Barron's Annual Round­table is out and worth the read for a host of dif­fer­ing views.  I would gen­er­ally high­light Mr. Zulauf for the 'eco­nomic big pic­ture' – although prob­a­bly 'worst case' in some of his com­ments, and Marc Faber for more action­able invest­ing ideas (although he is a trader type, so 6 months from now the view could be different).

Head over to Barron's for the read.

To a one, these lead­ing lights of Wall Street agreed that the world is a lot more dan­ger­ous than it was 10 or 20 or 30 years ago, when investors wor­ried more about return on their cap­i­tal than return of it.

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Zulauf: Europe is going to be key this year for the mar­kets and the econ­omy. China is slow­ing; the emerg­ing world is slow­ing, and the U.S. is barely above water, con­strained by its struc­tural prob­lems. I have called the euro a mis­con­struc­tion since its birth. The prob­lem is a dif­fer­ence in com­pet­i­tive­ness among Euro­pean coun­tries, and you can't solve it by lend­ing money to the less com­pet­i­tive coun­tries. You have to deflate wages and prices in the south, and inflate the north. But given Germany's his­tory, it will never inflate.

The mem­bers of the euro zone agreed in Decem­ber that each coun­try could have a struc­tural deficit of no more than half a per­cent of GDP. If a deficit goes above 3% of GDP, the coun­try will be sanc­tioned. This agree­ment now has to be rat­i­fied in all coun­tries. But when you agree to such a pre­scrip­tion and you are uncom­pet­i­tive, your cur­rency is over­val­ued by 30%, you can't devalue, and your nom­i­nal inter­est rates are too high, that is a recipe for a depres­sion. It is a death sen­tence. Sev­eral coun­tries won't rat­ify the con­tract, and the next day their mar­kets will be repriced accord­ingly. They will exit the euro, and the tur­moil will go to the next level. Greece is bust in either case. If you can devalue your cur­rency by 40% or 50% in that sit­u­a­tion, at least you will have the chance to see the sun again and recover.

What hap­pens at the next level of turmoil?

Zulauf: The bank­ing sys­tem goes bust. Assume Greece won't repay any­thing, or at most 10% of its total debt. It is not just the gov­ern­ment but the pri­vate sec­tor that is bust. That means banks in other coun­tries will be in trou­ble, which means they will be nation­al­ized. Gov­ern­ments won't have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won't affect the U.S. you are dream­ing. The esti­mated notional value of the over-the-counter fixed-income-derivatives mar­ket in Europe is esti­mated to be about 60 tril­lion euros. There are many links to the U.S. bank­ing sys­tem, although we don't yet know who is posi­tioned how. If one coun­try exits the euro, all hell will break loose.

Gabelli: How bad is bad, and how long will it take to recover? Felix, what hap­pens 18 months from now?

Zulauf: Fis­cal stim­u­la­tion is out of the ques­tion. That will come at the depths of the cri­sis, not before. Cen­tral bankers are more at ease with the prob­lems and will con­tinue to print money, but if the ECB over­does it, Ger­many will say it isn't par­tic­i­pat­ing in the game.

Hickey: Aren't they over­do­ing it already? The ECB's bal­ance sheet has gone to $3.5 trillion.

Zulauf: So far, the expan­sion is pas­sive. The banks are request­ing help to refi­nance their oper­a­tions because they can't refi­nance in the interbank-loan mar­ket and are los­ing deposits. Now the Bank for Inter­na­tional Set­tle­ments is demand­ing higher cap­i­tal ratios. That means Euro­pean banks will shrink their bal­ance sheets and weaker coun­tries with balance-of-payment deficits will have a harder time fund­ing their deficits, which leads to eco­nomic con­trac­tion. The Euro­pean cri­sis has a global dimension.

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

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