David Rosenberg Channels Felix Zulauf

From David Rosen­berg of Gluskin Sheff

This Felix Is No Cat

Though he does seem to be a furry ani­mal nonethe­less ... I'm talk­ing about the leg­endary Felix Zulauf and his remark­able con­tri­bu­tion to the Barron's Round­table. This is what he had to say — clear, con­cise and cogent:

There is too much debt in the indus­tri­al­ized world and the finan­cial sys­tem is vir­tu­ally bust. Rea/ dis­pos­able per­sonal income is stag­nat­ing or declin­ing. Employ­ment par­tic­i­pa­tion keeps head­ing south. This pro­duces a chain reac­tion: Weaker con­sumer demand in the West weak­ens man­u­fac­tur­ing in places like Asia, which weak­ens natural-resource pro­duc­ers such as Aus­tralia or Brazil.

As for the euro, it is a mis­con­struc­tion. As I said in Jan­u­ary, I expect the dis­in­te­gra­tion to begin in the sec­ond half of this year. That should lead the world into finan­cial and eco­nomic chaos. My two major themes into 2013 are euro dis­in­te­gra­tion and China weak­ness, due to the burst­ing of a real– estate boom.

The global econ­omy is weak­en­ing cycli­cally on top of a highly frag­ile credit sys­tem. It is an explo­sive cock­tail. The tower of debt is com­pounded by the gigan­tic over-the-counter deriv­a­tives mar­ket. In the past 10 years the notional value of deriv­a­tives world­wide has grown from $100 tril­lion to almost $800 tril­lion. The num­bers are mind-boggling. if some­thing goes wrong in the real econ­omy, it could shake the whole credit sys­tem dra­mat­i­cally. It is a dan­ger­ous situation.

The euro is not the real prob­lem but a trig­ger and com­pounder of the struc­tural prob­lems. It could only work if the euro zone entered a fis­cal and polit­i­cal union, which won't hap­pen, as Euro­peans aren't pre­pared to give up national sov­er­eignty. Politi­cians there­fore will go from one com­pro­mise and quick fix to the next, with the cri­sis deep­en­ing until some nations at the periph­ery won't be able to stand the eco­nomic pain any­more. They will want their old national cur­rency back, and devalue to adjust the exter­nal accounts.

China won't be able to save us, as it did in 2009. The Chi­nese will lower inter­est rates but their actions will be reac­tive and lag. If my the­sis is right, we must assume things will go awfully wrong in the next 12 months and the sys­tem will be at risk of col­laps­ing. Most U.S.-focused investors might not under­stand it as they see cor­po­ra­tions doing well.

The poten­tial exists for a broad-based nation­al­iza­tion of the credit sys­tem, cap­i­tal con­trols and dra­matic restric­tions on finan­cial mar­kets. Some might even be closed for some time.

We are wit­ness­ing the biggest financial-market manip­u­la­tion of all time. The author­i­ties have inter­vened more and more, and thereby cre­ated this mon­ster. They might change the rules when the game goes against their own interests.

We are in a severe credit crunch. It starts when the weak­est links in the sys­tem can't finance their activ­i­ties. Then you have a flight to safety into Trea­suries and Ger­man bunds, com­pounded by a quasi-shortage of good col­lat­eral. That's why bond yields have fallen so low. This isn't an infla­tion­ary envi­ron­ment but a defla­tion­ary one.

I like to think I could have said it bet­ter, but I don't think I could have. These are just a few excerpts but very hard-hitting stuff and a nice con­trast to a lot of the other mush out there. Fred Hickey is worth a read too in this Round­table dis­cus­sion, ditto for Marc Faber (dis­clo­sure: they are friends of mine, but don't hold that against them!)

The full Zulauf note can be found here

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