Ten Outrageous Predictions for 2020

Ten Outrageous Predictions for 2020

Will an Asian digital reserve currency tank the U.S. dollar by 30 percent versus gold? What if the Democrats win a clean sweep in 2020 election? As part of its tradition, Saxo Bank has released its annual set of «Outrageous Predictions» for the year ahead. 

These «Outrageous Predictions» presented by Saxo Bank should not be considered as its official market outlook, but viewed as events and market moves deemed outliers with huge potentials for upsetting consensus views.

1. An Asian, AIIB-backed, digital reserve currency tanks the U.S. dollar by 30 percent versus gold

Faced with a deepening trade rivalry and vulnerabilities from rising U.S. threats to weaponise the U.S. dollar and its control of global finances, the Asian Infrastructure Investment Bank creates a new reserve asset called the Asian Drawing Right, or ADR, with 1 ADR equivalent to 2 US dollars, making the ADR the world’s largest currency unit. The ADR is powered by blockchain technology and regional central bank reserves are loaded up with quantities of this reserve currency — equivalent to a combination of existing gold reserves, current non-US dollar FX reserves, GDP size and trade volumes.

The ADR is not tradeable by the general public given that it is a reserve asset. It represents a basket of currencies and gold, with the Chinese renminbi heavily prominent in the mix and the U.S. dollar weighted at below 20 percent. The redenomination of a sizable chunk of global trade away from the U.S. dollar leaves the U.S. ever shorter of the inflows needed to fund its twin deficits. The US dollar weakens 20 percent versus the ADR within months and 30 percent against gold, taking spot gold well beyond $2000 per ounce in 2020. 

2. Australia's nominal GDP doubles on MMT, causing the AUD to rally strongly

As consumer confidence and employment starts to plunge in early 2020, the Australian government decides to embark on a MMT-inspired economic policy aimed at restoring confidence, stimulating GDP growth and attracting investment. Using the largest fiscal stimulus programme in Australia for at least 30 years, this means massive increase in public spending in infrastructure, the health system and education, as well as the implementation of ambitious programmes to reduce the cost of living, provide affordable housing, reduce taxation and address environmental issues.

The strong rise in fiscal spending contributes to a jump in consumption and investment, almost doubling Australia’s nominal GDP rate to 8 percent in 2020. The business community applauds this bold new economic policy stance. Confidence and risk appetite are back. The trade-weighted AUD rallies and AUDUSD roars back to 0.8000.

3. Stagflation rewards value over growth

With rates at their effective lower bound, and the U.S. running enormous and growing deficits, the incoming recession will require the Fed to super-size its balance sheet beyond imagination to finance massive new Trump fiscal outlays to bolster infrastructure in hopes of salvaging his election chances. But a strange thing happens: wages and prices rise sharply as the stimulus works its way through the economy, ironically due to the under-capacity in resources and skilled labour from prior lack of investment. 

Rising inflation and yields in turn spike the cost of capital, putting zombie companies out of business as weaker debtors scramble for funding. Globally, the US dollar suffers an intense devaluation as the market recognises that the Fed will only accelerate its balance sheet expansion while keeping its policy rate punitively low. US unemployment rises and growth stagnates, even as inflation spikes ever higher. The year 2020 ends with the highest misery index (unemployment plus inflation) since the 1980s.  As the market narrative switches to stagflation, value companies and their solid, right here, right now earnings and dividends are highly prized over the stumbling growth companies, where weak growth weighs and where crazy high multiples were always about the mispricing of capital. The iShares MSCCI World Value Factor ETF outperforms the FANGs by 25%. 

4. ECB folds and hikes rates

In an unprecedented turn of events, in early January 2020, the new president of the ECB, Christine Lagarde — who has previously endorsed negative rates — executes a volte-face and declares that monetary policy has overreached its limits. She points out that maintaining negative deposit interest rates for a longer period could seriously harm the soundness of the European banking sector. In order to force euro area governments, and notably Germany, to step in and to use fiscal policy to stimulate the economy, the ECB reverses its monetary policy and hikes rates on January 23, 2020.

This first hike is followed by another a short time later that quickly takes the policy rate back to zero and even slightly positive before year-end. As the EU simultaneously warms up to fiscal expansion, the market reaction is surprisingly positive, European banks make a comeback as the EuroStoxx bank index rises by 30 percent.

5. In energy, green is not the new black

The combined forces of lower prices and investors avoiding the black energy sector has pushed the equity valuation on traditional energy companies to a 23% discount to clean energy companies. In 2020, we see the tables turning for the investment outlook as OPEC extends production cuts, unprofitable US shale outfits slow output growth and demand rises from Asia once again. 

And not only will the oil and gas industry be a surprising winner in 2020 — the clean energy industry will simultaneously suffer a wake-up call. Investors must realise that for clean energy companies, the average return on invested capital versus the weight-adjusted cost of that capital is a terrible 0.5, meaning that the industry is actually destroying capital. The VDE (Vanguard Energy ETF) / ICLN (iShares Global Clean Energy ETF) ratio jumps from seven to 12 in 2020 as clean energy investment doesn’t pay while dirty energy does.