'Hell Will Break Loose' — The Next Big Crisis Will Be A Shocker | Felix Zulauf

I know from my own experience when all the forecasts and experts agree to such a high degree something else is going to happen so either it is the economy is stronger or it is weaker and I think we will get both I think in the first few months the economy could appear a little bit stronger than expected which would then be a problem for the bond market uh and in the second half the economy will be weaker and we go into recession Felix zulaf president of zolof Consulting it is such an honor to welcome you to the Julia L Ro show thank you so much for taking the time to join me today the honor is all mine Julia thank you very much for having me well Felix I've wanted to interview you for many many years now and you are one of these well-known folks within the macro world and you've made some precient calls over the years and I'd love to start where I always start with my guest and that is to get their big picture macro view uh their assessment of the global economy and the markets and one of the things about this show is you can take as much time as you'd like okay oh my God where should I start well I I think investors have to understand that geopolitics that usually does not impact financial markets for long when there is an event or so will have an impact in the years to come uh the world uh order is changing the uh us Centric unipolar world order with the US controlling everything uh is gone it's over and we are in disorder and turmoil and in rivalry and conflict and wars and that will continue and intensify over the next 10 years or into the early 30s and that will eventually impact the world economy because there will be more sanctions protection ISM nationalism Etc and that makes it much more difficult for businesses to operate uh globally uh it's a completely it will be a completely different world from what it used to be much more difficult it will mean that uh prices uh will go up inflation will rise on a structural basis not on a cyclical but on a structural basis secular basis and that means that uh uh interest rates on a secular basis will go up we are now in a down cycle in inflation and in interest rates and uh we will probably enter a recession uh sometimes next year uh and and that should bring the equity markets down uh to a major low late next year or so from a high that I expect early in the year sometimes in first quarter probably late first quarter in equities around the world and uh and and that's um it's it's very simple up first and then down and that will create great opportunities because in recessions authorities do what they always do they reliquify the system and since our system in each cycle is more fragile and more lever than in the previous cycle they have to inject even more next time and all that money cannot be taken up by the real economy therefore it goes into the financial economy in the asset economy and it will push prices higher into through 25 uh probably into 26 and that will also include commodity prices and if commodity prices then rise to $15 $200 uh you will see inflation rates clearly above 10% and that will create problems for the bond market and we will have higher rates and uh that in in a highly leved world will create the crisis in the second half later part of the 20s that we probably all need to fix our fiscal problems because without a major mess and the major crisis you cannot raise the taxes and cut entitlements that have to be done you can only do it in a painful crisis situation that is monumental that's what I'm expect for the later part of the 20s so I I think we are working this decade through a roller coaster Market lots of ups and downs and uh for Passive investors that just buy and sit and hold uh it will be a very frustrating period and the total returns at the end of the decade will be frustratingly low could be even negative while for those people who can play the minicycle to some degree uh it could be a very beneficial decade very volatile very volatile yeah I like that description of a a roller coaster and um you you bring up some important points there's so many threads I want to pull on let's talk about um the notion of the roller coaster and it sounds to me what I'm hearing from you is you have to be nimble to play these cycles and maybe it'll be frustrating for the more passive investors can we flush that out because do you have to be more of a Trader in these kind of environments versus um kind of buy and set it and forget it type of play uh yes but not the short-term Trader you know short-term Trader is U is a losing game for most people and I would not recommend individual investors to enter that uh that game uh because eventually they will lose out but you have to time the minic cycles and the minic Cycles are one year up or one and a half years up and one year down and things like like that so more the long or medium term or the minic cycles that you have to try to time timing Cycles is uh very challenging difficult uh in uh our industry uh the saying is that you should not try it uh because nobody can do it but there are a few oldtimers who try that uh who have grown up like me I have grown up in the 90 in the late 60s and' 7s in those markets when it was up and down and up and down and uh the my first cycle was the bare cycle of 73 and 74 which I played levered Short and uh and and I'm I grew up with that so I can sell short I can buy long uh this is nothing new for me but it is very difficult for somebody who invest for the long term because because they want to buy an asset and hold it and want to buy the best assets to own uh unfortunately I always get that question what should I buy and where should I be over the next 10 years unfortunately that asset does not exist you have to be nimble and flexible and you may need some professional help uh to guide you through that up through these ups and downs in the market but um if you can just prevent 50% of the downside and participate in let's say 70% of The Upside you come out way ahead of the game how are you okay so like in what I was hearing at the top was um that there's still room to go here in the market before we get to maybe see more of a Down cycle can how are you thinking about playing this environment well you you know I tried to segment the markets and we had a first down cycle from 20 from early 22 to uh fall of 22 and then we had a recovery from 3500 in the S&P to the low 4,000 that was the first UPL uh I thought actually it was a correction to the upside uh I saw it coming and I called it and then we had a second UPL uh which which I didn't see uh I uh unfortunately I missed from the low 4,000 to 4600 in July I called the July top and then said I we have a correction and then in October I realized in late October that the the third uple was beginning and the third uple uh uh we have to measure it and we have to monitor it we use uh positioning we use sentiment we use Trend indications momentum indications and of course valuation but valuation is more for the long cycle and we are in over value territory we know all that and when you have high valuation you get low returns when you invest and when you get low valuation you get high returns when you invest so I will look and monitor particularly uh Trend and momentum together with sentiment and positioning and see how this works out uh I'm expecting a top sometimes in the first quarter it could stretch into the second quarter or so and then a pretty pretty serious downturn and the downturn is not so much uh magnitude is not so much related to the economy but is is related to the very unique situation we have technically in the market we have the highest concentration ever in a few stocks in in the market capitalization and it is much worse than in 1973 before the nifty50 tanked um you know in today's world IND individual investors often mandate a money manager a professional and the professional then invests according to the Benchmark or if he's an active manager he moves close to the Benchmark not quite but close and then he can charge a higher fee uh but I would say that 80% of the equity capital in the world is now benchmarked and and if you didn't want to underperform the stock market in the US over the last 12 months you had to own those Magnificent Seven stocks and if you wanted to outperform you had to uh overweight those stocks so think about it somebody out in the world invests indexed and virtually two3 of the capital goes into the US Stock Market out of that money onethird goes into seven stocks so you end up with the biggest concentration ever and when the market turns down for whatever reason when the market turns down Boney managers mutual fund managers get hit with redemptions they have to sell they have no other choice than to sell so stocks so how they outperformed on the upside they will underperform on the downside and they will exaggerate the decline uh to quite the dramatic proportions potentially uh because of that technical factor that has nothing to do with the real economy except that we have a recession and sentiment turns down and the investors get vary and more defensive and they want to reduce their Equity allocation Etc that's a fascinating point to think about too and it also makes you wonder Felix how many of those names the Magnificent s are also appearing within like ETFs and and whatnot and folks might think that're they're Diversified but they might own the same names multiple times as well that's absolutely correct uh Julia absolutely and and it's uh I have uh I have seen many cycles in the last 50 years uh since I'm doing this uh this is unique I have never seen anything as concentrated as this and I want to add that all those magnificent 7 are fantastic companies you know they are great companies but they are great companies even at half the valuation just to make that sure you know there's nothing bad about the companies although some of the companies have uh stagnating earnings stagnating revenues um like Apple you know it's a great company but uh for the last three quarters revenues have stagnated or even come down slightly and so have earnings hey there I just want to quickly interrupt the video and just say thank you thank you so much for coming to this Channel and choosing to watch this interview I hope that you are enjoying it and I appreciate you visiting the channel if you like what you see please hit that subscribe button it doesn't cost anything it's totally free and it will keep you up to dat on all of my interview I post two interviews a week with some of the most incredible people in in finance and investing and your support will help me bring in some more amazing guests if you already are one of my subscribers thank you so much I cannot express to you how much your support means to me I am incredibly grateful that I get to do something that I'm truly passionate about and you being there week after week it not only gives me that energy but it just gives me that faith to keep going and it means everything to me and I love seeing you all in the comment section I love interacting with you I love interacting with you on email or social media I just love hearing from you all and I just appreciate your support So Much I Feel incredibly lucky that I get to do something that I just love so I just want to say thank you and appreciate you subscribing all right back to the interview well as we are recording this we were recording the day after the last fomc meeting of 2023 can I get your reaction to the fed maybe more of your outlook there um it seems like a lot of folks seem to think we're going to have a rate cut in 2024 can we just hear more of your thoughts and just you know even um Branch it out to the bond market as well yeah I think we will have rate Cuts because I think we the economy is heading into recession but you know the soft Landing thesis is such an extreme consensus that when I I know from my own experience when all the forecasts and experts agree to such a high degree something else is going to happen so either it is the economy is stronger or it is weaker and I think we will get both I think in the first few months the economy could appear a little bit stronger than expected which would then be a problem for the bond market uh and in the second half the economy will be weaker and we go into recession and let's say it's a mild recession and earnings go down 10% only instead of 25 which is usual for a recession and you apply a ratio a PE of 16 at the bottom of the market you come up with 3500 for the S&P uh people do not think that way right now the fomc I think you have to understand that the FED is as conf confused about the economic Trends as the market is the Fed doesn't know exactly where it stands and it wants to keep all options open yesterday what they said was well we don't want to overdo it on the tightening side because we have to keep in mind if the economy weakens we have to help the economy and then cut rates Etc it it it left everything open the media put uh uh represented it as very dope I think it was not as doish as uh as the media represents it but the market is bullish once to be bullish we are close to year end all the active managers and the and customers man want to make sure that the portfolios at year end for their clients looks very nice and they have all the stocks you had to own this year in the portfolio and that creates tremendous demand and together is a relatively loose fed right now because they want to provide extra liquidity over year end because that's needed for all the window dressing that goes on in the financial system for a year end you know you have a plentiful liquidity situation and you have a bullish market and that gives you the higher price and I think the momentum will carry through into a high sometimes in the first quarter okay so I that's more of the near term picture when I was listening to you at the beginning of this conversation and I was taking some notes and I'm learning so much from you Felix you were talking about um looking out to the second half of the 2020s and inflation rates being above 10% I want to explore that thesis especially amid a backdrop where the debt situation I'm thinking about the debt situation here in the US um 33.9 trillion I believe the last that I checked um that sort ort of backdrop I just want to hear more on that thesis because sometimes it feels like maybe are we taking a bit of a Victory lap on the inflation battle here in the near near term where we have like a longer term challenge ahead we have a temporary Victory we have not killed the Beast uh you know this is inflation is just the rate of change of the Consumer Price Index and the Consumer Price Index is managed in a way that um it doesn't appear as high as inflation really is you know they constantly change that and if you took the basket of consumer goods and services uh from 1990 we would be at 10% inflation so they changed that constantly oh wow yeah you know if if recently they took out the um health insurance premiums and replac them with health insurance companies profits I don't know why but it's probably because profits went down and premiums went up so it's a lot of uh smoken mirror uh you cannot take that for granted I can tell you I come to the US for 50 years and this year was the first year that the restaurants in the US were more expensive than in Switzerland so I think the US has a more severe uh inflation problem than we have right now over here yeah that's saying something too more expensive absolutely absolutely so I I think the current inflation cycle uh uh behaves very much like the late 60s and 70s inflation cycle you can actually overlay those two and uh and that means that sometimes next year inflation bottoms uh cyclically maybe at 2% or 3% or something in that area and then we go up in the next inflation cycle and it will be driven by the money liquidity injection that I expect when we are in recession and that liquidity will also flow into Commodities in the world that we are with rivalry the bricks versus the g7s the uh autocracies versus the democracies Etc the bricks control three quarters of the world's Commodities and they will of course use that weapon in an upcycle and they will make Commodities more scares and uh and this is a supply issue not so much a demand issue and I think due to that prices will Skyrocket and if prices go up it flows into every product energy goes into every product and Service uh and uh and many Commodities flow into our products a sell of phone or whatever is made out of something and it's all Commodities and when Commodities go up eventually inflation goes up and uh and therefore the next cycle high will probably be clearly above 10% and that creates a problem for the bond market because we know from experience of the 70s it was the second inflation cycle that created problems for the bond market the first cycle was a mild bare Market although this one has been the most sever the most severe in 50 years the downdraft we have uh ETF 20y year bonds have declined 50% from the top uh from 2020 to 23 uh and and I think the next cycle will be as as severe as this one e probably even more so and then the question is what then I do not believe that our system can live with 8% treasury yields 10 years you know uh because it will be in the whole Western world that we will have much higher inter States I do not believe that our system can live with that and therefore I I think that central banks will try to go to yield curve control in some form when you try to do yield curve control you can control the yield but then you cannot control the currency or you have to introduce currency controls but then we are in a completely new world then it's over with free Capital markets you see so I think we are in for some important changes it could very likely be that several of the major currencies in 10 years time will be replaced by new currencies due to a currency reform because you know if you go to a major crisis like a depression I think in the 30s you had a stable currency system that was gold backed a stable Anor so what went down was the real economy whereas in the current situation you have a fiat currency system and the governments will try to underwrite the economy and they will let the currency go and it's it's just the opposite of what happened there so it will be milder in terms of economic Decline and it will be less painful but it will be much more painful what you lose in your savings and particularly for older people it is a disaster you have saved for your retirement and all of a sudden you have inflation rates uh I wouldn't say like Argentina but uh much higher inflation rates if you let the currency go you end up with very high inflation rates and that creates poverty uh in an increasing number of the people in a society and that creates social unrest so I think in the later 20s we will have a social crisis we'll have an economic crisis a financial crisis an economic crisis a currency crisis it's all it's it's like hell will break loose because we come from a world that has been relatively stable managed you know we had occasional crisis but it was well managed and under control I think the next big crisis in the later 20s will be a shocker for many people wow let me ask you this too on the um with our fiscal problems are do you think we're getting are we past the point of no return on addressing that or fixing that is there anything we could do to sort of Remedy this or is this kind of just the path that we are headed on this kind of Collision Course here with these types of scenarios on the horizon no you can you can fix it first of all the US government is uh very wealthy it could sell a lot of land and pay down debt um we could also raise taxes and we could cut entitlements however I cannot not name one politicians who would do that under normal circumstances they could only do it and justify it Vis A V their constituencies in a major crisis that is painful for all of us and and and that is what what we will get later this decade yeah one more question before well maybe we'll have a few more I don't know um I know we don't have much time left gold is a really popular subject on this show um I've had guests who've talked about kind of similar scenarios to what you've um painted here and um specifically gold as a monetary inflation hedge do you have a viewpoint on gold and if so could you share that with us I'm not the I'm not the gold buck but I I think gold is a certain protection against debasing currencies uh that's the monetary aspect of it and then I think a new phenomenon a new factor is coming uh to the world and that's because of uh the rivalries that I described the changing geopolitical order uh the uh dumb uh Mistake by the Biden Administration to use the dollar as a political weapon uh has really eliminated uh the US dollar as a reserve currencies for all those countries that are not close friends with the US and and they must uh look for other opportunities alternatives to the US dollar uh and gold is one of those assets they are using they will probably use other Commodities as well but gold is one of those assets the the biggest holder of gold is China and it's not just the government of China China's government is encouraging its people to own a lot of gold and China is saying the gold we own through our people is an important insurance against problems in the world and I think at some point of time they will try to back their currency with gold with that particular gold uh China and Russia are working on a uh not a currency but a currency unit that will not be backed by gold but will be related to the price of gold or to the weight of gold so to speak uh the U rumor is that within two years or so they will come out with that and it will be primarily used to settle trade Among The Brick Nations um and uh and then of course it will be used more in finance and over time it could become an important currency unit I don't think that's important for the next 10 years but what's important is the accumulation of the global south of gold by the global South to really have gold backed uh for that new world and new world order that will eventually um uh come up and uh and and I think in that sense gold is now also not just a monetary asset but also a geopolitical asset and it will be used much more outside the g7s as a u as a reserve currency because gold is money uh and uh and now the biggest owner of of gold these days is China and the second biggest is Russia um they own Russia alone owns twice as much gold as U as the US and you know when the last World order was created and the new currency order um in Breton Woods it was the guy that held the most gold and was the strongest Nation his currency was the anchor of the currency system I'm not saying that China will be in that position I doubt it will be but it will I think gold will play a more important role in the future in the world currency system uh than it has in the past that the Western world is selling gold and the global South is buying it got it what is what do you think that would mean for um the implications of like the gold price then well I think the gold price will uh will fluctuate um gold is on a pretty clear 8-year cycle uh the 8year cycle high was 2020 uh and and many of uh my friends who love gold have been very frustrated over the last few years and I told them gold is not ready it has to digest it has to prepare for the next cycle the ideal low for uh the 8year cycle is August 24 but it has probably made its price low already it means that from Summer of 24 on the price of gold will accelerate when it goes up it will accelerate and that probably goes together with the reification of the system by central banks that I see due to a recession well Felix I have to say it has been an absolute pleasure and honor and I've learned so much from you I want to give you a few more minutes to share any parting thoughts anything that we didn't bring up in this discussion that you would like to share and if you'd also like to share where folks can you know learn more about you and your work please take the next few minutes to do so well first of all you can contact us uh at at um our homepage Felix zulu.com or or write to info@ Felix zulu.com uh we publish a um Market letter uh on macro issues every two weeks and we have webinars throughout the year sometimes with guests uh and so on and you know what I said is the really the general picture that I provided uh you know I could go to any individual stock or currency or whatever and discuss it I think the one currency we should keep in mind is the Japanese Yen uh the Japanese have uh they provided um uh yield curve control model uh and and they have gone on that yield curve control model for so long and when the rest of the world tightened the Japanese did not and therefore the Japanese currency declined dramatically and it was then used more and more as the major funding currency in the world and I think next year when the world central banks will begin to ease and cut rates the Japanese will not because there is no need to uh and therefore I think from that inflection point it will make the Japanese Yen stronger uh may be that we have already seen the high in dollar Yen or the low in the Yen uh but it will accelerate because the short positions out there due to the use of the Yen as a funding currency they are gigantic I recall one of the dramatic events uh in 98 uh when dollar Yen declined very sharply in a few weeks from 148 to uh 10 08 uh a dramatic Decline and uh I was on the right side of the market at that time uh full of options on the right side and therefore I know I know very well it was the trade that uh was a distraction to Julian Robertson's tiger and I talked to Julian before that and I told him that uh uh he's in a dangerous position with that with that trade and it happened so fast and I think next time it will happen again very very fast because when these things move and the short position is so big then it moves very quickly very fast wow I just had a fascinating discussion on the Japanese Yin with Grant Williams whom I I know you that you know him um as well and so it's so interesting to hear more folks bring that up so that's something to pay attention to the Japanese Yen um in 2024 yes Felix I have to say it has been a pleasure thank you so much for being so generous with your time and your ideas and were always welcome on this show thank you again and be well and happy holidays thank you Juliet I also wish you happy holidays and thank you for having me on your show thank you thank you

Channel: The Julia La Roche Show

Views: 55,792

Keywords: Felix Zulauf, Zulauf Consulting, gold, hedge funds, economy, macro, geopolitics, inflation, rates, interest rates, bonds, bond market, equities, stocks, stock market, recession, FOMC, yield curve, yield curve control, currency crisis, Yen, Japanese Yen, financial crisis, social crisis, economic crisis, fiscal, debt, deficits, institutional investors, investors, investing, markets, market outlook, 2024 market outlook, soft landing, hard landing

Id: jeclS_HasGc

Length: 34min 8sec (2048 seconds)

Published: Tue Dec 19 2023