Macro Thoughts From Felix Zulauf

Felix Zulauf is one of the best macro thinkers around today.  He’s not totally in paradigm with MR (he’s a bit too hyperbolic for my taste at times), but he has a very good feel for the general macro landscape and the markets in particular.

Fusion IQ, Barry’s firm, has a very good exclusive interview with him.  Some snippets:

Fusion: Looking at China, Felix, you were bearish at the start of 2012, and then very presciently called a bottom in September. Both the Shanghai Composite and Hang Sang have rallied very strongly since that call. What is your current outlook on China?

Zulauf: The new government in China wants to maintain 7-8% growth, and wants to take steps to ensure this. They may increase public spending and relax monetary policy. This won’t come anywhere close to the stimulus of 2008, as China is still suffering the negative side effects. You might see a temporary improvement in economic indicators, but that’s it. The real level of growth in China is probably only 3-4%. That said, there is still perhaps 20-30% upside in Chinese equities, particularly in the first half, although you won’t see the sort of sustained move we saw off the 2008 low there.

Fusion: How does Europe look now?

Zulauf: In Europe, the prevailing policy goal is to keep the Eurozone together. Draghi has told us as much. The austerity policies may not be sustainable in the peripheral countries as people begin to revolt due to the painful and long lasting recession. Mario Monti lost support because the highly fragmented Italian parliaments withdrew its support. Angela Merkel faces an election in September, and may agree on diluting austerity programs as she doesn’t want any trouble. I see no growth at all in the peripheral countries. Germany may be forced into some debt mutualization on a small scale. It will be the ECB that has to carry Europe through by financing rotten financial institutions and rotten governments. The euro could see 1.40 into the second quarter before going to 1.00 next year, when the markets see more trouble and yields rise again on the sovereign debt of the peripheral countries.

Read the full piece here.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Brian_Ripley

    Zulauf says: “The euro could see 1.40 into the second quarter before going to 1.00 next year…”


    What about the US$ setting up for a rally right now?

    That might mess up a lot of portfolio construction.

  • Nick

    Interesting read, but this guys sounds just like the sell side consensus on most issues.

  • Old Dog

    VGK has been veddy veddy good to me, but it sounds like Felix thinks I should sell it at the end of this qtr.

  • Syd

    When asked whether the Fed has any bullets left, Zulauf says:
    “The Fed can buy stocks, or buy commodities … they can buy anything. Yet once you get to the point where central banks are financing 30-40% of government expenditures and the interest carry on that government debt increases, then you have a huge crisis. At that time, we will be forced to either clean out the debt, restructure or we end up like the Weimar Republic. But we are not there yet and it may take many more years until that point is hit.”

    I’m really interested in understanding his thinking here. I guess what he is saying is that at some point inflation is going to rise significantly, which will put the Fed in a position where it has to raise rates to keep inflation under control (and thereby cause aggregate demand to fall, i.e., a recession or worse). If the Fed chose not to raise rates, the risks are high inflation (which undermines the value of existing wealth) and an unsustainable growth in debt. Is that what he’s saying?