Mr. Z makes an important point regarding the addition of fiscal policy stimulus to central bank monetary ooomph. (technical term)
From Financial Sense Online:
We recently interviewed the legendary and longtime fund manager Felix Zulauf at Zulauf Consulting to discuss his outlook on the economy, the markets, commodities, and much more.
Felix explained how we are in what he calls the fourth bull cycle since 2009, what that means for how much longer the stock market rally may last, and also said that we are at the beginning—not the end—of a huge period of government spending into the global economy.
Here's what he had to say in a recent interview with FS Insider (see Felix Zulauf on Global Planned Economy, Massive Stimulus, and Current Bull Cycle for audio).
Record Stimulus with Fiscal Shift
Zulauf likens some of what we’re seeing now to what occurred in the 1970s, with several key differences. In that era, we still existed under a free market. When central banks intervened, it was to break the back of inflation with high interest rates.
Now, our world economic and financial system is built on growth, Zulauf noted. This system requires growth to service existing debt and liabilities. Without growth, the system breaks down into deflation.
On top of this systemic problem, the underlying economy is inherently set up for deflation. Demographics all over the world are as bad as they’ve been since World War I.
Population growth is very low and declining, meaning we can hardly produce the growth that our system needs. Productivity growth is also low because large numbers of zombie companies continue to weigh on productivity.
This is why our natural growth potential is probably less than 2 percent in the U.S., Zulauf noted, which is still the best figure among industrialized nations. In Europe, it is less than 1 percent, he said.
In an effort to fight this longer-term deflationary trend, authorities and central banks have been doing everything they can to force inflation through monetary measures.
For example, various central banks and governments have manipulated their currencies to grab market share and stoke domestic growth, Zulauf said. In addition, they've increased the supply of money via unconventional quantitative easing measures by trillions of dollars and cut interest rates to zero or below zero, which has still not had the intended effect of improving growth.
“Authorities have realized that they cannot just create money and liquidity and inject it into the financial system... We have to spend it. We are at the beginning of a huge period where governments will increase their expenditures to create demand and growth in the world economy... I’m talking about real expenditures in infrastructure and green energy... It's a big shift. We are in a transition from using monetary stimulus only, to using monetary and fiscal stimulus combined.”
Cycle Tops and Bottoms
Felix believes that the current cycle, which started in March 2020, was the fourth bull cycle since 2009. If the past is a guide, about every seven years or so, we see a market top, with 2022 likely to mark the next cycle top, he said.
Conversely, we tend to have a bottom roughly every 4 years, with the next possibly slated for 2024....
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Okay, that's where Felix starts to lose me. Most of the cycle and calendar trades have disappeared.
There was a time, before my time mind you, when you could buy beer stocks in April in anticipation of Q2 and Q3 earnings coming in showing summer beer drinking. And as this knowledge diffused through Wall Street they did what they always do, try to frontrun the action. So the move stared in March, then February etc.
The same was true of seasonal trades based on autumnal money flows from Eastern money center banks to the Midwestern banks and then to farmers.
Or Kondratiev waves. Even though there may be something to them, it's a quasi-periodicity with peaks and troughs that can be off by a half-decade from the idealized, which will play hell with budgeting your bonus payout. Or qualifying for a bonus payout. Or having a job.
Still though, all-in-all, we like Mr. Zulauf
