Zulauf: “I expect the market to go below the latest lows in September”

The next few weeks will be extremely volatile. I expect the market to go below the latest lows in September. The central bank will come in to provide liquidity, but timidly at first because the Fed was bashed for QE2. After the fall low, equities will recover part of what they lost into the turn of the year and then fall again. Economies around the world most likely will be in recession next year.

Once the S&P 500 falls to 1000 or below in the first half of 2012, the Fed will come in and try to support the system. Eventually the ECB [European Central Bank] will try to do the same thing in Europe. The damage in Europe will be greater, as Europe’s financial system is even weaker than the U.S.

Providing liquidity isn’t the solution, but if we don’t do it the system will break down. Providing growth is a difficult task. I don’t know how to do that. Long-term, we have begun the Japanification of the Western World. If we are unable to bite the bullet, our problems will grow bigger.

The Smart Money Speaks, Barron’s

As usual, I find Felix Zulauf’s commentary very perceptive. He has been right consistently for the whole of 2011 in predicting where things have gone. What he is saying is that the fundamentals in the west are weak and now that growth is ebbing, this will be manifest in stock prices. What will policy makers do? Zulauf predicts central banks will try policy stimulus. If so, I see this as supportive of gold and other hard assets. If not, expect a panic followed by policy stimulus.

Notice that Zulauf is making the same call I just made in my last post on Europe when he says “Providing liquidity isn’t the solution, but if we don’t do it the system will break down. Providing growth is a difficult task. I don’t know how to do that.”

Zulauf is not the only Barron’s Roundtable member with words of wisdom. I don’t agree with everything they say but here are a few choice comments from others in the article:

  • Bill Gross: “It is the economy, not the Standard & Poor’s downgrade of U.S. debt, that sent the markets lower. S&P didn’t help things in terms of timing, although its move was justified. Not just the U.S., but Euro-land is moving toward zero economic growth. The problem is, the financial markets have been set up for 2% to 3% real growth. Even Pimco’s New Normal of 2% has been roughed up.”
  • Archie MacAllaster: “The market is absolutely full of bargains. The problem is, markets run in very deep cycles, and we’ve got a cycle that may go on for years. It is difficult to advise people because I don’t know how long this cycle is going to last. But I have been in the business more than 50 years, and there are bargains here like I have never seen before.”
  • Fred Hickey: “The Federal Reserve will be forced to undertake another round of quantitative easing because the pain will be too great. When that happens, markets can light up, at least temporarily.”
  • Scott Black: “The country needed to focus on job creation. President Obama focused on health care. When the country is falling off a cliff, the primary focus has to be employment. He can’t raise revenue. He didn’t raise taxes on private-equity firms and hedge funds. He didn’t close the loopholes on ethanol.”
  • Marc Faber: “In the near term the stock market is oversold, and a bounce to between 1240 and 1280 on the S&P 500 is possible… Following the rally, the stock market will drift lower. Stock markets are beginning to discount very bad news. Sovereign defaults, a dollar crisis, an escalation of unrest in the Middle East, social unrest spreading from Britain to other Western countries including the U.S., renewed recession, disappointing corporate profits, a bust in China, aggression against Iran — all are possibilities. I’m not buying anything right now. But if stocks dropped another 10% to 20%, I might add to the positions I mentioned in the Midyear Roundtable.”

This has all the hallmarks of a continuing secular bear market. Play the rallies but be cognizant of underlying weakness.

Source: The Smart Money Speaks, Barron’s

  1. James says

    I see the probability that the Fed undertakes further QE before the end of the year at 100%. The simple fact is that economic growth has sucked for this entire recovery and the only thing holding up corporate profits has been margin expansion. That being said inflation measures are much higher than they were at this time last year so maybe Bernanke doesn’t move in sept (unless ES down another 15% than that probability goes to 1). I am watching the Core PCE deflator 3m annualized rate of change. If that thing dips below 1% (currently above 2) than we will see QE3 within the month. I expect that either inflationary pressures (e.g. commodity prices) will moderate or equities will get crushed and that will be the impetus for QE. As for how to play this, there are some really attractive upside call spreads in gold that you can buy. If the situation deteriorates more quickly than I anticapte, oct tenors will be in play otherwise Dec seems the way to go.

  2. TC says

    We are past the point of no return. Yesterday’s “liquidity crisis” can no longer be denied a solvency crisis in truth. Any further addition of liquidity will only accelerate collapse of economic activity, much as occurred in the terminal phase of Wiemar Germany’s hyperinflationary blowout of 1923.

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