Saxo Outlook 2009

OUTLOOK 2009
TURBO-GLOOM AND ANNO HORRIBILIS

– OUTLOOK 2009 TURBO-GLOOM AND ANNO HORRIBILIS –
Welcome to our yearly outlook for the Global economy.

In 2009 Investors should prepare themselves for continued deleveraging, illiquidity, volatility and uncertainty.
The global financial system has entered a new path towards the normalization of credit markets. We believe
that the last decade(s) of debt-financing were anything but normal and that we will see significant changes
in the perception of leverage and debt. Financial markets will have to adjust to the new paradigm, in which
leverage is seen more as a dangerous beast rather than an enhancer of profits. Growth will be negative across
the board, whether one looks at profit, real GDP, revenue or employment. In short, however much we wish
we were wrong, 2009 may prove to be an Anno Horribilis.
– 2 –
STEEN JAKOBSEN
CHIEF INVESTMENT OFFICER
Steen Jakobsen is Saxo Bank’s chief investment officer and a member of the
bank’s Senior Management Group.
Mr. Jakobsen joined Saxo Bank in July 2000. He designs and manages Saxo
Bank’s current trading models and fund management offerings for private and
institutional clients. In addition, Mr. Jakobsen runs the Saxo Macro fund and
the Saxo FX fund, totalling approximately $140 million in funds under manage-
ment.
Dividing his time between the London and Copenhagen offices, Mr. Jakobsen
has more than 20 years of experience within the fields of proprietary trading
and alternative investment. In 1989, after finishing his studies in Economics
at Copenhagen University, he started his career at Citibank N.A. Copenhagen
from where he moved to Hafnia Merchant Bank as Director, Head of Sales and
Operations. Prior to joining Saxo Bank, Mr. Jakobsen worked for UBS in New
York as the Executive Director in the Global Proprietary Trading Group.
DAVID BAKKEGAARD KARSBØL

CHIEF ECONOMIST
David Karsbøl is the head of the Saxo Bank Strategy Team and is responsible for
the overall macroeconomic views of Saxo Bank. He has a master’s degree in eco-
nomics (cand.polit.) from the University of Copenhagen, where he specialised
in finance, statistics and monetary economics. His master’s thesis was about
the pricing of gold since 1971 and he is known for his contrarian thoughts.
He is available for comments on the macroeconomic situation and forecasts.

David Karsbøl concentrates on Business Cycle Analysis and subscribes to the
reasoning of the so-called Austrian School of Economics (Menger, Schumpeter,
von Mises, von Hayek etc.). He believes that understanding debt cycles is inte-
gral to understanding the general business cycle.
After having worked as an insurance analyst in Tryg A/S, he joined Saxo Bank
in 2003 to work under Steen Jakobsen, who is in charge of the bank’s hedge
funds programme. David Karsbøl worked as a macro strategist until he joined
the Strategy Team in 2005. He has headed the Strategy Team since summer,
2007.
– 3 –
JOHN HARDY
CHIEF FX STRATEGIST
John Hardy graduated from University of Texas at Austin (graduated with high
honours). John is Head of Forex Strategy for Saxo Bank. Originally from Texas,
John has developed a broad following from his popular and often quoted daily
Forex Market Update column, received by Saxo Bank clients and partners, the
press and sales traders.
John is a regular guest and commentator on television networks, including

CNBC, CNBC Arabia and Bloomberg. Outside of his column and media appear-
ances, John generates trading ideas to profit from swings in the market on a
1-5 day time horizon.
He also writes regular ad-hoc commentary focusing on the major currencies,

Central Bank policies, macro-economic trends and other developments and is
one of the authors of the Saxo Bank Yearly Outlooks and 10 Outrageous Pre-
dictions. John has been with Saxo Bank for over six years.
CHRISTIAN TEGLLUND BLAABJERG

CHIEF EQUITY STRATEGIST
Christian Tegllund Blaabjerg grew up in Kolding, Denmark, and has a broad

educational background ranging from a Mastersin Political Science from Uni-
versity of Aarhus to a degree in finance from ASB, Aarhus School of Business.
Prior to joining Saxo Bank in 2007 Christian was a quantitative analyst in Danish
company Novozymes A/S within sales and marketing.
Christian works with equity analysis both on single company and equity markets
level. His primary focus is to develop trading models using various approaches
based on statistics/econometrics. Mr. Blaabjerg is available for comments on
major companies as well as equity markets in general.
Christian Tegllund Blaabjerg also appears regularly on major financial news

networks and printed media, commenting on single stocks as well as stock
market developments.
– 4 –
Content
SAXO BANK’S OUTRAGEOUS PREDICTIONS FOR 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 6
2009 TOP10 PICKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 8
RECAPPING OUR 2008 PORTFOLIO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 10
PREMISES FOR THE YO2009: MAJOR CONTRACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 11

ENTER THE DARK HORSE, BERNANKE (JUST ANOTHER INFLATIONIST). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 12
CULTURAL CHANGE, BUT NOT THE ONE OBAMA PROMISED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 13
GROWTH PERSPECTIVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 14
EQUITIES IN 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 16
EARNINGS ESTIMATES FOR MARKETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 17
HOW MUCH IS ALREADY PRICED IN? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 18
WHAT CAN WE EXPECT FROM DIVIDENDS?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 19
VALUATION TARGETS FOR INDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 20
TRADE RECOMMENDATIONS – SECTORS/SINGLE STOCKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 22
COMMODITIES IN 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 24
CHINA IN 2008 = UNITED STATES IN 1929?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 25
TOTAL WRITEDOWNS END-OF-CYCLE AND EVENTUAL SIGNS OF RECOVERY. . . . . . . . . . . . . . . . . . . . . . . . . P. 26
FX IN 2009: ANOTHER WHIPLASH REVERSAL AHEAD FOR THE USD? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 27

USD: ONE MORE ROUND OF STRENGTH - THEN GOODBYE GREENBACK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 28
EUR: SAFE HARBOR OR AN ACCIDENT WAITING TO HAPPEN? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 29
JPY: A ROCKY ROAD FOR 2009 AS JAPAN FIGHTS JPY STRENGTHENING PRESSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 30
GBP: MOST OF THE PAIN ALREADY PRICED IN? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 31
CHF: NO LONGER A SAFE HAVEN? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 31
AUD: TO REMAIN DOWN UNDER?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 32
CAD: A HAS-BEEN UNTIL 2010? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 32
NZD: FURTHER TO FALL... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 32
NOK AND SEK: WORTH A LOOK IN 2009?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 33
ENERGY IN 2009: FALLING CRUDE PRICES A HUGE GEOPOLITICAL RISK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 34
TOP TEN REASONS TO STOP WORRYING ABOUT CLIMATE CHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 36
– 5 –
SAXO BANK’S OUTRAGEOUS PREDICTIONS FOR 2009
True to the tradition, for 2009 we are offering our “10 Outrageous Claims”. The primary reason for doing this “Black
Swan” exercise every year is that human psychology is usually skewed towards optimism. Who would have thought that
the market capitalization of Citigroup would have gone from $165B to $40B in less than a year? Or that Lehman would
go bankrupt? Or that the GSE’s would be taken over? We tend to be somewhat more pessimistic in our Yearly Outlooks
than the average analyst in the market and believe that it is important for the investor to always take into account the
less likely scenarios (as perceived by the market).
When the market is about to bottom out and risk willingness still seems to be longer away than ever, we hope to be
among the first, small optimistic crowd in calling for higher levels. Please keep in mind that this is more of a thought exercise
than a set of outright predictions – we do not see that chances are better than 50-50 for all of these claims. However,
we believe that odds of these events are significantly higher than what is currently priced‐into the market. In the past we
have had 3 or 4 out of 10 right, hopefully next year it will be less.
Iranian Revolution
The Iranian economy is already under pressure as it is. However the single most important export good is oil and since
we expect oil to trade as low as $40 or even $35, the purchasing power of the Iranian society in USD will diminish. The
government will be under severe pressure as they will not be able to uphold the supply of basic necessities. There are
limits as to how much the Iranian population will stand up to. These limits are wide in a well functioning economy, but
with energy prices dropping heavily, social unrest and dissatisfaction are guaranteed.
Crude @ 25 USD
Crude will trade lower during 2009 as the demand slows due to the worst, global economic contraction since the Great
Depression. We will see production cuts by OPEC, but due to disagreement within OPEC the cuts will not be as substantial
as required in order to hinder crude falling from the current levels. Furthermore, oil producing and less civilized countries
that have grown dependent on oil revenues in order to please their populations will desperately break any concerted
efforts to keep oil prices high.
S&P500 in 500
S&P500 will hit 500 in 2009. The primary reason will be falling earnings, rather than falling P/E ratios (since the low interest
rates justify relatively high P/E’s). There are several reasons why earnings will continue to drop: 1) Consumers will no longer
be able to extent their credit from banks, since they are writing off losses and need to lower their balances. 2) Cost of
funds have also increased in the corporate sector and especially for debt financed consumption. 3) Total housing equity
is vaporizing and will no longer be able to serve as collateral for loans. 4) Companies will curb their investing programs,
which will hurt B2B business models.
Italy will make good on threats to leave the ERM

Italy has a long‐run affection for devaluations, which is not possible within the single‐currency cooperation. Government
finances are under immense pressure and the ERM requirements will not only be violated, they will be completely ignored
in 2009. EU is likely to crack down on excessive government budget deficits in several member states, but Italy could make
good on previous threats to leave the ERM completely.
– 6 –
AUDJPY to 40
The Australian economy is heavily influenced by the commodity market and a large part of the country’s economic expansion
in the past year has been driven by the commodity boom. We believe that the whole commodity complex will be left dead
in the water for the next ten years due to real demand destruction caused by the high prices in the past five years. At the
same time, we are bullish JPY with the big, Japanese Current Account Deficit and the overwhelming domestic savings.
EURUSD to 0.95 – and then to 1.30

The potential problems in the Euro‐Zone are simply not getting the attention they deserve. European bank balances are
under tremendous pressure due to the out‐sized exposure to Eastern Europe – a region that will increasingly falter during
2009. At the same time intra‐European economic tensions are increasing as witnessed by the government bond spreads
vs. Bunds. Additionally, the USD is the primary medium of exchange in money markets, which ensures that as long as they
stay tight, USD demand will be high. That said, the USD isn’t a sound currency and the obvious problems in the Euro‐Zone
are very soon all priced in. Thus, a move to 0.95 will be undershooting the fundamental case.
Chinese GDP growth to 0%

This is as close to recession, China gets in 2009. The export driven sectors in the Chinese economy will be hurt significantly
by the free‐fall economic activity in the US. Furthermore, a lot of the commodity based investments that have been
undertaken in the past five years will sour with the collapsing commodity prices. Since the Chinese economy has been
stimulated by overly expansive monetary policy for years, more of the thereby induced speculative excesses will also be
revealed in 2009.
Pre In’s First Out

We believe that several of the Eastern European currencies currently pegged or semi‐pegged to the EUR will be under
increasing pressure due to capital outflows in 2009. Several of these countries already have extremely large Current
Account Deficits and their needed refinancing will make them vulnerable to additional credit market disruptions. This
especially goes for the Baltic currencies. At least one EE currency will be de-pegged (be first out).
Reuters/Jefferies CRB Index to drop 30% (to 150)

Commodities might have been an even bigger bubble in the past years than equities (but not credit derivatives). We
believe that the speculative excesses have been so large that they have even skewed the demand and supply statistics.
We even doubt the consensus belief that demand has been outstripping supply for years is true. Hidden stockpiles of
especially industrial metals will be unloaded during 2009 and that will press prices even lower.
First Asian currency to be pegged to CNY

China’s economic, political and cultural influence is growing and a return from Phony Economics to Old School economics
will lead everyone to focus at the important issues. In other words: Who has the productive potential? Who holds the
debt? Who has growth and savings? Most of the answers will favour China and the Asian economies will increasingly look
towards China to find new trade partners and to scale down on the hitherto US‐centric agenda.
– 7 –
2009 TOP 10 PICKS
1) Short Nasdaq
The Iranian economy is already under pressure as it is. However the single most important export good is oil and since
we expect oil to trade as low as $40 or even $35, the purchasing power of the Iranian society in USD will diminish. The
government will be under severe pressure as they will not be able to uphold the supply of basic necessities. There are
limits as to how much the Iranian population will stand up to. These limits are wide in a well functioning economy, but
with energy prices dropping heavily, social unrest and dissatisfaction are guaranteed.
2) Play the “range” in EURUSD

Sell EURUSD at 1.65, Buy EURUSD at parity: Bernanke’s Fed has declared all-out war on deflation by taking rates to 0%
and moving into alternative policy measures that are exploding the Fed’s balance sheet. On the other side of the pond,
Trichet and the Bundesbank conservatives are taking a tighter stance and warning of too much monetary easing. This dramatic
divergence in policy direction and philosophy will create tremendous volatility in EURUSD in the coming year. On the one
hand, the EUR strength is unsustainable and EUR is very vulnerable if we see a perfect storm of economic weakness,
further deleveraging and European banks getting pummelled by heavy Eastern Europe exposure, so we would be happy
to sell EUR if it approaches and exceeds 2008 highs. Yet we are also long term bears on the USD, so if we do get a wild
sell-off in the EUR, parity would offer an attractive buying opportunity with an eventual target of 1.2000 or higher.
3) Buy German Government Bonds: 4.25%, 7/4/2039

We are entering a phase of deleveraging and extremely illiquid debt markets. Many assets are being liquidated and we
expect commodities to be under considerable pressure throughout 2009. At the same time, investors will seek refuge in
government assets. Especially high-duration fixed income like the German 4.25% 7/4/2039 offer an attractive safe haven
for investors as disinflation or outright deflation will dominate financial markets in 2009. Japanese government bonds per-
formed extremely well the ten years from 1990 where the Japanese stock and housing market bubbles burst. We believe
that the same will be the case now as the situation today is comparable to that of Japan in 1990-1991. If central banks
around the world decide to fight deflation and help governments finance the ballooning budget deficits, it might actually
prove to be an important support for German bonds which are still yielding much more than the US comparables.
4) Short CEE Basket vs. EUR

Long EUR/CEE basket (CZK, PLZ, HUF). The three largest central European economies were the darlings among emerging
market economies during the go-go days of the global credit growth bubble. Huge capital inflows set these economies
on fire: fixed asset investment boomed, credit expansion saw heavy borrowing at all levels. All three countries ran budget
deficits due to cheap global financing conditions. In the private sector, individuals took out mortgages in foreign currencies
like the Swiss Franc in what seemed a win-win situation – as major currencies were falling against the local currency and
interest rates were far lower abroad. Now, the credit bubble is unwinding with vicious force and these countries will be
hard pressed in the rebalancing act that must take place. Foreign debts are inflating dangerously as the capital flow reversal
is rapidly devaluing these currencies. Credit has also dried up: for mortgage holders holding foreign loans who are at
increasing risk of default and for the countries themselves, who will have to act quickly. The three major CEE currencies
may all fall sharply against the EUR in 2009.
5) Short AUD/G5 basket

Short AUD vs. G5 Basket (USD, JPY, CHF, EUR and GBP): AUD is the G-7 currency normally most closely allied with global
economic growth cycles and risk appetite. With our outlook for a very weak economic environment and significant room
for further deleveraging of risky assets, we would expect the already rather weak AUD to fall even further in 2009. This
is also a way to express a little extra downside risk in case the situation in China gets even uglier than the market expects
– something we expect has a reasonably high possibility of occurring. AUD will also be hard pressed on any significant
deflation in its iron ore and coal exports to mainland Asia.
– 8 –
As well, Australian consumers are some of the most overleveraged in the world, and as the recession moves from the
financial world to the consumer, Australia seems particularly poorly positioned for further weakness. The former premium
that AUD enjoyed due to its high interest rates will rapidly disappear as the central banks continues to cut deeply in the
New Year.
6) Short Copper
As an important building material and industrial input, copper is sensitive to the business cycle. With a rapid and unprecedented
contraction of economic activity, demand for copper has collapsed. And yet, the price of copper has still only fallen to
the 2005 level (around 150). According to our estimates, marginal costs of production for the majority of the industry
is around 70 cents per pound. We believe that the very high commodity prices in the past years have let to real demand
destruction – i.e. permanent substitution and alternative inputs in industry. That is part of the reason for the collapsing
demand. Another reason might be hitherto hidden, speculative stockpiles that distorted supply/demand statistics and led
everybody to believe that demand was outstripping supply for years. We now question this perception and believe that
these stockpiles are being dumped on the market… leading to prices that might actually undershoot the marginal costs
of production.
7) Buy PIO (PowerShares Global Water Portfolio)

Scores of countries are overpumping aquifers as they struggle to satisfy their growing water needs. The drilling of millions
of irrigation wells has pushed water withdrawals beyond recharge rates, in effect leading to groundwater mining. The
failure of governments to limit pumping to the sustainable yield of aquifers means that water tables are now falling in
countries that contain more than half the world’s people, including the big three grain producers—China, India, and the
United States. We do not see that these facts are priced into water stocks yet and recommend buying the EFT Powershare
Global Water Portfolio (PIO).
8) Buy S&P500 @ 500

Our macroeconomic scenario is disinflation and in such scenario companies will experience lower sales. Due to relative
high operational leverage margins will be hit severely; we expect margins to contract by 20% on average for S&P500
companies leading to an expectation of an earnings growth of -30% for S&P500. Depending on the valuation technique
used and assumptions made prior to the analysis we estimate the low for S&P500 in the range of 600-650 in 2009.
However bear markets tend to undershoot especially when prior bull markets overshot. The overshooting in the last bull
market was the biggest ever so 500 in S&P500 seems very likely. However, we also believe that we will see a slow rebound
starting in the end of 2009 and with S&P500 in 500 valuations starts to look very attractive indeed. We will be buyers at
these levels.
9) Short Valeo
Valeo is a subcontractor to the car makers producing parts. Valeo operates with a very high operating leverage and low
operating margin (EBIT) at 4% expected for 2008. With consumers hitting the brakes and car sales expected to drop like a
stone across the world during 2009 Valeo will suffer from this. A lower sales will turn earnings negative and the negative
earnings will put pressure on the dividend payout. The current very high dividend payout ratio will most likely go lower
and this will make the share trade lower and outperform the market to downside.
10) Short TUI Travel

TUI Travel is an operator of an international travel and leisure group. As the economy contracts, consumers cut back
on spending. One of the first things to cut back on is the spending on travel and leisure as this is not an ingredient in
the daily operation of a household. We expect the demand for travel and leisure will drop during 2009 as the economy
contracts further. The average operating leverage for the travel and leisure sector is 1.39, which is quite high given their
low margins at 7%. However TUI Travels operating margin is already negative at -0.71% and with a lower expected sales
earnings will turn negative. Dividends will be cut and the share will drop faster than the general market.
– 9 –
RECAPPING OUR 2008 PORTFOLIO
On the back of the ongoing credit crisis, our 2008 portfolio was based on the expectation of a worldwide recession.
Among our Top 10 Picks was a focus on a deteriorating US housing market and transport sector and an overheated Icelandic
economy among other things. The performance of our 2008 portfolio reflects the fact that it has been a very difficult year
in which to navigate the global financial markets. Our FX picks returned (12,7%) after being up by 21,5% during the year,
profiting from being long TRYISK, EURHUF and short GBPCHF. However, though naming 2008 “The Year of Recession”,
even we were surprised by the magnitude of the global slowdown. A few of our equity picks were based on ever higher
commodity prices, but we found to the detriment of the portfolio that falling global demand saw these trades turn from
winners to losers. Our portfolio was up by 21.5% by end-June, but ended the year down (3.7%).
2008 PORTFOLIO, USD DENOMINATED

20%
15%
10%
5%
0%
-5%
-10%
jan-08
feb-08
mar-08
apr-08
maj-08
jun-08
jul-08
aug-08
sep-08
okt-08
nov-08
dec-08
– 10 –
PREMISES FOR THE YO2009: MAJOR CONTRACTION
Last year, we wrote in the YO2008 that we are about to witness a change in a megatrend that has lasted almost 30 years.
In our eyes, 1980 marks the beginning of this trend, which has had debt-financing and credit creation as its hallmark. In
short, every economic problem was met with lower rates and yet more plentiful credit to the financial system.
Our thesis was that the easy credit fostered a speculative boom unprecedented in human history and that asset prices
were getting so much out of sync with reality that even the commercial banking system, which was the channel of credit
to the real economy, no longer wanted to increase lending. The fact that central banks began cutting rates aggressively
by the end of 2007 and that money markets did not react by letting interbank market rates drop as well was a clear sign
that the financial system was saturated with risk.
To be honest, we have been negative on the whole recovery since 2003 (just read our Outlooks from 2004 and onwards).
Our take was that we never really got a thorough clean up of the financial system back then and that the low-rate environment
just led to speculative excesses that were even worse than the dot-com bubble. We were definitely among the most
bearish on stocks in our YO2008 (calling S&P500 25% lower and the Shanghai Composite 40% lower during the year).
Events during 2008 proved that our thesis was more than right. Actually, we have been surprised and frightened about
the speed of the deleveraging.
The year 2008 proved us right and we will stick to our thesis for 2009: deleveraging will continue and get really, really
ugly. Make no mistake; this is a bubble comparable in size to the one that burst in 1929. Actually, measured by the outstanding
credit to GDP ratio in the US, the bubble that is now beginning to deflate is around twice as big now (350%) as in 1929
(170%).
US: TOTAL OUTSTANDING CREDIT / NOMINAL GDP

20%
15%
10%
5%
0%
-5%
1923
1926
1928
1931
1934
1937
1939
1942
1945
1948
1950
1953
1956
1959
1961
1964
1967
1970
1972
1975
1978
1981
1983
1986
1989
1992
1994
1997
2000
2003
2005
2008
Source: Bloomberg, Saxo Bank.
That means that there is no escape: Assets stand in front of an enormous, deflationary pressure. The only asset class that will
survive in the next year or two is government bonds, but even these will be threatened by the hyperinflation that is likely to
result from the exploding money supplies around the world.
All central bankers are subscribing to some variant of Keynesianism (whether they call themselves Monetarists or not) and want
to lower interest rates in order to avoid deflation. Thus, central banks will continue to lower rates throughout 2009 as economic
activity and consumer prices reach for new lows. They are probably already in despair over their lack of ability to alleviate the
effects of faltering asset prices. Lending has come to a total stand-still, which has until now only been possible in their worst
nightmares.
– 11 –
ENTER THE DARK HORSE, BERNANKE (JUST ANOTHER INFLATIONIST)
Ben Bernanke was chosen as Fed Chairman due to his alleged expertise as a deflation/depression fighter. He is assumed
to be “unconventional” in his ways of addressing the current financial calamities. Until now, his monetary policy has
been undistinguishable from that of any other central banker that has bought into the Milton Friedman or John Maynard
Keynes doctrines. However, 2009 will be the year that proves whether he is really unconventional or not. We believe that
Bernanke will lead the pack of central bankers on the march towards ultraexpansive monetary policy. We are not only
talking about plain vanilla lowering of interest rates here – In a feeble attempt to stop deflation, central banks will see
themselves forced into outright monetization of all kinds of assets. In other words, printing presses will go from frantic
high-speed to insane overdrive. A number of things are likely to be tried by desperate central bankers and authorities in
order to avoid deflationary pressures:
1. Government fixed income will be bought (monetized) for two reasons. A) First of all in order to help government
finance massive stimulus efforts so politicians are seen as “doing something” about the problem. B) Second, in order to
bring down the long end of the yield curve so financing costs are lower for faltering equity markets. Both the Euro-Zone
and the US have weak public finances, but the Euro-Zone have legal and political requirements for the participation in
the European Monetary Union that stand in the way of monetization of public debt. These requirements may quickly be
revised for the alleged benefit of public spending and “stimulus”, but especially the US will be prone to monetize public
debt. We believe that in order to stimulate the free-fall economy, the Obama administration will cut taxes and cover the
exploding budget deficit with freshly printed money.
2. When it becomes apparent that the commercial banking system does not want to pass on the credit made available by
the central banks to consumers and corporations (and 1-B therefore fails), central banks and governments will indirectly
increasingly act as a commercial lender in stead of the commercial banking system. This will happen with increased regulation
and subsidies etc. to encourage banks to lend and “unfreeze” the debt markets.
3. When mortgage bond and corporate bond spreads are continuing to widen and 1 and 2 have both failed or not proved
sufficient, central banks and governments will begin to simply monetize mortgage bonds and corporate bond to bring
down rates and “stimulate” the economy.
4. Accounting standards will be revised in order to stop mark-to-market induced sell-offs. Models will be allowed to
price the troubled and illiquid assets (CDO’s, CLO’s, MBS’s and LBO bonds etc.). The problem is that the financial system
is unwinding at such a rapid pace and with such ferocious power that the collateral behind these assets will continue to
deteriorate. In other words, phony accounting standards will not save the holders of these troubled assets from defaulting
counterparties and adverse market conditions.
– 12 –
CULTURAL CHANGE, BUT NOT THE ONE OBAMA PROMISED
President elect, Barack Obama, has talked a lot about “Change”. There is no doubt that change is coming. In the Yearly
Outlook for 2008, we expected a turnaround in the megatrend of widespread debt-financing culture. Debt has become
so big that the costs of servicing it are crowding out the consumption needed to maintain the investments. That is why
the whole Ponzi-scheme is now unravelling. There is no doubt that we are already seeing the first changes and reckoning
that change has come. No investors can assume any longer that they can just go to their bank and ask for more money
at low rates. No bank can assume any longer that it can lend out endless amounts of money without any credit risk. No
business can assume any longer that it can issue more corporate debt at Libor +100 bps.
Cultural change is coming in how economic affairs are being perceived. Shareholder equity will have to increase and internal
growth will be dominant vs. debt-financed growth in businesses. Dividend yields will be a new and important indicator
for the cash-flow strength of stocks. Culture will change from “we don’t pay a dividend, because we believe too much in
our own business” to “we do pay a dividend, because we have the cash-flow to support it”.
– 13 –
GROWTH PERSPECTIVES
The world economy is experiencing the worst contraction since the early 1980’s. In all of 2008, economic activity has been
in free fall, and we believe the same will be the case for 2009. Our Global Business Cycle Indicator is showing the worst
and most rapid drop in its history (see graph below).
SAXO BANK GLOBAL BUSINESS CYCLE INDICATOR
2,0%
1,5%
1,0%
0,5%
0,0%
-0,5%
-1,0%
-1,5%
-2,0%
jul-85
jul-86
jul-87
jul-88
jul-89
jul-90
jul-91
jul-92
jul-93
jul-94
jul-95
jul-96
jul-97
jul-98
jul-99
jul-00
jul-01
jul-02
jul-03
jul-04
jul-05
jul-06
jul-07
jul-08
Since the current recession is worse and bigger in magnitude – both from a geographical and an asset class perspective
– we believe that our indicator can continue to edge lower during 2009, albeit at a lower pace than previously. Like in
1992-93, we will probably see two or three years with lower and lower economic activity.
A lot of countries have already gone into recession – either de facto or according to the technical definition (two con-
secutive quarters of GDP contraction). Their numbers will increase and global trade flows will contract as more and more
consumers cut even deeper into consumption than they have already done.
We believe that the majority of countries in the world will experience a recession in 2009. Because the current crisis has
finance as its root, especially countries with large current account deficits will experience financial problems and will be
likely default candidates in 2009. In particular, we are keeping an eye on the Baltic states and Eastern Europe and expect
severe and deep recessions in these, but also oil-revenue dependent states like Russia, Venezuela and Iran will be very
vulnerable.
– 14 –
INTEREST RATES IN 2009: DEFLATION OR INFLATION?
There is no doubt in our minds: policy rates will head lower and in some countries considerably lower in 2009. Some
countries like the UK are now openly talking about adopting a Zero Interest Rate Policy (ZIRP) like Japan adopted after the
bubble burst in 1990. The ECB and SNB will also be forced to move rates much lower as Eastern Europe implodes due to
an inability to refinance their borrowings.
But the really, really big question these days is: Will we have deflation or inflation? To answer the question, one has to
understand our monetary system. In previous times with gold convertibility and limits to the growth of the money supply,
one would expect severe deflation as capital was destroyed and the real price of debt exploded. This time, however, there
are no limits whatsoever to the growth of the money supply. In the US, the M1 Money Supply has already exploded by
a staggering 10% after having been virtually flat for 4 years. All across the globe, central banks will do the same: print
and spend money. We believe that 2009 will be a year of deflation, but that exploding money supplies will prevent prices
falling for very long and lead to inflation by 2010.
RISK VS. SAFE HAVEN: SPREADS TO EXPLODE
This, however, will only be the case for more developed countries with secure property rights and a safe haven status.
Other countries in Emerging Markets or with unsustainable current account deficits will not be able to cut interest rates
from here. Actually, EM countries might have to hike rates to attract capital or to just prevent large outflows. In other
words, despite risk premiums already at record highs, we will see them go even wider from here. Spreads between corporate
and government fixed income, between EM and G10, between long maturity and short maturity fixed income, between
AAA vs. Junk will continue to widen.
THE LONG END OF THE CURVE
Since the world economy is experiencing the worst economic contraction in several decades – if not ever – tremendous
deflationary pressures are gathering. Yes, central banks will print money like never before, but we don’t believe they
will be able to overcome the deflationary pressures in 2009 (usually there is around a 9 months lag between changes in
monetary policy and effects on the real economy and prices). Perhaps they will by 2010, but for the first half of 2009,
government fixed income should outperform every other type of asset. From H2-2009, however we will see the spread
between the US 10-year and the 2-year treasuries begin a long journey higher. The government bond market is the last
bubble that needs to burst and the “2-10 spread” will reflect that this reckoning is dawning on the fixed income market
during the second half of 2009.
– 15 –
EQUITIES IN 2009
With a shrinking global economy and several economies in a disinflationary or outright disinflationary state it is very hard
to make a bullish case for equity markets. Historical evidence on equity performance in times of disinflation is very clear
and very negative. During the early 1930’s the U.S. stock market delivered its worst returns of the past century. From the
peak to the through the S&P500 fell 84% in nominal terms. For Japan during the 1990’s the evidence is clearly better,
however still rather gloomy, losing 65% over a decade. In other words: Equities as an asset class are best avoided or short
sold in an economy where disinflation rules.
We expect global equity markets to hit lower lows during 1H 2009, before a possible rebound during 2H 2009. This is our
best guess, but events could certainly unfold differently if a significant bear market rally materializes early in 1H 2009 on
the back of oversold equity markets here in late 2008 and then the sell-off arrives later in 2H 2009 on further negative
earnings revisions and disappointing recovery aspects for 2010. Either way, we expect significant new lows for global
equities in 2009.
From the equity markets in the U.S. we expect in 2009 a total return of -15.5% composed by -17% in capital gains and
1.5% in dividend yields, while for Europe we expect a total return of -17.9%made up of -20% in capital gains and 2.1%
in dividend yields. Finally for Japan we expect the total return from the equity markets of -19.9% coming from -21%
in capital gains and 1.1% from dividend yields. This is not particularly attractive especially compared with government
bonds like bunds with long maturity which currently yields 3.5%. When adding the downside risk for equities in 2009 the
comparison looks even worse for equities.
The global credit crunch has already had a significant negative impact on corporate profits and the downgrading of
earnings expectations has been going on for a while. But despite valuations looking increasingly attractive we expect
more earnings downgrades are to come. In Europe we expect a 36% decline in 2009 earnings for the market excluding
financials and an average 28% decline in EBIT margins. For the U.S. and Japan we expect a decline of 30% and 41% for
markets excluding financials respectively and 20% and 35% decline in EBIT margins.
The good news is that equity markets have already priced in a severe earnings recession. Most measures, whether based
on prospective, historical or cyclically adjusted P/E’s say that equities are currently undervalued or at fair value. But history
provides no meaningful reference point when considering the current credit crunch. At current levels equities are not
attractive and there is still considerable downside risk for equities. Bear markets do tend to undershoot significantly when
correcting downwards given that also the preceding upside overshoot was significant in size. The last overshoot in equity
markets was the largest ever.
– 16 –
EARNINGS ESTIMATES FOR MARKETS
Forecasting earnings for 2009 is a nearly impossible task. The probabilities attached to different macro economic scenarios
tends to shift almost daily as new fiscal and monetary measures are announced or old ones changed in response to chang-
ing political environments. However in such periods of turmoil it is even more important to stick to the big picture that
drives equities: Future earnings and the valuation of these earnings. In this section we will address the first of these issues,
while coming back to the second in the next section.
First, we find it too early to turn bullish in anticipation of a turnaround in the global economy. Historically equities have
rallied 4-6 months prior to an economic turnaround. But our economics team does not foresee such a turnaround in the
global economy before early/mid 2010. In such scenario late 2009 do seem like a more realistic time to turn bullish on
equities. Our earnings forecast for Europe, the US and Japan is shown in the table below.
Figure 1: Sales, EBIT Margin and Earnings Estimates (ex. financials) for 2009.
Europe US Japan
Sales -5% -4% -6%
EBIT margin -28% -20% -35%
Expected Earnings Growth

-36% -30% -41%
(ex. Financials)
Source: Thomson DataStream, Saxo Bank Research
We have intentionally excluded financials as their earnings are heavily distorted by write downs and bailout packages from
governments. In total their inclusion would disturb forecasts for the overall market.
The earnings forecasts assume negative sales for all markets which combined with disinflation results in an accelerated
negative top line growth. Such forecasts may not sound bearish enough to justify the rather significant drop in profits.
But operational leverage is important to keep in mind as anything below a 2% top line growth turns a margin boost into
a margin drop.
At the heart of our 2009 earnings growth forecast lays an assumption of negative sales for all three countries. The key to
this is clearly our outlook for a recession and thus negative real GDP growth. The latter drives sales growth for the corporate
sector. Our economics team forecast -1.5% growth in the Euro-Zone, -2% in Japan and -1.5% in the US.
Costs will most likely outgrow sales next year leading to the first market-wide margin contraction since the last recession.
Wage inflation is showing no signs of deceleration and should only subside with a considerable time lag as economic
activity slows. Our assumptions lead to EBIT margin contraction in the range of 20%-35%. Using these assumptions we
arrive at an earnings growth forecast for 2009 of -36% for the DJ STOXX 600, -30% for S&P500 and -41% for Nikkei225
– all ex. Financials.
– 17 –
HOW MUCH IS ALREADY PRICED IN?
The good news is that much of the coming earnings decline is already a part of the current share prices; but as always the
real interesting question is how much? We are not able to derive an exact answer, but we can get a really good estimate
by comparing current valuations with normalized valuations for the markets.
One approach in answering this question is using the P/E ratio. In order to analytically separate factors from each other
it is useful to rewrite Gordon’s growth model to: P/E = Payout Ratio (D/E) / Risk premium. We have lately been witnessing
a falling P/E ratio and a part of this de-rating has been caused by the increased risk aversion in the market leading to
investors demanding a higher risk premium for holding equities. Another explanation of the de-rating is that investors are
cutting their earnings expectations.
In order to arrive with an estimate of how much of the expected earnings decline that are a part of the current shares
prices we calculated an average bear market P/E after which we derived the 12 month forward P/E ex. financials for each
of the markets. The result is shown in the table below.
Figure 2: Premium/Discount to Normal Bear Market P/E’s.
Europe US Japan
Normal bear market

11 11 19
P/E (ex. Financials)
12 month forward
9 10 15
P/E (ex. Financials)
Premium/-Discount to
-20% -9% -21%
normalized bear market P/E
Source: Bloomberg, Thomson DataStream, Saxo Bank Research
Europe has currently priced in a 20% decline, which is far from the 36% decline we expect. The picture for the US is pretty
much the same as in Europe in the sense that there is still some way to travel before our estimated earnings growth decline
is priced in and the same goes for Japan. Given that our earnings forecast are correct we expect to see a significant decline
in equity markets as the earnings decline is not yet fully priced in.
– 18 –
WHAT CAN WE EXPECT FROM DIVIDENDS?
As we have seen from the previous sections earnings are under pressure and obviously the next question is what this will
mean for the future dividend payments. Dividend payments have been much less volatile on the downside than earnings.
In the last two recessions of 1991 and 2001 earnings dropped by an average of 50%, whereas dividends proved relatively
resilient and were only cut by on average by 6% for the European equity market.
Several companies and sectors are very much exposed to risks of cuts following from their lower earnings. The most
obvious example are financials, where solvency concerns, capital increases and part-nationalizations are causing sharp
reductions to future dividend payments; in many cases no dividends will be paid at all through 2010. Banks have been
the largest contributor to the total market dividend payouts and with this source of yields disappearing we expect to see
a lower level of dividends at the aggregated level.
Assuming that the payout ratio will be lowered following from the 50% average payout in bull markets to a 30% payout
ratio in bear markets we can derive the expected dividend yield which is shown in the table below.
Figure 3: Expected Dividend Yield for 2009.
Europe US Japan
Expected Dividend Yield 2.1% 1.5% 1.1%
Source: Thomson DataStream, Saxo Bank Research
– 19 –
VALUATION TARGETS FOR INDICES
Equities, whether American, European or Japanese look cheap on most measures when compared with recent history. The
problem with recent history is that it is next to meaningless in the current economic situation. Therefore it is more useful
to look at long-term valuation indicators which include periods of inflation, recession, disinflation or even depression.
The 100-year valuation history of the US equity market provides a useful benchmark. Although the correlation between
European, Japanese and US equities are not perfect, it is unlikely that the markets will diverge significantly in a globalised
world. The following chart shows the US CAPE (cyclically adjusted market P/E) based on 10-year trailing EPS.
Figure 4: S&P500 CAPE (cyclically adjusted P/E) based on 10-year trailing EPS (1881-2008)
50
45
40
35
30
25
20
Average = 16x
15
10
0
1881
1884
1888
1892
1896
1900
1904
1907
1911
1915
1919
1923
1927
1930
1934
1938
1942
1946
1950
1953
1957
1961
1965
1969
1973
1976
1980
1984
1988
1992
1996
1999
2003
2007
Source: Prof. Shiller, Saxo Bank Research
The message from the chart is not reassuring. US equities have finally touched the long term mean, but history shows that
bear markets usually overshoot on the downside. The current CAPE of around 16x is still well above the levels seen at the
end of the previous secular bear market, such as in 1921, 1932, 1974 or in 1982.
Where does this leave European and Japanese equities? The European CAPE based on 10-year trailing EPS is still at 25x,
well above the 10-year US CAPE of 16x. The story is the same with the Japanese CAPE based on 5-year trailing EPS reading
28x also well above the US CAPE. The European and Japanese CAPE’s do imply that there is more value to be picked up
in the US equity market compared to the European and Japanese equity markets.
– 20 –
Given that CAPE is a poor timing tool and does not take into account future growth rates and the cost of capital, it is
worth considering valuation measures which do. One of them is dividend discount model (DDM). The DDMs are highly
sensitive to the discount rate and growth assumptions used and should be used with care in the current volatile environment.
However the DDM approach is useful to place the current market into some context as well as offer some guide regarding
floor levels. Our assumptions are that earnings fall in Europe by 36%, in the US by 30% and in Japan by 41%. Further-
more we are assuming that inflation is 0 in 2009 and increasing slowly afterwards, the bond yield is 2%, the equity risk
premium is at 5% and we expect a 2% real growth in earnings. The results are displayed on the next page.
Figure 5: Equity Index Targets based on DDM simulations.
19. Dec. 2008 Lows 2009 based on DDM valuation
DJ Stoxx600 197 130
S&P500 885 610
Nikkei225 8667 5350
Source: Bloomberg, Saxo Bank Research
This gloomy outlook results in that the DJ Stoxx600 will retreat 35% from current levels (as of 19. Dec. 2008), the S&P500
will drop 31% and Nikkei225 will trade 38% lower. We these decline prices in mind we do not recommend entering
naked long positions in the equity market before the market has turned, which we expect will happen late 2009 as previously
mentioned.
– 21 –
TRADE RECOMMENDATIONS – SECTORS/SINGLE STOCKS
Financial gearing should is an important criterion in stock selection and sector allocation when we enter disinflation. Any
debt is bad debt, so those companies with high financial gearing ratios would see interest expenses drain earnings and in
some cases could struggle to meet interest payments as profits fall sharply. Highly geared cyclical sectors look most risky.
Here, the risk of earnings falling sharply is severe as we enter disinflation and an economic recession make high debt levels
particularly difficult to justify and maintain.
The second characteristic that is best avoided in a disinflationary environment is exposure to the investment cycle. As explained
earlier, disinflation creates a vicious circle and discourages companies from investing. Falling prices give consumers an
incentive to delay purchases and companies and incentive to delay investments. This behavior causes prices to fall even
further, starting the process all over again. Government spending is the third criteria. The advantage of exposure to
government spending is that it tends to be much less volatile and often counter-cyclical. Even though we are still far away
from the circumstances of the Great Depression politicians across the world have already floated ideas of government
spending to preserve jobs and jumpstart the economy.
The final characteristic that is best avoided in a disinflationary environment is operational leverage especially combined
with low margins. With falling price levels often accompanied by similar weakness sales volumes top lines are likely to
come under pressure in a disinflationary environment. As a result many companies are likely to struggle to deliver the sales
growth rates needed to maintain margins. We have scored each sector according to their criteria above using -1, 0 or 1
depending on whether how they perform. Our point of departure is that we are looking for sectors that are best hedged
against disinflation assuming that we are in a long position. So if the sector is hedged against inflation it will receive a
score of +1, less good a 0 and if bad it will be given the score -1. Even though we are dealing with three different stock
markets we have chosen to rank the sectors across markets. This is due to the general nature of the criteria. The results
are shown in the table below.
Figure 6: Ranking of Expected Sector Performance in a Disinflationary Environment
Cyclical vs. Government Operational lev.

Sector Financial leverage Total Score
Non-cyclical exposure + low margins
Cons. Disc. -1 -1 0 -1 -3
Cons. Staples 0 +1 0 +1 2
Energy -1 -1 0 +1 -1
Financials 0 -1 0 +1 0
Health care +1 +1 +1 +1 4
Industrials -1 -1 +1 -1 -2
Info. Technology -1 -1 0 0 -2
Materials 0 -1 0 -1 -2
Telecom 0 +1 0 +1 2
Utilities -1 +1 0 +1 1
Source: Saxo Bank Research
– 22 –
If the sector receives a score between -4 and -1 we expect the sector to underperform compared to general market.
If the sector gets a score of 0 we are neutral and if the sector gets a score between 1 and 4 we expect the sector will
outperform the general market. In other words we expect sectors like consumer discretionary, energy, industrials, materials
and information technology to underperform the general market. We are neutral on financials and expect health care,
consumer staples, telecom and utilities to outperform the general market.
Since we are rather bearish on equities for 2009 we recommend staying short in equities until the equity market has
rebounded in 2009. We have applied the same criteria for single stock picks and have only chosen stocks with a score
of -3 to -4 in order to enter short positions. We recommend entering short positions in the following stocks: Valeo
(Consumer Discretionary), TUI Travel (Consumer Discretionary), OMV (Energy), Kuehne + Nagel (Industrials), Sage Group
(Information Technology).
– 23 –
COMMODITIES IN 2009
Several factors have been causing commodities to collapse in the second half of 2008. We expect these factors to continue
depressing commodities throughout 2009.
First of all, USD strength was a huge factor, as most commodities trade in USD terms. At least a fifth of the 60% decline
should be seen in this light.
Second, there is no doubt that a very big, speculative element has entered this market – mutual, pension and hedge funds
have all found commodities to be a new element, which would they believed would enable them to decrease the volatility
of their returns. By using futures contracts, they believed that they could both capture the “roll yield” (from the general
contango in the market and at the same time reduce overall portfolio risk. The problem has obviously been that 1) too
many did it at the same time so that the commodity markets went into massive backwardation and 2) since everybody
bought commodities to reduce the portfolio risk stemming from stock markets, the correlation went to 1 anyway – and
especially so when commodity prices fell across the board in H2-2008.
Third, after scrutinizing supply and demand statistics, especially for the, we believe that official data has been manipulated in
order to scare the demand side into panic buying. The emergence of funds with the sole purpose of investing in physical metal
itself has taken some of the physical metal off the “data table”, skewing the statistics to show that estimated demand
was outstripping supply. Thus, hidden stockpiles seem to have been built during the past four or five year and these positions
now seem to be getting dumped on the market.
As after previous commodity bull markets, we are now entering a decade where very high prices have destroyed demand
for a decade (at least). Aggregate demand is dropping and where demand is still intact, substitution is setting in for key
industries. Even for Crude Oil, we are now seeing the total mileage driven in the US – a measure previously thought to be
completely inelastic - dropping for the first time in at least 50 years. With a severe slowdown in China, aggregate commodity
consumption is set to show outright decline in 2009.
We expect all industrial metals to continue heading lower for 2009. Gold is likely to outperform silver, since the latter also
has an industrial use and since gold is generally perceived as a better and more traditional hedge against turmoil, inflation
and devaluation (of the USD). Costs will be reduced in the whole commodity complex and prices on the commodities
might actually undershoot marginal costs of production. Overall, that probably means that base metals could drop by
roughly 50% from current levels. Look for copper to drop below 70 cents per pound and zinc to drop to $600 per ton.
Commodity shares will continue to get creamed in 2009. Many have expanded investments dramatically in response to
higher prices. High, fixed costs and in many instances outright negative margins will lead to operations being closed down
and many going bankrupt (see more in the Equity section of the publication).
– 24 –
CHINA IN 2008 = UNITED STATES IN 1929?
China, China, China. China has been THE story in the past five years. Who would not be invested in a country with
minimum 10% growth per year, with a strongly growing consumption (at least sometime in the future), thousands and
thousands of new millionaires and a voracious appetite for commodities? Everyone has depended on China – both to get
a return and to explain how global growth could and would continue. Everyone wanted to go there, either physically or
by investing.
Well, isn’t this exactly how investors perceived the United States in 1929 (albeit US growth was only averaging 4% p.a.
before 1929, but it was still somewhat higher than in the rest of the world)? There are more parallels: Both China and
the US in 1929 experienced extremely strong growth rates (roaring twenties in the US) for almost a decade, which com-
pletely blinded observers. Both have had some of the world’s highest savings and investment rates in their boom periods.
Both had significant current account surpluses to cope with (China by buying US Treasuries, the US by buying gold). Both
were trying to uphold pegs to faltering and unsound assets: The US tried to prop up the GBP at a ridiculous rate after the
re-peg to gold caused by WWI inflation and China is now trying to peg to the USD, which despite the newfound strength
is still trending lower and will end in catastrophe.
For both of the countries and their boom periods, monetary policy was extremely expansive at the same time as the general
price levels were flat to only moderately increasing, which led observers to erroneously conclude that monetary policy was
“neutral”. Therefore, very big bubbles were allowed to evolve and burst.
In the 1930’s, the US was one of the economies worst hit by the crisis, because their monetary policy was taken to the
farthest extremes. Chinese monetary policy has consistently been most extreme among the G20 countries. Over the past
10 years, annual M2 Money Supply growth in China has averaged +16%. That should be very frightening for the eternal
China bulls. To us, China looks like a very big bubble. The whole economy has become way too dependent on debt-
financed US consumption, which has now come to an abrupt halt. And the Chinese don’t have any plan B.
China is already now, in 2008, closing down thousands of factories, which paid migrant workers from the rural areas a
wage almost three times higher than the one they could make in the countryside. This will continue in 2009 as exports
are collapsing. Like in the final years of the Roman Empire, the population will actually seek towards the countryside in
order to be able to feed itself. The division of labor is falling apart and China will probably go through one of the worst
transition periods among all economies. The big question is if the mixed economy financial system will be a cushion for
the Chinese economy or a drag. The need for flexibility is indicating that it will be a drag.
Although government will make massive investments in infrastructure, they will be lucky to see positive growth in the
next two years. As we indicate in the equity section, we will probably not recommend buying stocks in 2009 and Chinese
stocks are definitely among the least likely candidates if we do.
– 25 –
TOTAL WRITEDOWNS END-OF-CYCLE

AND EVENTUAL SIGNS OF RECOVERY
At the end of 2008, total credit writedowns stood at around $700 billion, the majority of which originated in the US
(70%). After revisions, we will probably end at $750 billion for the whole year. Total, global writedowns since Q2-2007
now stand at almost $1 trillion. We have previously expressed that we anticipated a total of $2 trillion, but have now come
to the conclusion that $2.5 trillion or even $3 trillion is more likely before this crisis is over.
This estimate is based on a top-down analysis of historical experiences in recessions with default rates, the ratio of
outstanding debt to GDP and recovery rates. With commercial mortgages worth almost $1 trillion, junk bonds and LBO’s
at $3 trillion, prime mortgages of $8 trillion, consumer loans and home equity loans of $2 trillion and subprime and non-first
home mortgages totalling another $3 trillion, we are seeing a total of $17 trillion of assets that are at various risks of
defaulting. A lot of these assets are tightly collateralized by the housing market, which means that an additional downside
of 15-20% in home prices will lead to widespread insolvency.
Subprime mortgages have been blamed for the writedown losses, but the problem is much more fundamental and widespread.
Now, 7% of all mortgages are delinquent. The number is 4.34% for prime mortgages. As argued in the Growth Perspectives
section, we believe that it is likely that the economy will deteriorate continuously for a three-year period. Thus, both from
a time and a loss/writedown perspective, we estimate that we are currently about a third into the crisis until we begin
seeing real economic expansion again. But what should one look for in order to capture the recovery? Let us first stipulate
what will happen to the most important indicators.
1) US Personal Consumption YoY will stay below zero for at least six quarters. A reasonable sign of recovery will be to see
it above zero for at least two consecutive quarters.
2) The Credit/GDP ratio will probably spike due to a temporary drop in nominal GDP. 2) This ratio will trend lower for the
next two decades, but once it stabilizes in the downtrend, a recovery might be on the way.
3) Total Assets: Loans and Leases in Commercial Banks will drop, because banks will try to deleverage and restore solvency.
Currently standing at $1.6 trillion, the measure will probably drop at least 20% and needs to stabilize – i.e. the commercial
bank system needs to lend again – before we have a sustainable recovery.
– 26 –
FX IN 2009: ANOTHER WHIPLASH

REVERSAL AHEAD FOR THE USD?
The great credit bubble unwind of 2008 made for remarkable moves for all asset classes. And currencies were at the
centre of the maelstrom as global markets began destabilizing by mid year and then melted down into September and
October. A few metrics on the madness that hit currencies in 2008:
- Starting 2008 around the 2.0000 mark, GBPUSD plummeted as much as 25% beginning in mid-summer to six-year lows
well below 1.5000 by the late fall. By early December, EURGBP had risen over 20% on the year.
- After hitting a 10-year high above 1.6800 in October 2007 as global equities notched record highs, EURCHF celebrated
it’s 1-year anniversary of that mark in October 2008 by plummeting to a record low (and then reversed more than half of
those losses by mid December to complete the total whiplash effect).
- AUDJPY, the benchmark carry trade among the G-7 currencies due to the large interest rate differential , saw its 20-day
average trading range move from about 100 pips (about 1% of spot) over the summer, to over 500 pips during the panicky
days of late October. A 500% increase in volatility!
- In EM, South African Rand lost over 40% of its value against the US dollar after enjoying several years of relative stability.
At the far end of the risk spectrum, the Icelandic krona became completely non-convertible as Iceland’s banks seized up.
So what will 2009 bring for the major currencies? Our original idea for 2009 was that the first part of 2009 might look
like the last several months of 2008: that is, another another vicious round of deleveraging combined with a further
strengthening of the USD and the JPY and weakness in those currencies most closely associated with the previous global
growth cycle like CAD and AUD.
But just before year end, the Bernanke Fed has issued a declaration of all-out war on deflation that will entail a massive
expansion of the Fed’s balance sheet and the outright printing of money – a very aggressive stance even earlier than we or
certainly the market anticipated. The BoE and BoJ seem to be more or less ready to follow the Fed’s lead. But the ECB has
stood up and seems to be talking up a more hawkish stance of slowing and even stopping rate cuts and even criticizing what
the Fed is doing by warning of its inflationary. The divergence in policy trajectories and tension this creates is explosive
and is a virtual guarantee of enormous volatility in this supermajor in 2009. Intended devaluation vs. the capital flows and
safe haven seeking of deleveraging – which theme wins out in 2009?
– 27 –
USD: ONE MORE ROUND OF STRENGTH - THEN GOODBYE GREENBACK.
As we entered 2008, the US dollar was weakening due to the already advanced state of malaise evident in the US
economy stemming from the suprime-housing debacle and spreading credit stresses. The Fed had already launched an
aggressive rate cutting regime while inflation pressures were mounting all over the rest of the world. The market built
up enormous short USD positions in the first half of the year on these disconnect in the global economy, the so-called
“decoupling” theory, carry trades, and short USD/long commodity macro plays. European and other banks funded massive
liabilities in the US commercial paper market at attractively low rates. Then, when the credit crunch went global a vicious
wave of deleveraging of outstanding positions gave the greenback a turbo-boost that saw the dollar index rise over 20%
in short order. USD/EM crosses were the biggest gainers as short USD/long EM currencies and short US stocks/long EM
stocks had been one of the most popular macro plays, even among US investors, who had long ago given up on domestic
equities and were investing abroad like never before.. As we head into 2009, the USD rally has pulled back very sharply
due to the Bernanke Fed’s declaration of war on deflation. We see a binary potential for the USD in the new year. There
is still the chance that another round of deleveraging and asset liquidation sees the USD move stronger again vs. most
currencies. Longer term, the extremely aggressive move by Bernanke to move to a super-expansive stance is a clear effort
to devalue the USD to avoid debt deflation. Eventually, Mr. Bernanke will succeed.
Trade: Sell EUR/USD above 1.6000 with a target of 1.2000 / Buy EURUSD at parity whichever comes first. Buy USD/CAD,
targeting 1.4500
EURUSD in 2009:
A binary scenario: If it rallies much more, it’s a huge selling opportunity. If it falls to low, it’s a cyclical buy on the eventual
USD devaluation.
– 28 –
EUR: SAFE HARBOR OR AN ACCIDENT WAITING TO HAPPEN?
In the last weeks of 2008, the EUR has rallied steeply against most G-7 currencies as the ECB has taken the clear position
that it is reluctant to join the competitive devaluation game being played by the Fed and the BoE. While fiscal austerity
and worries about the inflationary implications of devaluation may be admirable, this stance is brutally strengthening the
Euro - a trend that will not be sustainable in the New Year. This trend is guaranteeing a very hard landing for the EuroZone
economy and likely the worst deflation in the world as long as the ECB and the EuroZone countries refuse to go all out
with the printing presses like the rest of the world. We suspect that circumstances and internal strife in the EU will eventually
force the ECB kicking and screaming to move rates toward the zero bound as well.
The EUR is looking awfully expensive as we head into 2009, and we suspect that dark clouds may be gathering over the
single currency’s viability by later in the year, with the possibility that one or more countries in the union, such as Italy or
Greece, threatens to leave the currency union due to the painfully strong Euro’s devastating effects on their economies.
Note that 10-year government debt for the Italy, Greece and other EU members trades at a significantly higher yield than
Germany debt already – over 130 basis points in the case of Italian 10-year notes as of mid-December. Any threat to the
EU’s integrity would have disastrous effects on the currency as world reserve managers could seek to diversify their EUR
exposures. We’re also very concerned about European banks and their huge exposure to CEE economies and potential for
significant levels of default on loans made abroad during the bubble years.
Trade: Sell EURUSD if it reaches above 1.6000. Sell EURJPY for a test of 95. Sell EURAUD and EURNZD as the major equity
indices sink to new lows.
– 29 –
JPY: A ROCKY ROAD FOR 2009 AS JAPAN FIGHTS JPY STRENGTHENING PRESSURE
The JPY carry trade ended with a bang in 2008 with the massive unwind in global assets. Outflows from Japan were
choked off, passive carry traders were taken to the cleaners, and the long oversold JPY rapidly sought a fairer valuation.
This process is not yet complete at we head into 2009, but the path of JPY strengthening may be a far rockier one in the
months ahead. On the one hand, the further the JPY strengthens, the more it is inflicting real damage on Japan’s export
dependent economy, and as well, the Bank of Japan is likely to begin intervening against JPY strengthening pressures as
it has already sought explicit permission to do so from other G-7 members. So while we are bullish the JPY for at least
the first half of the year while the global deleveraging plays itself out, the trade will be a difficult one to enter and exit
in terms of risk/reward. Since we don’t look for a recovery any time in 2009, we suspect that the carry trade will remain
a dead concept for the foreseeable future and will be a “buy on total panic if you dare” type of trade in 2009. Still, in a
global economy where so many nations are wallowing in endless debt, it is tough to bet against a nation whose population
has savings of well over 100% of US GDP.
2009 Trade: Sell EURJPY for 95. Sell CADJPY, targeting 65 or lower. Sell AUDJPY for test of 45.00
AUDJPY in 2009:
A continuation of global deleveraging will put further pressure on the classic carry trades, but if equities finally put in a
low, there will also be great tactical buying opportunities if the world gets too doomy and gloomy
– 30 –
GBP: MOST OF THE PAIN ALREADY PRICED IN?
GBP tumbled to spectacular new lows by mid-December of 2008 as the UK economy was by far the most vulnerable of the
European economies to the credit crisis. First, the economy’s only major export is financial services, the sector hardest hit by
the crisis. Second, British banks have enormous liabilities abroad at several multiples of British GDP. Third, the pound was
overvalued to begin with and once the BOE got aggressive in cutting rates, its traditional yield advantage was no longer
there to prop up its attractiveness from a carry perspective. Finally, the UK had a housing bubble perhaps even worse than
the US housing bubble and this is in the rapid process of unwinding as we head into 2009. The British consumer is one
of the world’s most indebted (perhaps tied with Australia). The good news? The short GBP trade was one of the most
obvious and heavily played macro themes in 2008 and has become a crowded trade. The market is already pricing in an
awful lot of misery for the UK on top of what it has already experienced, so we suspect that GBP could stage a strong
comeback somewhere in 2009 against its European peers at minimum, even though the BOE seems happy to let the
pound continue to weaken for now.
2009 Trade: sell EURGBP for 0.8000 again and Buy GBPCHF dips for test of 1.9500
CHF: NO LONGER A SAFE HAVEN?

The Swiss Franc performed a Jekyll and Hyde act in 2008 as the credit crisis swept through the markets. At first, the franc
strengthened sharply in line with the sharp contraction in risk appetite as it has nearly always done in markets past. The
assumption was that CHF had been used extensively as a funding currency involved in carry trades and anything carry
related should reverse. But then, after posting record highs against even the EUR, the CHF quickly began weakening
against the EUR and elsewhere by later in 2008 as traders and macro investors contemplated its exposure to the financial
sector. Although it became increasingly popular, especially for mortgages in Central and Eastern Europe, to borrow Swiss
Francs as a funding currency for asset plays abroad, Swiss banks and investors also invested abroad to the tune of several
multiples of the country’s GDP, so foreign liabilities and are a tremendous risk. Further cracks showed in the franc as serious
tax haven issues arose with US and German authorities – possibly tarnishing Switzerland’s ability to attract capital down
the road. We’re neutral on CHF heading into 2009. Still, the franc may outperform the Euro in the New Year.
2009 Trade: Buy GBPCHF for test of 2.0000. Sell EURCHF for 1.4800 again.
– 31 –
AUD: TO REMAIN DOWN UNDER?
The Aussie was caught up in the dual bubble in commodities and emerging market currencies and remained strong
until those two markets peaked in mid-summer of 2008. The unwind since then has been spectacular and likely heavily
aggravated by the unwind in enormous carry trade positions built up over years. The outlook for AUD remains very poor
as long as global growth prospects remain weak, which we expect them to do for the balance of 2009 (if with considerable
volatility in price movements, we must note). The Australian economy has lagged the weakness developing elsewhere
by, and therefore has a lot of catching up to do in 2009. AUD will be especially sensitive to any worse than expected
slowdown in China, due to key exports to that country, especially iron ore and coal. This latter risk is significant but of
unknown magnitude due to the opacity of China’s real economic performance.
2009 Trade: Sell AUDUSD for 0.5000 test. Sell AUDJPY for 45.00 test. Buy AUD basket if S&P500 hits 500
CAD: A HAS-BEEN UNTIL 2010?
The Canadian dollar was a bit slow to weaken in sympathy with the other commodity currencies this year, but once oil
prices collapsed, its fate was sealed and USDCAD quickly moved from just over parity to 1.3000 in the space of a month.
The Canadian economy has always been closely coupled to the US economy as a majority of its exports, commodity and
otherwise, head south of the border. Still, Canada has remained surprisingly resilient until the final months of the year,
when it became painfully clear that the credit crisis had gone global. The loonie will continue to suffer in 2009 on a broad
basis due to falling hard commodity prices associated with weakness in global growth. Weakness in the US auto sector
is also a concern as auto parts are one of Canada’s major manufactured exports. It seems that the weakness in Canadian
number is only beginning to pick up steam as we head into 2009, so it has a lot of catching up to do with its neighbour
to the south. Still, we don’t look for a meltdown: Canada was one of the most fiscally responsible countries in the world
in recent years and is relatively well positioned heading into this mess compared with other major economies.
2009 Trades: Buy USDCAD for 1.4500. Sell CADJPY for 65.00 or lower.
NZD: FURTHER TO FALL...
The NZD was the weakling of the G10 currencies in 2008 for good reason. The country’s economy was ahead of many
others in weakening due to its own credit/housing bubble that was ended with sharp increases in the RBNZ cash target to
above 8.00% by the summer of 2008. Now the central bank is cutting rates furiously to fight economic weakness and the
vicious unwinding of the domestic asset bubble. Still, New Zealand has a long way to go toward balancing its economy,
as the enormous current account deficit demands extensive external financing that will be hard to come by in the New
Year. As well, imploding agricultural commodity prices are cutting off export revenues. Fortunately fro the country, it has
done a good job of balancing its budget until recently so the country may be worth a look in the darkest days ahead once
it has taken a large further adjustment.
2009 Trade: Sell NZDUSD for 45.00 test. Buy NZD basket if S&P500 hits 500 for a 10% rally.
– 32 –
NOK AND SEK: WORTH A LOOK IN 2009?
The Scandies have weakened sharply in 2008 for good reason. In Norway’s case, the traditional correlation with oil prices
almost inevitably meant that NOK would weaken. Besides the correlation with oil prices, NOK had become a popular
carry trade currency due to the hawkish Norges Bank’s raising of rates to as high as 5.75% by mid-year. Alas, its exposure
to commodities, poor liquidity, housing bubble unwind, and now rapidly shrinking interest rate differentials means that
EURNOK Is trading at multi-year highs. Sometime in 2009, however, we suspect that the NOK could be worth a look on
a valuation basis and as the EUR is at significant risk of coming under fire.
SEK has weakened drastically as its export markets are going up in flames and as its banking sector is in trouble due to
enormous and ill-advised investments in the worst of the bubble economies of Eastern Europe – the Baltic countries. As
global deleveraging and economic weakness plays out, this could continue to weigh on the krona, but we suspect that
its value vs. the Euro is already beginning to get stretched as we head into 2009, considering that it still is has a current
account surplus and managed to run budget surpluses until this year. Sweden certainly looks far better positioned than
many of the EuroZone member countries for weathering this recession. As well, in December, the Swedish National Debt
Office has effectively announced intervention as EURSEK rose above 11.00.
2009 Trade: Sell EURNOK as crude oil runs below $40 for 8.50 and sell EURSEK for sub 9.50 again.
EURSEK in 2009:
The Scandies are underpriced and the strong EUR is starting to look like a bubble: The Swedish government has begun
intervention and this pair may fall hard in the New Year.
– 33 –
ENERGY IN 2009: FALLING CRUDE

PRICES A HUGE GEOPOLITICAL RISK
The global slowdown triggered by the rapidly deflating credit bubble pushed crude oil prices over a cliff by mid-summer
of 2008. In just a few months, the shocking reversal in prices has torn the economic rug out from under all of the major
oil exporters. Unfortunately for most of these petro-states, their leaders did a remarkably poor job of managing their
economies during the boom years: they squandered oil wealth on lavish domestic subsidies and allowed the inflation of
massive local asset bubbles due to inappropriately pegged currency regimes. Now, with global demand declines suddenly
outstripping every attempt by the petro-states to cut production and exports, these countries may face a further sharp
drop in oil prices in 2009.
The greatest risk from the events unfolding in the global energy market is that prices fall so far and so quickly that they
destabilize one or more of the shaky petro-regimes that have already suddenly found themselves on life support. And,
ironically, the harder oil prices fall, the higher the risk of a future supply shock. A supply shock could be brought about in
the short term by a collapsing oil regime – a la 1979 in Iran - or in the longer run simply due to the abrupt contraction in
new investment that is already drying up future supply potential when demand bottoms and tries to make a comeback.
Collapsing oil prices are the most likely source of further political and economic destabilization and geopolitical challenges
in 2009. And of all the major oil exporting powers, Iran is likely the most important.
When oil prices reached $145/barrel over the summer of this year, a day of global oil production had a spot market value
of $12.3 billion dollars. Saudi exports alone were worth well over a billion dollars a day at that incredible price. That high
price would have put annualized, global production at some $4.5 trillion. Now, however, prices have fallen as much as
$100/barrel, and global daily crude production is worth less than $4 billion/day. This precipitous drop in prices has put
petro-states around the world in the grips of intense economic agony. As we head into 2009, a global inflationary boom
has viciously morphed into a deflationary bust in the matter of a few months. Russia, the world’s greatest oil power next
to Saudi Arabia, has seen the market fleece its oligarch billionaires of the lion’s share of their assets and the ruble faces
a collapse. Dubai, the UAE’s attempt to create a Middle Eastern financial hub, sports empty “see through” skyscrapers
that attest to the implosion of the city’s property bubble. Venezuela’s populist Chavez looks increasingly against the ropes
politically on the homefront. Of all the major oil exporters, however, things look worst for Iran.
Iran faces perhaps the greatest pressures of all the major oil exporters as crude prices decline because the government’s
outlays rose in an entirely direct proportion with the rise in the price of crude oil, meaning that the downside is creating
the most pressure on this country’s current economic model. Rather than building up financial reserves while times were
good, the Iranian regime chose a disastrous policy of continuing and expanding massive subsidies, aimed at propping up
support for the regime among the nation’s poor. The lack of discipline in recent years has kept gasoline at the absurdly low
price of 11 cents a liter (with the guaranteed low prices resulting in the awful triumvirate of lack of investment in refiner-
ies, booming domestic consumption, and massive exodus of large portions of oil export revenues for the purchase of gas-
oline. Unbelievably, Iran is the world’s second largest importer of gasoline after the USA. The gasoline import situation became
so grossly expensive in 2008 that Ahmadinejad was forced to enact highly unpopular gasoline-rationing measures in 2008)
Those subsidies of fuel and food amount to as much as 20% of GDP, and oil revenues from exports make up approximately
80% of Iran’s foreign exchange revenues. It is clear that the Iranian economy is a one-trick pony. Various estimates assume
that Iran needs a price of oil between 80 and 90 dollars a barrel to fund its current budget. With international financing
unavailable due to its isolation and oil prices running as little as half of that, Iran is now quickly burning through its foreign
cash reserves in an effort to maintain the over-generous subsidies while it hopes crude oil prices recover.
Eventually in 2009, the government will be forced to cut subsidies meaningfully, a measure that will inevitably erode
support for the increasingly unpopular regime. The nation is headed for elections next June as the country is suffering
30% inflation and going into an economic tailspin. What is to become of Iran in 2009 is perhaps the most important
geopolitical question in 2009. The combination of the elections, the destabilization and unpopularity of the regime as oil
prices collapse, and the as yet unresolved issue of Iran’s nuclear ambitions make for a heady cocktail indeed. Add to this
Iran’s renegade status in the West, it’s implications for the Sunni/Shi’a faultline running through the Middle East, its con-
frontational stance on Israel, and its importance as a source of imported oil for large Asian powers and the implications
are clearly global. Either Iran’s economic weakness forces a more conciliatory response with the West due to the clear
economic exigencies, or the regime strikes out as it finds itself in its death throes in an effort to cast blame on foreign
scapegoats. Iran’s is a potential powder keg in 2009 that bears watching.
– 34 –
Supply and Demand and the Amazing Crude Oil Price Curve
The oddest feature of the oil market as we head into 2009 is that it prices are in unprecedented “ultra-contango” in
which spot crude prices are extremely low compared to forward prices for crude oil for delivery in the future. As the
chart below shows, the contango for 1-year forward crude has reached as high as 15 dollars in late 2008 as demand has
collapsed. The contango certainly tells us that spot demand is extremely low at the moment due to the global economic
collapse. The sharply higher prices further out on the curve supposedly mean that the current low prices are not expect-
ed to last. But is that the correct assumption? Oil demand is collapsing around the world, just as supply was beginning to
increase a bit despite warnings of an impending permanent production peak. Analysts have long assumed that demand
can only rise for the world’s most important commodity, but it forgets relevant historical examples if sharply falling
demand from price and/or demand shocks. For example, from 1978 to 1983, US crude oil demand fell 20% and
did not reach the 1978 level again until 1998. After the Asian crisis in 1997, South Korean demand quickly shrank
almost 15% and has yet to rise above the 1997 peak.
CRUDE OIL IN CONTANGO

20 160
140
15
120
10
100
5 80
60
0
40
-5
20
-10 0
1/30/1998
1/30/1999
1/30/2000
1/30/2001
1/30/2002
1/30/2003
1/30/2004
1/30/2005
1/30/2006
1/30/2007
1/30/2008
1 yr. forward Crude premium Spot Crude Oil Prices
Here’s another twist on the situation: at current levels of contango, anyone with the ability to store significant
amounts of oil has a free money trade at the moment: they can buy crude now, store if for a year and come away
with a tidy profit by locking in one-year forward prices right now. In the current market environment, there are
very few free money trades out there, so this one is likely to go away quickly as 2009 progresses- either via spot
crude rising versus forward crude or vice versa or both. We suspect that most of the pressure will be on forward
crude prices falling even further, although contango is unlikely to disappear entirely. And barring any supply shocks
from destabilizing petro-states, the crude market is likely to remain well supplied in 2009. Still, for the longer term,
crude oil supply is showing signs of peaking and the current global financial malaise is already pinching petro-
leum companies’ E&P budgets. Oil production efforts have an extremely long lead time, so whenever the global
economy does right itself somewhere down the road, the energy market will have a tough time responding and
the next price spike will be the inevitable result. A demand-led recovery in crude is not in the cards for 2009.
– 35 –
TOP TEN REASONS TO STOP

WORRYING ABOUT CLIMATE CHANGE
Climate change catastrophist propaganda has created one of the global economy’s gravest dangers as we head into
2009: global warming groupthink. Despite the economic meltdown we’re suffering, bureaucrats are scrambling to enact
bizarre, carbon cap and trade schemes in coming years that can only serve as a heavy additional tax on economic activity.
Stopping the global warmist conspiracy will be a tough task in 2009, as it has also indoctrinated US president-elect
Obama, who may be about to embark on a climate change agenda of disastrous proportions by marrying a warmist
agenda to a super-Keynesian “green jobs” stimulus package. But as a public service and call to rationality, we are happy
to offer here the top ten reasons to stop worrying about climate change as we would hate to see climatic bugaboos
wrecking our global economy even worse than it has been wrecked to date.
10. The climate is always changing.

Climatic conditions have been a vital component of our planet’s and humankind’s history. The Roman Empire’s northward
expansion, for example, coincided with a dramatic warming of Northern Europe, which allowed Roman agricultural
methods readily to expand northward. A subsequent cooling coincided with the Roman’s demise. The sharp warming
preceding and during the Middle Ages was an enabler of agricultural productivity and a population and cultural explosion
in continental Europe. It also aided the Vikings’ bold seafaring feats and ability to settle in a Greenland far warmer than
today’s. By the late 14th and early 15th century however, as the “Little Ice Age” settled over the Northern hemisphere,
dramatically cooler conditions had brought about both the Norse Greenlanders’ frosty demise and disease and death to
mainland Europe as well. Prolonged droughts killed off the Mayans over a millennium ago and failed monsoons and other
el Nino-like drought conditions in the late 19th century triggered huge famines in India and elsewhere. Climate change
has played a major part, for better or worse, in our history and will continue to do so until the sun dies billions of years
hence.
9. Climate models = garbage in, garbage out.

The world’s climate is one of the most devilishly complex “systems” we humans have ever tried to understand with computer
models. While our sciences have becomes enormously sophisticated and our computer power continues to grow expo-
nentially, we still can’t predict the weather with any accuracy more than about a week ahead at best . To take another
example, annual forecasts for hurricane formation probability in the Atlantic, are laughably inaccurate. It is probably
hubris to think that we can ever reduce the earth’s climate to a computer model as the endless input variables into the
system mean that any inaccuracy that is used as input for a model with so many variables becomes multiplied a trillion
times over time as each time that inaccurate input variable interacts with hundreds of other inaccurate input variables
the variance to “reality” grows apace. The end result? A worthless prediction no better than a random guess. But that
certainly doesn’t mean we shouldn’t try. If some day forecasters are able to get it right once in a while then we should
start listening – until then, let’s give a few million dollars to the model eggheads to see if they can come up with some-
thing interesting and consistently predictive rather than taxing our multi-trillion dollar regulations.
– 36 –
8. Where’s the warming?

It’s an inconvenient truth that the world has shown no convincing signs of warming since 1998: tied with 1934 as the
warmest year on record. The press continues to cover climate change topic in the present tense – as if we’ve already set
the thermostat higher and we’re slowly roasting ourselves toward the broiling point. The jarring reality is that the last two
years have seen some of the most remarkably cool seasons in multiple parts of the globe for generations. Is it not ironic
that as Mr. Obama is headed for the White House next month, many parts of the US are descending into the coldest winter
in modern memory? Temperatures that would be colder than normal in the southeastern US for January, for example,
already slammed this region in mid-November. This past October, Southeast England saw a snowstorm this year that was
the most remarkably early sign of winter since 1880. And how’s the Arctic ice doing these days? After handwringing of
near religious intensity by global warming alarmists about the “record low” (for the ridiculously short data record of 30
years) Arctic ice cover in 2007, the ice has now expanded so rapidly due to extreme cold this year that it is already back
to the average levels for the last 30 years. Shall we continue? Lets! The South American winter of 2007 was the coldest in
three generations, with almost unheard of snow in Santiago, Chile and frosts in Uruguay. China’s brutal winter of 2007-8
was the coldest in 100 years and caused unprecedented travel disruptions. While warmists mourn Arctic ice disappearance,
they neglect to mention that Antarctic ice cover showed the largest growth last year since measurements began . And
Antarctic Ice contains 90% of the world’s ice. As for the “warming trend” that has been reasonably well established since
the 1970’s (at least until 1998): The warmists have conveniently forgotten that the 1950s’ to 1970’s was an unusually
cold period in the last 100 years and many scientists in the 1970’s were actually fretting about the risk of global cooling.
We’re not out to claim that we are in the process of global cooling – but let’s at least look out the window and recognize
that something does not add up here.
7. Other environmental problems are far more pressing.

It’s unfortunate that, of all the environmental problems our society faces, climate change, a fuzzy, uncertain, long term
concept is pushing aside far more pressing and real concerns for the environment and our civilization. Poverty (which
often caused by and aggravates environmental degradation), soil erosion/desertification and management of fresh water
resources are real and present dangers that deserve far more attention than climate change. Our use of water resources is
of particular concern as too much of the world’s agriculture depends on fossil and other overutilized water sources. Let’s
prioritize our resources appropriately. We suspect that the popular appeal of the global warming conspiracy is a combination
of international bureaucrats love of big, globe-spanning government and the strange misanthropic environmentalist/anti-
capitalist impulse. Let’s look at measures that would benefit humanity rather than bureaucrats.
6. Other climate models: Global cooling just as likely.

According to multiple climate models that focus on other important climatic inputs besides greenhouse gases, the risk
of global cooling – and even another ice age – appears to be as high a probability as the notion that we are in danger of
cooking the planet. No, we are not predicting global cooling, but let’s admit that other inputs into climate could be as
important or even more important than greenhouse gases. Variations in the sun’s magnetic field, for example, are suspected
to be critical for the amount of cloud cover in the world – a key climate variable (water vapour is a far more important
greenhouse gas than carbon dioxide or methane) . Understanding the sunspot cycle is also vital, as it may be one of the
most important climate factors of all. The coldest parts of the Little Ice Age (approx. AD 1300-1850) coincided with little
and even no sunspot activity. The very cool weather this year may also be due to a very low sunspot cycle. Projections of
the next cycle suspect that it could be a very mild one, meaning potentially cooler conditions.
– 37 –
5. The data is flawed.

Headlines from October of this year trumpeted that October 2008 was the second warmest October since 1880. As of
early December, you can still google this news story and find this report presented as fact. But guess what? It’s wrong.
Many had a hard time believing this report in the first place as cooler than normal conditions were being measured in the
latter part of October. Then it was discovered by the blogging outfit at climateaudit.org that the data used to calculate the
average temperature was simply wrong. Data for all of Russia was absent and instead was simply copied from September.
Voila – record warmth. Others have discussed the risk that heat island effects in many cities around the world may be
skewing measurements unrealistically in the favour of warming in recent decades – especially across the huge expanses of
Russia, where temperatures have been the most suspiciously elevated (and which represents a very large landmass when
calculating global “averages”). Others point out unexplainable upward adjustments by the public agencies responsible
for producing climate data – especially the US’s NASA and NOAA and general attempts to treat climate databases and
the results drawn from them as secret information rather than part of the public domain. Let’s at least ensure we have
accurate data collection before we start rearranging our economic lives as if we are rushing toward a climate calamity.
4. Human activity helped created our great climate in the first place.
One core belief held by many environmentalists is that all human activity is bad, that we are somehow to be punished
for our voracious and short-sighted consumption of the world’s resources. While we are certainly responsible for plenty
of regrettable destruction of many ecosystems and other environmental problems, our presence on this planet likely also
helped to create the climate we live in today. Climate change has been swift and brutal in the past and there is mounting
evidence that our presence on the planet has actually helped to smoothe out the climate’s climate cycles, perhaps due
to huge emissions of greenhouse gases. Particulary, some research (see March 2005 issue of Scientific American, for
example) indicates that humans’ mass burning of forests as agriculture spread to Europe and Asia thousands of years ago
helped to stabilize the global climate as the normal ice age cycle was suddenly aborted rather than repeating itself. Many
credible climate models suggest that another ice age may be due in coming centuries. The possible good news? All our
greenhouse gas emissions may help save us from an ice age catastrophe once again ...
3. Peak oil is here. Peak hydrocarbons soon to follow.

We live on a finite planet with finite resources. Most of our entire civilization has been made possible by the greatest
resource of all that natural history has bestowed upon us: stored solar energy in the form of fossil fuels (coal, crude oil
and natural gas). Yes, we should be worried about burning hydrocarbons, not because of climate change, but because
this resource is finite and won’t last forever and we should make the best possible use of it. Conventional light crude oil
resources peaked a few years ago and overall liquid hydrocarbon production may have also peaked, and if not, will do so
in the coming few years. Natural gas will soon follow, and the nemesis of the global warmists – King Coal – will follow
within another decade or two. Most of the climate change worry wart’s models assume that our fossil fuel usage will
continue to expand apace - but our limited endowment of fossil fuels guarantees that we will forced to slow emissions
anyway in coming decades.
– 38 –
2. Climate change policy is lousy economics.

The artificial imposition of fanciful carbon “cap and trade” schemes cooked up by world bureaucrats are the effective
equivalent of a severe tax on industry and economic activity generally. The various policies are probably not implementable
in the first place as cheating would be rampant and easy by nations without strong traditions of enforcing complicated
regulations. Costs would likely be highest for those countries – especially Europe – where enforcement would be carried
out in full. Implementing these draconian regulations would be costly and onerous in the best of times. Right now, we are
in the worst of times and can ill afford these programs. If implementation is carried out, watch how the “renegade” states
with rich coal reserves enjoy tremendous growth at the expense of the chump nations who swallowed the cap and trade
pablum. This is a critical issue as Obama is clearly marching to the White House with visions of marrying climate change
alternative energy programs with some kind of super-Keynesian new stimulus package to create millions of “green jobs”
in the US. Remember Jimmy Carter’s wasteful white elephant investments in new alternative energy technologies? Is the
Obama administration doomed to repeat these mistakes?
1. “In the long run, we are all dead.”

The full quote, from John Maynard Keynes, is as follows: “The long run is a misleading guide to current affairs. In the long
run we are all dead”. No, this isn’t a fatalist profession of doom and gloom - it really sums up the nine points above and
should serve as a call to focus on things that are happening in the here and now - to shape things we know that we know
about rather then things that we really don’t know if we know about. The worst thing we could do for the environment
would be to see a total economic collapse: as poverty and environmental degradation go hand in hand. Let’s let the global
climate take care of itself for now.
DISCLAIMER:
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained.
The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from
the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially
leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in
particular if the conditions mentioned in the analysis do not occur as anticipated.
Please read our full Analysis Disclosure & Disclaimer at www.saxobank.com/analysis/disclaimer
– 39 –

Saxo Outlook 2009

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Saxo Outlook 2009

Uploaded by

Copyright:

Available Formats

OUTLOOK 2009

TURBO-GLOOM AND ANNO HORRIBILIS

Welcome to our yearly outlook for the Global economy.

DAVID BAKKEGAARD KARSBØL

He is available for comments on the macroeconomic situation and forecasts.

John is a regular guest and commentator on television networks, including

He also writes regular ad-hoc commentary focusing on the major currencies,

CHRISTIAN TEGLLUND BLAABJERG

Christian Tegllund Blaabjerg grew up in Kolding, Denmark, and has a broad

Christian Tegllund Blaabjerg also appears regularly on major financial news

2009 TOP10 PICKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 8

RECAPPING OUR 2008 PORTFOLIO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 10

PREMISES FOR THE YO2009: MAJOR CONTRACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 11

CHINA IN 2008 = UNITED STATES IN 1929?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 25

TOTAL WRITEDOWNS END-OF-CYCLE AND EVENTUAL SIGNS OF RECOVERY. . . . . . . . . . . . . . . . . . . . . . . . . P. 26

FX IN 2009: ANOTHER WHIPLASH REVERSAL AHEAD FOR THE USD? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 27

ENERGY IN 2009: FALLING CRUDE PRICES A HUGE GEOPOLITICAL RISK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 34

TOP TEN REASONS TO STOP WORRYING ABOUT CLIMATE CHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 36

SAXO BANK’S OUTRAGEOUS PREDICTIONS FOR 2009

Italy will make good on threats to leave the ERM

EURUSD to 0.95 – and then to 1.30

Chinese GDP growth to 0%

Pre In’s First Out

Reuters/Jefferies CRB Index to drop 30% (to 150)

First Asian currency to be pegged to CNY

2009 TOP 10 PICKS

2) Play the “range” in EURUSD

3) Buy German Government Bonds: 4.25%, 7/4/2039

4) Short CEE Basket vs. EUR

5) Short AUD/G5 basket

7) Buy PIO (PowerShares Global Water Portfolio)

8) Buy S&P500 @ 500

10) Short TUI Travel

RECAPPING OUR 2008 PORTFOLIO

2008 PORTFOLIO, USD DENOMINATED

PREMISES FOR THE YO2009: MAJOR CONTRACTION

US: TOTAL OUTSTANDING CREDIT / NOMINAL GDP

Source: Bloomberg, Saxo Bank.

ENTER THE DARK HORSE, BERNANKE (JUST ANOTHER INFLATIONIST)

CULTURAL CHANGE, BUT NOT THE ONE OBAMA PROMISED

SAXO BANK GLOBAL BUSINESS CYCLE INDICATOR

INTEREST RATES IN 2009: DEFLATION OR INFLATION?

RISK VS. SAFE HAVEN: SPREADS TO EXPLODE

THE LONG END OF THE CURVE

EARNINGS ESTIMATES FOR MARKETS

Sales -5% -4% -6%

EBIT margin -28% -20% -35%

Expected Earnings Growth

Source: Thomson DataStream, Saxo Bank Research

HOW MUCH IS ALREADY PRICED IN?

Figure 2: Premium/Discount to Normal Bear Market P/E’s.

Normal bear market

Source: Bloomberg, Thomson DataStream, Saxo Bank Research

WHAT CAN WE EXPECT FROM DIVIDENDS?

Figure 3: Expected Dividend Yield for 2009.

Expected Dividend Yield 2.1% 1.5% 1.1%

Source: Thomson DataStream, Saxo Bank Research

VALUATION TARGETS FOR INDICES

Figure 5: Equity Index Targets based on DDM simulations.

19. Dec. 2008 Lows 2009 based on DDM valuation

DJ Stoxx600 197 130

S&P500 885 610

Nikkei225 8667 5350

Source: Bloomberg, Saxo Bank Research