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Saxo Bank predicts K-shaped recovery for the US economy


The US economy will see a K-shaped recovery irrespective of who wins the November 3 presidential election, according to Saxo Bank.

A K-shaped recovery is one in which the performance of different parts of the economy diverges like the arms of the letter K. High-income Americans will see jobs come back and income grow, while middle-and lower-class people will not.

“There has been an increase in technology, fiscal stimulus, the Federal Reserve balance sheet, debt issuance, social riots, the top 1 per cent getting richer, autocracy and inequality,” said Steen Jakobsen, chief investment officer, Saxo Bank.

We will never go back to pre-Covid levels of GDP and demand

Steen Jakobsen, chief investment officer, Saxo Bank

“There has also been less employment, less productivity, less innovation because of the monopoly of technology companies, less basic research, undermining of the US education system, less globalisation and less privacy,” he said during a webinar series organised by the Alternative Investment Management Summit on Thursday.

US stocks have soared to record highs over the last few months, buoyed by the Fed's stimulus packages. However, the ground reality has been slightly different with unemployment still on the rise in the US.

As the world's largest economy inches closer to its elections, the Saxo Bank executive predicted three scenarios. There is a 40 per cent chance of a contested election where President Donald Trump will not concede defeat. This will result in a spike in volatility, sell-off in equities due to uncertainty, a weaker US dollar and stronger gold, according to the bank’s outlook.

There is also a 40 per cent probability of Joe Biden making a clean sweep, which could result in a sell-off in equities, particularly in technology, a rally in green stocks and higher interest rates.

Meanwhile, there is a 20 per cent probability of a Trump victory. This would increase volatility, cause four more years of disruption to the global order, trigger a relief rally and result in two split Houses, reducing the potential for a fiscal stimulus, as per Saxo Bank’s outlook.

However, Mr Jakobsen said there is zero correlation between the US elections and returns on equity investments.

“We will never go back to pre-Covid levels of GDP and demand. Covid-19 has made the business models we operate right now unworkable for the future,” said Mr Jakobsen.

Listing out the difference between policymakers’ response in 2008-2009 and 2020, the Saxo Bank official said the policy response in 2009 was entirely driven by quantitative easing and expansion of the Fed balance sheet but with no fiscal support.

“In 2020, we have a huge amount of fiscal spending, with QE numbers in March and April alone exceeding the value of QE1, QE2 and QE3. Fiscal spend goes directly to the consumer while Fed balance sheet expansion has zero value for the actual economy,” he added.

Referring to the Fed’s inflation target of 2 per cent as “outdated”, he praised the US central bank’s new strategy that will allow the average inflation rate to exceed the 2 per cent ceiling, which has been in place for 40 years.

Mr Jakobsen called on investors to take a higher weightage in the Chinese market in 2021. “As an investor, you will get excess returns in the growing debt of Chinese markets.”

He estimated that 60 to 70 per cent of all initial public offerings globally in the next 10 to 20 years will come from platforms like Tencent, Alibaba, JD.com among others in China.

The US stimulus is only a cash splash. There is no productivity and no increase in real GDP growth

John Hardy, head of FX strategy, Saxo Bank

Meanwhile, John Hardy, head of FX strategy at Saxo Bank, said the world needs a weaker US dollar to recover because most of the global debt is denominated in this currency.

“It needs a weaker greenback to inflate away legacy debt, both foreign and domestic. An overvalued dollar contributes to liquidity constraints,” he said.

Praising China’s crisis response, he said it was less focused on people’s incomes and more pivoted on promoting economic activity, industrial production levels and storing up strategic reserves.

“The US stimulus is only a cash splash. There is no productivity and no increase in real gross domestic product growth. The rush is to provide for social stability. It’s not the best mix for currency fundamentals,” added Mr Hardy.

Updated: October 15, 2020 08:00 PM