Via email, the chief economist for Saxo Bank in Denmark, Steen Jakobsen, discusses the “Saturation Point” for QE and the “Fiscal Cliff” in the US.

Steen writes …

Fiscal Cliff Comparisons

  • A lot of people are starting to compare 2012 with 1987. Yes, it’s scary.
  • Other people compare the fiscal cliff to 1937 Roosevelt where stock market tanked 50%.
  • Few people seems to realize that part of the “fiscal cliff” involved higher taxes on financial transactions, meaning it’s prudent to take your profit and pay the tax in 2012.
  • Greece is doomed. A headline today read : Soros to invest substantial amount in Greece – He did the same in Russia in 1998 – just before they defaulted.
  • All EU solutions on the table: banking union regulation probably needs treaty changes – we are at the end of line.

Saturation Point for QE Nonsense Reached

  1. We are reaching “saturation points” for QE, Macro nonsense, politics, low interest rates, intervention in markets and the concept of extend-and-pretend.
  2. The laws of the market have been abandoned and replaced by “asset manipulation”. We can discuss forever on the impact of QE, but everyone will and need to agree it distorts relative prices: It makes money cheaper and everything else expensive. QE also leads to subdued volatility between two equilibriums: The managed prices instituted by macro policy makers, and the real market price. The market then swings like a pendulum from “greed” to “fear” creating artificial volatility curves, [most often towards greed] which the market then misread as an indication of no trouble on the horizon. Meanwhile back in Reality-City the systemic risk is massive and expanding.
  3. We have paradigm shift in energy which will provide positive input to growth and reshoring of jobs to US and Europe.
  4. QE stopped having an impact on the [real] economy two years ago. Now we have reached the saturation point of QE on assets. Sure FED will print another 1 trillion, but the trend and talk even among policy makers (notably the Bank of England) is that QE impact is now limited after three year of zero interest rates.
  5. A crisis creates the foundation for a mandate for change.
  6. Social tension is rising everywhere.
  7. The EU does not work. Either they go to mini-max: Fiscal compact and the already [in place] supervision or they risk a treaty change which will take years and tear Europe apart. Greece will leave EURO inside next six month, but in a “managed fashion”.
  8. Merkel’s re-election means she needs to be more EU skeptical to create opposition for the all in SPD.
  9. A new one: Africa is the future. In 2013 investing in Africa post Q1 turmoil could be “safest bet” as Foreign Direct Investment is increasing (China has committed to in excess of 20 billion US Dollars over three years). The GDP’s are so small that “any” positive change will create exponential growth. The GDP of South Africa is 400 billion USD, slightly bigger than Denmark’s 330 billion US Dollars, but with 45 million more people and resource en masse.


We will have volatile end to the year with people looking to take profit for tax reason in the US – combined with a best compromise on the fiscal cliff likely to be a drag on growth by 1.5% (- 150 S&P; points).

The manipulation will continue for rest of 2012, but if we are right about the “saturation point” above then we are in for a big dose of reality which will have to be used to reset our portfolio towards upside – rather than downside – as the micro-economy is better than ever and the macro policies are bloated to such an extent it is difficult to continue.


Mish Thoughts and Notes

I cleaned up a few typos and added a couple of subtitles in bold and a few clarifications in braces.

I am in general agreement with at least 90% of what Steen wrote while noting that I had not thought much about Africa until now.

I too suspect we will see some sort of Fiscal Cliff compromise, without making my own guess as to size. Steen’s guess of 1.5% seems as good a guess as any, and it will tip the US into recession (assuming the US is not in recession now, which I still think it is).

I also expect QE is at the end of the line, and it never did anything for the “real” economy, ever. If QE has less effect on the “unreal” economy (asset manipulation and financials), then the downside will likely be greater than what Steen thinks. 

The macro picture: demographics, China, Europe, student debt, part-time employment, under-funded pension plans, etc., is bleak.

My primary disagreement with Steen is on the “micro-economy”. I suggest it only looks good because of distortions caused by fiscal and monetary stimulus.

Thanks Steen!

Mike “Mish” Shedlock

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