Ed D’Agostino:
I’ve been looking forward to this conversation for months, really, because I have a hard time
thinking of another point in my professional career where so many smart people disagree so
much and are calling for different things. Everything from a market crash and a big deep
recession to no recession, soft landing, smooth sailing. I think one thing that has surprised
everybody is just how strong the US economy has been after such a steep rise by the Fed of
interest rates. What are your thoughts on that? Is the economy really as resilient as it seems, or
have we just not seen the lag effect of these steep increases in interest rates?

Felix Zulauf:
It’s a good question. I also thought that at this time of the year, we would see the weakness
coming to the surface in the economy. I never expected a deep recession but a shallow one in
terms of magnitude to the downside. And that’s still my forecast. But I think the rise in interest
rates and the sharp rise in interest rates per certain sectors in the economy, which we already
see—construction, housing, automobiles to some degree. And you see also in credit card
delinquencies. You have the sharpest increase in year-over-year rate of change, I think, in 20
years or even in 30 years. It’s still at a low level, but it’s moving in the wrong direction—or in
the right direction if you forecast a softer economy.
I think the rise in interest rates will be felt over time because refinancing is coming on with a
lack of impact. And as that happens, I think you will see that the consumer will eventually slow
down. I do not believe it’ll be a deep recession because the inventory situation in the US is not
extreme, so I do not see a deep dive or anything like that. My hunch, however, is that there will
be a recession in ’24 or a weaker economy in ’24, with declining corporate profits. We will feel
the tightening that we have seen before. We will feel the impact of the inverse yield curve and
all kinds of that.
I think the Fed made a change in March of this year when we had the banking crisis. And the
banking crisis led to the situation that the Fed—and other central banks in Europe as well—
injected liquidity at large quantities into the system. And I think that liquidity, together with the
games that the Treasury played with liquidity, with the general account that the Fed and with
the reverse repo on the balance sheet, all that added more liquidity than one would’ve
expected without knowing that. And therefore, I think those who expected a recession have
been wrong because of those reasons.
And the repo are now down to 1.3 trillion. And in my opinion, there is 1.3 trillion to go.
And that means by late Q1, that effect is over. And then it is all for real. So you cannot do it an
encore. You cannot repeat that situation. And Janet Yellen tried to prevent the bond market
from playing havoc when a fiscal crisis began to appear. And she just didn’t issue many bonds
and issued everything on the short end of the yield curve. And the money market funds, they
got so much money that flowed over from bank deposits into money market funds, they picked
up and bought the reverse repos. And now the reverse repos, because of that, are coming
down.
So I think you had some special factors relaxing or re-liquefying the system, but primarily the
financial system more than the real economic system, and that extended everything. But my
hunch still is that we’ll have a weaker economy in ’24, and we will have weaker corporate
profits in ’24, and the market going higher first, will go lower afterwards.

Ed D’Agostino:
One of the things that surprised me is we had Silicon Valley Bank, failed.
Like you said, the Treasury and the Fed, they moved very quickly. Nothing else happened. There
hasn’t been that proverbial “other shoe dropping.” Were you expecting something else to
break, or do you think something else might break soon?
Felix Zulauf:
It’s actually the first time that interest rates or bond yields seem to have peaked for the cycle
without an accompanying effect, like a market crash, a recession, a big bankruptcy case, or
anything like that. So maybe this time is different, but those are dangerous words.
My hunch is that bond yields will go lower first. Very short term, they are bouncing. And then I
think they go lower, maybe to 370 or so. My technical work pointed to lower bond yields. But
my hunch is that something is not the way it should be, and therefore, we could have another
spike in bond yields, starting sometime in Q1 into the middle of the year. And maybe at that
time, something breaks. My technical work is calling for this decline, which could be about 370.
And then it could go up 200 basis points.
The whole magnitude for the cycle on the downside, I think, could be to about 3%, plus/minus
25 basis points. But something is not the right way. And what I saw is the bond market bulls are
now in charge, and the consensus on soft landing is extreme. And when forecasts and experts
agree to such an extreme degree, then something else is usually going to happen. That’s Bob
Farrell’s rule, and I think he’s right on that. And I see that the positioning in the treasury market
is the most extreme ever. JP Morgan did a survey at the treasury desk among their clients, and
their clients have never been as long treasuries as they are now in the whole history. In the
whole history. So it’s the most extreme.
Then, there was the global fund manager survey by Bank of America. The most attractive asset
for the next 12 months, they said is, I think, 54% or 53% bonds, which is very unusual. Normally,
it’s equities. Equities are only 25% or 29%. So that’s another extreme. Then, there is an extreme
in how many global fund managers believe that the long-term bond yields have peaked and go
down over the next 12 months. And this number is something like 70% or so. Never seen
before. It’s about twice as high at the extremes in the past 20 years. And when I compare all
these numbers to the last extreme that we saw, that was in late ’08, early ’09, and we had then
another 50 or 100 basis points down. And six months later, it was higher.
So I think the bond market is positioned for a big decline in bond yields. And if the decline only
goes to 370 and then goes up again, we are in for trouble. Then we could see a liquidation
wave, and then we could see 550–570 or something like that. And maybe at that time,

something will break, and we’ll have the normal yield peak that we see in a cycle, accompanied
by a bankruptcy case, a recession, or a market crash, or something like that.
Ed D’Agostino:
A few months ago, I had a similar conversation with Louie Gave, who you know. And Louie and I
were talking about the size of the US government debt and how there is a wave of issuance
coming from the US, from the Treasury. How does that factor in? Because it seems like the
market is ignoring this massive amount of supply that’s going to be coming.
Felix Zulauf:
Well, the market was afraid of it, and that’s why yields went up, because of that. And buyers
held back, and that’s why yields rose. But the wave never came because Janet Yellen was
financing and funding everything at the short end. Almost the whole treasury government at
the short end and not the long end. So she protected the bond market. But this doesn’t mean
that it won’t come. It means that the average majority of government debt has declined to a
level where, I’m not sure, but it could even be illegal because there are rules in funding. It could
even be illegal, and it would force Janet Yellen next year to issue even more percentage rising
bonds.
And these could contribute to what I said, that there could be a possible spike. I would pick the
second quarter for that. And that would give us then the low in the stock market because if that
happens, then bond investors will get burned, and equity investors will get burned. Because the
equity market is trading off the bond market at the present time. The correlation is quite clear.
Ed D’Agostino:
Even if yields go down, say 200 basis points, right? A lot. There are still a lot of companies out
there—at least in the US, on the small-cap side—I’ve heard as many as 30%–40% of the Russell
2000 aren’t profitable. So how do these companies continue to exist when they’re going to be
facing an actual cost of capital for perhaps the first time in their existence?
Felix Zulauf:
You are absolutely right, but the market doesn’t care about it. The market is focusing on what
drives the index, and those are the Magnificent Seven. And that’s another problem I like to
focus on very briefly. We have seen extreme concentration in the late 1990s in telecom and
technology stocks. Those were maybe 50–70 stocks. We had seen extreme concentration in the
Nifty Fifties in the early 1970s. And whenever you see such a tremendous concentration, you
are in for trouble, sooner or later.

What we have now is, for the last 15 years, passive investing has become the way to go, and I
would say being a fad. And this is worldwide. And when you look at the world, and someone
does worldwide indexing, so the world index is 62% US. So 62% of all the money goes to the US.
In the US, 30% goes into seven stocks. You see? And the concentration that we have now in the
market is much bigger than anything we have ever seen before.
So the point is this: if, for any reason, the market begins to turn down and some people begin
selling, these stocks will hurt dramatically because there is nothing else to sell. Professional
money managers had to be in these stocks to perform. And when you are a professional money
manager, you are measured in performance. And if you were not in those seven stocks, you did
underperform. And if you wanted to outperform, you had to go to a lower weight of those
seven stocks.
So I have recently seen a survey that says the largest US hedge funds have 70% of their
positions in 10 stocks. I’m not sure whether that is right or not, but it is symptomatic of the
extreme concentration and one-sidedness in portfolios. So I think, for whatever reason, the
market will go down. And sometime in Q1, I expect the market to peak, probably at marginal
new highs in the indices. Then I think we are in for not just a plain vanilla correction but for
something very serious. And that does not mean that we’ll see a deep recession or deep
economic problems. It just means that an extreme positioning in the market will be balanced
again, and that could mean a lot of downside in the indices.
Ed D’Agostino:
So downside is usually followed by opportunity. What comes after that? What would you be
ready to do? What’s your crash plan, if you will?
Felix Zulauf:
Okay. Well, I think first we go higher to the upper 4,000, 4,900, 4,950, or something like that.
And then I think we break below the October lows of last year, which was 3,500. So quite the
big decline. And you rarely have a year when you have an important high and an important low
in the same year. We had it in ’22. We had it in ’20. We had it in 2018, but those are exceptions.
If you go further back, it was 1987. Then it was, I think 1962… 1937. So it does not occur very
often.
And I think we will then have a high in the first half of the year, probably in Q1, and then a low
in summer. And, if I’m right, and we have that decline in asset prices, it affects the consumer.
Lower asset prices affect the consumer’s balance sheet, and he may be more reluctant to
spend. And we will have a shallow economy, a weakish economy, and we will have geopolitical
problems on top of that. And maybe even the spike in the bond yields for the reasons

explained. If you get that, then you get the authorities to stimulate. And then they will become
aggressive in stimulating, and inflation rates will be 2%–3%, or something like that, by summer
’24. And then they stimulate, and that should really trigger the next up-cycle. And then we go
higher, and I expect it to go to 6,000 or 7,000 on the S&P. And it will be a tremendous run.
Last time we spoke, Ed, I said this decade is the decade of the roller coasters. And I still believe
that. I still believe that what money managers and investors will go through in the coming years
is unseen. We have not seen anything like that before with the big swings in magnitude on both
sides of the market. The long-term bull market is not… The secular bull market is not that yet. I
think we have higher highs ahead in ’25, maybe even early ’26. And then I think it will crash
because if they stimulate, it’s not only good for equity prices, it’s also positive and bullish for
commodity prices. And commodity prices then go up. We have the second big uptake in the
secular bull marketing commodities, and that means that we are probably dealing with over
10% inflation in ’26 or so, I would say, and oil prices near 200.
If we have the war escalating eventually in the Middle East, which is a big risk. If Iran, for
whatever reason, and we could talk about this if we have time, if Iran gets attacked, they will
close the Strait of Hormuz. And if they do that, then you take out 25% of global supply of oil on
a daily basis. And then you have $400 oil as a spike. That would melt our system. So those are
the risks we are dealing with.
The geopolitical situation is extremely fragile. I recently listened to one of the best
contemporary historians, Neil Ferguson, and he had changed. Six months before I heard him, he
was more moderate. And the last time, that was two months ago, I met him in Zurich, in a small
group. I was surprised how much he sounded like what I tell my subscribers. And he said, “The
geopolitical risk is underestimated everywhere. It is a dangerous place out there. And we do not
have any diplomats that could fix the problem.” So that’s the situation we are dealing with.
Usually, geopolitics or politics does not affect the market for very long. If something happens,
it’s a short-term fail. However, if geopolitics or politics change the secular trend of the
economic framework, then it affects markets. And I think that’s what we are seeing. The
unipolar world order that has been very US-centric, with the US as a major hegemon, that is
over. That’s gone.
Ed D’Agostino:
I agree.

Felix Zulauf:
We have now a transition period, which I would call disorder, and the world has to find the new
order, which will likely be a multipolar order. And if we cannot achieve that through diplomacy,
we have to go through wars. And when the top dog is weakened or considered to be weakened,
you have all sorts of conflicts popping up to the surface. Armenia, Serbia, Guyana, Gaza, what
have you.
And I think this will continue because the BRICS are considering the US as weak. And the US is
not in a strong position. I quote again a famous historian who said, “The US needs another 10
years to be ready for war.” So the US is not ready for war. And that creates risks, much higher
risks than we assume.
So this makes for a very volatile world, very volatile markets. And the biggest assets investors
should have is an open mind and flexibility because the moves will be quite dramatic. I think the
shorter moves, the sell-offs that we are seeing now could go down to 4,300, and then we could
go up to 4,900. Those are big moves.
Ed D’Agostino:
Huge.
Felix Zulauf:
And then down to the low 3000s.
Ed D’Agostino:
Yeah. It’s interesting you mentioned Guyana because you’re the first person, outside of another
geopolitical expert, René Aninao, who you’ve probably run into at the Strategic Investment
onference. He’s the only other person that has mentioned that conflict. Most investors are only
hearing and seeing the big stories on the news, so Ukraine and the Middle East. And there’s so
much in the geopolitical sphere happening below the surface quietly that we, being the US, just
don’t seem to have a handle on. So Guyana, if I understand it correctly, the conflict is basically
Venezuela trying to extend its borders to grab the natural resources of Guyana. And Guyana,
what can they do about it?
Felix Zulauf:
I cover geopolitics a lot in my reports to subscribers. And I said at the very beginning of the
conflict in Ukraine—that Ukraine will lose that war. And now it’s decided already. That war is
decided. It’s lost for the West. We can talk about how it will end, et cetera. I have certain ideas,

but it’s lost. And the West will not contribute a lot more because it’s a black hole. You’re using
too much money.
Israel, Middle East is a very difficult situation. Always has been. Always has been. If you go back
in history to the Ottoman Empire, et cetera. And I think the Arab nations, Shiites as well as
Sunnis, have agreed on how to behave. They are pushing for a second nation, a two-state
solution, which is almost impossible when you understand how the West Bank looks like today.
And I think they are, on one line, they are in agreement. And you know the Saudis and the
Iranians, they have not been very good friends. The Sunnis and the Shi’ites, they were like the
Catholics and the Protestants in the old days. But they are together, and I think this is the
power broker China who brought them together. The power broker in the Middle East is now
China. It’s not the US anymore.
And it’s a very difficult situation for Israel. If the Gaza operation is terminated and they turn
toward Hezbollah in the north and attack Syria, then that would call for Russia to participate
because Russia and Syria have agreements, military agreements. So that will pull Russia in. And
Syria also has contracts with Iran, so it would pull Iran in. If Iran is there, then, of course, Israel
is on the other side, and then it pulls the US in. So this is a very dangerous situation. And my
theory is that Netanyahu being in difficulties in no-war times—because he’s prosecuted for
corruption—he’s interested in extending the war for selfish reasons. So I think this is a very
delicate and difficult situation we should monitor as investors.
Ed D’Agostino:
Felix, I don’t want to take up too much of your time, but you mentioned the power broker
being China. We can’t end the conversation without having at least a brief conversation about
China. You mentioned earlier that you feel like commodity prices will eventually go up. And I
want to press you on that a little bit because I have a hard time seeing how commodity prices
go up when China’s economy is where it’s at today. My understanding is it’s struggling, it’s low
growth, and they have their own serious issues with real estate. I know that’s not the entire
economy. But Xi seems to be focused on other areas right now. How do you reconcile the two:
a weak economy for China and yet a commodity growth?
Felix Zulauf:
It’s a very good question, Ed. First of all, if the West expects China to stimulate, like in the old
days, and create high growth, they will be disappointed. That will not materialize. China is in a
structural problem. They have to deflate their real estate sector, and that will cost a lot of
money. And eventually, they have to monetize it. And if you monetize something like that, your

currency goes down. So they will proceed very carefully, and it will be a drawn-out affair, I
would say, at least 10 years.
That means that China is out as a factor in bringing high growth to the world economy. China
has been the driver for many years—that’s over. That game is over. It’s passed. The world
economy is actually growing in real terms, at 1.5%. And 1.5% in the past 70 years has always
been a recession. So the world economy is actually in a recession-like situation.
I do not expect China to increase demand for commodities in a major way. What I do expect,
however, is that the commodity suppliers will restrain supply. So I expect the rise in commodity
prices, not due to strong demand, but due to weak supply. And all you need is a certain
normalization of demand and restrained supply. Keep in mind that 75% of the commodities in
today’s world are controlled by the BRICS. And in the power struggle and conflict between the
autocracies and the democracies, the BRICS are more autocratic, and they will use that weapon
of commodities in the conflict to weaken the other side. I think that is the solution to your
question.
Ed D’Agostino:
So when I put all of this together, part of the world that I’m most concerned about, I think, is
Europe. It seems like Europe’s in a very, very precarious situation.
Felix Zulauf:
Europe is the big loser. Europe is the big loser. And you have to understand, from a geopolitical
point of view, the US wanted to break Europe from Asia and Russia. If you look at the Eurasian
continental plate, it’s 4.5 billion people, okay? That’s 10 times as large as NAFTA. And the trade
increased dramatically. Germany’s trade with China is bigger than Germany’s trade with the US.
And the US got concerned that if these guys integrate more and more, and there is a railroad, a
direct railroad for cargo from Beijing to Germany, you see? So if these guys integrate more and
more, we lose our influence on Europe. And that’s why they had to break that. And Ukraine was
the breaking point because, by provoking Russia to attack, which was the plan. I mean, the
regime change in 2014 was orchestrated by the US. And by forcing the Europeans into sanctions
against Russia, it was the first step in the break. And they are trying to force Europe into
sanctions against China, which will not work because that would be horrible for Europe.
So it’s a different setup. Europe has virtually no commodities. Very little in commodities. So we
are dependent on the Middle East. And if I were the leader of the European nations or even one
of the bigger economies, I would travel to the Middle East and make sure that I get all the stuff I
need for our economies back and forth. They are sitting tight. They are flying to climate
conferences and such things. They do not get it in how weak a position Europe is. And I do not

see any change. I think Europe is the biggest loser of all of that, and that will be seen in the
currency long term.
Ed D’Agostino:
Is there anything that I didn’t ask you that I should have?
Felix Zulauf:
Maybe gold.
Ed D’Agostino:
Gold.
Felix Zulauf:
Maybe gold. I’m constructive on gold. But I think the recent rise was for the wrong reasons. It
was geopolitics. And actually, gold rose together with real interest rates, which has virtually
never happened before. And probably means that gold is very short term, not sustainable,
needs a rest. Eventually, it’ll go higher. I don’t see a lot of downside, and it will go higher. I think
next year, we will see 2,500 or so.
Ed D’Agostino:
And do you look at gold, really, as a currency hedge more than anything else? Or do you look at
it as an inflation hedge?
Felix Zulauf:
I think in the longer term, particularly in the second half of the ’20s, what I described about
rising inflation, rising interest rates, and then a crisis. And in that crisis, I think our governments
will underwrite the economies. Unlike in the 1930s, when they had a stable gold-anchored
currency, and they let the economy down, I think next time they will underwrite the economy
and let the currencies go down, and then gold takes off in a big way.