So what will happen next?
The euro is not the real problem but a trigger and compounder of the structural problems. It could only work if the euro zone entered a fiscal and political union, which won't happen, as Europeans aren't prepared to give up national sovereignty. Politicians therefore will go from one compromise and quick fix to the next, with the crisis deepening until some nations at the periphery won't be able to stand the economic pain anymore. They will want their old national currency back, and devalue to adjust the external accounts.
China won't be able to save us, as it did in 2009. The Chinese will lower interest rates but their actions will be reactive and lag. If my thesis is right, we must assume things will go awfully wrong in the next 12 months and the system will be at risk of collapsing. Most U.S.-focused investors might not understand it as they see corporations doing well.
How bad will things get?
The potential exists for a broad-based nationalization of the credit system, capital controls and dramatic restrictions on financial markets. Some might even be closed for some time.
Good heavens!
We are witnessing the biggest financial-market manipulation of all time. The authorities have intervened more and more, and thereby created this monster. They might change the rules when the game goes against their own interests.
We are in a severe credit crunch. It starts when the weakest links in the system can't finance their activities. Then you have a flight to safety into Treasuries and German bunds, compounded by a quasi-shortage of good collateral. That's why bond yields have fallen so low. This isn't an inflationary environment but a deflationary one.
Thank you, Meryl. Felix, you're next.
Zulauf: I assume the world economy is decelerating. China's economy will slow more than expected, but the Chinese government won't do anything dramatic to stimulate it. China will ease somewhat, but in piecemeal fashion. That is why those looking for China to get us out of the doldrums are wrong.
Cohen: What growth rate do you assume for China's economy?
Zulauf: Last year China's GDP grew by 9.1%. This year they will publish something like 7.2%, but the slowdown in reality will be more pronounced, and it will affect those who depend on China. The U.S. economy could grow by 1% or 1.5%. In Europe, I expect the next stage of the crisis -- the ratification of a fiscal agreement -- to be critical. I can't believe all the countries in the euro will ratify it, because it would lock them into a depression for five years. There will be exceptions, and that will trigger the next crisis.
We remain in a deleveraging world, and the deflationary process is intensifying. In the stock market, valuation compression has been at work since 2000. Occasionally we have had bull-market rallies when stimulus has been applied in major quantities. The last fiscal stimulus was in 2009, because all governments have realized they have too much debt. Fiscal stimulus is the only thing that works in this economy, and that will come later. We have to fall into a crisis that triggers a policy response. Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.
And when will that end?
Zulauf: It could end in the second half of 2012 or in early 2013. The market could drop 20% from the first quarter's high. Therefore we will need ammunition later this year or early next year to buy. My first recommendation is capital preservation, or cash. It doesn't return anything but you'll need it to buy when asset prices become cheap.
Schafer: What's the symbol? [Laughter around the room.]
Zulauf: You figure it out. The U.S. dollar will strengthen against other currencies temporarily, until the policy response comes. We are at the very end of the secular decline in bond yields. Yields on less-safe bonds, such as those issued by Greece and Italy, have already bottomed. Bonds perceived as top-quality will see a low in yields later this year. Ten-year U.S. Treasury yields will hit 1% to 1.20% before ticking up to 2.10% or 2.20%. There will be a horrendous move down triggered by intensifying deflationary pressures as money looks for so-called safe havens. I recommend 10-year Treasuries as a trade. When the yield reaches 1.20%, sell.
Investors should own some gold. But gold also will be subject to deflationary pressure and have a cyclical correction. The first part of the correction was the $400 drop to $1,520 an ounce from $1,920. Gold is now bottoming and could retrace half its losses. Then it could decline again in the second quarter, and you could buy it again in the summer. The low will be lower than $1,520. Then gold will rally in the next two years to a new high.
In what form would you buy gold?
Zulauf: I own physical gold, although you can buy the GLD [SPDR Gold Trust] exchange-traded fund. I hedge my position by selling futures contracts against it, but I closed my hedges recently because a temporary retracement is coming.
Gross: You have more of an emphasis on deflation and I have more of an emphasis on inflation two or three years out. If the 10-year bond yield fell to 1.25% and headline inflation was 2% to 3%, wouldn't that be bullish for gold?
Zulauf: Yes, but some aggressive players are overinvested in gold. If some other assets go wrong for them, they will be forced to create liquidity and sell their gold positions.
Hickey: That's what happened in 2008.
Zulauf: My next idea is how to play the slowdown in China. It will dampen prices for commodities, natural resources and Australian exports. China's boom was the main driver for the Australian economy in the past 10 years. Australia's last recession was in 1991. Despite rising exports to China, Australia runs a current-account deficit of more than 2% of GDP. GDP was up almost 2% last year. There is a budget deficit of around 3%. The current-account deficit was easy to balance because there was tremendous investment in the Aussie dollar. It was the so-called high yielder among currencies. Carry traders [who borrow in cheap currencies to buy higher-yielding ones] have bought it, along with individuals and even central banks. Holdings of Australian dollars are widespread, but now the Aussie dollar will suffer.
Why is that?
Zulauf: The strong investment inflow led to credit growth when interest rates already were too low. That led to a tremendous real-estate boom, with prices tripling. If China slows as dramatically, Australia will be hurt. The Australian central bank started raising interest rates in the fall of 2009. They went from 3% to 4.75% in November 2010. Last November they cut them to 4.5%. Now Australia is tightening fiscal policy because it has a growing deficit. The government cut spending, and as we have discussed, fiscal policy works much better in this environment than monetary policy. Short-term interest rates have declined to 3.2% and could fall another percentage point.
There are Australian government-bond futures with a three-year maturity. The yield is the difference between 100 Australian dollars and the futures price, which is currently A$96.84. That means the yield in the futures market is 3.16%, and it could rise by another percentage point in the next 12 months. This is a conservative play and you can lever it. It is a liquid market. The Reserve Bank of Australia will have to cut rates a lot more. Therefore, I would short the Aussie dollar against the U.S. dollar. The Aussie dollar has nearly doubled in the past three years against the U.S. dollar, from 60 cents to $1.02. It could correct by 20%.
Hickey: Do you have a view on the New Zealand dollar?
Zulauf: No, but I have one on Turkey. The global economic slowdown and the shrinking of bank balance sheets, particularly in Europe, will affect economies that depend on foreign capital flows. Turkey has huge external deficits. There will be a balance-of-payments crisis in Turkey, and one can profit by shorting the Turkish lira against the U.S. dollar. Turkey has been a booming economy for many years. Its leader, Recep Tayyip Erdogan, wanted to bring it into the European Union. The French didn't like that, and the Germans probably were happy the French blocked it. When Turkey's bid failed, Erdogan sought to boost its appeal as the leader of the Middle East.
To do that Turkey needed high economic growth, which required an aggressive and loose monetary policy. That created a credit boom, strong domestic demand and way too low interest rates for way too long. Economic growth was approximately 8% last year. Consumer price inflation is about 9.5%. The current account deficit is 10% of GDP. The budget deficit, despite the boom, is 2% of GDP. Ten-year government bonds yield 9.7%, around the inflation rate. Short-term rates were hiked to 11% from 8%. The 10% current account deficit won't be easy to finance.
So, what will happen?
Zulauf: Turkey is trying to cool its economy by hiking interest rates. They are trying to support the currency because they believe it is essential to have a strong currency to get continued capital flows to finance the current-account deficit. That is a dangerous strategy and will push the economy into a severe slump. At some point this year the government will have to change its focus from supporting the currency to supporting the economy. When that happens, the lira will go down. The dollar ranged from 1.80 Turkish lira to TRL1.15 for 10 years, and only recently broke out of that range. The dollar is trading at TRL1.88. Short term, it might rise, but long term it will drop.
Schafer: Don't high interest rates attract capital to Turkey?
Zulauf: Some investors are attracted, but when the currency falls there will be a new dynamic.
Finally, I am bearish on equities this year. It is best to short the EEM [iShares MSCI Emerging Markets Index exchange-traded fund] rather than individual stocks because it is dollar-denominated. Emerging-market currencies will decline against the U.S. dollar, and emerging-market equities will decline as much as developed markets, if not more. The EEM peaked at $55 in the fall of 2007. It is currently at $38.23 and could fall at least 20% later this year. Next January I hope to arrive with a more bullish message.
Faber: I don't disagree with you, but when would you reverse your position if you are wrong?
Zulauf: A 20% decline is my minimum expectation. If the Standard & Poor's 500 managed to rise above 1370, that would be a sign I am wrong.
Faber: Then you would buy?
Zulauf: Then I would close my short positions. On that note, thanks.
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.
June 13, 2012
May 08, 2012
"The percentage in gold is a very personal matter,” Felix Zulauf, founder of Zulauf Asset Management told Barron in Switzerland. “Some feel comfortable with 5 percent and some with 50 percent." The 10 percent level is good for many investors.
When asked on why you need physical gold:
In an interview Felix said that he believes gold will eventually rise two to three times in price and stresses the difference between paper and physical gold. He also sees the stock markets performing well in the first half of 2012, but believes things could turn around in the second half of this year.
In October 2011, Felix Zulauf said that gold needs a few months to build another base between $1,475 and $1,750 an ounce before its next move up sometime next year. As gold has gone down to $1600 an ounce, but has been for a long time in downtrend we believe that gold might be in the final clearance phase and then could start rising.
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.
When asked on why you need physical gold:
In an interview Felix said that he believes gold will eventually rise two to three times in price and stresses the difference between paper and physical gold. He also sees the stock markets performing well in the first half of 2012, but believes things could turn around in the second half of this year.
In October 2011, Felix Zulauf said that gold needs a few months to build another base between $1,475 and $1,750 an ounce before its next move up sometime next year. As gold has gone down to $1600 an ounce, but has been for a long time in downtrend we believe that gold might be in the final clearance phase and then could start rising.
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.
May 03, 2012
Felix Zulauf Market View
One of legendary and best investors of Switzerland, Felix Zulauf of Zulauf Asset Management gave his views on the market in an interview for the Business Spectator. He stated that the current risk-on situation and uptrend will likely end soon and that the global equity markets will start soon or maximum at the second part of 2012. Felix, who has also a member of the well known Barron’s Roundtable since more than 2 decades shared his worries about the debt-loaded industrialized countries and explained that the CB have no other choice but to run the printing press to stop the huge deflationary issues. Not only that but he also believes that the problematic consumer demand in the developed countries will force one of the biggest commodity consumers: China, to press the printing press even harder and stimulate its economy to offset the West’s decline.
When asked what he believes about Greece, he stated that the country has no future in the Eurozone. Money cannot fix competitiveness and it is what Greece lacks. Money can only fix the banks problems and help the ECB or the banks. Felix believes that eventually Greece will exit the EZ and will have its local currency cheaper by 50% at minimum against the EUR. Of course that will bankrupt the banks and the economy. Still Greece will recover because the tourism will go parabolic and in few years the country might even go back to the markets for capital. He even goes to say that the country might join the Eurozone again after a decade. Portugal is in the same position of Greece. Their bond show that the country is in a default territory and only time is needed. So Felix thinks that after Greece, the next in line for a debt crisis is Portugal.
When asked if there is a way for Europe to escape the debt crisis Felix said that austerity imposed by the Germany will not allow it. It brings the PIIGS into a downward spiral. Cutting the spending and getting the taxes raised causes recessions and this is exactly opposite of what should happen for the debt crisis to be escaped. The main problem is that with an economy that is in over-debt, there is no way and you can’t use monetary policy to counteract deflation because monetary policy does not work anymore, and only fiscal policy works really. As you see politicians realize countries need programs for growth but how is there a way to have these two both ?? Austerity and growth programs …
On Felix outlook for the equity markets:
The LTRO by ECB reduced and will reduce risk for a while. The balance sheet of the European central bank is exploding much faster than the one of FED did in qe 1 and qe2 … It is obvious that the central bankers think that big balance sheets means bigger final demand and better economy but Felix do not believe it is that because the transference mechanism is not working and is broker. It is only true that these operations will reduce system risk and risk assets will somewhat recover (which we have witnessed so far the in q1 2012). Felix admits that these money printing situations and flooding of the markets with cheap credits might postpone the issues and the cyclical in his opinion correction. He is worried mainly that from now until the fall of 2013 the markets are vulnerable.
Felix Zulauf believs that we will not see QE3 soon because the economic trends are favorable and can not justify it. There is no need of another program at this moment. The production is growing but we have rising inventories so if the final demand don’t increase and justify the sales rations expected by the producers, they will have to reduce productions and it will crash the markets. If sentiment changes hugely and we experience significant (market correction), the Fed might do another quantities easing program, but it would be very counter-productive because it doesn’t increase final consumer demand but only leads to risk assets going up and inflation going up. (How a higher gas bill can be positive?). QE3 only leads to higher oil prices and punishes the savers and the average citizens who don’t have a balance sheet full of risk assets. But the FED of course will try another qe3 when the economic numbers deteriorate as that is all they know and they are in a hopeless position. People believe that they save the system, but in fact they only give it time by making some people richer and increasing the disparity in the society which leads to social unrest, riots, worse middle class. The Fed push the top 20% up in wealth, and they push the other 80% down in wealth and prosperity.
Felix Zulauf’s outlook on commodities:
The prices of all commodities have risen hugely because of the growth of China and that is the main driver behind it. What will happen in China will determine what commodities will do in terms of price movements? Even though Felix doesn’t expect China to stop rising, it is at critical stop to decide its future. China sells cheap stuff, and feeds its people … they rely on exports and have invested in manufacture, infrastructure and plans much. But now we have a big weakness in consumption in the developed world and the real income of people is going down. It means China must change its way of work and model. Also the wages in China went up so they are not as competitive as before. That is why today, China has to focus more on the consumption inside the country. The issue is that the domestic consumption doesn’t have the same kind of multiplier effect to the economy as the exports and investments. That is why China’s growth will have to slowdown and will be lower than before (probably about 6% per year).
All that means a lower demand for materials and commodities and of course the their prices will underperform the equities in risk-on times.
There are only 2 commodities that will make an exception. OIL & GOLD. Oil’s price depends on geopolitical issues and is problematic while gold can be viewed as a true currency. FED and ECB have no other tool to stimulate and will dilute the fiat currencies.
When asked if there is a way to fix the deficit problem in USA, Felix said:
If the government in USA wants to cut the deficit from 10% to 0%, it means that the economy will go in a depression. Over the past 10 years, Felix calculated that if the USA did not have the deficits it had, the GDP in USA would be about 25% lower. This is the big problem. There is no solution to the problems and governments will continue to accumulate debt. Of course, at some point, buyers will take-over the market and will really decide the interest rates and then they will explode higher like in some European countries. Once it happens it will break the current system and who knows what will happen.
The other way which Felix believes is the likely way and path is of central banks monetizing debt and taking the role of financiers. The issue is that judging by history, when a central bank financed more than 30% of the government expenditures, the currency collapses and hyperinflation occurs. So at this time, we have two forces: a super high level of debt which is extremely deflationary and leads to higher unemployment, lower growth, riots and declide of wealth and prosperity and if not stopped, means depression and collapse of the banking system. It means also risk-off. Governments and CB do fiscal and monetary stimulus and offset these pressures, which means risk-on. Eventually, down the road a decision will have to be chosen: a system collapse (depression) or hyperinflation. The problem is that hyperinflation usually leads again to depression and system collapse.
Felix Zulauf on emerging markets position
The Emerging economies have lower debt levels and don’t have welfare systems that they cannot finance. That is why they are in better structural position. Also the demographics are much better and that is why they have natural growth. Emerging markets are definitely a place to in the long term. Of course when the world suffers system collapse, the emerging markets and economies will also suffer.
Felix Zulauf on the view of the Australian economy
He believes that Australians are blessed in some ways. The country benefits from the rise of China and the rising commodities prices leads to wealth creation and economic growth in Australia. The issue is that once China goes in its normal cyclical downturns as the one we probably experience now, Australia will sooner or later goes into a recession.
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.
When asked what he believes about Greece, he stated that the country has no future in the Eurozone. Money cannot fix competitiveness and it is what Greece lacks. Money can only fix the banks problems and help the ECB or the banks. Felix believes that eventually Greece will exit the EZ and will have its local currency cheaper by 50% at minimum against the EUR. Of course that will bankrupt the banks and the economy. Still Greece will recover because the tourism will go parabolic and in few years the country might even go back to the markets for capital. He even goes to say that the country might join the Eurozone again after a decade. Portugal is in the same position of Greece. Their bond show that the country is in a default territory and only time is needed. So Felix thinks that after Greece, the next in line for a debt crisis is Portugal.
When asked if there is a way for Europe to escape the debt crisis Felix said that austerity imposed by the Germany will not allow it. It brings the PIIGS into a downward spiral. Cutting the spending and getting the taxes raised causes recessions and this is exactly opposite of what should happen for the debt crisis to be escaped. The main problem is that with an economy that is in over-debt, there is no way and you can’t use monetary policy to counteract deflation because monetary policy does not work anymore, and only fiscal policy works really. As you see politicians realize countries need programs for growth but how is there a way to have these two both ?? Austerity and growth programs …
On Felix outlook for the equity markets:
The LTRO by ECB reduced and will reduce risk for a while. The balance sheet of the European central bank is exploding much faster than the one of FED did in qe 1 and qe2 … It is obvious that the central bankers think that big balance sheets means bigger final demand and better economy but Felix do not believe it is that because the transference mechanism is not working and is broker. It is only true that these operations will reduce system risk and risk assets will somewhat recover (which we have witnessed so far the in q1 2012). Felix admits that these money printing situations and flooding of the markets with cheap credits might postpone the issues and the cyclical in his opinion correction. He is worried mainly that from now until the fall of 2013 the markets are vulnerable.
Felix Zulauf believs that we will not see QE3 soon because the economic trends are favorable and can not justify it. There is no need of another program at this moment. The production is growing but we have rising inventories so if the final demand don’t increase and justify the sales rations expected by the producers, they will have to reduce productions and it will crash the markets. If sentiment changes hugely and we experience significant (market correction), the Fed might do another quantities easing program, but it would be very counter-productive because it doesn’t increase final consumer demand but only leads to risk assets going up and inflation going up. (How a higher gas bill can be positive?). QE3 only leads to higher oil prices and punishes the savers and the average citizens who don’t have a balance sheet full of risk assets. But the FED of course will try another qe3 when the economic numbers deteriorate as that is all they know and they are in a hopeless position. People believe that they save the system, but in fact they only give it time by making some people richer and increasing the disparity in the society which leads to social unrest, riots, worse middle class. The Fed push the top 20% up in wealth, and they push the other 80% down in wealth and prosperity.
Felix Zulauf’s outlook on commodities:
The prices of all commodities have risen hugely because of the growth of China and that is the main driver behind it. What will happen in China will determine what commodities will do in terms of price movements? Even though Felix doesn’t expect China to stop rising, it is at critical stop to decide its future. China sells cheap stuff, and feeds its people … they rely on exports and have invested in manufacture, infrastructure and plans much. But now we have a big weakness in consumption in the developed world and the real income of people is going down. It means China must change its way of work and model. Also the wages in China went up so they are not as competitive as before. That is why today, China has to focus more on the consumption inside the country. The issue is that the domestic consumption doesn’t have the same kind of multiplier effect to the economy as the exports and investments. That is why China’s growth will have to slowdown and will be lower than before (probably about 6% per year).
All that means a lower demand for materials and commodities and of course the their prices will underperform the equities in risk-on times.
There are only 2 commodities that will make an exception. OIL & GOLD. Oil’s price depends on geopolitical issues and is problematic while gold can be viewed as a true currency. FED and ECB have no other tool to stimulate and will dilute the fiat currencies.
When asked if there is a way to fix the deficit problem in USA, Felix said:
If the government in USA wants to cut the deficit from 10% to 0%, it means that the economy will go in a depression. Over the past 10 years, Felix calculated that if the USA did not have the deficits it had, the GDP in USA would be about 25% lower. This is the big problem. There is no solution to the problems and governments will continue to accumulate debt. Of course, at some point, buyers will take-over the market and will really decide the interest rates and then they will explode higher like in some European countries. Once it happens it will break the current system and who knows what will happen.
The other way which Felix believes is the likely way and path is of central banks monetizing debt and taking the role of financiers. The issue is that judging by history, when a central bank financed more than 30% of the government expenditures, the currency collapses and hyperinflation occurs. So at this time, we have two forces: a super high level of debt which is extremely deflationary and leads to higher unemployment, lower growth, riots and declide of wealth and prosperity and if not stopped, means depression and collapse of the banking system. It means also risk-off. Governments and CB do fiscal and monetary stimulus and offset these pressures, which means risk-on. Eventually, down the road a decision will have to be chosen: a system collapse (depression) or hyperinflation. The problem is that hyperinflation usually leads again to depression and system collapse.
Felix Zulauf on emerging markets position
The Emerging economies have lower debt levels and don’t have welfare systems that they cannot finance. That is why they are in better structural position. Also the demographics are much better and that is why they have natural growth. Emerging markets are definitely a place to in the long term. Of course when the world suffers system collapse, the emerging markets and economies will also suffer.
Felix Zulauf on the view of the Australian economy
He believes that Australians are blessed in some ways. The country benefits from the rise of China and the rising commodities prices leads to wealth creation and economic growth in Australia. The issue is that once China goes in its normal cyclical downturns as the one we probably experience now, Australia will sooner or later goes into a recession.
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.
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