Jakobsen: Europe Is Hitting Panic Button

Saxo Bank's chief economist Steen Jakobsen does not shy away from making strong calls on the big economic picture. So strong, in fact, that he produces a yearly list of “outrageous predictions”. He doesn’t always get it right – for example he said that Germany would go into a recession in 2014 – but Steen is known for using data to forecast trends that often turn out to be bang on the money.

Steen is regularly quoted in the financial media in Europe. The outspoken and outrageous economist will feature on our Macro Ideas panel at Inside ETFs Europe, our annual conference, in Amsterdam on 9 June. To register or view the agenda click here.

ETF.com: You have a strong view on what gold will do over the next 18 months, can you tell us a little more?

Steen Jakobsen: Sure. Gold has been extremely unattractive as an investment. First, of course, because the real rates in the world have been increasing due to inflation. So inflation has been a negative, the dollar has been a negative, and now there has been a stabilisation in both.

More importantly, when you have zero growth and zero inflation, it's pretty clear that you have to expect zero returns as well and, of course, your gold then becomes very attractive.

People are flying to quality assets because we have been noticing more volatility within fixed income. I think we can expect an increase in bond yields of at least 100 basis points over the course of 2015 and people will seek other assets in that kind of environment.

Equities will trade okay over the summer and will be the last to move. Basically, on a risk reward basis, the commodity [gold] remains one of the cheapest.

ETF.com: When you say we expect more volatility, do you mean spikes like we saw in October 2014 or just generally more choppy markets going forward?

Jakobsen: I think there are two kinds of volatility. You have geopolitical volatility, which is uncontrollable. Then you have market volatility.

Don't forget, if you look at a timeline of last year, oil prices crashed by 50 percent which had a big impact. We then had a couple of market flash crashes. Clearly, the market inability to take the high volumes, where everyone has the same position and trades in the same momentum, has created a risk profile which is significant in terms of the ability to transact: it's very easy to access investments but it's increasingly difficult to exit investments.

ETF.com: You said in a recent blog that the ECB was hitting the panic button. What does that mean?

Jakobsen: Just over one month ago Draghi was sitting in his ivory tower, congratulating himself personally about the success of QE (quantitative easing). But sitting here today, he is faced with a different picture.

Add to this the poor data so far this quarter – it’s been very disappointing – which is a surprising picture for Europe.

Then of course it's panic because the program was initially going to be 60 billion euros, every single month, similar to what you see in the U.S.. And now, less than one month after the start, they are arguing about the amount that should be issued and increasing it.

ETF.com: Do you think that deflation fears are generally passing in Europe? We saw, for example, that the UK slipped to -0.01 inflation in April, the first time it had gone negative in 60 years.

Jakobsen: I've said it all along and I've written all along. I think inflation expectations, and the whole discussion on inflation, has changed.

Inflation is lacking relative to the real economy. I'm not very concerned about that. I think a couple of very good long-term investors have also pointed out that just because inflation is not high, it’s not the same as having negative inflation.

This issue is always painted in terms of being a concern. People are starting see some earnings power and an ability to finally increase stock prices.

Look at historical charts of raising interest rates and their effects on inflation. It's rarely an aggressively increase: it’s the elevated use of the foreign exchange levels over the next one, two to five years, which, I think is clearly more inflationary.

ETF.com: We might be obsessed with what the Federal Reserve is doing in the U.S. but are markets in China and Asia being driven by the same factors?

Jakobsen: I think, historically, they have. But, as you know, I think there is a huge amount of power change in Europe and in the world. I think you and I are drawn to look first to the U.S., secondly to London and thirdly to Japan. In the future, everyone who wants to trade finance and understand trends needs to look to China first and foremost. In GDP terms China is the biggest country in the world already.

They have financial muscle compared to Europe, which is mostly accumulating debt in Frankfurt and the U.S. [Meanwhile, the US and Europe both continue] to spend money they don’t have.

There is a very tight shift going on now in terms of what's important in the world. In my mind, what’s happening in Beijing is already more important than the actions of the Federal Reserve.