THE SPECIALIST IN TRADING AND INVESTMENT
Hellerup, 23 July, 2014 War and markets By Steen Jakobsen “There are causes worth dying for, but none worth killing for” – Albert Camus The world is increasingly becoming engaged in civil wars and general turmoil where Camus word could and should play a central but never will. This article is one of the hardest to write as war is never about right or wrong. They are per definition always wrong and extremely personal and emotional The fact is however that we need to put ‘the risk of wars’ into our macro outlook as they are increasingly in intensity but also in casualties. I will not condone anyone or any party involved in the conflicts presently – I learned my hard lesson advocating the removal of Saddam Hussein, only to learn that the successors is just as bad, hence going forward Camus’ words are my mantra. The most simple way to “measure” geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it’s a tax on the economy when high, and a discount when low. The high energy consumption makes it a critical part of any projection done, despite this energy assumptions are often exogenous (given!). Think about this: Everything you did this morning had energy consumption in it : Waking up to your smart phone(charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air conditioned office. Likewise the rest of your day will be one big consumption of energy. The world energy resources are primarily extracted from “volatile” or underdeveloped regions creating a real risk of disruption of supply. Herein lies a clear and quantifiable risk. The way I measure this geo-­‐political risk is through measuring the spread between the 5th contract of the WTI Crude and the first contract. Of course, there are other factor workings, but in lack of better alternative, I use that: (LINK) C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 info@saxobank.com
THE SPECIALIST IN TRADING AND INVESTMENT
As can be seen since July 15th the “war premium” or more neutral “disruption premium” have increased by 2 $ -­‐ the world consumers are now paying 2 $ more per barrel of WTI Crude. Overall there are many factors influencing the crude market but the price of energy remains the one component we need to know is stable and preferably falling. The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria. Many will argue it’s different this time, back then we were too dependent on the Middle East! Sure but prices where only between 10 and 25 US Dollars! C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 info@saxobank.com
THE SPECIALIST IN TRADING AND INVESTMENT
Now we have lived with an oil rise in excess of 100 $ more or less since 2007! Crude is now 4x higher in price than during the “inflationist” 1970s – The time where we ended The Bretton Woods and the emergence of inflation targeting from central banks. No, the signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market however maintains a steady hand: Israel will be contained inside a couple of weeks; Russia vs. Ukraine will find a solution -­‐ The none acceptance of tail-­‐risk (Black Swans) is clear for everyone to see. Market is “perfect” in its information, zero interest rates will safe us and we have all been “dumbed” into believing that the real world no longer matters. Unemployment, social inequality, wars, innocents being killed, and tv images of people fighting to live another day is not relevant………except for the fact that for world growth to keep growing we need to continue to see growth in Africa, Middle East and Eastern Europe. We need to accept the world is now truly global – we smiled while globalization reduced prices and made our companies more profit, now the escalation of wars reflect a world where growth is short, energy is expensive and increasingly hard to get and that we have gone full circle with macro and interventionist policies. The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – where there are a action there will be a reaction C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 info@saxobank.com
THE SPECIALIST IN TRADING AND INVESTMENT
– if the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also markets, the real losers however let’s remind ourselves is the individual families losing loves ones. No, Camus got it right. There is nothing worth killing for, plenty to fight for. Chief Economist Steen Jakobsen Steen Jakobsen was appointed to the position of Saxo Bank’s Chief Economist in March 2011. Mr. Jakobsen returned to the Bank after two years’ absence. During that time he has been Chief Investment Officer for Limus Capital Partners. Prior to his departure in early 2009, Mr. Jakobsen was with Saxo Bank for almost nine years as Chief Investment Officer. 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 Options. In 1992, he joined Chase Manhattan in London as VP, Head of Scandinavian Sales, and then the Chase Manhattan Proprietary Trading Group. 1995-­‐1997 he worked as a Proprietary Trader and Head of Flow Desk at Swiss Bank Corp., London. In 1997, he became Global Head of Trading, FX and Options at Christiania (now Nordea) in New York until he joined UBS in New York in 1999 as the Executive Director in the Global Proprietary Trading Group. Contacts Mail: sjn@saxobank.com Phone: +45 5154 5000 C O P E N H A G E N . L O N D O N . S I N G A P O R E . D U B A I . P A R I S . T O K Y O . A N D O T H E R F I N A N C I A L C E N T R E S A R O U N D T H E W O R L D W W W . S A X O B A N K . C O M SAXO BANK A/S Philip Heymans Allé 15 2900 Hellerup Denmark
Telephone: +45 3977 4000 Telefax: +45 3977 4200 Reuters Dealing Code: SAXO Cvr. nr. 15 73 12 49 info@saxobank.com