2012 Barron’s Roundtable Featuring Marc Faber and Felix Zulauf

2012 Barron’s Roundtable Featuring Marc Faber and Felix Zulauf

Last week, Barron’s published their annual roundtable for 2012 – again featuring two of our very favorites in Marc Faber and Felix Zulauf.

Faber stole the show when he predicted that World War III would begin within five years:  “On another optimistic note, World War III will occur in the next five years. That means the Middle East will blow up.”

Though on the bright side, Faber believes this would be positive for stocks:

It is very positive for stocks and negative for bonds, because debt will grow dramatically. There will be massive monetization of debt. When the U.S. entered World War II total credit equaled 140% of GDP, and there were no unfunded liabilities. Now total credit-market debt is 380% of GDP, and unfunded liabilities make that 800%.

Faber reiterated his preferred portfolio allocation of 1/4 stocks, 1/4 gold, 1/4 bonds, and 1/4 real estate.  I heard him quip on Stansberry Radio that the good thing about this allocation is that usually no matter what happens in a given trading day, something will go up!  (You can catch Faber’s full interview with Porter Stansberry here by the way – it’s excellent).

He thinks the talk about Europe is a waste – they should boot the periphery out, and move on.  He had a good line on Greece:

The Greeks will get more money and pretend to implement austerity, and then buy a few more BMWs. Greece’s bonds need a haircut of about 90%, and even then, the country might not pay off the rest of its debt.

Felix Zulauf, meanwhile reiterated his belief that Europe will be the story for 2012:

Europe is going to be key this year for the markets and the economy. China is slowing; the emerging world is slowing, and the U.S. is barely above water, constrained by its structural problems. I have called the euro a misconstruction since its birth. The problem is a difference in competitiveness among European countries, and you can’t solve it by lending money to the less competitive countries. You have to deflate wages and prices in the south, and inflate the north. But given Germany’s history, it will never inflate.

The members of the euro zone agreed in December that each country could have a structural deficit of no more than half a percent of GDP. If a deficit goes above 3% of GDP, the country will be sanctioned. This agreement now has to be ratified in all countries. But when you agree to such a prescription and you are uncompetitive, your currency is overvalued by 30%, you can’t devalue, and your nominal interest rates are too high, that is a recipe for a depression. It is a death sentence. Several countries won’t ratify the contract, and the next day their markets will be repriced accordingly. They will exit the euro, and the turmoil will go to the next level. Greece is bust in either case. If you can devalue your currency by 40% or 50% in that situation, at least you will have the chance to see the sun again and recover.

What happens at the next level of turmoil?

Zulauf: The banking system goes bust. Assume Greece won’t repay anything, or at most 10% of its total debt. It is not just the government but the private sector that is bust. That means banks in other countries will be in trouble, which means they will be nationalized. Governments won’t have the money to pay for this, so they will assume even more debt. That is the chain of events I expect in 2012, and if you believe it won’t affect the U.S. you are dreaming. The estimated notional value of the over-the-counter fixed-income-derivatives market in Europe is estimated to be about 60 trillion euros. There are many links to the U.S. banking system, although we don’t yet know who is positioned how. If one country exits the euro, all hell will break loose.

Zulauf seems to agree with Hugh Hendry’s take that the situation will have to get worse before the central bankers are allowed to print money in earnest.  Insinuating what Hendry articulated when I saw him – that you may need a nasty bout of deflation before we see severe inflation or even hyperinflation.

Here is the link to the full 2012 Barron’s Roundtable piece – I recommend a stiff drink for permabulls who read on.  Regular readers of this site will be fine, and will likely enjoy the commentary.

If you encounter a pay wall, I’d recommend putting the title of the piece into Google, and clicking through the search, as that is what enabled me to take Rupert Murdoch’s “free ride.”

If you’re looking for more from Marc Faber and Felix Zulauf, we’ve got a lot from them in our financial gurus section.