Felix Zulauf is the Founder and President of Zulauf Asset Management AG in Zug, Switzerland and has been a member of Barron’s Roundtable for over 20 years. In a wide-ranging discussion, Felix covers Fed policy, how dollar strength will lead to a global crisis, and his concerns about China. He also gives a potential time frame for the next bear market but considers how asset prices will behave in a world when all major central banks around the globe, including China, which he thinks will ease next, have a very aggressive and expansive monetary policy.
Here's a portion of his recent interview with Financial Sense Newshour on his big picture outlook...
Do you think central bank efforts in Europe and elsewhere will continue to work?
"I doubt that their efforts will work as they suppose they should. It's all rooted in the theory of monetarism--you turn on the spigots and money flows into the system and then the economy takes off. As we have seen in recent years, it's not quite that simple. We have gone through a period of the biggest monetary stimulation in history and what we are faced with is a world economy that is slow...so I don't think it is going to work in the real economy but it's working in the financial economy. And these economies are moving in different directions."
When you look at the major economies around the globe, what area concerns you the most?
"I think the critical point is China. It's not Europe—it's China. China is faced with tremendous problems and I think the real growth rate over there is below 3% and...eventually China will have to devalue its currency. They are between a rock and a hard place because Japan moved ahead and devalued and all the other Asians are following slowly...and China has linked its currency in a silent way to the U.S. dollar and therefore its currency has gone up and up against all their competitors, which makes China uncompetitive for exports and therefore eventually they need to do something."
What is your main concern when it comes to a strengthening U.S. dollar?
"The Greenspan and Bernanke Fed pursued a policy that was too expansive for too long, which made the dollar a weak currency and created a situation where the U.S. dollar was used as a funding currency throughout the world. That has resulted in a dollar-denominated debt outside of the U.S. of probably on the order of $10 trillion U.S. dollars; $6 trillion alone according to the BIS in the emerging worlds, or emerging markets, and out of those $6 trillion the estimates are that at least one if not up to $3 trillion are in China. Having foreign currency denominated debt on your balance sheet is fine as long as that currency declines against you. But when this changes and the foreign currency goes up, that means your debt goes up every day without taking on new debt...(so) eventually the dollar's strength will lead to a global crisis."
How soon before you think that happens? It sounds like you don't see an immediate threat.
"I don't think we are there yet. I think the bull market...has further to go...and the inflating of asset prices will continue. At some point we reach a point where enough is enough. I rather think we will have a correction that will be bigger than what we have seen in recent years in the U.S. stock market in the summer of over 10% and after that the Fed's position and stance will change and soften and then will also remain or change course in its language to be more soft and easier and then it continues...then you have an easy U.S. policy, you have a very aggressive and expansive European policy, you have an easy Japanese policy and, at some point, even an aggressive and expansive Chinese policy..."
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