Risks and Opportunities

Investors started off 2015 with a slow global economy, low oil prices, a strong Dollar, and a deflationary Europe with great uncertainties on the progress of the US economy and the recent launch of Europe’s quantitative easing. The question is, what opportunities lie ahead? This article highlights the main topics covered in an interview between Mr. Frank Suess, CEO and Chairman of BFI Capital Group, with the globally renowned Swiss fund manager, Mr. Felix Zulauf. Mr. Zulauf currently heads Zulauf Asset Management, a Switzerland-based hedge fund and has forty years of experience with global financial markets and asset management. He has been a member of the Barron’s Roundtable for over twenty years.

 

Zulauf-S-640x360Felix Zulauf, Swiss fund manager and long-standing member of the Barron’s roundtable

Photo credit:

 

Frank Suess: Felix, first I would like to thank you for taking the time to speak to us. You are a renowned investor and fund manager with a solid track record over the past 40 years. In those 40 years, you’ve encountered many highs and lows in financial markets and business cycles. What do you think about the current cycle we are in?

Felix Zulauf: The current cycle is very unusual, because never before have we seen authorities, central banks in particular, intervening on such a large scale and pumping so much money into global financial markets. Hence, global financial markets are more distorted than ever before and accordingly, the risks are very high. Investing becomes very difficult in such an unprecedented environment, as it can’t be compared to previous situations.

Frank Suess: When you look at our financial markets today, what would you consider are the most alarming themes? And how can they affect the current situation?

Felix Zulauf: Global demand has weakened due to structural reasons. This is a situation that cannot be improved by pumping liquidity into the system. Zero or even negative interest rates have distorted the valuation and pricing of virtually all assets. We know that the longer a distortion prevails, the more investors get used to it and it becomes the “new normal” to them. That’s where the problem lies!

I see three potential threats: 1) Inflation and bond yields rise and begin to prick asset bubbles; 2) The world economy gets hit again by more deflation due to a weaker Chinese currency that would reinforce deflationary pressure, dampen pricing and corporate profits and finally the real global economy; and 3) Asset prices continue to rise and finally exhaust on the upside at very high and unsustainable valuation levels. In my view, #3 will be the most likely outcome.

 

USDCNY(Weekly)A potential source of trouble: the yuan – click to enlarge.

 

Frank Suess: Central banks, with the US Federal Reserve in the lead, have embarked on a series of quantitative easing and credit stimulus packages. Particularly since the crisis in 2008, central bank influence on financial markets and the global economy has reached an unprecedented level. What is your view on this? Has this huge market intervention been justified? Will central bankers really be able to steer the global economy toward sustainable growth?

Felix Zulauf: Markets are the best capital allocators and capitalism works if the authorities let it take its course. Had they let markets correct all the excesses in previous business cycles instead of printing more and more money, the world would be in a much better shape today. But our authorities had the dream to smooth the business cycle by not allowing the markets and the system to correct itself. It is difficult to correct this in a painless way, which is what the authorities are trying to do. That won’t work.

 

central bankersAssorted central planners – no painless way out

 

Frank Suess: How do you see this affecting accumulated wealth, particularly in the US? You were previously quoted as saying that “it will be a trader’s dream, but an investor’s hell”. Could you please explain to our readers what you mean with that statement?

Felix Zulauf: My hunch is that the US market will not make much progress this year but rather go up and down. This may be good for talented traders but bad for investors holding stocks that perform more or less in line with the S&P.

Frank Suess: Following the Americans, and then the Japanese, Europe has now joined the “QE bandwagon”. And, European stock markets, in general, currently look more reasonably priced than those in America. Should we now reallocate a bigger part of our portfolio into European stock markets?

Felix Zulauf: On a relative basis, European markets are now higher priced than in 2007 versus the US. But cyclical forces remain in favor of European stocks due to the highly expansive ECB policies. Europe has zero interest rates or even negative rates in some cases. I wouldn’t even be surprised to see German 10-year Bonds going to negative yields (they are 0.25% at present). There is plenty of liquidity around and the banks cannot lend it out. But still, Draghi wants to flood the market with more than one trillion of newly printed Euros. That is insane! The rationale: Weaken the Euro even further to help the structurally uncompetitive economies like Greece, Italy or France. That is all a very far cry from sound central banking, of course. For a while longer it will be bullish for European stocks, particularly for German equities, as they had already performed well when the EUR/USD was trading at 1.40.

 

10 yr. yield, Germany10 year Bund yield – just below 20 basis points as of today – click to enlarge.

 

Frank Suess: The slump in the oil price has been a major topic since last summer. Factors include a drop in global manufacturing, America’s increased production of shale oil, lower production by OPEC members. What is your interpretation? And where do you expect oil prices, and possibly commodity prices, in general, going forward? Who are the winners and losers here?

Felix Zulauf: The commodity cycle peaked in 2011 and I assume the bearish trend will last another few years. Oil’s decline is part of that down cycle. Demand and supply factors are at work here. Oil’s market share of total energy has been declining for some years. The Saudis want to change this by having a lower price and want others to cut back on production. On the demand side, the world is getting more and more energy efficient (the automobile sector is an example) and therefore demand is now rising, but at a slower rate than the economy. The winners remain the energy consumers, in a broad sense, and the losers are the energy producers. That relates to individuals, companies, industries and national economies. But of course, energy is always only one component of the whole investment landscape.

Frank Suess: Over the years, you’ve had great exposure to Asian markets, particularly Japan. Many eyes are now set on China. The Chinese are confident they will report strong growth numbers of 7% this year, while many analysts disagree, saying that it is unachievable on low export figures. What do you make of the current performance of the Chinese economy and its impact on Europe and the US?

Felix Zulauf: China’s investment and credit boom was the biggest in recorded history. It peaked a while ago and is now in a downswing. After such a boom, the economy usually slows for 5-7 years and that is what’s happening in China. 7% growth is a joke; I would rather say it is now beginning to fall below 3% and won’t stop slowing for several years. China will be forced to help the banking and shadow banking system to digest the fallout of the previous boom and that means it will become more and more expansive in its monetary policy. In turn, this will weaken the Chinese currency. But China is moving slowly – which reinforces the slowdown – because it is afraid of a big wave of capital outflows that could create a shock to the banking system. Hence, they play down problems and move slowly. But eventually, the currency will weaken further. Once the Renminbi weakens by 10-15%, it will weaken prices of globally traded goods once more. In turn, this will dampen inflation further as well as revenues, profit margins and profits in the corporate sector around the world. When this happens, many equity markets may realize that the “emperor has no clothes”. In other words, China is key to the rest of the world.

Frank Suess: Greece is on the brink of collapse and possibly exiting the Eurozone. Negotiations are still ongoing, and the situation is still developing. Do you see a way out of the Greek leverage situation? In your view, should the Greeks stay or exit the Eurozone? And what is the best course of action for both parties, in your opinion?

Felix Zulauf: Of course, Greece is bust – like several others. But as long as the fiction that everything is okay and financing will be provided remains, the world doesn’t worry. My hunch is that the percentage of those in European politics that are fed up with Greece is rising and therefore it is only a matter of time until Greece defaults. A major restructuring and reform with Greece staying in the euro zone will be very difficult to achieve because the ECB will hardly provide the capital necessary for the refinancing of a restructured Greece. Hence, an exit may happen and the Drachma could be reintroduced with a value that is perhaps 50-70% lower compared to today’s currency. At that time, Greece has a true chance to recover. However, this would set prejudice of exiting.

 

ATGGreece’s stock market has declined precipitously since 2007 – click to enlarge.

 

Frank Suess: When the SNB removed the cap on the CHF in January, did you see it coming? How would you evaluate this decision by the SNB, noting that only days earlier they said they would maintain the cap? Can we expect more of these shocking decisions in the near future and why so?

Felix Zulauf: Well, I was pretty sure they would eventually separate from the ECB policy, but had rather expected it to happen sooner. As a policymaker, you cannot tell if the truth could jeopardize your own policy. That is part of the game authorities must play. Well, we could see capital controls of some sort in the years ahead, because it is unreal to expect that all players are prepared to accept what other nations are trying to do at their own expense.

Frank Suess: What markets would you consider the most positive or negative? What investment opportunities would you say could develop in the course of the year that one should take advantage of?

Felix Zulauf: All equity and currency markets are pretty extended, at present. And many of the bond markets are as well. Hence, risk is high as assets are priced off a zero interest rate policy. I said last year that currency movements will play a key role. I expected the strengthening USD at the beginning of 2014, which is over a year ago. And European investors made 40% in US equities over the last 12 months while a US investor lost 10% in European equities, all calculated in their home currency. Hence, if you don’t understand currencies, you may get lost in these markets. I would certainly stay as far away as possible from emerging market currencies, bonds and also equities. On the positive side, I expect the USD strength to continue over the next 2 years or so but see some potential for a correction this spring. Long US treasuries are the most attractive fixed income instrument in the world because the economy will soften again against the general expectations of an economic reacceleration and rate hikes may be postponed for longer than generally expected. In equities, I find German equities the most attractive. Leading German multinationals made good money when the EUR/USD was trading at 1.40. It is trading now, at the time of this interview, near 1.08 and it must be a bonanza for them in terms of earnings. I would use short-term setbacks to buy more, but always hedge the currency.

 

Mr. Felix Zulauf will be an expert panelist taking part at the coming BFI Inner Circle Wealth Forum which will be held in Florida on the 27th and 28th of April.

 

Charts by: investing.com, BigCharts

 

 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • safe spaceReality is a Formidable Enemy
      Political Correctness Comedy We have recently come across a video that is simply too funny not be shared. It also happens to dovetail nicely with our friend Claudio's recent essay on political correctness and cultural Marxism. Since this is generally a rather depressing topic, we have concluded that having a good laugh at it might not be the worst idea.   How to most effectively create a “safe space” on campus Cartoon by Nate Beeler   It is especially funny (or...
  • Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012. Gold imports by India, the world's biggest buyer of bullion, could rise on pent-up demand from jewellers after the federal government decided to scrap an excise duty on jewellery it imposed in March, the head of a trade body said on Monday. REUTERS/Ajay Verma (INDIA - Tags: BUSINESS COMMODITIES)Fresh Mainstream Nonsense on Gold Demand
      They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our  article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”).  Sometimes it is a bit frustrating when we realize it has probably all been for naught.   Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters   This was brought home to...
  • fir wateringDrowning the Fir
      Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you:   Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
  • swiss-cultureSwitzerland About to Vote on “Free Lunch” for Everyone
      Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate.   The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
  • Hollande 2The Wonder Years Are Over
      Everybody Is Unhappy PARIS – “France?” We were in a cab on the way from Charles de Gaulle Airport yesterday. We had innocently asked our cab driver how things were going in the country. He had some thoughts...   French president Francois Hollande: against all odds, he managed to attain the most powerful position in French society. And yet, even he is unhappy. Photo credit: Patrick Kovarik / AFP   “France is a mess. We have 5 million people unemployed. And...
  • mossack fonsecaGold – The Commitments of Traders
      Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way.     As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
  • picture-social-contract-not-foundHeretical Thoughts and Doing the Unthinkable
      Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull.   Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC   Speaking at an investment conference in New York last week, George Soros’ former partner...
  • ClintotrumpStaying Home on Election Day
      Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates.   US election circus: Deep State Rep vs. Rage Channeller   The first, a loose...
  • Jackboot 2How the Deep State’s Cronies Steal From You
      Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn.   Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland   It is an excellent place for seafood and soda bread on a...
  • time100-grid-covers-whiteThe World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
      Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become.   Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
  • YenThe Japanese Popsicle Affair
      Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens.   Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...
  • Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, December 18, 2015.  REUTERS/Toru HanaiKuroda-San in the Mouth of Madness
      Deluded Central Planners Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.   BoJ governor Haruhiko Kuroda Photo credit:...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com