20% Decline In Stocks By First Quarter 2025? Felix Zulauf on a Bubble In S&P 500, Yen Carry Trade, and Bond Market Rollercoaster
Monetary Matters with Jack Farley
Deep Dive
Why does Felix Zulauf believe the U.S. stock market is in a bubble?
Felix Zulauf believes the U.S. stock market is in a bubble because it is at the highest or second-highest market valuation in the last 140 years. He notes that bubbles can continue to grow and last longer than expected, but they are driven by liquidity. The liquidity that has been fueling the market, such as the $2 trillion from the Fed's balance sheet, is now virtually spent, and the economy is showing signs of weakness, including a recession-like global manufacturing environment and potential economic impacts from proposed budget cuts and tariffs.
Why does Felix Zulauf expect a significant correction in the S&P 500 in early 2025?
Felix Zulauf expects a significant correction in the S&P 500 in early 2025 due to the drying up of liquidity, particularly from the yen carry trade. He anticipates that a strengthening Japanese yen could trigger a wave of liquidations, leading to a 1,000-point correction in the S&P 500, which would be a 17 to 20 percent decline. He also cites economic factors such as proposed budget cuts and the potential for a trade war as additional risks.
Why does Felix Zulauf believe the yen carry trade is a significant risk for the markets?
Felix Zulauf believes the yen carry trade is a significant risk because the Japanese yen has been a funding currency for global projects and financial markets due to its low interest rates and weakening value. If the yen begins to strengthen, it could lead to a liquidity crunch as investors unwind their positions, causing a wave of liquidations and market corrections.
Why does Felix Zulauf expect the dollar to make a medium-term top and then correct in the second half of 2025?
Felix Zulauf expects the dollar to make a medium-term top and then correct in the second half of 2025 because the current capital flows into the U.S. dollar have likely reached an extreme. He believes the yen could strengthen due to potential interest rate hikes in Japan, which would be the first to change the dynamics. The European economy is in a mess and cannot support a strong currency, but a stronger yen could push the dollar lower.
Why is Felix Zulauf bearish on bonds in the long term?
Felix Zulauf is bearish on bonds in the long term because he believes we are in a new secular uptrending cycle for interest rates. While he expects a short-term decline in bond yields due to a stock market correction, he anticipates that the next up cycle in bond yields will break the 5% level and could reach 6%, 7%, or 8%. This would have significant impacts on mortgage rates, private sector financing, and government interest costs.
Why does Felix Zulauf think the European Union could face a major economic calamity?
Felix Zulauf thinks the European Union could face a major economic calamity because it is a deeply socialist and uncompetitive system. He believes the EU's attempt to make all nations equal in terms of taxes and fiscal policy is unsustainable. The European economy is stagnating due to high energy prices and structural problems, and he expects it to either stagnate or enter a shallow, long-lasting recession over the next four years.
Why is Felix Zulauf not bullish on China's economy in the short term?
Felix Zulauf is not bullish on China's economy in the short term because of the massive real estate bubble that is bursting. He estimates there are 100 to 130 million empty homes, and the real estate sector is a significant burden on the economy. He believes it will take at least 10 to 20 years to digest this problem, similar to Japan's experience. While China is developing other industries, the overhang from the real estate sector will slow down economic growth.
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