Felex Zulauf's Investment Comment
Comment of the Day

May 11 2011

Commentary by David Fuller

Felex Zulauf's Investment Comment

My thanks to the author for permission to post his excellent report, published by Zulauf Asset management AG. Here is a brief sample:
Markets will force policy action

We believe that emerging economies will not fight inflation decisively as they think they can get away by simply slowing their economies at the margin, which they think will solve the inflation problem. However, we believe we will see a slowing of the emerging economies and if one looks closely enough, the signs are already visible. But the inflationary process at work as described above is not coming to a halt but continues. Hence, we expect inflation to rise again next year after a possible temporary lull. As long as the policy remains inflationary, even if somewhat less than before, inflation will eventually rise to higher levels in the current cyclical expansion. Emerging markets' policy is highly correlated to the US policy, of course. As long as the US continues her demand stimulation by steering a highly expansive fiscal and monetary policy, the emerging markets had to stop pegging their currency to the US?Dollar and let the Greenback drop sharply. By doing so, they risk to lose their competitiveness and therefore risk social problems. China, as an example, needs to create about 10 million new jobs every year to keep the unemployment rate stable.

Hence, we fear a major and painfully adjustment will be procrastinated but will eventually arrive as a sudden surprise within a very short period of time and will come as a shock to the world economy when it happens, most likely within the next few years.


We like to add here that it is simply a myth that devaluing the US Dollar will make the US economy more competitive, as the FED chairman always says. We have heard that song ever again since the end of the gold standard in 1971, a few years after we started in this business. At that time, we had to pay CHF 4.32 to buy 1 USD. Today, it takes us only CHF ? .86 to buy 1 USD. In other words, the US unit has declined by 80% in 40 years and Switzerland continues to run large surpluses on its trade and current account while just the opposite is true for the US. Actually, the US has in the last 30 years turned from the largest creditor to the largest debtor nation on this planet. Manipulating a currency does not put the US back to where it came from; only hard work, sound economic policies and excellence in education will do so.

David Fuller's view I think many subscribers will agree with these points. They may also be interested in Felix Zulauf's market views.

Felix is looking for a USD rebound and a commodity sell-off. The US Dollar Index (weekly & daily) is overstretched and due for a technical rally which appears to have commenced (note the weekly key reversal). Commodities are certainly in a corrective phase as we can see from the CCI, while silver has run into resistance following a retracement rally of approximately 50% of the recent decline. Crude oil (Brent & WTI) show similar action with downward dynamics today. Copper continues to erode support.

Felix also says "a decline of 15-20% in the major [stock market] indices is likely", in the second half of the year. For many investors, that may not be a risk worth selling for.

Behaviourally, I think the choppy activity we are seeing, coupled with the silver-led shakeout in high-flying commodities, could undermine sentiment and result in most of any additional correction occurring during the seasonal period of underperformance which commences in May and can carry on into at least August. However, for this to happen the S&P500 will have to break its progression of higher reaction lows, as Eoin also points out below.

Please note - I will be away on Thursday 12th May.

Back to top