The following is a summary of our recent interview with Felix Zulauf, Founder and President at Zulauf Asset Management AG, which can be listened to on our site here or on iTunes here.
It’s no secret that Felix Zulauf, a member of Barron’s Roundtable, has made timely calls in the past. Just last December on FS Insider, Zulauf called the bottom in gold, which has since risen about 30 percent.
This time on Financial Sense, Zulauf discusses his current outlook and how problems developing in China and Europe may affect both the US and world economy.
Changing Social Moods Are Affecting Politics
We’re currently in an environment completely different from anything money managers have seen, Zulauf said. The most important aspect of what is occurring now is the shift in the “zeitgeist,” or prevailing spirit of the time, he noted.
“I think the average guy is angry with the political leadership, and that’s true for the US as well as here in Europe,” he said. “In Europe, we have compounded all of those problems by the introduction of the euro, a monetary union that does not work and puts the majority of the economies in a deflationary straightjacket, and really making the citizens of those countries poorer.”
In Europe, we’ve seen the rise of anti-establishment political parties, and we’re seeing the effects of the shift in the zeitgeist in the US in the presidential election with Donald Trump appealing to these feelings in voters.
“I think Trump is reading the zeitgeist much better,” Zulauf said. “Either the establishment adapts to the changes the public wants—or they will get kicked out and replaced by new political staff that will run policies desirable to the people. The later is a faster change, and the former is a slower change. But change there will be.”
Looming Global Recession
Globalization is running backwards now, Zulauf stated, and world trade is declining.
“If you look at trade in US dollar terms, it is decisively below the peaks of 2014,” he noted. “And I think that decline and erosion will continue.”
The changes we’re likely to see with a shift to fairer trade will include trade disputes, terrorism, mass migration and other conflicts. These changes will mean less prosperity, less growth and probably a major economic crisis at some point, said Zulauf.
“I do not know the exact timing of it, but this is the landscape for the next 5 years,” he said. “Whether it happens very fast, or whether it is a slow process, we do not know.”
As a result, equities may see lower valuations. For now, though, Zulauf thinks the bull market in US equities will continue and will probably run until late this year or the early part of next year.
“I do not know what will make it end, but I do believe it’s the final leg of the bull market that started in 2009,” he said. “It will probably come to an end because of economic problems when there are cracks in the global economy.”
Cracks in China and Europe
The imbalances he sees forming come from China, with an overhang of bad credit and overcapacity, and from Europe, where he expects we will see political upheaval and the collapse of the euro.
Zulauf expects the Chinese to hold their currency steady until after the US elections, and then devalue. He also expects political forces in Europe to reach a breaking point when an anti-establishment party takes power, and it doesn’t matter in what European country this occurs.
“The timing for China is clearly next year,” he said. “The timing for the breakup of the euro is any time over the next five years. And it will be chaos—I think (Brexit) is the first crack that is appearing. The monetary union crack will be much more severe.”
Though Zulauf was quite bullish on gold when we spoke to him last December (right when gold bottomed), given the strong move it's had since then, he was more cautious this time around and thought near-term risks may now be to the downside. That being said, Zulauf feels the low we saw last December was a "very important low" and gold may be in the beginning stages of resuming its long-term bull market.
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