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