Felix Zulauf: Japan Will Be the Root Cause of the Next Global Crisis

Also, if consensus is correct, bond markets are at serious risk

Wed, Jun 12, 2013 - 2:51pm

Felix Zulauf, a member of the Barron’s Roundtable for over 20 years and a former global strategist at UBS, joins Financial Sense Newshour to cover a wide range of global macro issues, including today’s deflationary environment versus the inflationary 1970’s, Japan as the likely catalyst of the next global crisis, why the bond market is in trouble, and that gold could decline before another buying opportunity. Felix also does not believe that the Fed will ease off its QE program in 2013.

Here we present a few portions of the interview airing for FS Insiders Friday, June 14th.

On why continued economic growth could spell a disaster for bonds:

The consensus says that the US economy [and elsewhere] should be firm and firming during the rest of the year...If that is correct, then it would mean that bond markets are at serious risk…You have to keep in mind that the banking system, be it in Japan, the US, or Europe, is getting virtually free money from the central bank. And then they buy bonds and ride the carry trade. That has been very beneficial in recent years and it is beneficial as long as bond yields do not rise. But now with the changing expectations of an improving economy in the US, it seems that banks are afraid of a 1994 situation in the bond market and they are beginning to sell bond positions…

On a recovery in Europe:

I do not see an improvement coming. I do not agree with the official forecasts that there is a gradual recovery. Those that say so because they see an improvement in the current accounts [are wrong because]…these current account improvements we see in peripheral countries are really a reflection of the reduced imports side because of weak domestic demand. It’s much less because of a better competitive situation and rising exports. So, in that sense, this improvement in current account balances is very different from what we saw during the Asian crisis when the Asian countries really did bite the bullet. They let their currencies go down by 50%. They restructured. Some companies defaulted, etc. etc. And due to the competitiveness regained because of the reduced currency rate, they had an export boom. And current accounts improved because of export growth, not what we see in Europe, which is compressed imports.

On Japan:

I do believe that this will be the root cause of the next big global crisis whenever it breaks out, probably sometime over the next 12 to 18 months or so. First of all, I think the Japanese situation is very dangerous because Japan’s tax revenues, when you look at the numbers, they have to use almost 50% to service their government debt—their Federal government debt. So if interest rates rise further, Japan is basically bust…I think this is a very dangerous thing that the Japanese are starting and I believe it will most likely be the trigger for the next big global crisis in financial markets and the world economy.

In the rest of this interview, Felix explains his outlook on gold, stocks, the US housing market and much more. If you would like to hear the full audio interview airing for subscribers on Friday, June 14th, CLICK HERE to subscribe.

For a list of previous interviews and guests, CLICK HERE to see our archive.

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