'Tis the Season

Felix Zulauf Shares His Annual Outlook - Article #98

In this 14-minute article, The X Project will answer these questions:

• I. Why this article now?

• II. What Should Investors Be Prepared For?

• III. What Should Investors Focus On?

• IV. What Else Should Investors Anticipate and Prepare For?

• V. What is an Important Cycle to Pay Attention To?

• VI. What are Other Major Risks to Watch For?

• VII. What Investments Should Be Avoided?

• VIII. What Else Should Be Avoided?

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

• X. Why should you care?

Reminder for readers and listeners: nothing The X Project writes or says should be considered investment advice or recommendations to buy or sell securities or investment products. Everything written and said is for informational purposes only, and you should do your own research and due diligence. It would be best to discuss with an investment advisor before making any investments or changes to your investments based on any information provided by The X Project.

I. Why this article now?

Because it is the end of December, and Felix Zulauf has made his annual appearances as a guest on numerous YouTube channels where he shares his annual outlook. I introduced Felix Zulauf in my article last year, Santa Felix Came to Town!!! Santa who?? And what gifts did he bring us? - Article #19. You can find his impressive and detailed biography of him in Section I of that article.

The X Project exists for people who do not have the time or the interest in The X Project subjects to consume as much content as I do. The X Project curates, summarizes, distills, and synthesizes knowledge & learning at the interseXion of economics, geopolitics, money, interest rates, debts, deficits, energy, commodities, demographics, & markets - helping you know what you need to know.

This article is based on the following interviews:

• 2025 Economic Forecast | Felix Zulauf and Jimmy Connor on the Jimmy Connor Channel (December 28,2024, with 4,081 views)

• Signs Of The Late Stage Bull Market: Felix Zulauf Reveals on The Meb Faber Show (December 23, 2024, with 41,095 views)

• The Biggest Bubble Yet? Felix Zulauf Warns of Extreme Market Risks on Wealthion (December 18, 2024, with 37,007 views)

• Felix Zulauf: US Stocks Are In A Bubble - Here's What Could Break It on The Julia La Roche Show (December 17, 2024, with 14,244 views)

• ​Felix Zulauf: Three Major Risks to Global Markets in 2025 on Mauldin Economics (December 17, 2024, with 21,090 views)

• January Will Be ‘Hell For Investors’: ‘Sell Of A Generation’ Warns Fund Manager | Felix Zulauf on the David Lin Channel (December 14, 2024, with 137,859 views)

• Felix Zulauf’s Big Calls For 2025 and Beyond on The Monetary Matters Network (December 12, 2024, with 13,367 views)

• Ted Oakley - Oxbow Advisors - Interview Series - Felix Zulauf - December 12, 2024 (18,482 views)

• Felix Zulauf: Expect A Wild Ride (Up & Down) In Markets From Here on Adam Taggart | Thoughtful Money (December 10, 2024, with 58,501 views)

Below, you will find a summary of the top seven recommendations, predictions, themes, conclusions, and takeaways from these interviews plus my additional thoughts and why you should care.

II. What Should Investors Be Prepared For?

Zulauf predicts a “roller coaster” year with sharp market peaks and troughs. He anticipates a potential 15-20% selloff in major indices in the first half of 2025, followed by a recovery to new highs and a more significant downturn later in the year. This cyclical volatility stems from multiple factors, including overvaluation in equity markets, tightening global liquidity, and geopolitical risks.

Volatility is expected to stem from macroeconomic dynamics and policy decisions. Overvaluation in equity markets, driven by speculative inflows and excessive liquidity, poses the risk of abrupt corrections. Additionally, geopolitical uncertainties—from trade wars to energy conflicts—could catalyze sudden market disruptions. Zulauf also highlights that tightening liquidity will exacerbate market swings as central banks reduce monetary easing. Investors must adopt a proactive approach, incorporating hedging strategies and dynamically adjusting their portfolios to reduce exposure to high-risk assets.

Investors should adopt defensive strategies early. Zulauf emphasizes the importance of liquidity and cautions against overexposure to speculative assets. Investors should consider maintaining cash reserves, employing stop-loss orders, and staying nimble to capitalize on dips while avoiding catastrophic losses. He also stresses the importance of diversification to mitigate the risks associated with concentrated market bubbles.

III. What Should Investors Focus On?

Real assets like gold and select equities in strong companies are central to Zulauf’s strategy. Gold remains a hedge against currency debasement and inflationary policies, which Zulauf predicts will intensify as central banks shift back to quantitative easing (QE). He suggests that gold’s structural bull market remains intact, with the potential for significant gains over the next several years.

Zulauf underscores that inflationary pressures are likely to persist due to expansive fiscal and monetary policies. Gold, a non-yielding asset with intrinsic value, counterbalances to depreciating currencies. He predicts that central banks’ renewed adoption of QE and potential fiscal stimulus measures will accelerate inflation, further bolstering gold’s appeal. For equities, he advises focusing on companies with strong balance sheets, robust cash flows, and the ability to maintain profitability during economic slowdowns. Companies in energy, commodities, and essential goods may offer more resilience.

Additionally, Zulauf recommends focusing on “survivor” companies with solid fundamentals that can withstand economic downturns. These companies provide stability during periods of high volatility and uncertainty. Investors should avoid speculative and high-debt companies that could falter under rising interest rates or tightening liquidity.

IV. What Else Should Investors Anticipate and Prepare For?

Zulauf underscores the disruptive impact of rising protectionism, particularly under the Trump administration’s proposed tariffs. He compares the current trajectory to the “beggar-thy-neighbor” policies of the 1930s, which exacerbated the Great Depression. He warns that such policies could trigger a global recession, with Europe and China bearing the brunt of the economic fallout.

Protectionism introduces significant risks for global trade dynamics as countries retaliate with counter-tariffs and protectionist measures. Zulauf highlights that Europe, with its heavy reliance on exports, is particularly vulnerable. He parallels historical periods of heightened protectionism, emphasizing how such policies stifle economic growth and deepen recessions. The fragmentation of global trade networks could lead to inefficiencies and increased costs for businesses and consumers.

For businesses and investors, this means preparing for shifts in supply chains and trade relationships. Multinational corporations may need to re-evaluate their geographic exposure and diversify their markets. Long-term investments in regions or sectors heavily reliant on international trade should be cautiously approached. Companies focusing on local markets and self-sufficiency may emerge as more resilient.

V. What is an Important Cycle to Pay Attention To?

Zulauf’s insights into liquidity cycles highlight their pivotal role in driving market behavior. He notes that global liquidity, especially from sources like Japan’s low-interest funding environment, has been a major factor in sustaining market booms. However, he warns that this liquidity is finite and could dry up by late 2025.

Liquidity cycles dictate the availability of capital, influencing asset prices and economic activity. Zulauf stresses that diminishing liquidity can lead to cascading sell-offs as markets lose the support of ample funding. He particularly notes the role of reverse repos and the contraction of central bank balance sheets in signaling reduced liquidity. Investors should track these indicators closely, preparing for a shift in market dynamics as liquidity wanes.

The drying up of liquidity could exacerbate market downturns, creating opportunities for those who anticipate it. Investors should monitor indicators such as reverse repos and central bank policies to gauge shifts in liquidity dynamics. Preparing for constrained liquidity involves reducing leverage, avoiding overvalued assets, and seeking safer harbors like short-term government securities.

VI. What are Other Major Risks to Watch For?

Zulauf identifies the transition from a unipolar US-centric order to a multipolar geopolitical structure as a key economic and market instability driver. He highlights tensions between the US and China and Europe’s struggles with competitiveness and energy policy as flashpoints for potential conflict.

Geopolitical risks, including proxy wars, trade conflicts, and energy disputes, will likely intensify as the global power structure evolves. Zulauf suggests that the rising influence of regional powers such as China will challenge the US's traditional dominance. He also warns of the potential for resource-based conflicts as nations prioritize energy security. For investors, these risks necessitate a diversified portfolio exposed to safe-haven assets like gold, Swiss francs, or low-correlation investments.

Investors should monitor geopolitical developments closely, particularly trade disputes and proxy wars that could disrupt markets. Diversifying investments geographically and considering safe-haven assets like gold or the Swiss franc can help mitigate these risks. Long-term strategies should account for the potential decline of US hegemony and the rise of regional powers.

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• VII. What Investments Should Be Avoided?

• VIII. What Else Should Be Avoided?

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

• X. Why should you care?

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VII. What Investments Should Be Avoided?