Santa Felix Came to Town!!!

Santa who?? And what gifts did he bring us? - Article #19

In this 12 min article, The X Project will answer these questions:

• I. Who is Felix, and Why This Article Now?

• II. What does Felix have to say about geopolitics?

• III. What is Felix’s economic outlook domestically and globally?

• IV. What is Felix’s outlook for inflation?

• V. What does he say about interest rates and bonds?

• VI. What are Felix’s expectations for the stock market?

• VII. What about gold and commodities?

• VIII. What is Felix’s longer-term outlook?

• IX. What does The X Project Guy have to say?

• X. Why should you care?

I. Who is Felix, and Why This Article Now?

If the guy in the picture grew a long beard and changed into a Santa Claus suit, he would make a good Santa. He is Felix Zulauf, and he might be as legendary in the professional investment and macro-strategic world as Santa is in the kids’ world today. According to his current website, Felix:

• Has over 40 years of experience in financial markets and asset management

• Started as a trader with Swiss Bank Corporation in the early 1970’s

• Received training in research and portfolio management thereafter with several investment banks in New York, Zurich and Paris

• Joined UBS in 1977 as a Portfolio Manager of global mutual funds

• Became Global Strategist of UBS (1982) and head of the institutional portfolio management group (1986)

• Served as a member of the Executive Board of Clariden Bank from 1988-1990

• Founded Zulauf Asset Management AG in 1990, a Swiss-based asset management company

• Sold the majority of the firm and spun off a Family Office in 2009

• Served as a member of the Barron’s Roundtable for 30 years.

For at least the last couple of years, in December, Felix has made the rounds as the guest of some of the most popular YouTube channels, offering his outlook for the next year and beyond. And then he goes silent for the year, at least in terms of speaking to the public for free. And because he has been so prescient and accurate in the past, I look forward to December each year to listen intently to what he has to say about the future. This year, I have found Felix on the following seven channels:

• David Lin (12/7/23 – 112,711 views*)

• Blockworks Macro: (12/7/23 – 84,320 views*)

• Ted Oakley – Oxbow Advisors (12/8/23 – 31,218 views*)

• Mauldin Economics (12/8/23 – 29,779 views*)

• Adam Taggart:  Thoughtful Money (12/10/23 – 100,078 views*)

• Reppond Investments (12/12/23 – 8,584 views*)

• The Julia La Roche Show (12/19/23 – 25,285 views*)

(*Note: The number of views listed above is based on the count as of 12/23/23 at noon CT.)

The X Project exists for people who do not have the time to consume as much content as The X Project does, and so in this article, Felix’s themes, conclusions, and takeaways will be distilled, synthesized, and summarized.

Important note: Nothing written here is to be considered investment advice. These are simply thoughts and ideas for you to consider for your investment research or discussion with an investment advisor.

II. What does Felix have to say about geopolitics?

Felix Zulauf offers a critical perspective on the global geopolitical landscape, underscoring the market's underestimation of geopolitical risks amid a significant shift from a US-centric, unipolar world to a more complex, multipolar geopolitical order. He asserts that this transition is already manifesting in heightened conflicts and potential wars as global powers like China rise to challenge the existing order.

Zulauf highlights the proliferation of global conflicts, such as those in Ukraine, Armenia, Serbia, and Gaza, suggesting these are symptomatic of a broader absence of a dominant global 'policeman' to enforce stability.

Europe's geopolitical vulnerability is of particular concern to Zulauf, given its dependency on external commodity sources, which could leave it exposed in a turbulent multipolar world. He stresses that unlike in previous decades, geopolitical dynamics are poised to have a long-term and significant influence on financial markets in the future.

Overall, Zulauf's insights reveal a world in transition, with diminishing US influence and respect on the international stage, reshaping global power structures and introducing a new era of geopolitical uncertainty.

III. What is Felix’s economic outlook domestically and globally?

Felix Zulauf offers a multifaceted analysis of the current economic climate, noting the US's robust employment and real income growth, which may indicate a short-term economic boost. However, he casts doubt on the prevalent belief in a 'soft landing', instead forecasting an unexpectedly more robust economy in the first half of the year.

On a global scale, Zulauf highlights an overarching economic fragility, with Europe and China showing signs of stagnation while the US maintains relative strength. Regionally, Zulauf expresses skepticism regarding India's growth, deeming its economy currently overvalued, and he outlines the long-term economic challenges that China faces, particularly in real estate, which he expects to have a prolonged negative impact on global economic expansion. The geopolitical tensions brewing between China and the U.S. are also a concern for Zulauf, as he foresees the potential for these frictions to exacerbate economic uncertainty.

Zulauf identifies high debt levels and demographic challenges as significant hurdles for global economic growth, emphasizing that population growth and productivity are essential for economic stability, yet both are currently under strain. For the US specifically, he predicts a mild recession later in the year driven by sectors sensitive to interest rate changes, such as housing and construction, and by rising credit card delinquencies, which he believes will eventually lead to a slowdown in consumer spending. He also predicts that the widely anticipated soft landing is a misconception and that the actual economic outcome could significantly differ from current expectations.

IV. What is Felix’s outlook for inflation?

He casts doubt on the official inflation figures, suggesting that real inflation could be notably higher, and raises concerns about the potential misrepresentation of other economic statistics. Zulauf also discusses how the global geopolitical shift from a US-dominated, unipolar world to a multipolar one will have profound implications for international businesses. He predicts this transition will lead to heightened sanctions, increased protectionism, and rising nationalism, culminating in higher prices and entrenched inflation.

Looking ahead, Zulauf foresees an impending recession next year, which he believes will result in authorities reliquefying the financial system, further feeding into the inflationary cycle. He projects that such an economic environment will lead to inflation rates that breach the 10% threshold and exert significant pressure on the bond market, resulting in a climb in interest rates.

V. What does he say about interest rates and bonds?

Felix Zulauf anticipates a fluctuating bond market, forecasting a short-term dip in bond yields to around 3.7% for 10-year treasuries, with an unexpected surge following, potentially hitting new peaks before settling down in the latter half of 2024. Despite the possibility of a short-term yield decrease, he maintains that the bond bear market hasn't concluded. He highlights an alarming level of optimism in the market, with a widespread expectation of falling yields—a sentiment he deems risky, as it could pave the way for the opposite outcome.

Zulauf points out the exceptional consensus on declining long-term bond yields, cautioning that such uniformity often precipitates unforeseen results. He suggests that a stronger-than-anticipated performance of the U.S. economy could lead to constrictions in the bond market. Advocating for adaptability, Zulauf prepares investors for a decade marked by pronounced volatility across both stock and bond markets, advising against expecting a continuation of past trends.

VI. What are Felix’s expectations for the stock market?

For 2024, Felix Zulauf foresees a unique market scenario with the possibility of reaching significant new highs and lows, echoing infrequent historical precedents. He speculates that the S&P 500 may approach the 5,000 mark early in the year before plummeting to potentially the low 3,000s. This expected volatility is rooted in the current overconcentration in a select few stocks—dubbed the "Magnificent Seven"—which he predicts will experience a significant drop, thereby amplifying market volatility.

In response, Zulauf plans to hold minimal long positions in undervalued cyclical stocks, anticipating a potential rebound. He is also preparing to short the NASDAQ and S&P indices in early 2024, closely monitoring the market for indicators to execute this strategy.

Zulauf points to a resurgence in liquidity, facilitated by central bank interventions post the banking crisis earlier in March, contributing to the rising tide in stock and bond markets. Despite forecasting a continued rally into the first quarter of 2024, Zulauf warns investors that this uptrend could be deceiving, potentially culminating in a significant downturn, mainly due to the inflated valuations of top-tier stocks.

Advising investors on the impending roller coaster decade, Zulauf urges adaptability and an open mind, distancing from the linear progression of previous years. Drawing comparisons with the market dynamics around the year 2000, he underscores the heightened investment concentration in a select few stocks, a trend he hasn't seen in his extensive career, which could precipitate steep market declines if fund managers offload these assets in reaction to market fluctuations.

In summary, Zulauf envisions an initial rise in equity markets, succeeded by a substantial drop into a significant trough by late next year or the beginning of the subsequent year, offering compelling investment opportunities amidst the tumult.

VII. What about gold and commodities?

Felix Zulauf observes a notable shift in the gold market dynamics as it rallies amidst increasing real interest rates—a movement he ascribes to geopolitical influences. He foresees a bull market for gold, initially propelled by geopolitical tensions and later by monetary factors as countries, particularly in the East, transition their reserves from the dollar to gold. This move, he believes, will drive the price of gold to approximately $2,800.

Zulauf argues that gold serves as a hedge against the debasement of currency, and he envisions its price climbing not only for monetary reasons but also due to its growing significance as a geopolitical asset. He anticipates that gold will be more significant in the global currency system, especially for nations outside the Group of Seven (G7).

Zulauf expects a sharp price increase in the broader commodities market, accentuated by the strategic control exerted by BRICS countries. He suggests that underinvestment and geopolitical influences will notably affect commodity prices, with oil potentially experiencing a substantial hike.

However, Zulauf posits that the anticipated rise in commodity prices will stem more from supply constraints than surging demand. He notes that the strategic use of commodity control by BRICS nations could play a significant role in geopolitical conflicts, influencing global markets.

While he doesn't foresee a significant increase in China's commodity demand, Zulauf acknowledges China's growing geopolitical clout, particularly in the Middle East, and its potential impact on the commodities market.

Zulauf predicts a recession in the coming year, which he believes will prompt authorities to reliquefy the system. This intervention, he forecasts, will lead to an upswing in commodity prices, contributing to the broader economic and geopolitical narrative he outlines.

VIII. What is Felix’s longer-term outlook?

Felix Zulauf predicts a tumultuous period in the late 2020s characterized by a sweeping financial, economic, and currency crisis of a scale not seen by the current generation that will force nations to undertake drastic fiscal measures, including tax hikes and reductions in entitlement programs with the potential to erode wealth significantly. He points to several looming regional challenges contributing to this crisis: Europe's reliance on external energy and a declining population, China's overextended real estate market coupled with demographic decline, and the United States' burgeoning debt problem.

Starting with the recession in the second half of 2024, he expects the Fed and other central banks to re-liquify the system, which will drive asset prices to new highs, with the S&P 500 potentially reaching 6,000-7,000 in 2025 or 2026, In line with these projections, he anticipates inflation rates to surge to 13-15%. Zulauf predicts a dramatic rise in interest rates, potentially reaching 8% or more, as economic crises unfold and systemic issues come to a head. He also foresees a considerable bear market within the next five years, cautioning that equity markets could plummet by approximately 80% from those new highs.

Amid these challenges, Zulauf forecasts a pivotal economic shift driven by the vulnerabilities of the fiat currency system, exacerbated by high levels of debt and financial leverage. This shift may precipitate potential government defaults as countries struggle to manage their financial burdens. He warns that the severity of the crisis could lead to the overhaul of major currencies through comprehensive reforms.

IX. What does The X Project Guy have to say?

First, Felix Zulauf’s longer-term outlook is consistent with every article and every other expert that The X Project has covered, including (to name a few):

• Bill Strauss and Neil Howe’s book The Fourth Turning: An American Prophecy

• Reinhart and Rogoff’s book This Time is Different: Eight Centuries of Financial Folly

• George Friedman’s book The Storm Before the Calm

• Peter Zeihan’s book Disunited Nations: The Scramble for Power in an Ungoverned World

Second, The X Project agrees with his longer-term outlook, and it largely drove The X Project into existence. The risks in the near future to our living standards, wealth, and prosperity are immensely significant, and The X Project is driven and motivated to inform and educate. However, there is much more to the risks, downsides, doom and gloom. There are also immense opportunities in the coming chaos and tumultuous times. Moreover, all the turmoil and extreme volatility will pass, and The X Project is very optimistic about the future of our country and our children.

X. Why should you care?

Again, nothing included here should be considered investment advice. These outlooks and expectations are ideas to consider and research further or discuss with a competent and capable financial advisor.

It is important to note that Zulauf is highly critical of the financial industry’s prevailing complacency. Zulauf specifically calls into question the continued reliance on the traditional 60/40 investment model and passive investment strategies focused on market indices and target date funds. He suggests that this strategy, a mainstay among investors, will likely fail to deliver effective results in the unpredictable years ahead.

Zulauf underscores investors’ need to adopt a nimble and adaptable approach to their investment strategies, particularly in light of the current climate of economic uncertainty and market volatility. He insists on maintaining an open mind and staying well-informed about the interplay between economic policy, market trends, and the overarching geopolitical landscape.

For individual investors looking to navigate these challenging times, Zulauf recommends enlisting the expertise of professional money managers who have a firm grasp of business and market cycles. Such guidance can be instrumental in minimizing risks during downturns while capitalizing on potential gains during market upswings.

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