First of all, Zulauf commented that the LTRO facility with the next payment scheduled for Feb 29, 2012 was another example of “kicking the can down the road.” The fear of systemic risk has disappeared due to this money printing. However, nothing has been done to address the underlying issue.
Zulauf noted that “creating the Euro was probably the dumbest economic decision since WW2.”
Felix Zulauf did not think that the strong European nations would be ready for a fiscal union. There is a treaty to be signed in early March that would mean that every country can only have 0.5% of primary budget deficit (basically the budget deficit without interest payments). However, this type of agreement “virtually guarantees depression like conditions in the periphery conditions. At some point people get sick of the austerity and the economic pain.” It’s possible that one country does not ratify the treaty and “those who do not ratify the agreement will have the market price their assets as though they may exit the Euro and that could chaos in the markets.”
Zulauf was skeptical that Greece would fulfill any of it’s promises to the Troika. Cuts and austerity are simply too painful. The Greeks promised to fire 30,000 government workers before and ended up firing only 1000 workers. Eventually, the EU will probably get “sick” of Greece and ask them to leave the Euro.
Of course, the response to all of the debt problems in the periphery countries is money printing or QE. Zulauf said that money printing will continue to “zoom.”
The reason why Zulauf was bearish on the markets for 2012 during the Barron’s Roundtable is that he eventually sees 1-3 countries leaving the Euro in the next 12-18 months. This will roil the markets. Zulauf had a a number of short positions that he recommended at the Barron’s Roundtable and it appears that he continues to feel that the market will have a great sell-off in the second quarter.
In addition, Zulauf is still bearish on China and expects lower growth in China to significantly impact commodity prices.