Steen's Chronicle: Given two options, take the third Steen's Chronicle: Given two options, take the third Steen's Chronicle: Given two options, take the third

Steen's Chronicle: Given two options, take the third

Macro
Steen Jakobsen

Chief Economist & CIO

I've been reading through the usual number of end-of-year/Outlook 2024 reports and it strikes me that there is a strong consensus in place. I'll let you figure out what it is, but... As someone who hates having no sense of direction, I decided to write out the two most likely scenarios: I will call them "Everyone is wrong" and "It's all about elections, stupid!." Of course, there are several other options, hence the title, but the two that I will outline now are the most likely in my opinion:  

Everyone is wrong


  • No soft landing (2024 will be the true cost of 2023 rate hikes).
  • No more improvement in inflation (1-year inflation swaps are already at 2% now).
  • No further rate cuts are priced in (155 basis points are priced in for the next 18 months).
  • Earnings have not yet bottomed out.
  • A Middle East crisis is a real risk.
  • Ukraine talks fail and the war enters a deadly phase, creating a massive identity crisis in the EU and the US.
  • The Fed continues to play the inflation card and steps back from political "help".
  • A funding crisis based on new record debt levels in the US (Q1 sees the largest issuance ever from the US Treasury + corporates).
  • The real cost of changing weather patterns means a massive food crisis.
  • A small bank crisis re-emerges.


What is cheap and what will happen to the market?

  • Stock market is down 50%.
  • Energy and commodities are dirt cheap (Gold to USD 3.000).
  • Soft commodities explode in price.
  • ECB and Fed end up cutting by more than 250 basis points.
  • Inflation swaps hit a new low (190 basis points) and rally to a new norm of 350-400 basis points.

It's all about the election, stupid!

  • The financial system is being "juiced" to give maximum support to incumbent political leaders.
  • The stock market is now really just a number. A game played live with big numbers. A modern-day Monopoly game. 5,000 why not 6,000 in S&P 500?
  • A soft landing does happen - magic prevails, soft financial conditions catapult a restart of the growth engine combined with fiscal overflow from 2023.
  • The Fed continues to indicate that if things get worse, they stand "on the ready." The Fed already seems engaged in changing direction with no economic vindication in November 2023. Why?
  • The Fed stops QT in a desperate move to support the market until November.
  • Elections are seen as business-friendly.
  • Peace in Ukraine.
  • The Middle East remains contained.
  • Oil and energy continue to fall on the "hope of new alternative energy sources" - the market buys the concept of green energy and forces the energy sector down.
  • Real rates hit a new recent low below 100 basis points. Inflation picks up a little and rates fall a lot.
  • The US election cycle is confirmed in the upside on stocks.
  • The US dollar goes into a tailspin and the Fed directs the market to YCC-like conditions with limited upside in rates possible.

What is cheap and what will happen to the market?


  • S&P 500 is up 20% and Nasdaq is up 35%.
  • EMG does even better than S&P 500 with a 35% gain.
  • Leveraged equity outperforms along with Russell 2000 and 3000 with 36% gains.
  • Credit spreads fall close to zero. There is less risk in corporates than in governments!
Of course, you can come up with better and more realistic scenarios, but as the simpleton I am, I will wait for one of the two scenarios above to play out in what is the most greedy, uninformed, least fundamental market in modern history.

We have politicians globally who are reality stars and live in their own fantasy and with their own economic laws: Putin, Erdogan, Trump, Meloni, Wilders, to name a few. No wonder with "reality stars" running the narrative, we will, and should, end up with an economic and political landscape governed by storytelling rather than hard facts.

Never has the market been more separated from facts than now, never has the incoming problems been ignored more; debt, spending, inflation, military, and energy deficiencies, and in 2024, we will add fundamental problems of food growth and security to the equation.

We all know that if we don't face problems, they will only grow and get worse. 2024 could be another year of pretending and postponing because major economies need "speed" and "grace" for elections. However, it could also be a year where reality meets the harsh world of fundamentals. I will let you decide: scenario 1 or scenario 2? Or is there a third option, like the one promised by Clinton, Blair, and Abe? It's unlikely, but I'm open to surprises.

You can use the above scenarios to adjust your strategy for 2024. If you think scenario 1 is only 20% likely, then your expected return would be:

(0.2 * -50%) + (0.8 * 20%) = -10% + 16% = +6%

If it's 30% and 70%, then your return would be: (0.3 * -50%) + (0.7 * 20%) = -15% + 14% = -1%

Just to give you an idea of the stakes involved.

Personally, my gut feeling based on the macroeconomic situation is that scenario 2 will happen in the first half of the year. The economist in me, however, is 100% behind scenario 1. So, don't worry, you're not the only one who's frustrated over where the market is heading.

Good luck in 2024!
Steen Jakobsen, CIO, Saxo
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