Felix Zulauf: Avoid bonds and stocks

The founder and head of Zulauf Asset Management in Switzerland, Felix Zulauf, "sees the forest and the trees", as Lauren R Rublin puts it in Barron's. His bearish macro forecast in early 2008 was bang on the money, and he has said that the deleveraging process could take years. But he also rightly predicted a stockmarket rally in early 2009. So how does he see things now?

There has been no improvement in the big picture, Zulauf says at Barron's mid-year roundtable. "I am in a good mood but I feel sorry for the world." The global economy's structural problems haven't been solved; the authorities "go from one quick fix to the next". But "at some point we will have to face reality".

Europe is in big trouble. Greece is bust, but if it defaults "you could see a bank run throughout the European and global banking system" that would be "worse than the collapse of Lehman Brothers". The European Central Bank itself is especially vulnerable to a default. The trouble is that we have to let bankrupt entities default, but Europe hasn't recapitalised its banks sufficiently. "We missed the chance during the financial crisis... I would have nationalised the banks and [made them] improve their equity-capital positions."

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In the short term, beware of equities, says Zulauf. "From Asia to Europe to the US, all the important indicators are rolling over... economic growth could slow to a crawl. The stockmarket isn't priced for that." Profit estimates will be cut. "There is a 20% downside risk from the market's May high." Once the data turns unequivocally poor, the authorities will "come to the rescue and try to stimulate again... [but] that is when a trader can move in on the long side for a rally at year end". Gold will do better than stocks in the next few years.

As for bonds, the Fed has created "deeply negative interest rates", which means inflation will flare up. But the bond market "will take several more years to realise this". Long-term investors should steer clear of bonds for a decade.