Generating this year’s Outrageous Predictions has been even more of a pleasure than usual, as it seems that never before have there been so many path uncertainties for the future, so we have had an infinite variety of scenarios to draw upon. As usual, we try to keep at least a measure of consistency across the predictions by using a unifying theme. For this year, we settled on the theme for 2012: The Perfect Storm.
Saxo Bank’s yearly Outrageous Predictions report has always been one of our more popular publications, and understandably so, as it frees us and our readers from the constraints of the high probability events in the middle of the supposed bell curve of possibilities. But there are a few key points I need to underline about this publication:
The first is that we always focus on “fat tail” predictions, i.e. events that are unlikely to happen, but are perhaps far more likely than the market appreciates. Saxo Bank first launched this publication 10 years ago as an exercise in looking at events which, should they happen, would change the outlook and performance of markets. This was before the concept of Black Swans was popularised. Our publication was rather inspired by option theory and looking at the tail-risk – an event which based on odds or logic has a very small chance of happening, but somehow still happens far more often than any model is able to predict.
Consider volatility during the 2008 Financial Crisis which no model could even imagine. Or think about a natural disaster like the earthquake/tsunami that hit Fukushima. Disaster planning could supposedly handle a very substantial earthquake and Fukushima was supposedly located in a low risk zone. But instead, Japan suffered an earthquake of severity which seemed impossible in Japan’s geology, and the resultant tsunami wiped out back-up power. The unimaginable happened once again.
Saxo Bank’s yearly Outrageous Predictions are not intended as real predictions and certainly not as “forecasts” in any way. Rather, the Outrageous Predictions are 10 important events with under-recognised probabilities in our view. Should any of them come to pass, they would change the way we need to analyse, trade and report the markets.
It is also important to note that our Outrageous Predictions nearly always have a negative bias, which is in fact a natural antidote to how the market normally operates. Human beings have a tendency to think positively, which is a natural part of our motivation to get up and go to work every day and a vital part of our survival instinct. Day in and day out we think about building a better future based on a continuation of the present. This is good for morale but does a poor job of preparing us for reality.
In that light, please do not let our Outrageous Predictions get you down. They have been prepared in the spirit of encouraging you to think outside the box and prepare for world-altering events. Thinking outside the box is rarely a comfortable exercise, but neither is dealing with an unpleasant surprise for which one has failed to prepare in any meaningful way.
Should one, two or three of our Outrageous Predictions come to pass, it would make 2012 a year of
tremendous change. This may not necessarily be a negative thing either - and given the structure and
uncertainties in the marketplace here at the end of 2011, we would suggest that even if none of our
predictions come to pass, equally important and totally unanticipated events will. Sometimes we need to get to a new starting point before we can gain the right perspective. We hope 2012 will be the year where we start on the long march towards re-establishing jobs, growth and confidence.
Maybe, just maybe, our Outrageous Predictions can at least lead to a discussion on how we can prevent some of them from happening. We would like nothing more than to be proven wrong on negative views, but only if they are replaced with something better than the current central bank and government-manipulated paradigm.
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