Felix Zulauf sees problems ahead in North America and Europe because of private sector debt. Consumers are “spent out” and “cannot continue to accumulate debt”. Expansionary fiscal policy and deficit spending have allowed the real economy to cope while expansionary monetary policy has helped asset prices.
Zulauf sees a pause in this dynamic. But when the inevitable relapse occurs, he believes the response will be aggressive because he believes austerity measures will not be tolerated in a democracy. In his view, expansionary policy will resume and this will lead to an inflationary depression over the next 3 to 5 years. He recommends gold as a currency to hedge against these events. This will be good for stocks over the medium-term. However, he says stocks will not be spared by the inflation because he sees the S&P trading down to book value of about 500 before the secular bear market is over. That is over 60% below present levels. Stock picking and rotating between risk and safety at the appropriate times is very important in this environment.
The main difference between today and the 1930s in his view is that we had a gold standard during the Great Depression whereas we have a fiat currency system today. Zulauf believes this will be a buffer against the extremes we saw in the 1930s.
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Source: McAlvany Weekly Commentary 06 July 2011 (hat tip Barry Ritholtz)