August 10, 2013

Felix Zulauf: "Recovery fantasies are a mirage"

The famous asset manager Felix Zulauf and his son Roman expect a new global crisis emanating from Japan. In the interview, they reveal how much further bond prices fall, as the flood of money from central banks acting on the return of the euro crisis and the right investment strategy for looming risks.

Business Week: Gentlemen, just burst the global bond bubble?

Felix Zulauf : You have to take what is happening, place in a large weather scenario. We had 30 years declining yields and a few years ago a major financial crisis. Worldwide central banks have put their banks money almost for free. The banks have thus acquired with bonds. You always have less attention to credit quality, because the banks have said yes to them, Ye have a modest risk, because we are there and buy up everything. ECB President Mario Draghi told a year ago that he would defend the euro, cost what it may. That was irresponsible because it has almost the banks encouraged them to continue to take a lot of junk bonds of bankrupt states on their books. Since then, the government bond holdings of European banks have grown from 2500 to 2.9 trillion euros. Now banks, shadow banks and other investors are replete with such interest papers, and to an extent, as never before in history. And in this situation is suddenly the opinion by that of the American economy is better, and the Fed says: Because the economic situation improves, we will return the money printing gradually. It is quite clear that bondholders will sell.

If the Fed because actually return the money printing? Or have the strong reactions of the exchanges made Bernanke cautious?

Felix Zulauf : Bernanke has the exit so unconditional ... An unemployment rate of 6.5 percent ... and an expected inflation rate of 2.5 percent ... Felix Zulauf : The first condition is simply not to be fulfilled. Therefore, he is always able to say: We are not there yet and print on. I assume that the structural framework factors in industrialized countries facing debt, demographics and banking systems will allow in the future, probably more economic growth. Accordingly, I assume that the central banks will not come out of their role as financiers for government bonds. We will continue to operate on a large scale deficit spending to keep the system fairly afloat. Because these deficits on the capital market alone can not be financed, new money is needed. This money will have to draw the central banks.

Although the central banks buy, but bond prices fall and yields rise.

Felix Zulauf : In the banks and shadow banks with large loan portfolios, which were also highly financed on credit, here come the risk manager and say: We have seen this once before in 1994. Since the interest rate is gone up and suddenly it was the largest bond market crash in modern history. From this fear now has developed its own momentum. So it is for the time being not decisive whether the economy is now better developed or not. The point is to limit the risks on the balance sheets of the banking and shadow banking system worldwide. And when that risk must come down, is sold. Then prices fall and the interest rate goes up. The running.

Bernanke's statements are related to the end of his term in January 2014?

Felix Zulauf : He will of course not stop with accelerator control fully depressed, but sketch out an exit route so that his legend is not compromised. I do believe he is honestly convinced that the economy recovers. He may be a good money theoretician, but he is not a good economist. This is true today, unfortunately for most central bankers. They are so cranky in their views and spoiled by the monetarism. And they are constantly forced by their own governments to bring the coals from the fire.
The U.S. government must refinance half of their debt over the next three years.

Against this background, it is a coincidence that U.S. President Barack Obama, the successor to Bernanke publicly discussed calculated at a time, is on the speculation about a retraction of the bond purchases by the Fed? Or Obama wants to install only one moreaggressive than money printer Bernanke?

Felix Zulauf : I do not think. Bernanke has actually weary of office. But to bring its continuous and proper, in my view reminders to the President and Congress finally the financial budget into balance, annoy Obama. Accordingly, Obama dismisses him early from responsibility.

Inflation Protected Treasuries, TIPS are short, even more broken than normal bonds. Is not that rather a sign of rising risk of deflation and less for economic recovery?

Felix Zulauf : So I interpret that as well. But that does not play the main role in the bond markets at the moment. There is currently only the motto: Save yourself if you can. It's about limiting losses. The recent losses were not a trifle. In the past five to six weeks is the return of a U.S. ten-year government bond - and this is still one of the bonds, which has suffered least - has risen by 100 basis points. Investors have lost more than three years coupons in less than two months. This is brutal. Whenever there is a crash when the markets go against them, then investors will have to reduce their risks and drive down positions. In the bond markets put huge sums and there are hardly any counter-parties who want to buy or can. That can not take it all the banks together. So suppresses the yield up.

When does the rise in yields?

Felix Zulauf : should If the economy really doing so well in the U.S., as it believe the financial markets, if the situation in Europe stabilizes and when it awesome would in Japan up, then have the interest rate rise until it again the economy stalls. Presumably, the world economy will be but not nearly as good as expected. Quite the opposite will happen. The rise in yields will be exhausted at some point, probably in the course of the summer.

On what level of return?

Felix Zulauf : That I do not know. I can imagine that this will be in ten-year U.S. Treasuries so at about three percent. Much worse, it now applies to countries whose funding is heavily dependent on foreign countries, ie mainly emerging countries with high structural current account deficits.


Felix Zulauf : If the money that flowed into the country in order to finance the deficit, flow out again, then the currency is weaker. In a first phase, the countries want to support their currencies, because they all still have inflation. For if the currency is weaker, imports become more expensive, inflation goes further up and one still has major social conflicts. So they rely ...
... By raising interest rates.

Felix Zulauf : But then they get a weaker economy. Over time, they can not keep up and the currency falls further the interest. Such countries are in a terrible situation. These economies all go into recession.

Which emerging economies are particularly vulnerable?

Novel feed : Particularly at risk are countries such as Turkey, Brazil and Poland. Have attracted a lot of capital from abroad in recent years. Their currencies have appreciated. The central banks had to hand hold it there. You tried to push interest rates to make the investment in their countries and currencies less attractive. Thus, a domestic economy, but debt-financed boom has developed. This boom is coming to an end because the film suddenly runs backwards. The money is going down, interest rates go up accordingly. As a result of the credit boom bursts, and that pushes the economy.

The boom was not significantly fueled by monetary policy in the U.S.?

Novel feed : Yes, it was the starting point of development. Because the traditional fixed-income investments have brought into line with countries account surpluses such as Germany almost no return, a hunting went on worldwide to increasingly attractive returns. Investors were always courageous and willing to take risks.

How long is the flight of capital from emerging markets will persist?

Novel feed : The process continues until the balance of payments deficits to surpluses are. Domestic demand has become so weak that exports exceed imports. Only then, the currency stabilized. The latest example of the process that we're watching, was the currency crisis in Hungary between 2008 and 2011. Other examples in 1998 were the crises in Asia and Russia. The script is always the same everywhere.

Under pressure not only emerging. The city of Detroit, for example, is facing bankruptcy. Is this the beginning of a losing streak in high yield bonds?

Felix Zulauf : It is of course true that the weakest links in the system, that are very outside, taken at the periphery first. There will be bankruptcies, this is completely normal. The default rate for high-yield bonds will rise. When interest rates so as to shoot up now, for example, in Brazil or Turkey, then the lights go out in one or the other company. There were indeed primarily the private companies that have accumulated there in recent years, large debts. What happens now that the global economy is set to slow sharply.

The volatility, the fluctuation intensity in the markets has risen sharply. Do you fear that as the one or the other major hedge fund comes under the wheels?

Novel feed : Although one can not rule it out, I'd be surprised if it would grind a large hedge fund in these turbulent times. Since 2008, the hedge fund industry has strongly professionalised its risk management. With an overly large loan lever is not working today. As fast as it used to be no more shooting from the hip. There are now more private and institutional investors who take a greater risk. Or they think of the famous international investment funds from the United States, which holds ten to 15 percent of the Irish bond market.

You mean Franklin Templeton.

Novel feed : This is not a hedge fund that is an investment fund. These funds have to face other difficulties as hedge funds who are trying with consistent risk management, such concentration risks to go out of the way. Looking at the volatility we are still at a relatively modest level. The low volatility, we had a few weeks ago, was actually the worrying signs. The lower the volatility, the higher the chance that something actually happens. Shortly before the outbreak of the financial crisis in 2008, we had an extremely low volatility.

Are the major risks ie not in the shadow banking system, but with the banks?

Felix Zulauf : How I see it, the risk management of hedge funds is much better than the banks. Alone in the European banking system, I appreciate the need to write down about one trillion euros. Have not always done their homework. All the bailouts that are there, are much too small. As a new crisis may be coming soon to us.

And in Japan?

Novel feed : Banks keep there 900 percent of their liable capital in domestic government bonds. You have to manipulate the risk systems almost to himself at all to be able to feel comfortable with such stocks.
Even central banks are now sitting with their losses on bond holdings.

Felix Zulauf : net of accounting ago that's no problem for a central bank. The Fed has never said that she wants to sell bonds, but only that they might buy something less. In the balance sheet, the bonds will be made at cost or 100 percent, because they are held to maturity.

Despite the sharp rise in yields could be interpreted as a loss of control by the central banks, especially in Japan.

Felix Zulauf : This is only an issue if confidence in a currency decreases, because the currency breaks down and away.

Which major reserve currency could happen first?

Felix Zulauf : The dollar will tend to be the strongest currency. Big problems gets - and as we now get visual instruction - the Japanese yen. The budget deficit in Japan is ten percent and public debt at around 240 percent of economic output. About 40 percent of the tax revenues it for the interest service. When interest rates are doubled, it would be 80 percent of revenue.

That would be the de facto bankruptcy.

Felix Zulauf : Exactly. When a central bank prints more money in such a situation, then the currency goes into a downward spiral. Then the confidence in the currency from one day to another is gone and the central bank loses control, both on the domestic bond market as well as the local currency. The probability that Japan gets in the next two to three years into this situation and loses control of its currency and financial markets is very high, well over 50 percent. Then there is a yen-crash.

From which level of the yen exchange rate goes into a dive?

Felix Zulauf : I had a yen for sale recommended in autumn 2012, with less than 80 yen per dollar and with the expectation that it is for dollars at 120 yen within two years. When we reach and break through next year this brand, then this is probably the point at which the Bank of Japan will lose sovereignty over their currency and financial markets. Then it can go quickly to 200 yen per dollar. Flight-like money is leaving the country. When that happens, the central bank must stop the outflow of capital.


Felix Zulauf : That will only be possible with capital controls. Then, a new era begins. How will look like, we do not know today.

Which addresses separated just by Japanese government bonds?

Novel feed : Until now, the primary Japanese banks but also foreign banks and investors. But the largest owners are Japanese pension funds and social security funds.

But the Government Pension Investment Fund, the largest pension fund in the world, holding stocks equivalent to $700 billion.

Novel feed : Exactly. And they have not even been started sales. When should start to sell ten percent of their portfolios to go out of yen into another currency, then we reach the next dimension in this crisis yen.

Can the Bank of Japan ever so quickly print money to offset this bond holdings?

Felix Zulauf : You can do that, but then the yen goes up in smoke. And if the yen falls, then come up with some time lag, the other Asian currencies under pressure. That's always been that way. A much lower yen is the pricing of exports of other Asian economies Nix.

So Japan exported through the weak yen falling prices and declining growth rates in the region?

Novel feed : That's right. But not only to Asia. Japan exported deflation in the world. If the correlation of the Japanese export products you look at, the highest correlation is given by Germany, the second largest with South Korea and the third largest with Taiwan.

Still, these countries hold still.

Novel feed : But the currencies of Korea and Taiwan are already under pressure because their external balances deteriorate significantly.

Are the parallels to the 1998 Asian crisis?

Novel feed : Absolutely. The first country that came under pressure, was Indonesia, seen as the weakest country in Asia. Now, with the yen's depreciation, but also countries come under pressure, which previously had strong balance of payments, such as Thailand, Malaysia and Singapore. Singapore and China Singapore is one of the fundamentally strongest countries in the world.

Novel feed : That's basically it. But there the balance of payments is under pressure from two sides. First, the majority of Asian companies can handle their export business there. To export at low prices to Singapore and from there to higher prices in the rest of the world. The profits they make and are taxable in Singapore. But now, through the economic downturn, exports of Asian countries is under pressure and, accordingly, the current account surpluses of Singapore. The country was also in great demand by investors who put their money into security and sought a safe haven currency. Who have worn a lot of capital to Singapore, but could pull it off quickly. Singapore will be charged on both the current account and the capital account. The Singapore dollar is already moving down, but the big moves are still to come. Let's stay in Asia and go to China. There threatens the money exchange between banks, the interbank market freeze. Threat to China's banking crisis like in the 1990s in Japan?

Felix Zulauf : There are indeed many parallels. The difference is that the Chinese currency is managed. That was not so in Japan. In China, it was in the past ten to 15 years, the largest investment and the biggest credit boom in history. The data from China one must always be careful though. Maybe there is double counting in the credit data. But the Chinese credit system has drawn some new loans in the amount of the entire loan portfolio in the U.S. banking system in the past five years. This is huge. And the real estate prices in the centers, such as Beijing and Shanghai, are still going up.

The government has introduced measures that should prevent that. Why not grab the?

Felix Zulauf : Because there is no functioning financial market in China. The wealthy Chinese may pay any money abroad without special permission. And because the stock markets are not run in Germany, because the profits of the corporations are under pressure, the Chinese remain almost exclusively the property market. Now that the banking system has a liquidity shortage, the government is faced with the question of whether they should pay alimony the banking system. But that they would fire up the one-sided credit and real estate boom even further. So more expensive, vacant property for the rich who can afford not migrant workers.

Felix Zulauf : Yes. This policy would trigger further social conflicts in the country. The Chinese government sees the images from Rio. Therefore, they tried to gradually let the air out of the bladder. The last few days have shown that the central bank People's Bank of China beispringt in stressful situations with liquidity, but aims to trim the banking system and the shadow banking system.

What is the Chinese shadow banking system, and how it became so inflated?

Novel feed : The large excesses in China, it was in the first phase of this credit boom, right after the financial crisis. Since it was primarily the off-balance sheet vehicles of local governments, which could create infinitely much credit, for example by leased land. In the second phase, the problem is in the so-called wealth management products. The past two years have been the big hit with investors, ostensibly because they promise a good return between five and ten percent.

What does this mean?

Novel feed : these products are offered by private providers in the shadow banking system. These are funded at the short end of the yield curve, but invest the money in the long term. The People's Bank of China is very concerned about the excesses in this area. Therefore it leaves the interbank market is now more market forces. And thus some providers of these products are now automatically eliminated by bankruptcy.

China and Hong Kong Since the government and central bank move a fine line

Felix Zulauf : Absolutely, that's not dangerous. I assume that the authorities remain tough in the first phase. You want to keep the coupling of their currency to the dollar to some extent. But then they have to admit that interest rates rise. You can not have both, so freeze the currency and press the same interest. But rising interest rates will weaken the Chinese economy in the coming quarters massive.

What consequences will this have?

Felix Zulauf : I expect that the central bank is the range within which the yuan may fluctuate against the dollar widen. Thus, it is the Renminbi weaken somewhat with time.

In China, the long-term interest rates are lower than short-term. Announces the inverted yield curve in China is a recession?

Novel feed : If it does not work in the interbank market, pushing the short end up so is the stress indicator par excellence. The big problem for China is actually the yen. The Japanese have devalued its currency against the dollar in recent months by 30 percent, while the Chinese have revalued their currency against the dollar by two percent. Unit costs have risen in China in the past five years by about 80 percent. China has been shot with the wage increases and the fixed yuan in different industries priced out of the market. The Chinese corporate sector has massive problems of profitability. This can be seen now on the capital balances.


Novel feed : The Chinese companies begin to make their deposits, which lie in renminbi in Hong Kong back to the mainland. They have massive cash flow problems and need the money.

Comes as Hong Kong also pressurized?

Novel feed : Yes, and from two sides. The financial account suffers from the one under the outflows to China. Secondly, the capital account and thus the binding of the Hong Kong dollar to the U.S. dollar is now coming through the rise in yields in the U.S. and emerging markets under pressure. The consequence would have to increase interest rates in Hong Kong.

How will absorb the local real estate market?

Felix Zulauf : The will suffer. And because Hong Kong is primarily a real estate business, which is not without consequences for the entire region. This is a fatal story.

Deflation German companies have in recent years made big business in Asia, especially in China. As long as Germany keeps as a supposed island of economic bliss yet?

Felix Zulauf : Well, the consumer is now probably the best segment in China, thanks to strong wage increases. The Chinese consumer has been more money and buys as long as progress to layoffs and closing companies. The slowdown in Chinese consumption will only arrive in about six to nine months.
So German cars they will buy more.

Felix Zulauf : In Germany we have a different problem, a Japanese. This is especially true for the German car industry. suddenly when a Japanese is 20 percent cheaper , the German competitors must respond. Its profit margin falls. Moreover, Europe is in recession. But Europe is still the biggest market for German products.

So it will not make the gradual recovery, which many economists for the second half of the prospect?

Felix Zulauf : When I for the euro zone, a negative growth of about two percent had promised earlier this year, I was looked at very funny. But I think we get there. And Germany will cool accordingly. The whole recovery fantasies are a mirage.

What makes you so sure?

Felix Zulauf : they look at the credit growth in the euro zone. The lending shrinks with about four percent. In credit-based economies can thus achieve no growth. That is impossible.

Economists see the light at the end of the tunnel in the improved current account balances of individual peripheral countries.

Felix Zulauf : That is absolute nonsense. Improve the current account only because a collapse in imports due to the shrinking domestic demand. But as you can not heal. You can not be healthy if you hungry.

Then the deflationary pressure in the periphery will it last?

Felix Zulauf : I assume so. Although it has made some concessions with regard to the pace of austerity and reform efforts, but on balance remains unchanged: The periphery is not competitive. This is also true for France, particularly even. If you are uncompetitive, then you can sell anything on the world market. Then the external balances remain in deficit or be deficient.
According to the write-downs on bank balance sheets increases. We are actually back to the point where we were a few years ago before. Only the magnitude is worse now than it was then.


Novel feed : Because banks still issue stocks have much more than then. The European banking system has total assets of about 27 billion euros. Let's go cautiously assume that the impairment is five percent, which is likely to be more ten percent in some countries, we expect an impairment of well over a trillion euros, which is more than 1000 billion.

Because 60 billion euros, which are provided in the euro rescue fund ESM for the recapitalization of the banks, hardly rich.

Felix Zulauf : That's it. This is at best a drop in the bucket. Politics is far removed from the reality of what it is doing.

So the euro crisis returns again?

Felix Zulauf : It must break out again yes practically crises, financial markets are placed in crisis mode, so again one or the other step is taken forward. Is certain only that the taxpayers have to bleed heavily in Europe.

A lost generation Would be a reversal of the euro still a viable option?

Felix Zulauf : What is reasonable is when countries that are not competitive, decisions on reforms, but at the same time escape, then in to a currency devaluation would be healthy. Originally, I had assumed that citizens will demand in the periphery after a certain period of suffering the escape their country out of the euro. This is perhaps still a possibility. But technically a reversal is hardly possible. So I have at least the central bank experts reported, with whom I have spoken. A reversal would only be feasible if we simultaneously introduced capital controls in the euro zone. Then, individual countries could decide their exit. If you do not do that, then there would be an immediate run on the banks and the system would collapse. One can really only handle an economic system under which almost resembles a war economy. Perhaps the policy comes at a later time when we are still deep in crisis, to reach this conclusion and says: It's just not more. But politics is not long so far. It will keep trying to patch up the problems, while the problems of the paste are actually getting bigger. We will continue to have negative growth, here and there, maybe a little stimulus program is launched again. These would then be financed eventually via ECB. But because the ECB is not a free national central bank, there is even since certain restrictions.

The cost would be a reversal of the euro not as astronomically?

Novel feed : It's amazing that is always talked about the high cost of unwinding of the euro, but not about the opportunity cost of the periphery has to bear to stay in the euro.

Talk about it!

Novel feed : The improved current account balances are paid for with a slump in domestic demand. Unemployment, especially among young people, is increasing at record levels. More and more young people to remain at home with their families live, because they can not afford their own apartment. You can not start a family themselves. The structure has disastrous consequences, also in view of the demographics. There is a lost generation.

Threatened the euro and the entire European Union?

Felix Zulauf : The risk borne by the euro in fact in itself. One can say about the EU, whatever you want. It is certainly too technocratic and too centralized. But her basic idea, the creation of a free European Economic Area without barriers and a joining of forces from other continents is absolutely worth preserving. With the euro but EU member states are divided into a first and a second class that rushing against each other. To me it seems as if Europe is driving the ship without a pilot in the storm around. This is extremely dangerous.

Are the British still be in five years in the EU?

Felix Zulauf: If an exit, then the British. But Britain must of course be careful. But the country would also be a border region. A withdrawal would be conceivable only if a free trade agreement with the EU could be agreed. But then the question would remain open whether London could still remain the European financial center.

Does the centralist France come to understand what it is about?

Felix Zulauf : No, but something else I did not expect. Fran├žois Hollande was in the early eighties economic advisor to then President Fran├žois Mitterrand. He was the brains behind the idea to nationalize the banks. Mitterrand had to undo that after a year. Hollande has learned nothing and I am always amazed how such a loser can be elected at the head of all nations.

Does the Paris-Berlin axis yet?

Felix Zulauf : No, the positions are too far apart. Socialist ideas in Paris ruled high, semi-socialist in Berlin. If the alliance does not work, then that means a weakening of Europe. Then there is no more lead in Europe because Germany can not take the lead only for historic reasons, it would take over power its economy actually.

Will the unconditional attitude a German government change to the euro when the anti-euro party should move to the Bundestag alternative for Germany?

Felix Zulauf : If the AFD should enter the Bundestag, then this is probably be less than ten percent of the votes. You might replace the FDP, but overall nothing can align against a large coalition. The Social Democrats are so naive with regard to the euro crisis, Germany after the election that the claims of other countries will yield even a little more. The heads of the current government have realized that the euro is a bad design. I think Wolfgang Schaeuble is aware, and Angela Merkel. But they can not say, and they can not be returned.

Power of the federal government's policies against their own convictions?

Felix Zulauf : It makes a policy of small concessions, if the pressure is too high. But these concessions are always too small, too late and the euro project will never be healthy. While the federal government is in Germany with its obligations deeper in, but the big hit is not coming.

Novel feed : I think we just go with open eyes on a wall and can not get out - until it crashes. Then everything has to be reorganized in terrible pain.

Enter the United States from Europe to the U.S. model no chance?

Novel feed : History has primarily monetary unions that ended offense.

For example?

Novel feed : In Yugoslavia, there was also a monetary union of different peoples that did not fit together in this form. The consequences were devastating. Or take the Soviet Union after the turn. The situation at that time was similar to now in the euro zone. Moscow no longer had the political sovereignty over the breakaway republics. But still had all the ruble as currency and could with the local banks in the periphery of the former Soviet Union draw any rubles, as now, the national central banks in the euro zone on the emergency credit lines PA and Target-2. You have again and again brought prominently in the Business Week, about the contributions of Professor Hans-Werner Sinn. So the euro zone makes a similar Rubelisierung through as did the former Soviet Union after the turn.

And the Bundesbank looks on?

Felix Zulauf : The Federal Bank recognizes this risk and therefore balks at this intervention of the ECB, which gives permission to the national central banks to print money. Within the ECB, a great battle is raging between the camp of the Bundesbank and its President Jens Weidmann on one side and the bearing to Mario Draghi. And Draghi in his philosophy among the Anglo-Saxons, who always want to solve a problem with the printing press.

If the Bundesbank get backing from the Federal Constitutional Court?

Felix Zulauf : I do not think. The Constitutional Court was lathered on the policy and the ECB. Karlsruhe will approve the money printing and best fitted his judgment with a few footnotes in order to print something maybe slower than it would otherwise expire.

Why gold may not be maintained in the current environment?

Felix Zulauf : You have raised it initially linked to the inflation based on the U.S. bonds. Inflation rates are low and will continue to fall, rising real interest rates and the economy will be weaker. It has built deflationary pressure. In contrast, the price of gold is not immune. Gold is a good hedge against inflation and against systemic risk. The latter are now taking up significantly. Gold will then rise again when the policy and central banks respond to all the problems we have discussed. The reaction will come.


Felix Zulauf : The same money printing policy as always, only on a much larger scale. I expect that we will hear over the summer to re-clear sounds from the central banks. Then the U.S. Fed is not much spoken of tapering off..
So ... the retraction of bond purchases.

Felix Zulauf : It is the markets indicate that one is still there. Accordingly, the gold price will recover. Whether that is then Could the launch also be triggered by a banking crisis in China?

Novel feed : China has a credit crunch. This means that there is not enough liquidity in the system. In such a terminal everything is sold, the good and the bad. New purchases will not be made. The first came when a bank would go bankrupt or rumors making the rounds.

Felix Zulauf : Technically, the gold market is actually clean. The mood is now worse than the slump of 2008. The positions on the futures markets are heavily designed on a falling gold price. These are really good conditions for a low. I think the gold price is this low, pretty close. Between 1150 and 1250 per ounce deep should be achieved. The time now is certainly not the right time to sell gold.

And who wants to buy gold?

Felix Zulauf : The portions can buy, but first piano. Anyone who has to put money and not supply means nowadays has a problem.

Felix Zulauf : Even those who are called inflow, have this problem. We come from a risk-free interest rate environment in an environment with interest-free risk. There are no safe havens and no more returns, but only risks. If they can lose three years coupon bond with supposedly the highest credit rating within six weeks, then shows exactly in what a broken environment we move. It is an environment that is only allowed to hold short positions. Buy and leaving them no longer works.

How should investors operate in this market environment?

Felix Zulauf : You must first provide a stable anchor, namely the characteristics of bonds. For a moderate yield, but relatively little variation with as few sharp price declines would have to be taken care of. Which can be reached again only when extremely opportunistic behaves with active long and short positions ... So ... bet on rising and falling prices ...

Felix Zulauf : ... and in the fixed income, currencies, equities and commodities, but without credit and leverage with clearly allocated risk budget. If you suffer namely in a low yield environment large losses, they hardly get the later straightened again.

How would you position yourself up to date?

Felix Zulauf : We would hold short positions in bonds of the periphery, ie in countries with current account deficits, especially in the emerging markets and their currencies shorten, or about Turkish lira, Brazilian real, Polish zloty, or Indonesian Rupiah. I think all of these currencies remain under pressure against the dollar. The dollar will be the strongest currency in this period of crisis. Even the euro is coming back a little, but the euro is flat, thanks to Germany, still relatively stable. Significantly weaker he would flows from the euro zone in crisis in the money.

So a balance of payments crisis?

Novel feed : The last balance of payments crisis, there were in Spain. But that took place within the euro zone. The next balance of payments crisis, possibly triggered by France, could be a balance of payments crisis, because then flow with the rest of the world funds in the dollar area.

And not the way to Germany or France control of the periphery?

Novel feed : The road to Germany is dangerous because the governments in the euro zone, including Germany, have indeed made it clear that they will ask citizens to pay. Of who has money, his bank must be based, as we have done this in Cyprus. This has been suggested as well by the EU Parliament and now approved by the finance ministers that. Against this risk, the citizens are afraid and will try to escape. Then, capital flees from the euro zone.

If this path already trodden? Even the savers seem quite relaxed and confident on the deposit guarantee.

Felix Zulauf : That's true. But markets run just warm. And if the concern is only once there, it is already quite late.

Then call money is therefore no choice?

Novel feed : At least not in the euro zone. But for example, in an Anglo-Saxon bank in London or in New York, in dollars, that would be a good option.

How it looks with stocks?

Felix Zulauf : Rising bond yields, capital flight and the unresolved debt issues slow down the world economy massively . In this environment, corporate profits will come under pressure worldwide, especially since the major cost reductions, ie, dismissal of workers are largely gone. They're coming yet, but not to the same extent as in the past. The large control optimization of business is over. Because now comes more headwind to the company. Because margins and profits come in all regions of the world under pressure, the share prices will fall. In recent years, it was always that one should buy stocks because bonds are too expensive, so that you can no longer buy. There is of course some truth. But now comes the question:

If earnings fall, then I will still have stocks? The last few weeks show that this is actually not the case. Shares initially remain under pressure.
And in the long run?

Felix Zulauf : Since shares are likely to be the best instruments with which you can operate in the coming years. But you can not just buy it, sit around and think that you get so wealthy. Those days are over. One must manage its portfolio.

That means?

Felix Zulauf : You have to buy in order to sell and you may have to sell in order to buy back later can. In stock we currently have peaked in the cycle. We are in a medium and in our opinion, in a cyclical downturn, which is expected to expire in late summer or fall to much lower levels. Now let's see how big the discounts are then. You could be considerable. If they proceed in an orderly frame, then counter-movements would use. When most stock market, the American, I could even imagine in such a situation, that this also increases the high points once again reached or even marginally over this. But then he falls back. But today is important that the air is very thin up considerably and the risk of a major downturn.

And so you say: We assume that because we know more, where is the top and bottom?

Felix Zulauf : We of course also go along the wall. We analyze the world, to provide a thesis and invest accordingly. But we are not dogmatists, we manage the risk constantly. For investors, whether private or institutional, who can not do, the coming years will pass very disappointing.

The financial repression, ie the creeping expropriation of savers via negative real interest rates as after the Second World War is to bring everything back into balance, according to many experts. What do you think?

Felix Zulauf : That will not work. At that time, the national debt was even high. But today the situation is completely different than it was then.

What is different today?

Felix Zulauf : First, the demographic situation is different, we are too old. Second, households had at that time no debt and thirdly accumulated during the war on a large demand, which unfolded after the end of the war. Which has provided for a longterm economic growth. We will no longer have today. The financial repression has so far been the most successful in America.

There, the economy has actually recovered somewhat. The problems in the banking system have become somewhat reduced, but the total economic debt compared to economic output has only been stabilized. In Europe, this debt is even in countries with strong upward in the peripheral countries happens even in a rush. Since it is continuously worse. In Japan, I also do not see any success of financial repression. Where the economy is relatively well run as long as stimulus programs are launched.
As well as their half-life is limited.
It would expropriation.

Felix Zulauf : That will eventually be the result when everything else is useless. You will collect special taxes, there will be a redistribution from the private to the public sector.

That's all, unfortunately. fair to ask those to checkout, have virtually no load is benefiting from the monetary policy of recent years?

Felix Zulauf : This cleavage is the result of a misguided economic policies, as we can trace it for decades, particularly in Anglo-Saxon countries, but increasingly also in Europe. The problem with it is that you are quoted without power assets acquired long since then over the hills. Will ultimately have to pay the service providers of the Company, ie those who have entered into business risk, jobs and wealth created.

Do you want that no more strikes this way, that everyone prefers reflected as a civil servant through life? Is this the solution? This is not my opinion, but it is the populist response. And since we live in populist times, I am afraid that there will be exactly this response.

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.