Felix Zulauf, the founder of Switzerland's Zulauf Asset Management, "sees the forest and the trees", says Lauren R Rublin in Barron's. He rightly said there was trouble ahead in early 2008 and forecast a market rally in 2009. Today, he is still in a gloomy mood.
The big picture, he says in the latest edition of Barron's, is that "we remain in a deleveraging world, and the deflationary process is intensifying". The underlying weakness in the developed economies, along with the recent withdrawal of fiscal stimuli, will undermine stocks. "Equity markets around the world will top out during this quarter and then enter the next down leg." The S&P could drop by 20% from its high this quarter. The equity downturn will end late this year or early next year, following more action from policymakers to combat a deflationary crisis. Keep cash handy to scoop up stocks.
A major reason to worry about markets is an intensifying euro crisis, reckons Zulauf. The new fiscal pact is supposed to be ratified this spring, but several countries won't sign it "because it would lock them into a depression for five years". The failure to push through the pact will trigger the next panic. Several countries could exit the euro and the turmoil would then "go to the next level". That means "the banking system goes bust".
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Moreover, China "will slow more than expected". Given Australia's exposure to China, it makes sense to play this theme by shorting the Australian dollar, says Zulauf. "It could correct by 20%" against its US counterpart. And forget decoupling: emerging-market stocks will slide "as much as developed markets, if not more". Gold will "rally in the next two years to a new high", but it will first suffer another dip in a rush for liquidity as the markets worry about a deflationary downturn. Once it falls below $1,520 an ounce, buy.
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