A different take on 2024: the Pretend-and-Extend A different take on 2024: the Pretend-and-Extend A different take on 2024: the Pretend-and-Extend

A different take on 2024: the Pretend-and-Extend

Steen Jakobsen

Chief Economist & CIO

Summary:  This is a letter, I wrote for a cycling event for our dear colleagues in Saxo Belgium. While written in a humorous tone, I believe there are some important points about how I see 2024 unfolding.

Barely three months into 2024, the market is already throwing a tantrum worthy of a toddler. AI stocks are inflating faster than a birthday balloon filled with helium, and the only question is when the pop comes. Meanwhile, the fixed-income market has whiplashed from expecting endless rate cuts to screaming headlines like "Fed Cuts? In 2024? Don't Make Me Laugh!"

Here at Saxo Bank, we remain eternally optimistic. Cuts? Oh, there will be cuts. A smorgasbord of cuts. We also predict the market is just a sneeze, a cough, maybe a minor allergic reaction away from a long overdue consolidation phase. Not a market crash, mind you, just a brief respite for everyone to catch their breath (and maybe top off their margin accounts).

Of course, logic and valuation would suggest a significant correction is inevitable. But hey, it's an election year! And wouldn't you know it, the "establishment" will do absolutely anything to keep the market and economy looking like a freshly manicured lawn, even if it means using a weed whacker disguised as a watering can. Expect the Fed and ECB to pre-empt the inevitable low point in the inflation cycle with a generous dose of stimulus. Quantitative tightening? More like quantitative "maybe later, honey".

In other words, we're dealing with the most manipulated market in history, all happening during a glorious super-cycle of ever-expanding debt. The US government has spent a cool $3 trillion on fiscal initiatives, netting a measly $2.4 trillion in return. Talk about a stellar investment strategy. But hey, that's how the market keeps chugging along! That's why economic data keeps looking rosy, despite the reality being held together with duct tape and wishful thinking.

When Uncle Sam throws a money party this extravagant, the party favors inevitably trickle down to risky assets. Crypto? Sure! Nvidia? Why not? Microsoft? Absolutely! As long as it promises a 30% return in the time it takes to microwave a burrito, the market will gobble it up. The hilarious part is that the market consistently underestimates its own stupidity. It truly believes "this time is different!" when, in reality, it's the same old story, just this time completely financed by debt. Just take a peek at the balance sheets of the Fed, ECB, BOE, and BOJ. They make Italy look like a financial powerhouse!

So, what are the opposing forces at play in 2024? On one hand, there's the desperate need for everything to be calm and normal leading up to the elections. The mere mention of a certain orange-hued individual sends shivers down European spines, prompting frantic scrambling to keep the wheels of the economy turning, even if it means throwing money at frivolous projects like military spending and the potential protection of a certain war-torn country.

On the other hand, the global economy is slowly returning to earth, like a deflating hot air balloon. Growth? Sure, it's chugging along better than expected, but "expected" is a far cry from "potential." Europe's been stuck in the mud for a year and a half, and the US is poised to follow suit in the second half of 2024.

So, how do we make money in this chaotic mess? The answer is to bet on the stronger impulse. In the short term, the "it's all about the election, stupid" mantra is clearly winning. But the inescapable economic gravity of slowing fiscal stimulus, ending loan programs, rising delinquencies, and the absurdly high real rates will eventually take hold.

My prediction? Things will start to shift around mid-Q2, the market's inflection point. Until then, I'll maintain a balanced asset allocation: one-third equities, one-third commodities, and one-third fixed income. But let me tell you, just like picking the winner in our one-day classic race, during Q2 though I expect I will lean towards gold, commodities, and overweighting fixed income. (Hey, getting paid 4-5% on government debt ain't half bad in this crazy world, right?)

May the spring be with you, and enjoy the race!

Steen Jakobsen
Chief Investment Officer, Saxo Bank


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