Republican candidate â or even Hilary Clinton, for that matter. Paulâs share in the Republican candidate polls has rocketed from 1 % to 6% in the space of a few months and there is the best part of a year to go until the election. As should be clear from this yearâs Outlook, we are quite negative on the US economy in 2008. A general slowdown and stock market turmoil should increase the odds of a Ron Paul nomination as he has been the only candidate to speak frankly about the budget and current account deficits and the dollar crisis. 2) S&P500 falls 25% from its 2007 high to 1182 Why 1182? That would be an exact 25% drop from the 1576 high the S&P500 index reached in mid- October of this year. History shows that a stock market drops 15-30% when housing markets fail. âEasy Al Greenspanâ and âthe slice and dice any manner of junk and pass on the risk to your clientsâ investment banking paradigm triggered the biggest housing bubble in US history. The unwind from the height has already been severe â by some measures the most severe since the Great Depression â but it has further to go. So we are daring to forecast that the fall in the major US index would lie at the extreme end of the scale before we see the light at the end of the tunnel. 3) EURSEK falls to 8.8000 (now 9.4000) In 2007, the SEK was a currency of many stripes. First, it was on a weak footing as the carry trade was in focus, and its low interest rate attracted interest in selling SEK as a funding currency. Then the Riksbank moved rates onto parity with the ECB for the first time in over two years and many speculated that it could become an even higher yielder. But then a few weakish numbers from Sweden and a bout of risk aversion have put the SEK on a weak footing as 2007 draws to a close. But we believe that 2008 could be a stellar year for the currency as the still new governmentâs continued, more liberal-minded policy initiatives support capital inflows and also because rate differentials offer relative support for SEK. As an added bonus, the country sports one of Europeâs largest current account surpluses as measured by percentage of GDP. 4) USDSGD falls to 1.4000, but then rises back to 1.6000 (now 1.6000) The beginning of the righting of global imbalances has meant a stronger Singapore dollar over the last year. The Monetary Authority of Singapore (MAS) has allowed SGD to strengthen to help ease the pressure caused by strong capital inflows and inflation and as the country registered robust growth rates. This process could continue for a while into 2008 and take USDSGD toward 1.4000, but eventually the pair could rise sharply as Singapore has already taken a large share of the necessary adjustment to reflect global imbalances. SGD could also weaken as capital flows ease sharply and possibly even reverse when the market looks at the odds for a global growth slowdown and as Singaporeâs own sovereign wealth fund continues to look for overseas investments as a way to recycle its massive reserves. 6) At least three of the largest 10 US homebuilders will go bankrupt As 2007 draws to a close, many of the stocks for the largest home construction outfits in the US are rallying after Bush rolled out his desperate attempt to stem the subprime tidal wave by fiddling with rate reset mechanisms and implementing other measures that all seem like pumping medicine into a dead horse. These measures are too little and too late, as the last phases of the US housing boom were one of the worst examples of overextension by any industry ever â driven by excess liquidity (see S&P500 prediction above). Why is it that we think we need to abolish the economic cycle? The unwind of this bubble will continue and we think at least three of the largest US homebuilders could go bankrupt in 2008. If you are reluctant to go short stocks on this story, find companies that specialise in legal services. Why? This situation has the potential for endless lawsuits as this legal precedent-setting legislative proposal is guaranteed to produce a feeding frenzy for lawyers if no one elseâ¦ To save you a bit of time, the tickers for the largest ten US home builders, as of this writing, are DHI, TOL, CTX, PHM, NVR, LEN, KBH, RYL, BHS, and MTH. 7) Chinese stock market falls 40% by late summer The Chinese stock market bubble in 2007 saw one of the most remarkable accumulations of paper wealth in financial market history. The rise in Chinese equities is certainly due in part to solid fundamental underpinnings, including a liberalisation of markets and remarkable economic growth. But there are a number of factors that we believe may have resulted in an unhealthy overextension in equity prices that could mean an ugly correction in 2008 â possibly around the psychologically important 2008 Summer Olympics in Beijing. So what will provide the trigger for a sell-off? First, Chinese officialdom is showing an increasing willingness to clamp down on excessive growth with liquidity tightening. Second, some of the âfundamentalsâ in earnings are really a pyramiding of stock market gains as companies have booked profits stemming from stock market gains! Also, much of the bubble has been caused by capital controls that have kept too much liquidity bottled up in the domestic market. Signs are that those controls may be eased significantly to allow domestic capital to flow abroad and ease this pressure. So the Shanghai composite could fall as much as 40% or more in 2008. Look to buy any excessive fallout, however! 8) Grain Prices to double â again! 2007 saw the most spectacular gains in the grains complex in recent memory as wheat prices doubled and soybean prices rose to levels not seen since the wild grain markets of the 1970s. The story of grains is a simple one of supply and demand. Human population growth has slowed on a percentage basis, but per capita consumption of grain is accelerating as emerging markets switch to higher protein diets, which have a multiplier effect on the grain market. Every kilogram of beef requires 7 kilos of feed, for example. Chinese meat consumption has doubled per capita since 1990 and milk consumption has tripled since 2000. Most of the world that can be put to the till has been â this means that only pricing can stem demand in this most inelastic of all markets. Add to this the ethanol phenomenon, which many view as stealing food from people and putting into petrol tanks (watch for a growing ethics crisis in 2008 as the âstarving stomachs vs. SUVsâ debate grabs headlines). In short, the average price for the grains complex (Corn, Wheat and Soybeans) could double after having already doubled in the last 15 months. For those who would rather not trade grain futures, have a look at the ETF called the PowerShares DB Agriculture Fund. 9) World oil prices accelerate to $175 Much of the conventional wisdom on oil has been proven wrong over the past few years, as previously unimaginable new highs in the price of oil have only been a reflection of the strength of global growth, rather than an obstruction in its path. And with the weak USD and shrinking profit margins for refiners, the end consumer in many places throughout the world hasnât noticed a difference between oil prices at 99 dollars compared to oil prices at 75 dollars. Even if global growth slows in 2008, it will continue to move ahead in the emerging markets of the world where marginal energy demand is growing the most. As âpeak oilâ becomes a widely accepted principle and supply and demand do a nervous dance, the price risk in energy remains firmly to the upside. 10) UK growth turns negative The UK economy may go into a nosedive in 2008, weighed down by some of the same factors that have toppled the US. The UK housing bubble is possibly worse than the US bubble and has only begun to unwind. The Bank of England (BOE) has dragged its feet as the credit crisis has unfolded, which could worsen the situation compared with the Fed, where âHelicopter Benâ has replaced âEasy Alâ. The UK consumer is even more overextended in terms of all forms of debt than his US counterpart. Need we say more? Okay, we will: the UK terms of trade are awful and getting worse and its most important industry â financial services â is likely to see its worst recession since the internet/telco blowup of 2000-1. By Q3, UK GDP growth may flop into the negative column.