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17 Dec, 2021 06:19

We’re on the verge of '70s-like revolution – Saxo Bank chief investment officer

As 2021 draws to a close, futurists, political scientists, and economists are all competing in wild guesses about what the next year has in store for us. We talked to Steen Jakobsen, chief investment officer at Saxo Bank.

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Sophie Shevardnadze: Steen Jakobsen, Chief Investment Officer at Saxo Bank, great to have you with us. How are you doing?

Steen Jakobsen: All right. Thank you. Thanks for having me on.

SS: It's our pleasure. So, Steen, every turn of the year, you come up with what you call “Outrageous Predictions” for the year to come. First of all, tell me why make outrageous predictions? What's to it? Is it purely a mind exercise? Or there is more to it?

SJ: Well, it all started 20 years ago, and you have to remember 20 years ago, we didn't have a smartphone, we didn't have social media. So at the time, the time around Christmas was very slow from media and markets. So we had a lot of time on our hand and we said, hang on a minute, why don't we do an exercise which, as you say, is a mind game or a way to look at the future where we really tried to provoke thinking with the reader in the sense that everything we do as human beings are finding patterns and thinking in linear terms. This exercise is about being not linear but looking at the exponential risk, the exponential upside. So over the last 20 years, this has become by far our most sought after publication. It's become sort of a global brand and I know from going to Russia, a lot is very much inside the Russian nature – in Russia you always look for the downside, that’s just the way you are, like me almost. But it's a good exercise to think about small probabilities that if they do happen have a high impact on markets. 

SS: So none of the 2021 predictions came true. But then again, that's why they're outrageous, right? These are things that aren't likely to happen, even though they could. So you tell me when I read about this, you know, potential black swan events, and at the end of the day, they're so far out that there aren't likely to happen, why would I worry about the scenarios? I mean, there's plenty to worry about these days. Why put more strain on my nervous system?

SJ: Because the way we operate in markets is that the market changes in certain directions until for some other reason the direction is changed so disruption happens. And historically, although of course, as you said, last year, we didn't hit anything on the nail, if you allow us to extend the window by which we have to be right, that’s 36 months on average we have two calls right. You know, if we wanted it to be right, of course, we would just make prediction 5-10% of the market for every single product. And that would in itself, make sure that by just coincidence, we'll get there. That is not the exercise. So this year, we talk about you living 25 years longer. We talk about a space race on hypersonic weapons, we talk about the fact that there will be a raincheck on fossil energy, we talk about a democracy crisis in the US. So if you don't think that's outrageous enough, you know, is only because today, the everyday life seems to me, as someone who's been doing this for 30 years, it's very difficult actually, to make outrageous prediction, compete with the reality of the outrageous day-by-day life that we see. 

SS: So in the 2020 predictions, a possible pandemic wasn't even mentioned, even though the virus was already with us in late 2019. And so in a sea of global trends, how do you choose which ones are worth highlighting and which aren't?

SJ: Again, the exercise is not to be precise. So you have to remember this is really about provoking people into thinking about different themes. So if I am allowed to rephrase your question, so to say that if you read the 10 Outrageous Predictions this year, what can I take away from it? Well, you can take away from it that we are saying that there's probably going to be a reclassification of nuclear and natural gas. The fastest-moving market in terms of new investment will be next-gen medicine. There will be a military ramp-up globally, not only in Russia but globally, which will benefit a lot of technology companies and companies that the space, we will probably have during the year a crisis in terms of funding. So I think it's super relevant for people to think in this sort of way because, you know, let's just talk about the Federal Reserve, what they’ve done over the last month, they have pivoted 180 degrees from saying that inflation is transitory to now following a script, which is that inflation is dangerous for the working population in the US. So these changes happen all of a sudden, out of the blue. And that's why we're trying to prepare people for them.

SS: The theme of this year's predictions is revolution and disruption. What kind of revolution are we talking about here? Is it supposed to be more of an Arab Spring-type or the 60s culture-type revolution?

SJ: The latter. I think you chose a great denominator here – the 1960s, the 1970s revolution. So you know, if you look at the world, from a political standpoint, right now, we have the most fragmented political system ever globally. We have probably the single biggest divide in the world today is not between the rich and the poor, it's still big, and it needs to be closed, but it's really between the youth and the baby boomer generation. There is a funding need, there is a practical need, there is an ambition need there is a hope need to create more future for the young generation. And that is underlying this in citation marks «revolution». So when we talk about revolution, it’s in the sense that something is being regenerated, refound or redefined, not as we used to in 1789 French Revolution or even in the context of the Russian. It’s not a weapon, sort of going to arms revolution, but it's certainly a disconnect of the way we do business today. And I think that's very much in line with what we're trying to talk about in this ‘outrageous’ prediction.

SS: So a revolution is always a result of a festering wound, revolutions seem fast, sudden, but they’re, you know, endpoints of grownup processes. Which ones of the processes that you observe now can lead to a revolution of some sort our days?

SJ: In the political space, the lack of faith in constitutions, we see the attack on the Constitution in the US, we see it in even in my own country, Denmark, with the prime minister here has been, or at least right now is partly being tried on having violated the Constitution during the Covid-19 crisis. So there is, and to me, personally, this is a massive risk, because I think, in democracies and in countries that has done extremely well, over the last 100 years, are countries that have a very strong constitution have very, you know, law-abiding way of conducting business on a daily basis, when that's under attack, the fabric of life is under attack, and the ability and the ignorance of the core system – Remember, in sort of, in philosophical terms, a core system is entirely built on the belief that it's fair, if the core system is seen not to be fair, then the faith in the system breaks down because you cannot enforce on people something if they don't believe in a system. That is sort of the psychological, philosophical way of doing. If you look at then the practical market terms, we are at the end of the road in terms of the ability to ignore inflation, we are at the end of the road in terms of the ability to debt-finance everything. And we are probably also at an end road in terms of continuing to do fiscal support. So what the world needs right now is another way of increasing productivity, which by the way, have a very positive derivative story because productivity as we know it today, and the way you get productivity is to invest in people, it is to invest in basic research and it is in the faith that we can build something better in the future. The opposite is happening to the market. … So you are extremely right – and it’s a great question - in pointing out that a revolution comes at an endpoint of something that doesn't work. It’s when the system breaks down or gets disrupted by something that either is just a platform and a timespan before you get to it to a new model. So I think, firmly and not outrageously, I think in the next 5 to 10 years, we'll see the biggest macro changes that we've seen in history since the 1960s, spinning into the 1970s. I think we're following the same script, different actors, different sort of relative power struggles going on, but the story is still the same, there is not enough hope for the youth and there is too much money accumulated in one side of the economy, which is the financial markets, and inside that, people who have real estate and equity portfolios. University, I think, of Michigan has been doing a story, where basically over the last, I think, 40 years, they've asked people under the age of 40 relative to the people above 40, “how do you feel about the future?”. Historically, the under-40-year-old have always been more positive about the future than the over-40-year-old. Of course, now, as you can imagine, the story is the opposite, the youth is actually more negative. If you look at the recent data out of the US we've seen, then, despite the fact we have very low unemployment, the labor market, the low-income market in the US can negotiate very good terms to get a job. Despite that their economic condition, the economic affordability of the challenge that they are looking at is getting smaller. And I think, of course, I'm using US because I have better data there but when I travel around the world, the story there is still the same. I just came back from Paris last night. Every time there's a little increase in prices, a little inconvenience in terms of higher contribution to society, society immediately rises to the occasion, and special interest groups immediately come onto the floor and then try to negotiate sort of a stability continuation of the already established maxim that’s in place. I think there is way far more fragmentation, far more under the surface tension that is building. 

SS: Your team predicts that the fight against fossil fuels will be put on hold. That's happening already. I mean, just looking at the G20, or the COP26 summits where our leaders agreed that the initially set green energy transition goals were far too ambitious. Is it looking like we can’t really afford the bright green future that we need to survive on this planet?

SJ: Or we can afford it but the way we executing on the plan to get to that point is not done correctly. I think if you want to make it very simplistic, you can argue at least the Western world thinks that if you increase the amount of electric vehicles on the roads, you have a good way of actually getting to a CO2 emission standard, which, of course, is not true. But what we are doing right now with the way we are executing is that we are executing on getting more money, more flow, a taxonomy in terms of the EU which is entirely built on green transformation and investments. But when you are decarbonising, you’re metallising economy, and then on top of that, which is the single most outstanding issue and the biggest risk for any investor, including the Russians, we are underinvesting into the mining and into the energy sector. The CAPEX, the capital expended to use into that sector is close to zero. And this is at a time where electricity consumption globally is still growing at 6-7% with the global economy only growing at 3-4%. In other words, the electricity consumption is accelerating relatively to the overall growth of society, meaning people are using more electricity. The ability to do a baseload energy generation in Europe is an all-time low. This week alone, we had the highest energy prices ever in France – 205 euros per kilowatt, we have a deficiencies in terms of the energy, which means basically for the European sector right now we are more dependent on the flow from Russia than ever before. While we at the same time, of course, still have discussion whether Nord Stream should be implemented here now or in the future and, for God's sake, stop me from being involved with that, I have no opinion on that but that's definitely just the practical case. And you know, the way this winter looks is going to be colder and the storage of energy is lower again also, which means that the inflationary pressure, the energy crisis as a concept is already there. You have to give us a little bit of an excuse in terms of the fossil energy call. Remember we wrote this before the COP26. But you're absolutely right. If you look at the evolution of what's going on politically globally, Japan has pivoted towards more nuclear power, Finland is now trying to get the EU to accept nuclear power and reclassifying it. We've seen the utilities in the UK is coal-burning, decommission atomic plants in the US is being reopened. So clearly, you know, at the end of the day, the green transformation is a political agenda, getting electricity coming out those switches that is right behind you, that is a political need that needs to be filled on a daily basis. Now the politicians feel this. Hence, we will see this re-classification and a redefinition of the move towards a very good objective for ourselves in society, but something that needs to be done in a political and accountable way.

SS: So you also look at major cultural shifts, not only economic or political, and you predict a more niche Internet revolution on Facebook that will see a mass exodus of young people from that platform. Are you saying Facebook will die in 2022?

SJ: No, what we’re saying is that the youth, again, once they don't want to be defined by a commercial algorithm at a major platform, they are increasingly moving away. We see that some of the fastest growing apps in the world today is apps, which is using the same sort of connectivity and being on at all times, the fastest rising as far as I know, social media platform is a French app, which is using the concept of Instagram, but where your Instagram account and everybody else's Instagram is always telling you, telling people how well you're doing, how the sun is shining, how good the food is, how expensive the car is, this one is turning things around and saying this is sending you once a day, a five minute span by which you have to upload a picture. So this is showing you the reality of real life, the good side, the bad side, the downside and everything else. On top of that you can only engage in the social platform if you are a member and contributing yourself. Of course, the Instagram is a little bit like streaming services or TV in the old days today, it's almost a pay-per-view sort of way to see. So what we're seeing is that the young people increasingly will claim and want to be on platforms, which is expressing their view their way of interpreting the world, not a commercial, top down version of it. I think that is the grassroots, going back to what you said earlier, if you use the analogy of the youth revolution in the 1960s, and the redefinition of what is it that we want relatively to what the establishments want, because however much up on a beat that Metaverse wants to be, they are run by people who are you know, very different in age and wealth and then political opinion than the management of these companies and that's going to be increasingly an issue not only from Facebook, but also from Instagram, and TikTok and everything else. I think we will have smaller, more agile, more precise expression of people's interest going forward. Underneath that I also personally think that, you know, private data urgency is a major issue even for young people today.

SS: You also predict women's crusade on gender inequality and the gender pay gap in particular. So the World Economic Forum says before the pandemic, it would take 99 years to close this gap, now – 136 years. Since we don't know how long this pandemic would drag, how many more are to come or, you know, whether there'll be other black swans, it may not even be possible to fix this gap. What do you think?

SJ: Now, we are saying that, listen, maybe the way to get equal gender pay is not to ask for it, but to take it. And the way they can conduct that in the “Outrageous Predictions” we make is that you know theoretically use something like a Reddit or make a women's group that basically gather together and accumulate all of the wealth that these women [have] and go after what we call the patriarchy of companies. So basically, you know, dissing companies, which is not trying to close the pay gap, who is not getting the right amount of C-suite women representation, and certainly on the board as well. And on top of that, you can also find companies which is doing the opposite and go after them. So I think you're underestimating this mobility but most importantly for me, actually, is the fact that the purse or the size of the AUM sitting with women, is even in the most patriarchic societies in the world, like in the Middle East, it is almost always the woman that sits on top of cash and the risk willingness. So I actually think over the next two years, you will see the first women-only bank, you will see the first women-only broker. I don't honestly understand why no one's ever done that, you know, why isn't there a women-only broker? I mean, if you look at the old expression of commercials in financial markets, it’s always a male person, it’s always about cars and powerful and these signals the colors are always dark blue–

SS: But is it about making it all all-female, segregating once again, you know, women alone, men alone, or is it about equality and having as many women and men and maybe working on the same ground but on equal conditions?

SJ: I think in, you know, a good philosophical question, which has been tried to be addressed for a few hundred years, is it about equal rights – is it about equality for everyone? Or is it about equal rights to everybody? Our push is for equal rights for everybody to have their say, I think this concept that you can equally treat all people the same is rubbish. I mean the strongest constitution in the world, including my own constitution in Denmark, it’s based on the principle that everyone should have the ability to choose themselves. And I'm simply just saying, instead of asking for this stuff that women could get together and start to put pressure on companies. It doesn't mean that companies need to change what products to sell or how they do it. It is the representation of that, there is nothing on earth physically practically that dictates that women should be paid less. I don't even understand the argument practically and I'm, you know, the wrong person. I'm a 50-year-old white male, right? I'm the atypical person you're talking about this. I shouldn’t even be allowed to talk about it, but I want this to happen, I don't really care whether it's based on one thing to do. But you're right to point out. For this to succeed, it has to be about the equal rights to expressing that view. And that's why something like Reddit women's army would be a great way to do it. Because that's basically just saying, you and other women just go on a certain platform, you agree that this and the other company is good, and then you support it, and you sell the companies you don't like, and that way, you can show far more power than you can get by the factors, I agree, in a political system.

SS: What about scientific revolutions? While we worry about, you know, income inequality, climate change and all that, science is making absolute giant leaps every year, and you have a prediction of a possible massive breakthrough in medicine, which is quite likely, seeing how medicine is getting all the funding in this pandemic days. How would a major breakthrough in, as your prediction says, longevity impact everything else?

SJ: Well, let's take the negative and then talk a lot about the positive after. But the negative side is that we have difficulties dealing with the world today with seven billion people in it. Imagine we all live 25 years longer, then theoretically, there'll be 10 to 11 billion people totally in the world. That will make the metropolitan issues of traffic and pollution bigger, it will make the inequality in the cities bigger probably. And it will certainly make the ability to deal with the green transformation slower and more prolonged. Other side effect is, of course, the fact that as we live longer, and the way we are achieving that, and you're absolutely right, the medical breakthrough in this space is absolutely incredible. So what we figured out scientifically is that there's not a single pill, there's not a single way that you improve your longevity, what actually happens is that most people die from lack of what is called resilience. Resilience is the fact you get attacked by a disease, your ability to come back from that defines how long you live. Now with this CRISPR, gene editing, cell regeneration, cells splitting, organ transplants being possible, both artificially and practically, you can grow it you can, you have medical platforms, the whole virus, of course sits on this as well… What we actually doing is that as you go to my age and older, our resilience will improve simply because, you know, in 5-10 years from now, we potentially will be able to detect early signs of cancer. And before it gets into a hospital treatment, we can do precision medicine or gene editing that makes sure that this is not evolving into a real attack on your resilience. The offside of that, of course, is that what is the single biggest cost to the Russian society as it’s aging is the health care cost. Imagine we have a whole health care system that just first off has 50% preventive medicine and 50% treatment. That will come at more than half the price of what it is today. And ultimate move to a platform where 80% of all diseases is treatable or diagnosed before people get into the hospital, that will reduce the massive burden of you know, the cost of society and running a society that is ageing, that could be a massive upside. But most importantly, and I have to smile when I say that is for me as an investor, I know for a fact when you project what the flow there is into the sector, it will be growing at roughly 25% a year for the next 10 years. This is the single biggest growth that I've seen in anything in terms of markets ever in my life. And I'm pretty sure that the offside of the reduced cost is why society wants it. And as an investor, of course, I want to tag on to this. The problem is as you very well know, you can now ask me what is the free stock I should buy to represent this? I don't know because it's all very emerging. It's very fragmented in terms of the market structure. But I know for a fact that is all moving along the same path towards a great utility for society and massive return for investors in what you know, is being coined next-gen medicine.

SS: Thank you so much for this wonderful insight, Steen. Well, I wish you all the best of luck and I wish all your positive predictions to come through. I wish all of us to be more aware of everything that is going on. And I think that is the only way to go forward. Happy holidays. Stay safe. And I hope we talk soon, maybe next year to reevaluate next year's predictions. What came true, what didn't?

SJ: Absolutely and best of holidays to all my friends in Russia. I missed coming into Moscow two or three times a year. So the prediction for 2022 that I hope will happen is that I'll spend more time in Russia with my friends and colleagues and clients. And it's always a pleasure to talk to you guys so best wishes to the whole family at your station and everyone who's listening, so best of luck everybody.

SS: Thanks, Steen. Take care.

SJ: Take care.