Steens Chronicle: Three things cant be hidden long: The

sun, the moon and the truth (Buddha)

This week saw US GDP rebound an impressive 4.0% taking the run rate for GDP in 2014 to
2.3% still shy of the ambitious 3.0% the consensus firmly believe in. Wall Street is busy selling
strategies on how to hedge the coming hike in policy rates from Fed and we are, again, told how
rates will explode.
This narrative will implode and shortly if I look at Saxo Bank's JABA models:
Main Macro and Market calls:
Fixed income will outperform all assets class in 2014 View established in Q4-
2013. Long 1.5% Danish Government bond, Long Bunds futures, Long 10 Y USA.
US Dollar will sell off in H2 of 2014 NEW VIEW. Long EURUSD and adding short
USDJPY. Targets: 1.40+ and 96.00 USDJPY. Yield in US will accelerate to downside in
Aug-Nov.
Germany will reach negative growth by Q1-2015 & France will be in recession. Euro
growth reach zero again. 2014 another lost year in economics and non-reforms
Inflation expectations will bottom in Q4 major buy signal for gold, silver and more
importantly mining.
Short Dax since 10.000 - and still believe in 25-30% correction in H2-2014 as projected
all year.
Geopolitical risk will see keep energy prices elevated leaving the consumer with less
disposable income and companies with thinner profit margins.
========================================================================
ALPHA Positions: (all of which is more than three month old except EURUSD and Crude)
Fixed income: Long Bunds since November 2013 / Long 10 Y since April adding IEF on this
Fed scare
Equity: Short DAX only
Commodities: Long Sep. WTI Crude (since two weeks ago)
FX: Long EUR/USD from yesterday just below 1.3500 in Sep. Futures, Short AUDUSD Sep
Futures (one month old), short ZAR calls and looking to sell USDJPY
========================================================================
BETA positions:
Long 80% fixed income since Q4-2013 mainly Danish government bonds, Bunds and IEF.
Long 15% long equity: AA, INVN, VALE looking to buy mines, insurance companies and
utility in Germany. Major short position not confirmed yet.
Cash 5%

The world will see lower growth & lower yields in 2014 - yet another lost year in non-
reforms and easy money
There is no denial Q2 GDP was good, neither that the US has created more jobs (mostly part-
time though), but that the Fed is ready to take a risk and go early on raising interest denies
history and even logic.
Furthermore, the US GDP was always going to rise in Q2 Our JABA models had this outlook
from late last year:

SAXO BANK Economic JABA model on US GDP

(*) The Saxo Bank JABA model is a proprietary model that uses lead and lags from multiple
business & economic vectors to predict future moves.
The pink dotted line is GDP note how is rises in Q2 only to collapse into Q1/Q2 2015
US GDP has averaged 2,0% in the last five years I dont see it rising from this low-trend level
and on the GDP I have following comments:
1.) From the 1
st
GDP release to the final 3
rd
correction the net change is on average 1.46%
since 1970s I see Q2 being 2.5% if not 2.0% offered by its third correction

2.) Tax receipt data does not confirm the uptick:


3.) US GDP has been reduced to an exercise in measuring inventories. Its extremely
volatile but also important to note they are way above their average for the last eight
quarters further more in the last five years US GDP has grown 2% per year when you
exclude inventories the so called Real Final Sales even Q2s numbers was? Yes 2%!

4.) Disposable income continues to lag and so does housing the two key components in
the US economy.

Clearly, to me, this short-term sell-off is directly correlated to a narrative dictated by Wall Street
to create trading volumes. Yes, it is a hard claim, but rest assured that next time chairwoman
Yellen has a chance to show her extremely dovish credentials she will. A bigger concern for
the Fed must be the fact Wall Street in its narrative almost totally ignores the wording and the
text from Fed officers. Fed communication policy is failing day by day and its projections have
little impact on investors.
My key call both in macro and trading remains new lows in interest rates (10 Y and above in
maturity) by Q1 or Q2 2015. The high growth expectations and denial of international
geopolitical risks will accelerate the move to the downside inside the next two months.
I suggest adding to IEF or simply buying more 10 Year Treasury bonds.
A new call is a weaker US dollar over the next two months. To that end I have added long EUR
Sep Futures to my Alpha portfolio yesterday (31
st
July) below 1.3500. US data will disappoint as
shown in the Saxo Bank JABA model and our US dollar model is now supporting the same
outlook.

I expect EURUSD to trade 1.40+ on the above plus deflation in Europe & USDJPY to trade
towards 96/95.00 in next cycle.
In Europe my view is similar the big call being Germany will hit negative growth by Q1-2015
this call has been in place since Q4-2014 due to several factors:
1.) Rebalancing of growth in Asia the investment drive in China and rest of Asia since
2008 has kept Germany afloat growth-wise through export orders but now the net flow is
negative.
2.) The US current account deficit has halved over the financial crisis from above than 400
billion US dollars in deficit per year to less than 200 billion. Germany and export nations
simply need to find an additional 200 billion dollars of exports just to stand still. It also
raises a key questions (hat-tip: Bo Petersen): Who can afford someone else's growth?
- or put differently: If the Germanic model of exporting only should work somebody must
accept a deficit.....in low growth, rising deficits and debt service, that someone is
becoming ever more elusive!
3.) Germany has the worst energy policy in Europe, if not the world. It decided to be
dependent on Putins gas instead of nuclear power. Electricity in Germany is now a
luxury good for many households. Only Denmark has higher electricity prices.
4.) The minimum wage and lack of labour market reforms. The new coalition rolled back or
even reversed some of the great progress made since Schrder. I have a lot of
sympathy for Chancellor Merkel, as a female leader and a former east-bloc citizen. But
clearly, she has made a lot of strategic mistakes in trying to keep her chancellorship
I have been long fixed income in Denmark and Germany since Q4-2012 the target is sub 1%
and new lows in yields as deflation will finally make investors realise we are steering straight to
Japanisation due to inactivity and lack of reform.
If Germany hits zero growth in Q1-2015 where does that leave rest of Europe, especially
France? Yes..indeed.



Finally, the missing link in the puzzle is China again our Saxo Bank JABA model has seen an
uptick but remember its based on doing more of the same in China spending fiscal Yuan's
instead of changing structure. China remains a story I doubt, but the model rules:


Finally,
Energy is my new focus. Rising geopolitical risk keeps prices elevated and many years as a
trader in the US reminds me that the correlation between gas prices and consumer confidence
is almost one to one.
Our Saxo Bank JABA model sees higher energy prices in this cycle and this will subtract from
consumption and growth but also makes Germany and other energy deficient countries look
naked in the strategic field of providing energy cheaply and efficiently.

Whats even more concerning is that inflation-adjusted energy prices are now back at 1970s
prices yes the last true energy crisis, where I as wee boy could not play football on Sundays
as no one was allowed to use private cars on Sundays!


I very much doubt that the Fed scare initiated the sell of I have been looking for the Fed will
not move early, neither does the data in truth support the present narrative of US recovery, but
what concerns me and could create added momentum is bloated VaR value at risk. Dont
forget we are leaving behind the lowest recorded volatility in FX and equity which means that to
get a real return many investors have extended their leverage as their confidence rises. Banks
are fighting to get ready for AQR (asset quality review) in Europe and increased capital
requirements in the US which means the banks are carrying the lowest inventories of risk to
their balance sheets EVER!
Many people think they understand options very few realise that the real risk in options is not
volatility per se, but discontinued pricing the fact prices do not go up and down in the
expected range but jump by several standard deviations. Thats 2008, 2000, 1998, 1992, and
1987 for you. Fat tails. They generally happens when the market is at its most confident and
can see no wrong. The narrative becomes one of infinite returns for very little risk. Sounds
familiar?
Yes, the truth is often ugly, but often liberating too. We need to move away from chasing paper
profit to investing in people, ideas and prospects. We should not fear the coming sell-off, but
embrace and use it for creating a true mandate for change. Its about time.
Safe travels,
Steen Jakobsen

My research on www.tradingfloor.com: https://www.tradingfloor.com/traders/steen-jakobsen
My Twitter account: https://twitter.com/Steen_Jakobsen
Latest important links:
GDP US comment: https://www.tradingfloor.com/posts/us-1st-gdp-release-an-impressive-40-
but-watch-the-corrections-comingfirst-of-our-jaba-mo-1209715
War and markets: https://www.tradingfloor.com/posts/steens-chronicle-war-markets-1125555
From here to eternity in the age of low interest rates: https://www.tradingfloor.com/posts/from-
here-to-eternity-in-the-age-of-low-interest-rates-999217
My macro presentation for Q2-2014: State of flux: https://www.tradingfloor.com/posts/macro-
update-global-economy-in-a-state-of-flux-656762
Germany may have won the World Cup but its economy is cooling fast:
https://www.tradingfloor.com/posts/germany-may-have-won-the-world-cup-but-its-economy-is-
cooling-fast-1076281