Clenow Futures Intelligence Report

Clenow Futures Intelligence Report

November 16, 2012

Barron’s Q&A with FELIX ZULAUF



Barron's: Felix, why so glum about the EU? 
Zulauf: The European monetary union goes against the laws of economics. Politics is keeping it together, and that has created enormous stresses. Europe must narrow the gap in competitiveness between Germany and the debtor countries at the periphery. This is deflationary for the peripheral nations, and creates economic pain for the system and individuals.

If you're right that President Obama will be re-elected, what are the implications for taxes and spending cuts in the U.S.?

I hope Governor Romney wins, but I fear that Obama will be the victor. Then, much will depend on the composition of Congress. In any case, the so-called fiscal cliff won't be as high as many fear. Raising taxes and cutting spending wouldn't reduce GDP [gross domestic product] by 4.5 percentage points, but something closer to 1.5 percentage points. Still, the combination could slow the economy next year.

What is your outlook for Japan?
Some interesting changes are occurring in Japan. The Bank of Japan and the government have battled but are coming to a resolution. The government is introducing some reforms that the BoJ wanted, and the BoJ eventually will cooperate by weakening the yen. The root of the changes is the deterioration in Japan's balance of payments, which will allow the Bank of Japan to weaken the currency more dramatically than otherwise would be the case. A weaker yen will help the Japanese economy and particularly export industries. The yen trades at 79 to the dollar. It could fall to 100 in the next two to three years.

This would be terrific news for Japanese multinationals, which aren't on the radar of global investors. Nor are they widely owned in Japan. The market capitalization of these companies is a fraction of what it was 20 years ago, whereas the Japanese debt market has exploded in size in the past 20 years. We are in the embryonic stages of a major shift of assets from bonds to stocks in Japan.

What is happening in China?
The biggest recorded credit and investment boom in history has gone bust. The Chinese stock market has given back almost 90% of its rally off the 2008 lows. After the government changeover in mid-November, expect some economic stimulus. That could help Chinese stocks rally. In the next six to nine months, Chinese stocks are an interesting bet, and Chinese exchange-traded funds such as the FXI [ iShares FTSE China 25 ] and the GXC [ SPDR S&P China ] could be good vehicles.

Are you still bullish on gold?
Gold is in a secular bull market. The correction to the low-$1,500s is over. There is a lot of optimism in the market, and gold needs to come down a little. If Obama wins, the price could shoot up again. If Romney wins, the market could be weaker going into December, after which the price will rise. Next year, gold will go to new highs.
Felix Zulauf was born 1950, and is the owner and president of Zulauf Asset Management, a Zug, Switzerland-based hedge fund. Felix has worked in the financial markets and asset management for almost 40 years. Mr. Zulauf has been a regular member of the Barron's Roundtable for more than 20 years.