Felix Zulauf Growls
- Joshua M Brown
- January 21st, 2013
This weekend was the opening salvo of the Barron’s Roundtable and opinions were fairly diverse. Most of the participants did their usual talking-your-book routine: Abby Joseph Cohen is bullish, Bill Gross is vaguely bearish, Mario Gabelli says its a stock-picker’s market etc – no surprises, same thing 20 years running.
But the commentary that really caught my attention was from Felix Zulauf, who was more bearish than usual this go-round, perhaps overcompensating for the absence of Gloom, Doom and Get a Room Report’s Mark Faber (who supposedly was away on assignment scaring the shit out of elementary school kids about their parents’ job insecurity).
Felix Zulauf is one of the few global macro investors you ought to pay attention to – because he’s made some of the biggest calls of all time and, unlike newsletter punks, has actually managed real assets in real life throughout his career. Zulauf’s dour take on the European risk-on rally ought to be considered, regardless of what fading bond yields in the marketplace have been telling us…
Can Europe have a 1990′s Asian-style recovery?
There are several issues in Europe. A monetary union of nations with different economic structures is a strange setup that leads to all sorts of stress. There are huge differences in competitiveness among euro-zone economies. Some observers say Europe’s current-account balance is improving, and Europe could have a spectacular recovery, much as Asian countries did in the late 1990s. This is complete baloney.
Asia had a financial crisis in the 1990s, and countries let their currencies drop by 50%, which led to a boom in exports. That is not the case in Europe. Countries on the Continent’s periphery don’t have an export boom. They have an import contraction. You can’t create growth under such circumstances. That is why any hope of Europe’s periphery coming out of the doldrums is completely misplaced, and there is a good chance France will be the next problem…
On why France is fucked:
Unit labor costs have risen to such a degree that the French economy has become noncompetitive. It is beginning to unravel. The French can’t sell their cars anymore. The government isn’t reforming the country; it is marching in the wrong direction, toward more socialism. You will see big disappointments in France this year, including rising current-account and budget deficits.
On seemingly improving bond markets in Europe:
Bond markets in Spain and Italy and Greece were priced for calamity. The ECB stepped in and removed that threat. That made bond markets rally and interest rates fall. The decline in interest rates is just about over. Yields in those countries will trade sideways for a few months and then start rising again.
On the coming reversal in risk appetite:
It is difficult to time such things, but around the middle of the year, the markets will start to reverse. I don’t know whether they will end the year slightly up or slightly down. I expect the first half of 2013 to be friendly to equity markets, and the second half to be unfriendly, with risk rising.
Ugly stuff to be sure. The difference between this kind of commentary from Zulauf versus many other skeptics is that the Swiss gentleman is NOT playing a game for attention, he is not an alarmist entertainer. His commentary is genuine, there is no “product” you can subscribe to and your chances of being able to invest in his Switzerland-based hedge fund as a non-institution are probably nil.
But here’s where Felix loses me. The trigger for his vision is a revolution of some sort, which places an awful lot of faith in the idea that policymakers can only keep screwing up and citizens can only imagine a future in which the government provides for them:
Europe’s high priests of economic policy have put preservation of the euro above everything else. By doing that, they have destroyed millions of jobs and consigned millions of people to poverty. At some point this will backfire. You can’t glue the European Union together forever with central-bank money. Financial markets can’t force the issue because the ECB will go against them. It has immense ammunition; it can print money. Eventually, it will be the man in the street who revolts. You can send people into poverty for a while, but there is a limit.
Josh here: The “man in the street” is doing nothing except watching soccer and complaining to his neighbor, who is similarly not lifting a finger. More likely than a Les Miserable-style race for the barricades in capital cities across Western Europe is something akin to what we’ve seen in America – people get off their asses after awhile and make their own luck, so to speak. People get sick and tired of being sick and tired and they go out to find ways in which they can be productive and create value. It takes time but it happens in the end. And it is a more highly probably outcome than muskets and torches in my opinion.
Anyway, click over for the rest of the Roundtable if you have a subscription…
For further information – in the summer of 2010 Barry Ritholtz interviewed Felix about his life and career, how he got started, made a name for himself and his investing process. It’s available in two parts here:
Also, over at the Fusion Blog we have the transcript of an interview with Felix from the first week of this year, in case you missed it:
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.