20% Decline In Stocks By First Quarter 2025? Felix Zulauf on a Bubble In S&P 500, Yen Carry Trade, and Bond Market Rollercoaster
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close the door. I'm so happy today to be speaking to Felix Zulauf, renowned macro investor and publisher at Zulauf Consulting. Felix, great to see you. How are you doing? I'm doing well. Thank you very much. It's great to be with you. And thank you for inviting me to your show.

I'm so glad you could make it, Felix. You've seen a lot of market cycles. You've made a lot of bold contrarian calls. How are you thinking about the markets right now? Does it remind you of something you've seen in the past, past market cycles? Or is this something completely unprecedented?

It's interesting you ask me that because just the other day, Mario Gabelli, a colleague from the Roundtable, Barron's Roundtable, sent me a picture from the January 99, a year before the top Roundtable. And the picture was when he brought...

flowers, tulips actually to the round table because the market was tulips. It was a boom and in the bubble, et cetera. And we laughed about that. We were one year early. I think we are in a similar situation.

There is no question that this is a bubble in the U.S. equity market. We are, depending on the yardsticks, we are at the highest or second highest market valuation ever in the history of the last 140 years of the U.S. stock market.

And bubbles have a characteristic of going higher and go on for longer than rational minds would dictate. But we have to look what is driving the bubble. The bubble needs liquidity. And liquidity needs to grow all the time. If liquidity stops growing,

then the bubble breaks and the bubble breaks. There could be exogenous events breaking the bubble. There could be economic events.

breaking the bubble, but I think more likely it's liquidity. And liquidity has been dramatically bullish over the last two years. It took me a while at the beginning to understand it, but it was the unlocking of sterilized money from the Fed's balance sheet, the reverse repurchases.

that was injected into the financial system of over $2 trillion. That was really the driving liquidity force behind the stock market. That liquidity is now down to 600 and something billion. And I think it's now in the hands of the banks and the banks have no interest to sell them. So that force and source of liquidity is virtually spent. And then we have another

$800 billion in the Treasury's general account with the Fed that could be spent and ejected into the financial system. But I think the new incoming Treasurer is a market-savvy person who understands the situation we are in. And I doubt that he will spend that money right away and rather

reserve it for a day when it's needed. And therefore, I think we are coming to the very end of the liquidity injection into the stock market. And the other

The questions I have about the current situation are really economic in nature. I mean, everybody is painting a pretty rosy picture, but the world is not really rosy. I mean, world manufacturing or global manufacturing is in a recession-like environment, including the US.

And the U.S. is in a special situation because of a phenomenon that has shown up for the first time in U.S. history, and it has not shown up anywhere else, which is that the supply of labor has dropped below the demand of labor. And that is keeping the employment situation strong. It's keeping the

household income situation strong and supported. And as long as you have rising asset prices like equities and cryptos, etc., obviously that keeps the consumer going and supporting. That's not the case in the employment situation in other regions of the world. So I think the US is an exception. And now we have two factors that are coming into play. One is from Doge.

When Elon Musk and Vivek Ramaswamy want to cut out expenditures from the budget, they said $2 trillion. Let's say they achieve half of that. If they achieve half of that, it represents over 3%, 3.5% or something of GDP. And one guy's expenditures are another guy's income.

So while I applaud such an effort for structural reason very much, I think in the very short term, it is weakening the economy and is a negative. In the short term, it's a huge positive in the long term. So this is one concern I have about the economic outlook. And the other one is the tariffs. I looked at the tariffs and the tariffs proposed by Trump

Really, when you look at it historically, tariffs similar to the period we had in the US between 1900 and 1945, the end of World War II.

And if you, you know, some people think he's using these only for bargaining reasons until he gets what he wants. I'm not so sure about that, but that's another topic. But even if he uses only half of the tariffs that he suggested, then we would have tariffs similar to the period from the beginning of World War I to the end of World War II.

And that was a period not only with two wars, but it was a period that was economically a catastrophe with the world economic crisis, one crisis after the other that eventually led to World War II. And it was the Great Depression and all that. So the medium term decline from the 1929 top.

turned into a disaster because in June of 1930, the Smoot-Hawley Act was introduced and high tariffs were introduced. And a tariff is nothing but a tax. You know, the guy who has to pay more for his goods is taxed.

And the guy who earns less for his goods sold is taxed. And that's a tax. And if Trump wants to replace the income tax or part of the income tax by tariffs, that may work very well in an insulated U.S. economy. But what it does for the rest of the world is a disaster. And the rest of the world is not going to sit quiet and just...

you know, dream up new bubbles, how the world should work. They will retaliate, of course, and they will come up with their tariffs and with their sanctions, etc. And then the world could find itself all of a sudden in a trade war of major proportions. And that's the risk I see. And historically, the first year and a half after the election or the inauguration,

That's the period when the new administration introduces all sorts of new laws and new policies, etc. So that's usually in the markets. That's usually not good for stock markets. And I think this would fit the pattern. So I think we are in for some rough sailing because we are using new policies that we know exist.

do not bring more prosperity, but actually just the contrary, historically speaking. That's the historical experience. And I feel rather bearish about the markets that are very extended on a medium term and even longer term basis.

based on those risks I see. And so, Felix, I've interviewed you several times before. You've made some big bullish calls. You've made bearish calls as well. Most notably, in our first interview in late 2021, which was very close to the top in late 2021 or early 2022, Felix,

Across all those interviews, I've never heard you use the word bubble to refer to the stock market. Now you are calling the stock market a bubble. That's very interesting. Of course, a bubble is one in which

valuations drastically exceed fundamentals and are rapidly going to correct within, you know, let's say you write in your report, Zuluff Consulting, about how valuations for the U.S. markets are in their 98th percentile. So only 2% of the time have they been more expensive. 98% of the time, the stock market has been cheaper. But Felix, if the stock market's a bubble, it can always get bigger, as you referenced earlier, just because valuations are

you know, in their 98th percentile, they can go to the 99th percentile. How are you thinking about when this market is going to correct? In terms of timing, where do you think the top is? Are we already at the top? And when do you think the market is going to stop going up? Okay, Jack, you are absolutely right. Bubbles can grow bigger, of course, and can go on longer and to more extremes.

I gave you some of the reasons why the economy could play foul with the stock market. There is a liquidity reason also. You know, I talked about the repurchase and the TGA and that's U.S. domestic liquidity. But there is something bigger than that, and that's global liquidity.

And there are many proxies where you can look at it, etc. But one of the best correlations I found in the current cycle that correlated extremely well with the NASDAQ 100, the most high bet index there is, is really the yen index.

And the dollar yen parity over the last, what was it, 12 or 13 years or so, went from below 80 to above 160. And Japan in that period had zero interest rates.

And the currency declined uninterruptedly. When the dollar goes from 80 to 160, it means that the yen was cut in half. So you had a funding currency that got cheaper by the day over the years and where interest costs or capital costs were minimal. And that's why the whole world was funding

projects in the real economy as well as in the financial markets by using the yen as a funding currency. That was a source of global liquidity. Now, the problem arrives when the currency, instead of getting cheaper every day, all of a sudden becomes stronger every day and begins to rise. And there is one thing I want to mention.

The central banks of the Western world are all in rate cutting. And not only the Western world, the major central banks are all in rate cutting mode and will remain so for a while, except for Japan. Japan is talking about hiking interest rates. They have 2% inflation and they have 1% interest rates or even less than that.

And therefore they are talking about hiking. So they go against the majority. The other thing is, think about what President Trump will tell the Japanese prime minister when they get together about the currency situation between the US dollar and the Japanese yen. The purchasing power parity of dollar yen is 88.

and he trades at over 150 at the present time. So he will tell them that you better watch out what you do with your currency or we will punish you, etc. That's why even the Japanese are interested to strengthen their currency to some degree. So I think when the Japanese yen begins to strengthen and dollar yen and

Euro Yen and whatever currency against the yen begins to decline, that means global liquidity is beginning to dry up. And that's what I see.

I'm watching the dollar/yen situation very carefully because I think it is key to understand the markets and how markets move. And then I see that the market is very extended. The technical tools I'm using, I mean, I build a fundamental case and then the technicals help you to check your trend and then spot reversals.

And what I see is my proprietary momentum model, so to speak, for the US indices and actually for all the indices around the world is more or less at the monthly sales signal near or at a weekly sales signal and very near a daily sales signal. You very rarely have such a constellation

in the world markets. And it's the same for the old markets. So I think it's a matter of a few weeks until a correction begins. And I think that correction will be at least 1,000 points in the S&P, let's say to 5,000 in the S&P or something like that, into a low in the first quarter. And then we have to see what happens then. If I'm right on that call, then I think

bond yields will decline medium term during such a stock market correction. And we could go down to three and a half or three percent or whatever in 10-year treasuries. That would be the third medium term decline in the declining cycle of treasury yields. You know, this was

from half a percent to 5% was the first up cycle in a new secular trend of rising interest rates. And that cycle topped at five. And we have now we are going to go into the third medium term decline. Usually you do not have more than three medium term declines. So that should be over by the second quarter. So that could mean that from then on, when you have such a correction,

central banks and fiscal authorities will come in and lend support to the situation. If they do so, they could extend the bubble and the market would rally again into later of 25 into even a higher high. That is a possibility.

I think it's too early to say. I will talk about that when we are at the low, sometimes in the second quarter or so. And, you know, we have, it's like a magician right now. There are too many balls up in the air on the economic side and on the liquidity side. And it's too early to carve in stone a scenario for the whole year.

I think it will be a roller coaster year, downs and up moves, big moves. That is good for medium term traders. I'm not sure it is already the end of the secular bull market because there is a possibility that we could have one more rally from a second quarter low into later in the year. But I think after that it will get very ugly and unpleasant.

Usually, when you have parabolic markets like we have had so far, parabolic markets do not correct by going sideways. And going to one extreme on one side usually leads to another extreme on the other side. So we are in late cycle territory.

I think volatility will increase. Bull market in volatility is beginning and you better be a medium term trader than a buy and hold investor for the next 12 to 18 months.

And so you think a thousand point in the S&P 500 within the first or second quarter of 2025, that would be a 17 to 20 percent decline. So in a short period of time, that would be very, very volatile and that would scare a lot of people. What would the catalyst be for that correction in terms of the timing? First of all, the trigger will likely be something that is related to the dollar yen situation.

And that is global liquidity. We should also not forget that there is a bubble nobody speaks about that is very hidden. That's the private markets. There is a bubble in private equity and private debt in the non-public market, in the private markets. And that bubble is probably also at least two trillion.

And that could dry up as well. So there are many things coming together. And then for the timing, I'm using simple technical tools that have helped me during my career to spot the reversal points in the marketplace, as I described them, momentum,

trend analysis, we use differences between shorter and longer moving averages, we use put/call ratios, we use surveys. We have had the biggest inflow into equity markets ever in the last few weeks. So these are all signs not of a bottom but of a top, you know, and it looks familiar to me.

Mario sent me this picture. I think he should have brought tulips in January of 2000. And I think in January 2000, we were trading at Nasdaq 5000 and I was extremely bearish and short.

that market at that time. So I think we are very close to a medium term shakeout. I'm not sure it is the end of the secular cycle from 2009. We could have another run up and that run up would come

if the Fed and other central banks begin to ease and bail out the market. You know, the European Central Bank will be the first central bank in '25 going on QE. And that's not because they love QE per se, but that's because they need to help

financing the governments that are broke, like France, etc. And there is a necessity to do so. And I think the Fed will do so too. Powell is a politician. He's not the monetary expert or economic expert. He's a politician. And if the market goes down 15% or more, he will be there and provide the

all the liquidity that is needed to get the market up again. And then there is, you know, animal spirits and after a correction, people jump in and then you have another rally, how high it will be. It could go to 7,000 or 7,500 or so. It could also be just back to the top, to the highs.

We do not know, but I think this year will be a market with that volatility and not a buy and hold straight up as we have seen in the last two years.

Felix, I want to explain a point you made about the Japanese yen. So for over a decade, the Japanese yen has been getting weaker and weaker against the dollar. And because Japanese interest rates were at zero and interest rates around the world were higher, it was very profitable to borrow in yen, which would get weaker and weaker and yield zero to pay for...

assets that yield higher around the world, whether it's the US, Europe, other countries and the like. And you said that a lot of the global liquidity and assets in the financial system are involved in this yen carry trade, and that the yen getting stronger would unwind that and cause serious market consequences. And you talked about if Trump were to talk to the Japanese prime minister, you said,

because the Japanese currency is so weak, that actually benefits Japanese producers because they can sell their goods cheaper to the rest of the world. So Trump, to use a Trump phrase, he might say that they're, quote, cheating on trade because the Japanese yen is too weak. So the U.S. and Trump and therefore the U.S. wants the yen to strengthen. I know I was speaking to a very serious former Japanese official. His read of the situation, I'll tell you who it is later, Felix, after we finish recording, is that the Japanese people are very unhappy with how

weak the yen is. They want a stronger yen. So Japan wants a stronger yen. The U.S. wants a stronger yen. And therefore, perhaps the yen will strengthen and that will have serious monetary consequences and financial consequences for the markets. That is absolutely correct. That's how I see it. And obviously, the Japanese people agree with me. And I think Donald Trump would agree with me as well. The point is, when people have to

you know, by the yen, they have to sell dollars and euros, etc. And when you sell those currencies in huge quantities, it pushes bond yields up. It pushes interest rates up because they are selling. And as that happens, you create a liquidity compression or a liquidity drying up in those currencies. And that is global financial markets bearish.

as a weakening yen was global financial markets bullish. And Felix, what are you thinking about currencies and the US dollar in particular? So you think the yen could strengthen against other currencies in the dollar, but you write that at present global capital flows are all towards the US dollar and away from virtually all other currencies. So there's kind of a black hole there.

The US is the black hole where all currencies, all money is just flooding into the US, into US bonds, US currency and US stocks. Do you expect this to continue? You said you expect the dollar index, which is now at 107, to rise to 110.

What's your view and why? When the dollar index traded at 100, I said we go to first 106 and then to 110. We went to 108 and we are, I think, in a medium term top.

And you are right that all the capital from all over the world, for reasons that are deeply rooted in the economies and the economic landscape, as it presents itself in different regions and in the geopolitical change that is going on, the capital is flowing to the US.

And then you have the magnet of the big story, the bullish story about the US leader in artificial intelligence and all those rosy scenarios. And that is accelerating the capital flow into the US dollar. And it has probably gone to an extreme. And I think that extreme could end.

as I suggested with the yen. And I think the dollar/yen will be the first to change because you cannot make the same story with the euro. The yen could strengthen due to changes in Japan as they hike interest rates. You cannot make that story in Europe. Europe is a mess. Europe is at best in stagnation.

Europe has priced itself out of the world markets in many ways in manufacturing because they have gone extreme on green energy and they are too costly in green energy and economic activity is energy transformed into a product.

And therefore, they have priced themselves out of the market and they cannot have a strong currency. If they do have a strong currency, it will only be because the U.S. dollar would decline. And that will only come once the Fed decides.

begins to ease dramatically and pursues a very expansive monetary policy, then you could have a change in the dollar. I think it's too early. I don't want to make that call yet.

I think I could see that if, let's say, we have that correction in the stock market and I see the Fed changing dramatically. Right now, the Fed is cutting interest rates, although there are

reasons of economic nature to cut interest rates. They are cutting interest rates just because they want to fulfill their prophecies and prognosis. But, you know, there are quality spreads are not

They are very low. The economy is doing very well. The Atlanta Fed, based on released indicators, is suggesting 3.3% growth. And the stock market is at the historic high and at historic excessive value.

and the Fed is cutting rates. That tells you something about the Fed. It's a political entity, and I think it's not very wise, the policy that they are pursuing. And that actually goes for most central banks.

Felix, far be it from me to disagree with you, but I'll just make the counterpoint for the sake of argument. The Fed would say that the reason they're cutting rates is because inflation is falling. So the real rate of interest is actually going up. And the labor market is, they wouldn't say weakening, they would say softening. So why not cut interest rates? That's what they would say. First of all, prices have not gone down. Inflation has gone down. That means that the consumer...

After having much higher prices in the last few years, prices go up again, but at a slower rate. And I can tell you, I have come to the US for 50 years

And in all those 50 years, it is the first time in the last two or three years that a comparable meal in a comparable restaurant in the US is more expensive than in Switzerland. The first time in 50 years. And I can also tell you a colleague of mine showed me his insurance bill for next year, his personal health insurance.

I see that my maintenance fees for my home in Florida for 25 is up 28% versus 24, and it wasn't stable in 24. So I think the US has a deep-rooted inflation problem, and they have not achieved

inflation in the target zone. And if you really want to be serious about squeezing out inflation, you have to take the risk of pushing the economy into a recession. But you have to go with your inflation rate to 1% or below because in the next up cycle, you need such a low base. Otherwise, you cannot break inflation.

Therefore, I think the Fed is wrong, is doing a miserable job. It has helped to create the bubble. And usually when bubble bursts, it gets ugly in the economy. So you can be very grateful for the bubble, but also very grateful and blame them for what comes afterwards. This is this is.

very irresponsible monetary policy the Fed has done under Powell, under Bernanke, under Yellen and all those guys. It started really with Greenspan. It started with Greenspan. Before Greenspan, Paul Walker was a great guy. He was guiding monetary policy according to the long-term needs of the economy.

All the guys that came later after him are short-term operators, and they want to be liked by the media, by the political establishment, and that's why they don't do a good job. That's a very interesting point, Felix. Thank you. What are you thinking about commodities? I'm talking about oil, about gold, and about agricultural commodities such as wheat and soybeans.

I think the world economy is not in good shape. The US is in a special situation, as I described. If we have the trade talks coming up and more tariffs, etc., that's usually not good for world growth, for global economy. And I would expect that the commodities will not perform very well over the next six months or so.

Oil is interesting because despite all the war activities that have gone on in the Middle East, oil has never spiked.

So it shows that the physical market is very well supplied. And I think that if I'm right about the world economy, that the surprises will be rather to the downside and not the upside. Then I think we could see oil falling into the low 60s and then spike from there at some point, because I doubt that the Middle East will...

you know, start the new peace period. Unfortunately, I think it will remain. But keep in mind,

The Chinese economy is not doing well. It is in a deflationary, problematic situation and trapped for years. And they will not do what the Western world usually does. They will not stimulate like crazy to come out of it because it wouldn't work. It would only make the situation worse. Europe is trapped in...

in a situation where they have become uncompetitive due to high energy prices and due to structural problems of overregulation and an aging population. So the world economy is not doing well. The US is a special place. You have to understand that. And if there are some activities by DOGE

And on the tariff side, that could change also. And that's not very good for commodities. Gold is different. Gold is sort of a...

centimeter for how much governments are liked by the investment community. And I think gold made an important medium term peak around 2800. It is in a correction. I think the downside is about 2400 over the next four months. It could be a very complex correction. But I think what I see from my indicators, I think

The next few months will not be very good for gold. You also have to understand that the big buyers at lower prices were the BRICS, central banks, the Chinese and the Russians and some others.

Turkey, et cetera, and they have stopped buying. And in the last move up, it was the Western speculators that bought. That is weak money. And I think that weak money will probably shaken out during this correction. Once the correction is gone, I think we have another run higher, over 3000 or so. And then we have to look at it again, depending on how the world presents itself.

Yeah, agricultural commodities depend not so much on the general economic pace, but on climate and weather condition, etc., and on geopolitical conditions. And I think with wars going on and sanctions, etc., there could be a bigger tightening move on agricultural commodities from the Eastern Bloc.

And, you know, blocking Ukraine to export agriculture and things like that. That could mean that if we have a little problem in weather conditions for agricultural, then it could be a big problem in the marketplace all of a sudden, because then you have a supply.

disruption. And I think agricultural commodities are sort of bottoming. It's a slow bottoming process, but I think the downside is minimal and the upside could be quite attractive.

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Felix, what do you think about Bitcoin, which is a commodity and has been on a huge bull run and it's now at $100,000? I do not consider myself as an expert on cryptos, including Bitcoin. I do not know how to value these assets. I understand that there is a limited supply.

unlike a fiat currency. And therefore, that's the attractiveness in a world where the central banks are irresponsible in their policies. I understand all that. And I understand that you take

the so-called governance of cryptos or Bitcoin away from the governments that have not done a good job with our currencies. And that should be in a libertarian way. It should be more attractive and more trustful. I understand all that.

However, you know, as a store of value, it's nice as long as it goes up. And I think it goes up as long as liquidity is plenty. Once liquidity dries up, those cryptos, including Bitcoin, will correct. And we know that the big corrections in Bitcoin have usually amounted to up to 80%.

So my hunch is that we will run a little bit further here, short term, maybe to 115 or 120,000. That is possible. I'm not saying that will happen, but it's possible. But if it happens, it would, according to my analysis, terminate a big move up for a big correction, one of at least 50 to 80%.

So when equity markets correct, they correct probably due to a drying up of liquidity. And I think the same will be true for the Bitcoin and the crypto market. And they are much more volatile. So when stocks go down 15%, cryptos probably go down 40 or 50% or whatever. Felix, if you don't have a view on this, we can just move on. But have you heard of a company called MicroStrategy?

I'm not familiar with the details. I understand that they are a big owner of Bitcoins and therefore it's a proxy for Bitcoins. Instead of owning Bitcoin, you own that company that owns Bitcoin. It's almost like an ETF of Bitcoins.

Yes, but they issue convertible bonds, which institutional investors like to buy because the stock is so valuable. So the embedded call option has value. It's always late in these moves. People become increasingly innovative and how they could play that. And I know the more innovative people get, the closer we come to the end of the move. That's my experience. That.

That is a good point. I think you're being perhaps a little euphemistic and generous with the term innovative. So Felix, how concerned are you about the global economy? And in particular, what do you think about Europe? Because I see you write that in Europe,

Sorry, I see you write that in Europe that you say we could expect a major economic calamity. First of all, the European Union is a misconstruction. The European Union is trying to make all the nations equal. And I understand that there needs to be equal industrial standards and things like that. But to making everybody equal in terms of taxes and fiscal policy and whatsoever,

is an attempt that will never really work out well. That's the one thing. And when you do not achieve the equality, then you use the center to

you know, make the equalization by spending money, taxing some and spending money, giving money to others. It is like a communist system. It is very similar to what the Soviet Union was. And these systems to make everybody equal are deeply socialist.

and will become uncompetitive and fail. And the same thing will happen for the European Union. What the European Union has achieved, they say, it was peace. We don't have peace in Europe at the present time.

And I think it is a fair weather construction. And when the situation gets as worse as I think it will economically, it will break apart. You know, the European economies, in my view, will stagnate at best over the next four years or so, if they do not go into a shallow and long-lasting recession, because this is not...

a business cycle problem, it's a structural problem. They have too expensive energy. We buy Russian oil and Russian gas, why are others at the much higher price? Felix, what do you think about China?

As you mentioned earlier, the economy is experiencing deflation and the economy is not in a good place as well. But the stock markets reflect that. And, you know, as legendary macro investor Stan Druckenmiller says, never invest in the present. You want to invest in the future. So if the economy is really bad now and it's going to get better and the stock market is reflecting current very negative conditions, is now a good time to enter the Chinese market? What do you think?

Overdid it. They built too many homes. There are 100 million, some say even 130 million empty homes.

Some of them are sold and not built yet, but paid for, but not built. And the developers are crazy bust. And it's a terrible situation. I have never seen a real estate bubble as big as that one bursting. And it's bursting and it's under control in an autocratic system.

You can keep it under control, but it's a long process to squeeze it out. And I think it's at least a 10-year affair, if not a 20-year affair. Japan had the same problem, but on much lower scale, and it took them 20 years to sort it out. So I think it will take China very long.

Of course, they are developing other industries that are doing well, but it's an autocratic system and they will not do what the Western world does. The Western world, when they have a problem, they always come in.

They throw money at the system, they rebalance the system by bringing asset prices up through monetary injection. By doing that, they weaken the currency and that has been going on. And the dollar today is worth about 2% of what it was 100 years ago. But we are still going on. And they fear that if they started that process, they would end up like the Western system and eventually

run into serious problems. So I think they are trying to go the slow way and therefore the 4% growth or 4 or 5% growth, that's a dictated number by the government. That's not reality. I'm not saying the economy is falling apart. The Chinese have achieved a lot

That is impressive. But this overhang of the real estate sector is a big burden and slows down the process. And therefore, we have a deflationary trap. The bond market has done extremely well, as it usually does in a deflationary depression, so to speak. But the stock market has not. And that's the reality. And as long, you know, China cannot expect it

to enter the big bazooka type of stimulus when they are facing US president and trade talks that are coming up where they come under pressure. So they will probably use some of the stimulus to bargain in a negotiation with Trump.

But I'm not bullish on China, maybe long term. But I think they have many, many years ahead of digesting this problematic situation. That's very interesting. Felix, just to close out this conversation.

So when we first spoke in December 2021, you were very pessimistic on bond yields. They were about 1.5%, let's say. They are now at 4.5%. They peaked a year ago at 5%. You think in the short term, as the stock market will decline sharply in the early part of 2025, that bond yields will go down. So yields down, price up. On a long-term basis, are you still bearish on bonds, however, which means prices down, yields up?

In 1981, I wrote a piece, "The Buy of a Generation for Bonds," when the US in 10 years traded at 15% or so. And I was the first buyer at the UBS buying 20 years, zero coupons of the Treasury bonds. And in June of 2020, when the yield was down at half a percent, I wrote the piece,

entitled "The Sale of a Generation for Barns". So it was just the other side. What we have seen so far, we are in the first cycle, in the new secular uptrending cycle for rates and barn deals.

And the first up was to 5%. And the complex correction to the first up cycle is down to maybe about 3% or so. We hit 360 so far. We could hit 3% or so sometimes towards mid-year of 2025.

if the stock market declines as much as I expect. But after that, I think we will have a higher level for a bottom from where we start the new, the next up cycle in bond yields and inflation, by the way. And the

You know, our economies are pretty much exhausted in terms of demand. And as long as our policymakers try to stimulate demand, as they always have done, it's that of supply. And Trump may be an exception here. We could talk about that.

then there is no way that you cannot prevent a rise in inflation and a rise in bond yields. And in the next up cycle from a 25 low, you will break the 5%. And when you will go up, you will not stop at 550. You will go to 6, 7 or 8%, something like that. And you can imagine yourself what that will do to...

mortgage rates, to financing of the private sector, the private economy, etc. And what it does to the budget in terms of interest costs, etc.

Yes, I'm still on a secular basis, quite bearish on bonds. And that is true worldwide, except maybe for China. And Felix, what do you think the Trump administration will look like for the economy and markets? You said that you think tariffs could be inflationary, but you also say he will be pro-growth. Just tell us what you mean by that, as well as your other thoughts.

If I understand correctly what's going on in Washington, then I think Art Leff will have a big saying and his idea of flat taxes or low tax rates to create more supply and have decent growth is a good idea. That's a good idea. However,

You know, that was what Ronald Reagan did in the early 80s when he was elected. And Art Leffer was actually the advisor to Reagan at that time. The problem is with Reagan at that time, the government debt was $800 billion or so, and it went during Reagan's time to $2.6 trillion, something like that.

Now the amount of debt of the government is 36 trillion. So it's a different starting position. And tariffs are obviously very tricky and difficult to understand how much damage it could do to the U.S. economy because the U.S.,

may think it hurts the other guy, but it will backfire and it will hurt the US as much. And therefore, you know, the idea is the right one. I would have loved to see it happen 30 years ago. It comes a little bit late. And therefore, I have some reservations whether it will work out the way we all hope for.

I hope it will be successful. It would make the US the bright lighthouse again for the world, for the democratic world as a capitalist

model that works in favor. And Felix, you referenced earlier an acronym DOGE, DOGE, Department of Government Efficiency, which aims to cut out government waste. Felix, when I look at the government budget, I see a lot, so much through Social Security, Medicare, Medicaid, defense and interest expense. You know, when I look at this narrative that there are these vast hordes of

federal government bureaucrats who are doing nothing. And that is the reason why the budget deficit is so high. I'm just not seeing it in the numbers. And I looked at in terms of the federal workforce, so not state and local governments, but federal workforce, there are fewer federal government employees now than during 19. So I think really a lot of the government waste

is in the defense namely the pentagon you write about how the pentagon has failed its uh sixth or maybe seventh audit in a row and there's hundreds of billions of dollars in the budget that we don't know what happened you know to call it the deep state it will vivek ribaswamy and elon musk be successful in taking on the deep state and in cutting wasteful spending

from the Pentagon? President Trump said when he was elected that he will dismantle the deep state. And I would applaud that because the deep state, not just in economic and money terms, has been a problem. It's also a geopolitical force that is very questionable and does sometimes things it should not do. So I would be very happy if...

He eliminates or reduces the deep state to a much lower influence. I think 80% or maybe 75% of government budgets in today's welfare states legislated. And it's very difficult to cut out a lot of waste.

So I think these two guys, they are entrepreneurs. They are the bosses. They can tell their people what to do. They will now be faced with government entities, bureaucracies. And I think that is much bigger

to get through and they cannot dictate. They can only make recommendations. So I hope they are effective for the long term benefit. But if they are short term, it will be painful. And it's always like what you see in Argentina going on. This is a great attempt to change. And it was possible because things were so bad.

And I applaud what he's trying to do. But first, before you are successful, there is a period when pain goes up and grows bigger for the people. And you need to elect, you need to have an electorate who is prepared to take a little bit more pain first. And that's

Big question mark whether that will work, because inside the Republican Party, Trump is not alone, and not everybody is a Trump fan and a Trump follower. So he will face some headwinds also in the political process. Felix, it's been such a pleasure speaking with you. Could you just summarize your views? And if you feel comfortable, could you use the phrase

the decade of roller coasters, because I feel like that's a very compelling analogy. - I coined that phrase a while ago and I think it will continue. And what we will see in '25 is a roller coaster of a smaller proportion. As I said, a peak in equities very early in the year, declining to a second quarter low, another rally then, maybe even to new highs.

It will be a very volatile year and thereafter, what comes thereafter will depend on the economic policies set in place, particularly on the tariff side and in the attempt to cut out some of the FED in the government budget. In currency terms, the dollar is making a medium term top and should have a correction in the second half.

Bond market should have a rally, interest rate declining from early in the year towards mid-year. But after that, I think we will most likely start the next up cycle in a new secular uptrend. And gold is undergoing a correction with a risk of 2400 on the downside, but it remains in a structural bull market.

Thank you, Felix. People can find your work at FelixZulauf.com. Tell people what is your institutional research service with Zulauf Consulting? What do people get? I publish about every two weeks, even a little bit more than that. And I have quarterly webinars explaining everything in detail with charts and occasional interviews.

guest webinars with interesting people and you can ask me questions via

phone, video or email. And I'm covering geopolitics, political trends, the business cycle of the major economies, interest rates, currency ratios, the stock market and some sectors, as well as the commodity complex. So it's a pretty macro view of the world.

Felix, thank you so much for coming on Monetary Matters. And thank you everyone for watching. A reminder, you can find this show Monetary Matters, not just on YouTube, but on Apple Podcasts and Spotify. And please, if you feel so inclined, leave a review. It really does make a difference. Until next time. Thank you, Jack. It's been a pleasure. Thank you very much for inviting me. Thank you. Just close this door.