Thursday, August 19, 2010

On the minds of private money

I have made it practise to bring out the advice and foresight of the some of the most commonly known money managers, economists and global gurus throughout this blog history. However, I also seek to find those "private billionaire investors".... not the famous Warren Buffet or George Soros type, but the billionaire who is not public ally known and continues to amass a fortune by diligently managing his own funds.

Today I bring you excerpt of an interview with one such self-made, Felix Zulauf private investor extraordinaire. How does he see things in our current environment and what he's doing about it today and planning for tomorrow...

Let’s shift gears and talk a little bit more about global macro and your approach. When you’re doing your day-to-day work, what are you looking for? What is a day in the life of Felix Zulauf when he gets to the office?


Well, I’m a believer in cycles. I strongly believe that an economy — all economies — do not move in linear but in cyclical fashion. And so do financial markets. And my goal is to catch most of the up cycles and most of the down cycles, because assets are priced based on where we are in the cycle. So I do a lot of cyclical work. I do not moon cycle but the classic business cycle. There is the 3-5 year inventory cycle that they teach in basic economic theory, then there is the investment-related cycle which lasts 9 years. And then you have the 18-20 year real estate cycle and etcetera. I try to get a big picture of where the major economies of the world are moving and where the risks and pitfalls will be in the next six to 12 months. That’s my work — to find out where we are in the business cycle. And then I apply classic tools like monetary analysis, I do valuations because capital markets go from one extreme to the other. They never go in between and reverse to where they come from — that’s important to understand.

Once it hits an extreme (like in 2000), it does not go to a new level in the historical range in terms of valuations and then goes back to overvaluation again. It always goes from overvaluations to undervaluations.

Is that true for the housing market in the US?

The housing market has been a linear affair, particularly since the gold standard was abandoned. When you overstay a cycle by these aberrations like two expansive monetary policies, you could a stretch a cycle for a long time. But when you do that and overstay a cycle, you create more excesses and the correction, when it comes, will be happening in a much-altered time frame than normal. And it will be much sharper and much more painful.

How do you avoid the classic investor foible of confirmation bias? Especially with the internet, you can very easily only read the things that agree with you and nothing else?

Every human being tends to be lazy, and tends to like people and opinions that tend to agree with him. My situation is that I really grew up in the whole industry as a maverick. I was never a mainstream guy. I can see best when I can see lonely. And the majority is on the other side. But I reason, I look at them, and I check it [their stance] out. And you know that the markets are horrible. The markets tell you, relatively quickly, when you’re wrong. So I’m very risk-averse. I like to make money, but I hate to lose money. So I’d rather make a little bit less and not lose money. That is something that I learned from my youth on. I wasn’t born with a golden spoon in my mouth, so I had to make my fortune first all through hard work and suffering. And I don’t want to lose it.

In March ‘09, I turned bullish for a rally. I saw that in 2 to 4 months it went up 25 to 40 percent and I didn’t expect that rally at the beginning when it started to last that long and go that far. Once it never corrected, I had to go back to my drawing board and do the homework and I sought a bet that was very similar to two previous cases in the history. One was in the US — that was in 1938 — that rally had the same characteristics in terms of fundamentals and in terms of technicals. And the other case was in Japan in 1995, ‘96. Both rallies lasted one full year. Both rallies were eventually fully retraced and that’s what I think will happen here too.

So we have three factors moving the market. One was the stimulus demand, the other was the re-stocking of inventory throughout the manufacturing sectors of the world, and the third was financial banks manipulating financial markets up to the point where they got the prices where they wanted them. And I think quantitative easing to that degree is not possible in the current environment without first having a crisis again because you run into political problems. And the same is true for government spending of the size we have seen last year. Because the political framework is such that some people are very concerned with the debt that we are piling up virtually everywhere. And therefore, the markets are now forcing the hand and you see that markets are beginning to break down. The deflationary forces are gaining the upper hand and the western world is really hoping that China will bail us out by buying all the goods that we want to sell.

I just came back from a three-week trip to China and my view is very different. I think China is in the early stage of a decline with economy weakening that will turn into a hard landing.

I’m bearish cyclically. I’m not sure about the secular framework, but it doesn’t matter at this point in time. At this point in time, the cyclical forces in China are bearish, and the biggest problem for the Chinese people are the run-up in home prices over the last 18 months of about 100%. Private sector debt in China is almost the same as in the US relative to the size of the economy. And the people cannot afford housing anymore so the government wants to bring housing prices down. And they will be successful with all of the tightening steps they have undertaken. The problem is — you cannot just hurt housing. The economy is a mechanism that is inter-linked. If you hurt housing, you hurt many other sectors too. I’m very bearish cyclically for the next two years or so. It could be also that we will never see 10 percent growth again. Maybe we will see 4 or 5 percent, that’s possible.

Ten percent growth in China? That’s over.

bearish on equities on a cyclical perspective over the next 2 years or so. I’m also bearish on commodities because of what I said about China.

There was recently too much noise in the gold market, but that was another opportunity to buy, because eventually gold is the best store for your savings over the next five years or so.

What else do you think is interesting, what might you look into buying 1,2,3 years from now?

I think equities in the very long term are interesting investments. But we are not at the point where we should buy them long-term yet. We are in a structural bear market that started 10 years ago. I talked about the valuation cycle and we have gone far away already in valuation declines in Europe. We have gone from four times book value to about 1.2 times book value. We will probably go under book value. In the US, book value is 500 in the S&P. Usually, secular bear markets end slightly below book value, so there is still some way to go.

So that sounds like you think we’ll break the March 2009 lows.

I think we’ll see it again in the next 2 years, yes.


Saverio Manzo
http://www.saveriomanzo.com/

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