Felix Zulauf turns bearish, expects major correction and QE3
Barron’s Roundtable member Felix Zulauf spoke to the German-language Handelsblatt about the European sovereign debt crisis and financial markets in an article published today. Like Jeremy Grantham, he has turned bearish. Below is my translation of that article.
Title: Italy is Next
The euro will break apart. At least that is what stock market Guru Felix Zulauf expects. Handelsblatt spoke to the Swiss investment banker about his expectations for the stock market.
Frankfurt. Mr. Zulauf, you were always a big critic of the euro. How is the crisis going?
Felix Zulauf: Debt problems are never solved by more debt. In Greece, an epic drama is playing out. The Greeks are broke. The Irish are too. And the Portuguese are close.
Who’s next?
Spain is still doing well, but the things will proceed as in Ireland. The Spanish bonds are priced incorrectly. The European Central Bank is manipulating the price.
Is that the full count of crisis countries?
No, it is missing Italy. Deposits are falling at their banks. We are experiencing a bank run in slow motion. Banks in Italy and in Spain are being refinanced with ever more short-term financing. Soon the biggest buyer of government bonds will be missing. This means that yields have to rise. And the bomb will explode in Italy this year already.
Can the Euro take it?
No. The markets want a breakup of the euro, with a value loss of 40 to 50 percent in the peripheral countries. The politicians want to save the euro.This is only possible via a weak currency and high inflation.
And the other currencies?
None is healthy. The dollar is also weak. Only the Americans believe that they can live with a 10 percent government deficit every year and that the U.S. central bank can expand its balance sheet forever.
How does the Fed deal with the crisis?
The purchase of government bonds was nonsense. We live in an era of central banks as great financial market manipulators. Fed Chairman Ben Bernanke wants higher stock prices. Previously they would have sent a Fed chairman into the wilderness for such a goal.
And the consequences?
My scenario for the coming years, even for Germany: tax increases, reduction of growth expectations, thus decreasing purchasing power. Profits will accrue only the wealthy few, who own stocks, real estate and commodities.
What’s on shorter term in the stock market?
Between the Spring and the Fall, I expect a major correction in commodities and stocks. This has now begun. The markets are overheated and the emerging economies are raising interest rates.
Investors have so far been very sanguine…
Because they have made a lot of money over the last two years. Now a defensive positioning is best. First to fall will be commodities, then shares. In the summer, analysts will begin to lower their earnings expectations. Then shares will drop, perhaps by 20 percent.
And what will the Federal Reserve do then?
It starts its next government bond purchases, their "QE3."
Source: „Als nächstes ist Italien dran“ – Handelsblatt
Bah, humbug. Can we please stop all this Euro-doomcasting from London?
The markets “demand” the end of the Eurozone? WTF is that even supposed to mean?
Is that the same markets that made silver run up to $50 and back to $30 within a few weeks (and will push it up again in a few months)? That gave us the great depression and the bubbles leading to the GFC?
Somebody show this guy the numbers for Q1/2011:
the Eurozone grew by an annualized rate of > 5%; Germany >6%, with Spain finally growing again just like Greece, which – despite all the troubles – posted growth of 0,8% for the quarter (>3,2% annualized).
Furthermore, growth in Germany is more and more domestically based [dare I say: I told you so? https://pro.creditwritedowns.com/2011/02/what-is-the-secret-to-germanys-economic-success.html %5D:
“In a quarter-on-quarter comparison (adjusted for price, seasonal and calendar variations), a positive contribution was made mainly by the domestic economy. Both capital formation in machinery and equipment and in construction and final consumption expenditure increased in part markedly. The growth of exports and imports continued, too. However, the balance of exports and imports had a smaller share in the strong GDP growth than domestic uses.”
https://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/05/PE11__188__811,templateId=renderPrint.psmland
Strong growth in the core (i.e Germany, but also France, the Netherlands and Austria: all at or close to 1% for the quarter) is spilling over to the other Eurozone countries (easy to see for Spain, which, like Germany grew 50% above expectations: 1=>1,5; 0,2=> 0,3).
Growth in the eurozone will fall soon, because of the impact of the commodity bubbles. German banks are sitting on horrendous losses overseas that are being allowed because of bailouts. Industrially the core nations are doing well but their banks are still the problem. German and french banks are vulnerable to defaults in the PIIGS, but they have one big saving feature their property markets were not inflated into bubbles. The banks in the Netherlands are more vulnerable because of a property bubble at home.
I have to agree that the markets do not want a break up of the eurozone. It could impact businesses in reducing trade and increasing investment risk, and thereby profitability. Each nation has its own problems but virtually all point back at the banks losses either at home or abroad. Banks are not fundementally stronger than they were in 2007.
Bah, humbug. Can we please stop all this Euro-doomcasting from London?
The markets “demand” the end of the Eurozone? WTF is that even supposed to mean?
Is that the same markets that made silver run up to $50 and back to $30 within a few weeks (and will push it up again in a few months)? That gave us the great depression and the bubbles leading to the GFC?
Somebody show this guy the numbers for Q1/2011:
the Eurozone grew by an annualized rate of > 5%; Germany >6%, with Spain finally growing again just like Greece, which – despite all the troubles – posted growth of 0,8% for the quarter (>3,2% annualized).
Furthermore, growth in Germany is more and more domestically based [dare I say: I told you so? https://pro.creditwritedowns.com/2011/02/what-is-the-secret-to-germanys-economic-success.html %5D:
“In a quarter-on-quarter comparison (adjusted for price, seasonal and calendar variations), a positive contribution was made mainly by the domestic economy. Both capital formation in machinery and equipment and in construction and final consumption expenditure increased in part markedly. The growth of exports and imports continued, too. However, the balance of exports and imports had a smaller share in the strong GDP growth than domestic uses.”
https://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/05/PE11__188__811,templateId=renderPrint.psmland
Strong growth in the core (i.e Germany, but also France, the Netherlands and Austria: all at or close to 1% for the quarter) is spilling over to the other Eurozone countries (easy to see for Spain, which, like Germany grew 50% above expectations: 1=>1,5; 0,2=> 0,3).
Growth in the eurozone will fall soon, because of the impact of the commodity bubbles. German banks are sitting on horrendous losses overseas that are being allowed because of bailouts. Industrially the core nations are doing well but their banks are still the problem. German and french banks are vulnerable to defaults in the PIIGS, but they have one big saving feature their property markets were not inflated into bubbles. The banks in the Netherlands are more vulnerable because of a property bubble at home.
I have to agree that the markets do not want a break up of the eurozone. It could impact businesses in reducing trade and increasing investment risk, and thereby profitability. Each nation has its own problems but virtually all point back at the banks losses either at home or abroad. Banks are not fundementally stronger than they were in 2007.
Get Club Med financial discipline or out of the Euro and then things are fine.
I am not certain why there is all this fuss about differentials in interest rates. Countries are not similar in the underlying situations and the spreads only reflect that reality. If the PIIGS are out of the Euro is anyone trying to suggest the interest rates spread between say Germany and PIIGS or (Deutschland and BUNGA BUNGA LAND) magically disappear?
Get Club Med financial discipline or out of the Euro and then things are fine.
I am not certain why there is all this fuss about differentials in interest rates. Countries are not similar in the underlying situations and the spreads only reflect that reality. If the PIIGS are out of the Euro is anyone trying to suggest the interest rates spread between say Germany and PIIGS or (Deutschland and BUNGA BUNGA LAND) magically disappear?