What the World Needs Now...Is a Crisis

08/09/2012 8:30 am EST


Steen Jakobsen

Chief Economist, Saxo Bank

Economist and investment officer Steen Jakobsen says real change to global economies won't happen until crisis points are reached. Believe it or not, he says we aren't there yet. Nonetheless, he sees this as a good time to get into investments.

Kate Stalter: Today, I'm pleased to be speaking with Steen Jakobsen, Chief Economist and Chief Investment Officer at Saxo Bank in Copenhagen.

Steen, you will be giving a talk at the upcoming MoneyShow in Shanghai, and I was very intrigued by the title of your talk, "Why the Crisis is Overdue." Please tell us why you chose that title, and what some of the topics are that you plan to be addressing.

Steen Jakobsen: Well basically, history-economic history-has shown us that the only way we create reforms and new starts and new beginnings are through a crisis.

The way the macro policy is conducted these days, it is a game of extend and pretend, where we are extending by buying time, and we are pretending that we are buying time at all times. Effectively, it's a little bit like a schoolteacher who refuses to ever change the curriculum, despite the world moving on, and that's the same with policymakers.

We know for a fact, if we look at history, that the macro is always wrong. So anything decided by politicians and central banks are by definition wrong. All the good things in the world are defined by the micro environment that corporations and individuals like yourself, who are acting out of will to survive and make a profit, and being logical.

So, if you combine all these things together in history, with the individual versus the state intervention levels, then clearly we need some sort of catalyst to create a new beginning. And certainly-I think everyone will agree with me at least-we need a new beginning, because what has been conducted and tried over the last four years has been absolutely futile in terms of regenerating growth.

And certainly as we speak, we have the highest unemployment in Europe. We have China on its way to having less than 7% growth, and we have the US, who is at best at stall speed in terms of growth. So what the world needs is a new beginning, a new start, a new reform, or new faces, to put it bluntly. Hence the title.

I think the faster we get a crisis, and the faster we get to a lower point, the faster we should be able to move forward. And I think we stand right in front of ten to 20 years of good returns in equities, and overall for the world economy, because we have failed so miserably over the last 30 years.

Kate Stalter: It sounds like you're saying it needs to get worse before it gets better. Is that correct?

Steen Jakobsen: That's correct, but not necessarily in economic terms or even in equity returns. It needs to progressively get worse. I define a crisis as having three phases: What I call the denial, and then the protests, and then the mandate for change.

Denial is the fact that we pretend that nothing is wrong, so what we do in terms of policy- medicine for that-is we do some physical expansion, which happened during 2009 and 2010. When that doesn't work, we move into protest, so we say everything we tried was based on the wrong politics of the politicians and the central bank in the early stages.

So now we are protesting against it, like what we've seen in the French election, and we've seen across all electoral votes over the last two years. Basically, we are trying to ditch whatever happens and replace it with the opposition. We know it doesn't work, but it's basically part of the phases.

And then the mandate for change is this third one. The mandate for change has a V-shaped recovery...and that's what I talk about when I talk about we need a crisis.

You have to remember, it is exactly one generation since anyone was given a political mandate for change, and that was Thatcher in the UK. She took over that segment of Europe. She fought with the unions, she fought with everything, and to try to regenerate just the UK into its rightful place in the world economy. And she succeeded because she was given a mandate by the voters.

Also, at the same time, 1979 was a time for fast change-1979 was also the year we started the big march south in China and the opening in China. So basically, the world economy has lived through one generation of one policy.

Then again, looking at history, we need to change the policies and the way we conduct ourselves. And I think that's why I'm so positive. Because the way we're conducting ourselves right now is not working. Clearly, that's for everyone to see.

Kate Stalter: It sound like I heard you that it's not necessarily the case when countries have elections-and of course, there's a major US election coming up in just a few months here. When a country changes from one ruling party to another-that's not necessarily the mandate you're talking about, is it?

Steen Jakobsen: No, no. Clearly in the US election, you can confuse...the mantra from when Obama got elected was "change." The problem is, of course, that he didn't constitute any change at all. He just talked about change. He just talked about change. We didn't actually conduct any change.

What I talk about is real change-a mandate given for change, and then someone acting on the mandate for change. But what we see across all political spectrums-any election right now, including the US-it's just more of the same.


Essentially, in the US, we are still moving between denial and protest. So if Romney gets in, there will be a protest against what happened with Obama, and if Obama gets elected, it's still a protest against wanting to change. It's not a mandate for change.

A mandate for change in the context of the US would be for someone to be given the power to deal within fiscal class within the US, to do something actual in terms of facing this deficit, the fiscal deficit. And you know as well as I do, that's not going to happen.

Whatever happens in November in the US, and certainly will happen with the present Congress. So we need to see that the electorates, you and I, take our responsibility seriously, and we vote into power who really want the change, not people who just talk about the change.

Kate Stalter: And how about in Europe, Steen? Obviously, that's another area of huge concern around the world.

Steen Jakobsen: Yes, Europe. Europe is in the ninth inning of its crisis. And what we need to see in Europe is the same. In the next two months, and maybe potentially already in this week, we will see whether the ECB will be able to print money effectively. They've done it indirectly. That would not be a solution, again. That is, again, between denial and protest, really.

The mandate for change in Europe is, we constitute some reforms and we act on the reforms. So in Europe presently, there are a lot of laws being passed. There's a lot of goodwill in terms of rhetorically supporting whatever the demand is, but no one is following through.

I mean, Greece is still today collecting less tax than it did three years ago. Italy is not taking more taxes in. So Europe is on the brink of decision, an endgame where it needs to decide.

And, again, it goes to title of the speech. It is really-we need a serious crisis. Don't get me wrong: I think it's a big crisis that 25% of all Spain is unemployed. But we need more than that.

We need to see people getting seriously concerned, and politicians feeling that at the end of the day they have their back up against the wall, and they need to react. That's sort of the environment we need to create.

Then, maybe for one nanosecond, we have politicians who are rational and logical. As you know, it doesn't happen very often, but a deep crisis seems to be the place where we do see some rationality.

Kate Stalter: Let me just ask you today, given the fact that you will be giving this talk in Shanghai. Where do Asian economies, and perhaps China, in particular, fit into all of this?

Steen Jakobsen: I have a huge respect for what China and Asia have done over that one generation I talk about. But I also think you have to realize they're also the end of the game, because the basic model of China and Asia has been to provide cheap labor and infrastructure investments. You know, you can eke out so much growth and productivity from that, but at a certain stage your economy has to move from the phase of being semi-industrial to being industrial.

So what a lot of the big economies need to do now is go through the needle eye of the semi-industrial to being industrial. That means you need to increase the intellectual capital. You need to be providing universities, education, health-care systems-creating a model which is more similar to Singapore than it is to the present model they have right now.

That's a huge task, because as long as, for instance, China doesn't have a health-care system, the Chinese will save 50% of their savings for a rainy day if they get ill. And that's issues of more capital, and that's not a good way to conduct policy.

What I'm seeing is that we will have one generation of slightly slower growth, but that it will be productive for Asia. The Asian model will survive and it will be generating better growth. I think also for Asia, we are in a phase of denial and protest, that we need to move for a mandate for change.

Kate Stalter: And over the next year or so, you do see some investment opportunities, despite what's going on out there in the world?

Steen Jakobsen: I think this is a great opportunity for investments. I mean, think about it: For the last 12 years, we've had non-performance or zero performance in equities. We have a zero interest rate [environment], or negative even.

If you wanted to do a 30-year pension scheme right now, where would you invest? I think clearly, equities are coming back. I think that when the crisis is at its deepest, you need to be investing in markets and companies which are logical, which are profitable and want to move forward.

So this is not a negative call. This is really just pointing out the fact that to have a new beginning, we need a breakdown of the old system.

Related Reading:

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European Central Banks Are Still Missing the Point

China's GDP Growth Is Fine

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