Felix Zulauf: Europe will turn Japanese

As anti-euro parties gain ground, legendary investor Felix Zulauf sees a Japanese-style slump heading for Europe.

Felix Zulauf "accurately predicted last year" that growth would be sluggish, the dollar would rise and commodity prices fall, says Lauren Rublin in Barron's. His past calls have been pretty good too. He foresaw macroeconomic trouble for 2008, but was bullish on stockmarkets in early 2009. So what is the founder of Zulauf Asset Management saying now?

Last year the consensus expected economic growth to return to pre-crisis levels, says Zulauf in the Barron's Roundtable. But it didn't happen and won't happen this year either. A recession is unlikely, but growth in the US and elsewhere is likely to slow as deflation gathers strength and rattles confidence. Inflation has disappeared in Europe and could fall below zero in the US too.

Much of the world looks gloomy. China's investment and credit boom is slowing, which is having a knock-on effect across Asia. Industrial capacity there has been built up based on expectations of 10% growth in China. "The corporate sector in Asia is unprepared for this slowdown."

Europe remains a mess. Quantitative easing will merely take the pressure off governments to introduce painful, growth-boosting reforms. Germany "is moving backwards on reform. Italy and France aren't moving at all." The single currency is structurally flawed: it "acts as a deflationary straitjacket" for half of the European Union. In a few years, a popular revolt will have finished the euro off.

Already, anti-euro parties hold a third of the European parliament's seats. "I see no hope for Europe. It is going the way Japan did."As a result, interest rates will stay low, or go even lower this year, while major stockmarkets could suffer a correction of 10%-15% in the next few months. US earnings disappointments caused by a strong dollar are a likely potential trigger. The commodity cycle, then, remains bearish, but the outlook is bullish for gold.

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