Felix Zulauf’s Guide to ‘Crazy’ Policies, Investment Bargains, and Bitcoin Mania

There’s lots to watch as of late, from China’s muscular rise to Europe’s shaky union, to not point out the worldwide meltdown in bond yields and buildup in public debt. Nor do the prospects for shares, commodities, and Bitcoin escape Felix’s gimlet eye. He touches on all of those subjects within the edited interview under. Barron’s has equipped the names of particular exchange-traded funds that mirror his present funding themes.

Barron’s: As you wrote not too long ago, we’re dwelling by the types of issues we’ve solely examine in historical past books—a pandemic for one, and unconventional insurance policies designed to cope with the fallout. We’ll survive the pandemic, however how will we exit this period of chronically low rates of interest?

I don’t assume we will. When you begin debasing your forex and inflating your monetary system continually and chronically, you may’t cease. Should you do, you danger a deflationary accident. The issue immediately is that the world doesn’t have sufficient progress. Demographics are one trigger; annual inhabitants progress within the U.S. is about half a proportion level, and declining. It’s close to zero p.c in Europe, and declining. It’s zero in China, and declining, and unfavourable in Japan. Financial progress equals inhabitants progress plus productiveness progress, and productiveness progress developments are additionally declining as a result of insurance policies being utilized in lots of elements of the world are creating extra zombie companies. The U.S. financial system is destined to develop by in all probability lower than 2% a 12 months on a long-term development foundation, and Europe, by lower than 1%. However our system is constructed on progress

How so?

We have to develop to service our money owed, cowl our pension prices, and so forth. The central banks have been making an attempt to create progress for the reason that monetary disaster of 2008-09 by pumping liquidity into the worldwide financial system. Nevertheless it obtained caught within the monetary system and didn’t make it to Most important Avenue. Now, the authorities have turned to fiscal enlargement. Governments world wide are speaking about investing large quantities of cash in infrastructure, and significantly in local weather change. On this manner, they hope to create sufficient demand to raise financial progress charges.

It should work for a really brief time. Popping out of a disaster, there may be often pent-up demand. All of the spending may elevate progress by 4% or 5% for a number of quarters, however afterward, progress will ebb once more until the fiscal push will increase.

What are the seemingly penalties of all this spending?

The government share of the economy will continue to rise. The extra authorities is concerned within the financial system, the much less productive and environment friendly the financial system turns into. If productiveness falls, prosperity declines. An ever-larger proportion of the inhabitants falls into poverty or near-poverty, and society takes on an even bigger position in caring for these individuals. We’re slipping into deliberate economies and higher socialism. In the long run, it’s the flawed recipe.

A lot of Europe may disagree.

I anticipate the Biden administration to take the U.S. towards the European mannequin. Below regular circumstances, it’s tough for Europe to generate 1% annual progress. Asia is completely different as a result of it’s one generational cycle behind the West. The inhabitants may be very hungry.

Long run, the present financial framework will result in social battle, performed out towards the background of a battle of a hegemon in relative decline—the U.S.—and a brand new energy that’s rising and self-confident: China. These types of conflicts often begin with commerce, as this one did, however they might result in navy battle.

You’ve got referred to as the European financial union the largest

mistake of the century. Why?

The political elite favors European integration, and the Germans, below Chancellor Angela Merkel, have caved in to the French. The European Union structure is French; it’s centralized. The German structure is decentralized. Imbalances exist inside the EU as a result of some economies are extra aggressive than others. To rebalance the imbalances, the EU has weakened the stronger members; it hasn’t strengthened the weaker members. Europe will proceed to combine, and financial progress and prosperity will proceed to say no. Far sooner or later, there will likely be a significant revolt of the individuals towards the elites. Don’t rely on Europe to launch any massive progress agenda. It gained’t work.

What’s forward for the U.S. financial system?

If the U.S. launches a giant infrastructure program, the financial system will take pleasure in sturdy progress for a lot of quarters. Inflation may additionally shock on the upside, however whether or not that will likely be a secular change, we don’t but know. The U.S. may see a 3% soar in costs this 12 months, resulting from a weakening greenback and rising import prices. Asian exporters are elevating costs for the primary time in 20 years, which is a significant change. You’re seeing worth hikes in digital parts. Commodity prices are also rising. That may circulation into the patron worth index eventually.

The bond market gained’t be comfortable.

I anticipate the 10-year Treasury yield to rise to the 1.5% space. Then we’ll see whether or not it reaches 2% later this 12 months or early subsequent 12 months. [Bond prices move inversely to yields.] As yields rise, the valuations of progress shares may fall. Later this 12 months, maybe from late summer season onward, progress shares will likely be in high-risk territory. The U.S. inventory market may have a short lived correction in March, brought on by an increase in yields. If that correction is shallow, the prospect of a late-summer shopping for climax within the massive progress shares is excessive. If the correction is deeper, a cyclical prime for these shares will likely be postponed into the primary half of 2022. However financial coverage gained’t be tightened, and financial progress gained’t collapse. Thus, we don’t have the basic elements that often create a bear market.

What are probably the most and least engaging investments immediately?

The least-attractive belongings are long-term bonds, with the caveat that inflation and rates of interest may keep low for years. However even then, bonds wouldn’t yield a excessive return.

Probably the most engaging belongings are long-duration belongings: the shares of firms that may obtain gross sales and earnings progress even in tough financial and political environments, and actual belongings. Progress shares are extremely valued, but when bond yields and inflation keep low for the subsequent 5 years, these shares will do effectively.

The place are you placing your cash?

I put money into themes. I just like the agriculture theme. Jim Rogers mentioned years in the past at a Barron’s Roundtable that farmers have been getting older, and there weren’t new farmers taking their place. We’ve fewer farms on the earth immediately, and so they have to provide extra, for extra individuals. There are shortages in every single place, and local weather occasions are affecting harvests and inflicting costs to spike. [

Invesco DB Agriculture,

ticker: DBA, tracks agricultural-products prices.]

I’m additionally fairly bullish on oil. The U.S. dollar probably has about 30% downside over the subsequent 5 years. That’s bullish for commodities normally, that are traded in U.S. {dollars}. I may see West Texas Intermediate, the U.S. benchmark crude, buying and selling at $100 a barrel in 4 years, as a result of the Biden administration’s insurance policies are towards drilling for brand spanking new oil. [

United States Oil

fund (USO) tracks WTI prices.

Energy Select Sector SPDR

(XLE) holds big oil stocks.]

Are you investing actively in Asia?

Sure, by futures and ETFs. I’m lengthy Japan, Taiwan, and Korea. Taiwan and Korea are my favourite markets due to their expertise tilt. [

IShares MSCI Taiwan

(EWT) and

iShares MSCI South Korea

(EWY) offer exposure to these markets.]

I’ve some reservations about China. The Chinese language didn’t overdo it on fiscal spending, and whereas they aren’t tightening financial coverage, they’re tightening the reins a bit. Due to this fact, the Chinese stock market might underperform different Asian markets for some time.

What appeals to you within the U.S.?

I personal a few of the FAANG shares [large tech stocks such as

Facebook

(FB),

Apple

(AAPL), and

Amazon.com

(AMZN)] and ETFs, though I began to cut back my positions earlier this 12 months as a result of I assumed a correction would are available in February. If it is available in March or April, I’ll enhance my positions on a buying and selling foundation.

Gold is lifeless cash this 12 months, however I prefer it long run due to the loopy coverage strikes we’re making. Millennials are shopping for Bitcoin as a substitute of gold. At any time when there’s a selloff [in gold], I snap up some gold-mining shares, as they’re cheap long-term options on the gold price. The GDX [

VanEck Vectors Gold Miners

] ought to do effectively over the subsequent few years.

What do you make of Bitcoin?

I don’t consider that Bitcoin will ever make it as cash utilized in day by day funds. It’s too difficult, the value is simply too risky, and “mining” it requires an excessive amount of vitality. However so long as individuals consider Bitcoin as a safe store of value, the value may go increased, and it may change into a mania. On the peak of the tulip-bulb mania [in the 1630s], the costliest tulip bulb value as a lot as a home. That implies Bitcoin may attain $1 million sometime. However tulip bulbs commerce immediately at solely $10 a dozen.

Thanks, Felix.

Write to Lauren R. Rublin at lauren.rublin@dowjones.com