Ted Oakley - Oxbow Advisors - Interview Series 2023 - Felix Zulauf

[Music] hello everyone I'm Ted Oakley managing partner at Oxbow and one of my favorite people and he doesn't even know it as Felix Zula who is a real Pro and I love to interview people that have been in the trenches and managing money and Felix made he's made some of the great calls over the last four decades and so Felix we're really glad to have you it's all my pleasure Ted thank you very much for inviting me say I want to start it out because you always since you're based in Switzerland uh you always have the best views on what's going on people are worrying about what's geopolitically what's going on they're they're they're confused about the mid East and Russia and Ukraine the whole thing you you you you you'd get a different look at it well you know I may have a different look I'm not sure whether it's the right look or not but uh I feel pretty strongly about it we are coming out of many decades since World War II uh where the world order was us Centric and uni poo the US was the dominating Force dominating nation and it could discipline everybody during the bipolar World period where the communist uh economies really were insignificant in in the whole world global context when the Wall came down that order continued and uh the US uh was the unchallenged leader uh unipolar us Centric world with all the institutions um you know like the UN the World Bank uh uh World Health Organization and what have you they were all founded by the US and and because the US was by far the strongest Nation after World War II the US dollar was used as the main currency which became the main Reserve currency in the world that is the world we have left that world order has crumbled because a new Challenger has come up China and uh and in the past when you when you look at it whenever there has been a dominating haimon and the Challenger came up it created a problem conflict rivalry and often War we have had that situation in the last 500 years 16 times 12 times out of the 16 was a direct war between the two um uh one situation was is out the war and three others were with Deputy or proxy wars so I I think we are in a a transition period from the old stable order to a New Order which will most likely be multipolar uh and we do not know how it will look like exactly but I think China wants to have a saying uh um India will have a saying uh Russia wants to have a saying and and Europe of course wants to have a saying uh and we are in the transition period that is disorder it's chaos everybody is trying to position himself in the the best possible way and this is a situation where you don't have a disciplinary disciplining uh uh World policeman so to speak and therefore all the potential conflicts in the world all of a sudden come to the surface you know we had Ukraine we had Armenia aaban we had Serbia now we have Guana we have Gaza Israel and Palestine Etc and there will be more of it five years ago I started to write about the coming conflicts and um and wars and uh at that time my subscribers laughed at me and said oh you are a pessimist Etc and here we are we have war in different corners of the world and I think it will intensify over the next few years the long War cycle Peaks very late in this decade that means the second half of this decade will probably be quite rough and the biggest problem that I see is not Taiwan I think Taiwan will long term integrate into China smoothly if it is let alone uh if the US doesn't use it as a provocation as it used the Ukraine as a provocation against Russia um but the biggest problem I think is in the Middle East Israel is now trying to clean out Gaza from Hamas which I understand from the Israeli point of view uh the risk is that this Israeli cabinet which is in my view a very weak cabinet uh then tries to get after hisbah if they try to get after hisbah his is in Lebanon and in Syria and if they attack Syria Syria has a military agreement with Russia and of course also with Iran and that means that Russia and Iran will then then get pulled in and if that's the case then of course on the Israeli side the US will get pulled in and I think that is the biggest risk I see that the war could broaden into a uh sort of a World War II or something like that uh that's the biggest risk I see on the horizon that's um geopolitics and of course the world economy um is uh is is also in some trouble we have the biggest debt burden ever relative to the size of our economies uh we have a uh demographic situation that is not prog gross um China has peaked in terms of growth and they will they are beginning to drn in population you know by the end of this Century China will be down to about 750 million from 1.4 billion at the present time um uh Europe is shrinking uh Japan is shrinking and when you really look at the oecd plus China Brazil Russia um that's 95% of world GDP uh then you see that from the early 50s to the early 90s population grew about 25 million every year on average and since the early 90s that number is declining and in 2019 I believe we hit the zero level and we are now shrinking now economic growth is population growth plus productivity growth and uh if you have the demographic situation that I just mentioned it's very difficult to achieve the growth rates that we need to keep our economic system stable and that's what you know that's the position we are in we have a very challenging position and policy makers of course try to achieve higher economic growth and they are using tools like going deeper into debt like running larger fiscal Dev and things like that and it makes the mess even bigger instead of smaller and that is a very dangerous situation we are in so I think the next few years will quite challenging what do you uh what do you see there Felix on the Ukraine Russian situation well you you have to understand that the eastern part of Ukraine is ethnic Russian uh the donbas region and uh in 2014 we had a revolution in Ukraine and according to my information uh the US orchestrated that Revolution Victoria newand Deputy to for Secretary of State blinkin even said on a phone call it cost us5 billion to organize that Revolution and of course they uh put in place a Washington friendly government from from a Moscow friendly government so it was a one of the many regime changes that the US orchestrated in the world and uh and that of course meant for Putin that he would lose the only warm water port in Crimea in Sasa pole and therefore he had to take Crimea and uh he tried to defend the ethnic Russians in the eastern part of Ukraine because they were Trea did badly and there was a civil war cre created in Ukraine the Western Ukraine against the Eastern ukrainians uh which were or are Russian ethnics and and and speak the Russian language uh so that was the situation before 22 and uh Putin requested many times from the US actually for 20 years to discuss the European security architect because it disliked that NATO kept expanding eastwards step by step and was beginning to knock on Russia's doorstep you see uh and uh and and the US refused to discuss that and when Putin learned in February in early February of 22 that the Ukrainian uh Army uh Was preparing an attack against the the the Eastern regions provinces of Ukraine the Russian ethnic territory um he attacked and he never wanted to uh you know take all of Ukraine back the Western narrative that Russia wants to re-erect its old Soviet Empire again I think is wrong because Russia doesn't have the economic means means nor does it have the military means to really occupy such a large territory and then put the their soldiers there it would be beyond what they have in terms of means so I think what Putin wanted and you saw that that he pulled back after two months from Kiev he wanted Selinsky the president of Ukraine at the table to discuss an agreement and he wanted to keep the US and NATO out of Ukraine and the two came to an agreement in April uh 22 in Istanbul and at that time uh they needed or or Ukraine wanted to uh a guarantor for the agreement which is the US and Biden said we are not in you have to continue fighting we do we disagree and then the war really uh took on a different dimension then Russia be began to become serious and uh that's when they began to destroy a part of Ukraine militarily and and that was also because Putin was coming under pressure at home in Moscow because uh in his cabinet the people said if you start a war do it right you know and uh and and so this is the situation we are at it seems that the counter offensive was a failure um the Western world is running out of money and running out of weapons and ammunition uh they cannot support Ukraine any longer at the same level as in the past and therefore Ukraine has lost uh Ukraine has in my view Ukraine's military that was originally 700,000 people and then built up to 900,000 people has lost 500 ,000 people uh recently uh that is that uh Dead uh wounded uh missed and imprisoned and uh recently State television in Ukraine uh sent the message out that we lost 1.1 million and Selinsky intervened and they recall that message but it is just a blood bath and it is horrible and very sad and Russia has won that war and the West has fast uh the only open question is what the agreement eventually will look like I think the agreement will eventually be dictated by Russia and it would be uh very good if the US and the West would talk to the Russians and we could finally discuss the whole European Defense or security architecture and have peace well that on that same question if you look at the goal that those countries over there that you know Russia China are buying and don't you think that relates back to the freezing of those original monies that Russia had here well of that came later you know the freezing of the money came later uh I think that was a major mistake by Biden because it derates the US dollar as a major Reserve currency and since then China is major seller in us treasuries and is a major buyer in Gold because they will use more gold as a reserve currency instead of the US dollar and others in the bricks plus uh regions uh and Nations they will do the same uh I I I think uh if you step back and you look at the world map you see there is one continent that is called Eurasia so Europe and Asia is one continental plate and when you look at that continental plate there are 4 and a half billion people on that plate so half of the world or a little bit more and the trade between Germany and China is bigger today than Germany with the US and the US fear was that as these guys integrate more and more wire trade we could look lose our influence and then as if we lose our influence on Europe you know we are not the top nation in the world anymore and I think they needed something to break that process of trade integration and I think Ukraine was the case they used and with Ukraine uh they provoked Russia to attack and then they could force Europe into sanction against Russia and therefore Russia is out of the equation H in on that EUR Asian continent and you have to understand that what works is you have technology in Europe in Western Europe and to some degree in China and you have cheap labor in Asia and you have Commodities in Russia and these together could be a very powerful trade block uh as you have NAFTA with commodi is in US and Canada and oil in Mexico and cheap labor in Mexico but NAFTA is only 10% of that Eurasian continent and therefore they try to break that process and they are the US is also trying to force Europe into sanction against China which in my in my view will not work because uh China is too important to the European nations the European nations depend on exports uh particularly the Western European nations and uh and if they would uh sanction China uh as the US demands over the longer term that would backfire badly so this will not work and so in that respect economically you know looking ahead the rest of this decade so how how do you see do you see the US declining somewhat and those countries increasing how do that fit together well I think each region has its own problems you know the Chinese has have overbuilt their real estate stock uh is uh you know you have 100 million empty empty homes in U in China uh compare that to a total of 140 million homes in the US you know that is dramatic and with a declining population you will not you will not grow into that empty stock of homes and therefore uh there will be a lot of writeoffs and it will be a long digestion of the problems and uh and the banking system has to be refinanced I I think they will take time it's more than 10 years and that means that the China cannot really be a locomotive any longer for the world economy as it used to be in the last 20 years uh it will rather be a restraining Factor Europe has a um stagnating to shrinking population it has major problems with the Muslims the to integrate the Muslims and there are unrest everywhere there are cultural problems or or problems between the cultures um we have the highest energy prices in the world and have become in many ways uncompetitive uh and that leaves the US you have the best demographics you have your own energy you can produce domestically Europe depends on outside energy so I think you are the least dirty shirt in the laundry so to speak but you have your problem also you are building up your debt situation government de situation and also in the private sector to a degree that it becomes a hindrance to growth and uh restraining factor and it will backfire in the next few years in the bond market because neither the politicians want to cut back uh nor the constituencies because when you ask them are you uh okay with cutting the entitlements they say no of course not and therefore you need you need a serious fiscal crisis that has not arrived yet people are talking about it but what we have seen in the bond market has not been a fiscal crisis yet we will have a big fiscal crisis and the bond market uh in the next few years I think you will see it in the next three years or so the bond market um uh will shoot up to very high interest rates to force change and the force changes could be raising taxes the US on average has lower taxes than the rest of the world not as all the countries but on average the rest of the world uh you could sell your government could sell land your government owns a lot of land and things like that and also make some Cuts those cuts um in entitlements are only possible in a major crisis and and when I say major crisises has to be something on the order of what we saw in the mid 70s when New York was virtually bankrupt and things like that you know we had such this is this is nothing new to the world it it happens all the time we had it you know most people do not know any longer that the UK had to be bailed out in the 70s by the IMF uh so we will have we will see something on that order and you know it's interesting to say that because you look at the 70s uh you know you had the oil embargo you had you know New York and all that and you look around now we have more debt than we had ever had then and the question we get this question a lot and my question to you and I think you just answered part of it is what's the endgame of that the end game of that has to be some damage I'm I'm hearing you say yeah he t it has to be painful um uh it's it's a major crisis and only in a crisis of major proportions you can make the steps in a democracy that are necessary to be taken uh under normal uh uh circumstances uh the political process cannot take that step you need a major crisis a crisis that makes every citizen aware of it and probably feels it also and and I think uh we will get it in the later part of the 20s yes and so in that regard uh if you look at stock and bond markets for example uh do you see a lot of volatility coming relative to that that would that obviously affect the stock market too but how how do you see that um you know I I call this decade of the 2020s as the decade of the roller coasters in in our markets uh where at the end of the decade or in early 30s when you look back for the last 10 years your total return will be frustratingly low but you will have live through dramatic increases in the stock market and declines in the stock market Market because what I what I just said about the fiscal crisis and what it means for treasury bonds you know treasury bonds could then all of a sudden go to 8% or even higher than that uh in the late 20s um and and and that of course means much lower stock prices uh but they will not stay down there they will all come back you know the the stock prices come back and then you go through such a roller coaster period it uh requires a different approach than when you have a smooth um long-term almost linear rise with little swings cyclical swings uh it requires a different attitude how to run money and and I think uh you have to have some capabilities to time these I call them minic Cycles or Cycles or minic Cycles uh in market and even if you just can cut out 50% of the move up and you can avoid 50% of the move down you will end up in a much better position than the guy who stays invested and stays put and suffer through the downs and enjoys the UPS but at the end of the time he ends up with a very frustratingly low total return which is interesting Felix because we both came into the business about this same time in that period of the 70s up to 82 you know the markets all they did was they went up 20% down 25 you know just back and forth and if you sat there like this is my question to you half our business today the in the industry have only been through this thing where you just plugged in indexes and exchange shed funds and you did a 60/40 look and you forget about it and it doesn't seem to us at least at Oxo that's going that's going to work the next 10 years but I'd be curious on what you're thinking yeah I I I absolutely agree I uh I think that will not work it will lead to frustratingly low results um first of all on the interest rates side I think at 40 years of declining inflation and declining interest rates and I think we are in the early part of this of the secular trend of rising inflation and Rising uh interest rates uh which will fluctuate cyclically around the rising cular Trend um you know the world that I describe geopolitically means that there will be less trade uh and there will be less efficiency from trade and therefore that calls for higher prices and more inflation structurally and and that's what we are having um when you have um a 6040 portfolio the 40% will have a good time in a down cycle which will be short and not last very long and the very bad time in the up cycle as we just saw in the last few years and we had we had one of the biggest draw down in the bond market uh in 50 years it I think it was the biggest draw down in 50 years and uh and and in stocks you stocks are correlated to interest rates and bond yields because that's the capitalization factor of earnings and therefore if the capitalization Factor swings cyclically but in a cular rise that means that valuation will decline on a secular basis and swing around that decline cyclically uh so this is how I how I see it and and then you have the other thing these passive Investments and indexing you know I think more than half of the money invested in stocks today is indexed and then you have another big portion of actively managed money that is not indexed but it is closet indexing where the active managers can charge higher fees but they run too higher risk to move uh really far away from from The Benchmark and and if you take that together I would guess that you are over 80% in index money now if anywhere in the world somebody wants to index his portfolio to the world stock index it means that almost twoth thirds of the money goes into the US Stock Market and onethird in the US Stock Market goes into seven stocks uh in today's time never never in history has there been such an extreme concentration in few stocks as we see today it's more extreme than what we have seen at the 2000 top in technology or at the nifty50 top in 73 it's more extreme and of course those who wanted to outperform uh the index had to overweight those stocks and that means that once the market begins a correction next time which I think probably from a top in the first quarter of next year the correction for these technical reasons could exaggerate on the downside and magnify the decline it has nothing to do with the real economy it has to do with the over ownership of a few stocks that have such a heavy waiting in the index and I think most investors are not aware of what sort of risk they are carrying in their portfolio um so yeah all the time of times yeah I know what you were thinking in 2000 and you were right on the money for sure and do you feel like now's a little bit like that I mean people are very complacent they don't mind all this you know all this concentration not really thinking straight uh it's interesting they think things are going to go back just like they were the last 15 years and so that you see a a correlation between 2000 and now well you know the correlation I refer to is in the concentration of stocks I think in terms of valuation it was more extreme then than it is now uh and and now you have a pretty large segment of the market that is uh um uh valued at the level that is reasonable so the bigger part of the market is value that at reasonable level but it's a few stocks that um distort the Aggregate and and they distort it in a nice way because prices are going up and it pulls everything with it uh to a degree but um that overvaluation and excess will be corrected and it will get corrected you cannot rise to such a degree and then correct by going sideways you know that that is not the way markets work well and I I would I would ask you this about the industry itself how do you see and you've managed money all time now you manage your family office but how do you feel about the I I feel as though and I'm gu in a question about this that the industry itself has gotten really complacent they do a lot of things that don't don't really to me uh concentrate on preservation of capital for people and we've tried to size that hey you want to think about preservation the next 10 years you need to try to get away from you know this Wall Street Mantra here but how do you feel about the industry like that yeah I I agree uh we have had such a good uh time in the last 15 years uh in the market being long being long 6040 that the people tend to extrapolate in a linear way and that is also not how markets work and the industry you know what I what I think has been very bad for the industry is that uh particularly Black Rock pushed this ESG standard uh and I think what originally was probably thought as a good thing has become an exaggeration and it distorts many things it leads to uh male Investments and uh and uh and and wrong decision at the highest level in the corporate sector and and I think this is this is wrong and the climate U the climate wave uh is uh is overdone and I think it's cresting and when 80,000 people from all over the world travel on their private jets Dubai to uh in in their 27s say to discuss how to change climate you know something is wrong you see that's so true they we fly this spend all this jet fuel to talk about how we can change the climate it it it and you know speaking of that and you've been you've been in this thing a long time but if you look at public companies today and their boards and what they do I don't think I've ever seen a period where you had rubber stamp boards that really don't think at all about what's really going on in the public sector day is that something you noticed or has ever cross your mind oh AB absolutely I uh I recently talked to uh the head of the Swiss National Bank uh we exchange views uh regularly and I we discussed the cred wi situation you see and I said um I asked him what did they do wrong because he looked into the whole situation from early on and he said you know they had everything right because we talked about this climate thing and DG Etc also and and he said you know on paper they did everything right they had everything rubber stamped everything was according to ESG but eventually the board didn't understand banking anymore you see which is a good point and I think and I think this is the case we these boards today care about so not all of them but many care about so many other things than their own business that they are not focusing on the right thing anymore and I think this is not a good thing well and the other thing I noticed so much rather than concentrating on organic growth and really building your company up we've gotten into this mode particularly the last 15 years where you've allowed these CEOs and companies just to buy the stock back and change the numbers and you know go ahead and create a bunch of stock options and I just don't think that's been good for the companies or good for the investors how do you see that yeah and it's also bad for society as a whole I think we have tended more and more towards a new feudal system where the U part of the elite and particularly uh public company boards and managements uh and uh and their bodies in government and the public affairs have interrelated to such a degree that they have become a new club and uh and it's a feudal system and they care much more about their own well-being than what the job is namely the well-being of the company the well-being of the employees and and their clients and the well-being of the citizens you know they many have forgotten that in a way well and it's interesting uh gosh you you you describe it the best ever I mean that's exactly our point of view the way this thing has come down here the last 15 or 20 years and it just seems at some point okay at some point you're going to have to operate or you going to have to be in the real world and a lot of these companies you know they they they've had Financial engineering this last you know 30 years and but they haven't really gotten down to doing business because I look at their revenues five years later revenues are the same you know and so it's interesting the way you describe that do you think um in looking at the markets and I'll wind up here I just want to ask you this question if you were you know if for a an investor that's obviously not your size but just make investors out here in the in the in the hinterland would you what would you what would you advice would you give just gen generally for the next five years what would be your advice to them well the most precious asset is to keep an open mind and remain flexible and not extrapolate the past into the future in a linear way and find a pro who understands business cycles and Market cycles and can help you in uh timing them it doesn't mean that you sell at the very top and you buy back at the very bottom but he can help you to reduce the downside and enhance the upside to some degree and even if you cannot enhance the upside but you reduce the downside you come out as a winner and I think people need to keep that in mind I see today so much risk uh that people have taken they're in you know private Equity they're you they don't know what they own in a lot of cases in private Equity they're leverage up in real estate uh they're in these expensive markets that they're in um you think those will those Alternatives will come back to haunt them as well well you know the problem with the private um uh market and not the public market is that in the private Market you only value those Investments at the correct price when you have no other choice anymore you see and the rest of the time you get some sort of value which may be correct but maybe not and and that's the problem with those markets you only know what you get when the bad days are here again yeah well listen um I really appreciate phelix you taking the time I know you're really busy and there you don't do a lot of interviews but I'm glad you did this one because I think people will get a lot out of it and and I'm hoping uh maybe next year we can visit with you again that would be great that would be great thanks thank you very much for having me it's been a real pleasure and hopefully we can meet someday in person all right thanks a lot then Felix thank you Ted take care hello everyone I just want to say if you like this video and you want to see more of this type of information because we really try to get the information that you don't see from anybody else then be sure and click on subscribe and you'll see more of what we do here at Oxo [Music]

Channel: Oxbow Advisors

Views: 39,775

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Id: EO0po9kFFYc

Length: 39min 40sec (2380 seconds)

Published: Fri Dec 08 2023