The Euro crisis will escalate again, says Felix Zulauf. Swiss money manager is preparing for a collapse of the stock market. But even greater is his concern that angry citizens could take it to the streets.
Mr. Zulauf, we are aware that you have a keen understanding of the markets. Where are we now?
We are in the final stages of a strong rally. I think that we will see a larger correction this year.
I do not know. My guess is that the optimism is the first drop. We may even see a kind of panic buying that drives up the indices to new highs. Not later than the second quarter is problematic, in my view.
How violent will the correction turn out to be?
I think it is realistic that we will see declines of more than ten percent, and in some markets it may represent 20 to 30 percent. If such a collapse would takes place, it would be at least an opportunity for buying.
What could trigger the collapse?
The markets expect the global economy to recover and we have the problems we have to overcome. I disagree. I think that the economy and corporate profits do not develop as the market had hoped. When it becomes clear how far desire and reality are, it could trigger a collapse. But there are many other potential problems, which could trigger a correction.
The policy says that the worst was over.
I see nothing normalizing. The structural problems are still there; they were just lined and have been for some time drowned in a sea of liquidity.
What will happen in the future?
Take a look at the latest economic data in Europe. As yet no improvement is seen. The real disposable incomes have stagnated in the peripheral countries. This reduces the demand. I will not even talk about Greece or Spain, where the situation is quite dramatic. But even in Italy the gross domestic product is eight percent below the level as of five years ago.
In the financial markets is again at least peace has returned.
That’s because the European Central Bank has taken emergency actions. It has stated to finance bankrupt states and financial institutions so that the euro does not fall apart. That was a signal to the banks, again with full risk investing in government bonds, whatever the outcome. The banks have borrowed from the ECB a percentage of money in order to buy bonds from Spain and Italy, with have an interest rate of five, six or seven percent. This is a great deal for the banks. Finally, the ECB stands ready to take the risks. The result is that banks are now fully charged with government bonds. Ultimately, one has not solved the problem. It has just moved and enlarged.