December 10, 2011

Felix Zulauf, events that will rock RISK ON

“I think the periphery goes into depression. When you look at a country like Greece, it’s now been in recession for three years. GDP is probably down 15% from the top. The stock market is down 90%, which is the equivalent of 1929 to 1932 in the US. This is depression-like.”
“More and more economies will fall into that situation. That creates the problem of people revolting. Right now we have new governments not elected by the voters, the citizens of those countries, but implanted as technocrats by the EU center, by Brussels. So they will be very disliked and I think you will see some revolutions starting or intensifying next year.

Then I expect next year one country, probably three, will exit the euro. That will make 2012 very interesting because there are no rules on how to exit the euro. A country exiting the euro means the next day, when they exit, their banking system is bust. That means the banking system has to be immediately nationalized in a new currency.

They introduce a new currency, they nationalize the banking system, and then, of course, the government is also bust. Then the government will default. That’s what you have to expect next year. I think Greece will do so and Portugal and Ireland are candidates also.

Then it will depend on how that crisis is managed as to whether the crisis can be turned around and terminated or whether it will intensify and drag on into 2013 and force Italy and Spain out of the Eurozone as well. (This will have the effect of) creating turmoil in the financial markets and weakening the European and most likely the world economy (even) further....

“...Let’s go back to what I said, one country exiting (the euro) and then you have chaos. Obviously that country will default. Not only the government, but also the private sector will default to a large extent. That means the banks in the remaining European countries will have to take huge losses, much more losses than the recent stress tests used.

That would mean you have to expect more nationalization of banks in several of the European countries to stabilize the system.This means the governments that have to nationalize banks, they don’t have the money. They have to go into debt and that means the debt levels go even higher.

So you can expect the bond markets will not be very quiet in their trading next year. It will be a very wild situation that I see coming for next year.”

1)  If a (any) country leaves the Euro then remaining countries (France/Germany) are force to realize losses (because at the moment the have a get out of debt write off free card), the then EURUSD will sink like a stone.
2) Subject to how (1) happens, all country(s) at once or staggered over time will extend the crisis no end.
3) If the EURUSD sinks so does risk on assets as fears of contagion and world recession will be the motivation.
4) Of course (2) and (3) will be very strong for the USD. This will kill stocks, commodities and metals.
5) A rally in USD of any strength will see the USA Federal reserve pull out the all stops to pump up SP500 (with Obama blessing as its an election year) and sink the USD.
6) Gold has yet to have a decent correction, the above could produce it easily (Gold $1000 could print).
- interview in Kingworldnews

November 25, 2011

Felix Zulauf Recent Views

  • -Italy is the worlds 3rd largest bond issuance behind Japan and USA
  • -Italy cant print money like USA
  • -Bank deposits in Greece and Ireland have been falling rapidly. A modern day bank run.
  • -Italy deposits are shrinking. The flow has just entered negative territory.
  • -Europe has a banking funding crisis. That is customer deposits are not funding the banks. Currently the EU is funding the banking systems.
  • -The private banking sector own 62% of all Italy debt. Italy debt is massive, and a huge challenge for Germany to guarantee all Italy liabilities. Most likely to the amount of $1 trillion Euros.
  • -If Germany guarantees Italian debt then this is would be a fiscal union.
  • -A fiscal union is against the German constitution and the German high court will battle this decision as unconstitutional. 'All hell could break loose if German court do not support the political decision'.
  • -History has shown that monetary unions on there own fail. They must be fiscal, monetary and political unions to succeed.
  • -The next six months will be very interesting and volatile.
  • -Italy issue is massive government debt. Not private debt.
  • -Italy has seen interest rates rising due to the bank funding crisis, this means the government must cut spending, thus force a deflationary environment.
  • -Zulauf see the PIGS countries leaving the Euro. To become competitive on a lower currency.
  • -Markets are forcing the issue as they are forcing interest rates upwards. The rising cost of debt can not be funded when asset prices are falling.
  • -Currently there is a cocktail for a deflation decline for industrialized economies.
  • -Zulauf sees a recession for industrialized economies in 2012
  • -Merkel is a trained communist, and does not understand free markets. This likely to screw up.
  • -So far Germany has aided bailouts and not a fiscal union. The current bailout fund can not handle Italy and Spain. The bailout fund would need to be $2 trillion Euros. Zuluaf thinks the German people would not support a fund this large.
  • -If Germany does not support a fiscal union then the European experiment is OVER. The PIGS would have return to there own currencies to survive.

  • -Today's economists are using models that are now broken. The stock market used to be a great leading indicator for the economy. Not any more. The use of QE to pump up stock asset prices worked for the stock market but not for final demand from the general economy. Thus QE does not work any more. Bankers are not lending to the consumer.
  • -Economists who believe that higher stock prices are better for the economy are mistaken. The wealth effect from stock prices to get better demand and growth is the wrong approach. This approach suffers a reality check when stocks sell off (ie August 2011).
  • -Fiscal stimulus works better than QE. All the world economies slowed down late in 2010 when fiscal programs ended. Fiscal stimulus works when final demand is weak.
  • -Fiscal stimulus should come in the form of infrastructure projects, get people working and building usable assets. Government should cut spending on entitlements to a bear minimum, government spending should be on projects that increase production.

What’s next, the next crisis, what can be done?
  • -Print money is expected as it’s easy to do. But it is a sugar high that will last a few quarters. Then the economy will slump again.
  • -Required, must have major fiscal structural change to get true real growth from real demand.
  • -Gold will continue to rally as government chooses the sugar high QE option.
  • -With each QE cycle the risks are getting higher and higher for a bigger bust.
  • -Policy makers have no idea what to do. They have no formula when USA growth is so low. A deflationary accident is very possible.
  • -Zulauf knows no formula to fix it, but it will take a lot of pain, whatever is done.
  • -Zulauf says preserving capital is critical.
  • -Prosperity enjoyed since the 1970s was achieved on accumulating great debt. A consumption dominated economy. Debt must either be deflated away or forgiven. Zulauf expects high inflation from economic misery rather than economy boom to reduce the debt level relative to assets.
  • -Gold will continue is rise against paper currencies until we get positive real interest greater than 1%. And this is years away.
  • -Gold could rally for years. Gold could fall $100 or $200 dollars as it has gone up in a straight line, if does BUY MORE.
  • -Eventually some of the current currencies will be destroyed, and will be replaced by asset back currencies (Gold, commodities, etc)

November 09, 2011

Get Your Short-Sale Candidates Ready

 Felix Zulauf was interviewed by Barrons and he appears to be distrustful of the strong stock market rally in October.

“Investing is very difficult right now. U.S. stocks are bouncing around and probably will continue to do so into early next year. Friendly buyers have to turn sentiment optimistic again before global equity markets have another leg down. Gold is in a longer-term digestion period after a huge run-up. Give it a few months to build another base between $1,475 and $1,750 an ounce, which could be the platform for its next move up sometime next year. Investors should be defensive, look to preserve capital and prepare a list of short-sale candidates for the next leg down. And they should buy more gold on dips.

In June, Felix Zulauf recommended shorting XME, XLI, XLK and the XLF.   Most of those ETF’s soon crashed 30% making it a wonderful call. At the time, Zulauf recommended that investors cover their short positions in and around November.

October 08, 2011

Felix Zulauf Interview On European Debt Problem

Felix Zulauf gave a rare interview where he discussed the European debt problem.

September 11, 2011

Don't Buy Stocks Until The Next Stimulus Begins

The market will range between 10% up and 10% down. I don’t know where it will end the year. The U.S. central bank will be forced to quit quantitative easing by the middle of the year as political pressure increases, but it won’t shrink its balance sheet. The ending of QE will take some excitement out of the stock market. Then there is room for unpleasant surprises. From time to time, the Chinese could shock the markets by acting more serious about tightening. I don’t like the widespread optimism right now, and I can’t join the bandwagon. The crisis in Europe is continuing. We don’t know where it will lead and how it will affect the U.S. Corporate profit margins can’t stay at such high levels. They will probably revert to the mean, which historically was 5.5% or so, not today’s 7% - in Businessinsider

Felix Zulauf is an asset manager and hedge fund adviser.

September 09, 2011

S&P Bottoming at 500, Bullish On Gold

Even during the 1970s and early 1980s, the last major secular lows in the stock market, we were trading slightly below book value at maybe 90% of book value or something like that. I did expect the stock market to decline into a secular low to around a book value of slightly below that. Book value is roughly 500 or a little bit over 500, depending on how you define it.
The next 2 or 3 years, I think authorities will do everything necessary to extend the recovery attempt in the economy, and from time to time, come up with stimulus, and that will limit the downside, and I said maybe the downside is around 1000 in the S&P, or between 1000 and 1100.

I think we are in for some very frustrating years where we trade in a range, maybe between 1000 and 1500 or so on the S&P, and lots of traps and mine fields, and at the end of this period, I would say 1400-1600, we have a major disaster coming, and then they cannot support it, and the dam breaks, and then we get another washout. - in McAlvany Weekly Commentary

Felix Zulauf is an asset manager and hedge fund adviser.