In a lively session at the 64th CFA Institute Annual Conference last week, veteran investor Felix Zulauf was interviewed by John Authers, global editor of the Financial Times Lex column. Zulauf’s bearish message to investors: the S&P 500 could drop by as much as 20%, the euro will fail, and the United States is in permanent decline. His one sure bet? Buy gold.
Zulauf began trading stocks as a professional in 1971 and now manages his own money after enjoying a successful career at leading investment firms in Europe and the United States. He described his investment philosophy as identifying and profiting from market cycles — in other words, catching parts of the market’s ups and downs. There is no single indicator that can identify turning points in market cycles, however. The art, he said, is to combine fundamental and technical analysis to identify them.
During his session, Zulauf said his bearish outlook for the S&P 500 is based on a variety of factors, including higher energy prices, lower real consumer income, and an economic slowdown caused by monetary tightening in emerging markets that is designed to tackle inflation. “Come summer, you will see analysts cutting earnings estimates,” he warned.
With regard to the euro, Zulauf said that the common currency is a “misconstruction” because it is a monetary union without a fiscal and political union. He noted that over the last 200 years, there have been many monetary unions — but all have failed and so, too, he believes, will the euro. In addition, Zulauf predicted with a “90% likelihood” that Europe will experience another recession later this year. As citizens in the eurozone continue to suffer the effects of harsh economic times, he contended, they are increasingly likely to vote for governments that will be willing to break away from the common currency.
Zulauf was just as gloomy about the outlook for the United States, telling delegates that he does not see an economic revival coming. His argument: the U.S. simply cannot remain a leading world economy while simultaneously running unsustainable fiscal deficits and printing ever more money. “The average American has no money and lives hand to mouth,” he said. The danger is that the U.S. is increasingly deviating from the traditional paths to greater prosperity: saving, investing, researching, innovating, and manufacturing.
The one exception to Zulauf’s bearish outlook is gold. The value of the precious metal simply reflects the debasement of fiat currencies, he said. “It is easy to print paper money,” he told delegates, but “it is hard work to get gold out of the ground.”