The global economy is on the edge, with Swiss billionaire Mr. Felix Zulauf predicting rough times ahead due to widespread distortions in global markets. Fears of a new global crash are very real in some quarters, as debts rise, the dollar climbs, and asset prices climb into unsustainable territory. As central banks continue to intervene in global financial markets, the real danger is that markets will continue to get out of whack, making potential corrections more painful and prolonged than they might have been.

Central banks around the world have spent a lot of energy trying to avoid another financial crisis, through a series of quantitative easing and credit stimulus packages that aim for sustainable global growth. However, with Greece in trouble, China in a downswing, and global demand weakening, there is a real danger that history will repeat itself. Debt is a huge problem that is not going away, with popular solutions designed to smooth cycles possibly creating distortions instead.

The topic of financial distortion was brought up in a recent interview with Mr. Felix Zulauf, head of Zulauf Asset Management and long-term member of the Barron’s Roundtable. According to Zulauf, “The current cycle is very unusual, because never before have we seen authorities, central banks in particular, intervening on such a large scale and pumping so much money into global financial markets. Hence, global financial markets are more distorted than ever before and accordingly, the risks are very high. Investing becomes very difficult in such an unprecedented environment, as it can’t be compared to previous situations.”

Economic Cycle Theory

Mr Zulauf is a strong supporter of economic cycle theory, also known as the business cycle. According to Zulauf, structural factors have weakened global demand, with central banks furiously trying to avoid pain by pumping liquidity into the system. Instead of allowing markets to correct naturally, a situation has arisen where zero or even negative interest rates have become the new normal. This artificial normalisation has distorted the valuation and pricing of assets, which Zulauf predicts will lead to further rises and eventual exhaustion at “very high and unsustainable levels.”

“Markets are the best capital allocators and capitalism works if the authorities let it take its course. Had they let markets correct all the excesses in previous business cycles instead of printing more and more money, the world would be in a much better shape today. But our authorities had the dream to smooth the business cycle by not allowing the markets and the system to correct itself. It is difficult to correct this in a painless way, which is what the authorities are trying to do. That won’t work.” said Zulauf.

US Stock Market Predictions for 2015

Zulauf is predicting ranging US markets for the rest of the year, as conditions worsen for long-term investors but create opportunities for talented short-term traders. With regard to Europe, Zufauf says cyclical forces remain in favour of European stocks due to highly expansive ECB policies, noting that European markets are comparatively higher now against the US than they were back in 2007. Zufauf also thinks that oil prices will continue their down cycle for the next couple of years, with US dollar strength likely to continue and China slowing despite predictions of 7 percent growth in 2015 by Chinese authorities.

Zulauf is not the only commentator to forecast tough times ahead in recent weeks, with Ann Pettifor from Prime Economics offering this warning: “We’re going to have another financial crisis. Brazil’s already in great trouble with the strength of the dollar; I dread to think what’s happening in South Africa; then there’s Malaysia. We’re back to where we were, and that for me is really frightening.” While this forecast might seem alarmist, Pettifor did correctly foreshadow the credit crunch in her 2003 book The Coming First World Debt Crisis.

Last Updated: October 25th, 2020