Felix Zulauf Discusses the Evolution of Markets

He's created an immense amount of wealth for his clients. UH in fact essentially retired from running other people's money to set up a family office to manage his own money. He currently is operating a consulting firm out of Zurich where he's advising all sorts of institute utians, governments, high net worth families about the economy, what they're what the global intervention by central banks and governments means for future growth, Why we need to be aware of the role of

China going forward. UM. I have a UM really long term set of gratitude for to Felix. When I first began playing with the idea of UH. These longer form interviews He was one of the very first people I reached out to a mutual friend. UH introduced us and we did a conversation in two thousand and ten that really was UH the predecessor to Masters in business. So if if you enjoy these conversations, really you have Felix to think, he's the one who who sent me on

the path for this. I could talk about his track record and all the other things he's done over his career endlessly, but rather than listen to me continuing to babble with no further ado my conversation with Felix Zulof. My special guest today is Felix Zulov. He is a legend in the asset management business. He began his career as a trader for Swiss Bank, moved up to research

and portfolio management in New York, Zurich, and Paris. In nineteen seventy seven, he joined the Union Bank of Switzerland and Zurich managing global mutual funds, eventually heading the institutional portfolio management unit and becoming the global strategist for UBS. He founded his own hedge fund, zulof Asset Management, in which allowed him to independently practice his own investment philosophy.

Felix also runs Zulof Consulting out of Zurich, Switzerland. I don't even know how much more of your your background I could read. You've a member of the Baron's round Table for thirty years, have developed just a legendary reputation, and you are also one of the people who inspired the idea for Masters in business. When we had an interview way back in two thousand and ten, Felix Zulof, Welcome to Bloomberg. Thank you very much, Berry. Great to to be get your guest here. And I I like

to hear that I inspired you. You definitely did so. So I I gave that background of the early career of yours. Um, what motivated you into the investment business? What what drove you in that direction? You know, I was a college dropout actually, and my parents requested that I lawrened solid profession and that was the profession of a bank at that time. At that time, it was still a solid profession and and you didn't need a

college degree for that. I didn't need a college degree for at and I went to a bank and worked for a bank as an intern. They educated me. It was very boring. Banking was very boring at that time, and once I went to the investment department, it became lively. You know, something started to move, and I was interested to see what made things move. And I asked the people there and I got so many answers, and I figured out very quickly that they had no clue. So

I wanted to learn what made those things move. And there were no opinion leaders in Europe at that time. That was in the late sixties, early seventies. So I looked for the US because there were some opinion leaders and I read them and I made the decision that I wanted to be able to make those decisions like they and found my opinion on solid research. So this

is how it happen. So so give us some of the names of the U s opinion leaders that attracted you in the late sixties and early you know, the one that inspired me the most was Bob Farrell. So, the legendary Bob Farrell, uh first technician at Merrill Lynch ran the research department. Am I am I getting his CV correct. He ran a market analysis department. It was a technical analysis department at that time, and I think he is the dean of technical analysis and had a

department of about twenty people at that time. By the way, you're not the only person who have referenced Bob Farrell as a huge influence. I could give you a list of of a dozen people. What was it like working with Bob Farrell. Well, I spent a few weeks as an intern at Bob Farrell's department. He sent me right next to Bob practor at the desk. Really uh, and I heard about one, two, three, four, fives and and a b c s and things like that, and I wave and you don't strike me as an Elliott wave

of technician. I I looked at it, and I learned it, and I read the books. And Bobby is still a colleague of mine. I visited him a few times at his home in Gainesville, Georgia. UM. But I figured out after some years that all of a sudden, you see threes and fives and abc s everywhere, and it pollutes your mind, you know, And it is there is a subjectivity to the to the theory. It can be very helpful at times, but it is one of many tools to say, to say the least, what did you learn

from working with Bob foul Bob Farrell. Um, he's a modest man, a true gentleman, and a very good friend. And I learned from him not only the modesty. I learned from him house sentiment changes over time. He gave me a booklet very early, uh, the One Way Pocket. That's a classic and very small, little, very small little booklet was written one hundred years ago in nineteen nineteen seventeen, and it describes what happened in the Wall Street brokerage

firm by the action activity of the clients. And he chose how sentiment changes over a full cycle in the stock market, from the lows, the bottom to the peak and and and that really made a big impression on me.

So I started to learn that. So around shortly after that time, nineteen seventy three, you identified markets as having been very toppy, and you short of the market broadly, pretty much right before the seventy three seventy four bear market, which was a fifty seven percent collapse in US equities. What led to that decision and what did you? Um, what was your thinking like back then? That was before

I met Bob Farrell. Uh, And yes, I met an English gentleman, a good friend of mine when I worked at a brokerage firm in Paris, and he showed me technical analysis, pointed figures and cycles and all that stuff. And I did my analysis and I came to the conclusion that the market is due to top and to go into a bare market. That was before the first hike in oil prices and the first oil crisis hit, and I speculated my The owner of the shop asked me to to become a salesman at in Paris. I

was an intern at that time. I was twenty three years old, and he said I should play with my own money, and I said I do, but I don't have enough. So he asked how much do you need and I said, UH, have a million. At that time that was a lot of money. And he gave me the half million and I started to build a short position on credit. Marchin UH and I wrote, I wrote the whole market down, and I was almost killed in the bear market really in UH in fall of nineteen

seventy three. It was brutal from someone to fall. So I learned. I learned the business the hard way with my own money, right hardly hard way, and and painfully. Let's talk a little bit about the early days at at UBS. You started in the mutual fund and research department, you worked your way up to global strategists over the course of five years, and then you ran the institutional portfolio department a few years after that. That's a pretty

quick rise to the top of a major bank. What what were you doing that had you stand out so much from your peers. Well, I think it was a different time than it is now, and I was ahead of my peers because I didn't go to university. I worked it up the hard way. I was a speculator and a practitioner, and I read probably more books than those guys who went to university teaching business and learning business and economics. So I was way ahead of that

in terms of knowledge and practice experience. When I was in my upper twenties and I ran, I ran mutual fund at UBS, US equity mutual fund by the way, and I I outperformed. I did very well. I was an aggressive young man at that time. Then they merged research and mutual funds and I had to be on top of being a mutual fund manager, I had to

be a research analyist, which I which I hated. Really, I I didn't like it because I'm not the stock picker and company analyst, although I I did produce research, research reports and things like that, but I I was in love with macro and that is my field of

expertise and that's where I feel home. And so I was given the position of the global strategist at an age of thirty virtually, and I was the global strategies for the whole group worldwide when I was thirty, and that was way ahead of my peers at that time. And you sort of described this as being unburdened by a classical education as an advantage. Absolutely, I think I learned the business from the practical side and not from

the theoretical side. I read and started the theory near next to it, but it was not the driving force. I was a practitioner, and I wanted to learn the theories behind what makes the world moving and what makes markets moving. But it was not that the theories that the world is moving like this and therefore stocks or bond prices have to do this or that. You know it.

I started from the other way around, so you you didn't have any bad ideas to unlearn, That's right, you know, I have the best stock picker I know in in Europe with an outstanding track record. He's a dentist by education, and he then went into consulting business consulting and learned all that, but he was never biased by learning the theories early on in his career. And so I think this is an advantage, or it can be an advantage.

In my case, it was you've been doing the Baron's round Table for thirty years and you announced this year is going to be your last. Tell us the thinking behind that, what what led them to invite you, and what did you decide? Okay, three decades is plenty. I visited Barons in early nineteen six, and I did so because I was asked to do so from the bank.

The bank wanted to have a better saying and the better world in the world of investments, and so they sent me on a mission to see the media, etcetera. And I you in New York at the time. I was in Switzerland at the time, and I visited Barns and I gave an interview and the title of the interview was Investors Hell and Traders Paradise, and that's what I said. It was in early eighty six and I said the market would move sideways, up and down and

up and down. Great for traders, but horrible for investors. And I said in that interview that the Soviet Union was bankrupt and would decay, and as a result of that, interest rates would decline, inflation would decline, interest rates would decline for many years to come. And Ellen Abels and then wrote me a letter and invitational letter to join

the Baron's round Table. And that's how it happened. And then thereafter was eighty seven when I was running the institutional portfolio management at UBS and Zurich, and I did something that probably nobody ever did before or after. I went to zero equities and we were unloading equities for

weeks and weeks and weeks. And I was criticized by general management for doing that, but it was because in the early eighties eighty two, I increased or I pushed the bank to increase equity to sixty, which at that time was unheard aggressive for a continental European to be a fifty fifty. Absolutely, absolutely, and then I wanted to cut back in in summer of eighty seven. By the way, in the summer of eighty seven, the S and P five hundred was up about thirty five percent year to date.

That that was up a is that a fair number. I think it was not from the bottom or from the year from year date before the crash, it was mid thirties and maybe even not tell you. I cannot tell you the exact number, but it was way up. It was huge way. It was way up. And I wanted to cut back, and the investment committee followed, and we decided to cut back, and then general management intervened and uh, and I thought they should care about their business,

and we did the investment side. And I that's why I made an extreme example a statement that we go to zero, and I ordered all my portfolio managers to go to zero equities. But I explained them why. I explained them the reason. I didn't know that the crash was coming. I expected declined for the next six months or so, as opposed to in a day and picked the trough almost four almost The market went just about flat on the year after the crash. Is that about right?

I really do not know. I'm gonna I'm gonna say that's ballpark that maybe that maybe, but we did very well. We we were up a lot markets down a lot, and unlike the US market, the European markets kept going down for another month after the crash. And interestingly, in in Switzerland, where you had registered chairs and barrel shares,

registered chairs could not be bought by foreigners. So a clever smart investment bank or he created warrants on registered chairs, and those warrants all had a premium of up to running for another year to two years. And I, for myself, I shorted all those warrants because at that time you could shorten on in the future on margin. So all those warrants were down about or so I had a

good year, to say the least. Let's talk a little bit about the Great Financial Crisis, because you said some really interesting things both before and after, and I wanna discuss that a little bit. Heading into the crisis, you were fairly bearished. Tell us, Uh, tell us what the thought process was in the early two thousand's before the financial crisis, well before we had the Asian crisis in the nineteen late nineteen nineties, and we had Ellen Greenspan

running the FED. And I knew Alan Greenspan before he became FED chairman. Uh. He was an advisor to UBS at that time, and we met Davis were months to discuss the world affairs, and his focus will not that appropriate,

but he is a great historian. And I detected because it was the time of the late seventies early eighties when we went from rising inflation to declining inflation, and I asked some lots of questions about deflationary processes, and he was very concerned about another traumatic nineteen thirties and from then on, and you can really go back into statistics from nineteen eight seven on, that trauma sort of

guided monetary policy. It was always too easy for way too long, and this led to the excesses that we have seen before. First the Asian crisis, then we had Night with a big decline in the market, and then we have we have LTCM and and all that and recovery. And due to his fear, he flooded the markets, you know, he flooded the system and and that created the excesses thereafter.

And the excesses was monumental. You had a simple telephone stocks trading at hunter times earnings and things like that. I very specifically remember because of the White two K fears, the FED flooded the system with liquidity in October and over the next six months the NASDAC doubled gain in six months. All that traces back to easy al Yeah, that and and so you had excessive valuations, and then you had rising inflation and rising interest rates, and that

broke the market, no doubt. The early two thousands, everything priced in dollars or credit spiraled out of control, that's right. And then we had that crisis, and that crisis again triggered the next stimulation, you know, support of the system, the next stimulation. And then you had also the economic policy of making housing available for every American even if they cannot afford them, and and all that, and that created the next big excess, which was the land cycle.

And in the center of that cycle was housing, primarily US housing, but also housing in Spain or wherever in the world around the world. Global boom and uh. And it's always important to see what's the driving factor and the driving theme in the cycle ease. So in the last cycle it was housing, really state, and in the current cycle it's China. That's that's fascinating. Now you have a reputation as a perma bear. But in March of two thousand and nine you came out and said, hey,

we're overdue for a substantial rally. Thirty I believe is what you had said. And you were pretty much within days of the low, weren't you. I think it was one day away from the low. Uh. And it is in print in Barrens. I said, now the next six months, we'll see twenty five to rally, and then we'll see he could fall back once again. But I'm not sure. We have to assess it as as as we see it.

It's happened. So that raises the question in my mind, from whence does this reputation as a perma bear come from. That's not a very bearish statement from yeah, and I'm not. I'm not the perma bear. But the label was given to me after the eight seven crash because I called that downturn, and I made very statements, and unlike most others in the industry who are reluctant to make very statements, I call them as I see him. So whenever everybody else who might be bearish is reluctant to speak up,

I do. And and that gave me that label, which is absolutely wrong. In the early nineteen eighties, you know, I was going around as a raging bull. It was a time when you could buy a blue cheap type of stocks, like a union level. You could buy at the that was lower than the dividend yield, and nobody wanted to turn bullish because everybody was sitting in money market that was so high returns at their time, and

I was pounding the table and nobody was listening. So I do not get the reputation of a raging bull. I got the reputation of a bear because of the eight seven experience. I believe. Let's talk a little bit about the current environment, which seems to be giving a lot of people, especially on the hedge fund side fits. What makes today such a different era than than what preceded, And I'm not saying it's different today, I'm saying what is what is the you mentioned earlier? Every cycle has

a different driving force. What's the driving force in this cycle? Well,

the driving force in this cycle is China. But the cycle is somewhat different from previous cycles because we have after Night, after two thousand and nine, we have really entered central planning in a way, because the central banks have taken over to manipulate financial markets to the degree that they move prices where they want to have them, and that is a new element, and that is distorting a lot of things that used to work well in previous cycles and do not work as well in the

current cycle. So that's a distortion. And the question is whether this is a permanent distortion that will be with us forever in the future, or whether this is a temporary distortion. My my understanding is that it is probably a permanent distortion. So so here's the pushback to that, because we've heard variations of that argument from from many quarters. And the other side of the argument is, hey, we've always had the government sticking its fingers into markets. Following

the Great Depression, well it wasn't the central Bank. We rolled out FDIC insurance for depositors, and the new SEC was introduced. You had a huge set of policies after World War Two to stimulate the economy, and then in the seventies we went off the gold standard. So arguably the government has always been sticking its fingers where it

doesn't belong. That's absolutely right. But it sticks more and more of its fingers into where it doesn't belong, and this is a trend, and the trend is then reflected that the government share of our economies is on the rise as as a trend, and the interference is on the rise, and the free markets are on a decline. And and this is the change. I think it's a structural secular trend change that we have seen. It started very slowly in eighties, after seven with the central banking

becoming more biased to asymmetric expansionary policy. And after oh nine it was two more steps forward in that process. And I think central banks cannot go back to where it was because if they tried, they would break the system. You knew Alan greenspand personally, he very famously was an iron rand acolyte. He believed in free markets. How is it that this free market libertarian economist put us on

such a track to government management of markets. You know, it's one thing to commentate and in theory what should be done and what's right and what's wrong. It's another thing to be the guy who pulls the trigger, makes

the decision, and is responsible for that decision. And as soon as you are responsible, you move more slowly, more cautiously, and you rather air on the side of making it better for the world, not worse or less painful, not more pain And unfortunately that is true for the short term, but in the long run the outcome is exactly the opposite. You make it less painful in the short run, but you make it more painful in the long run. So at the most recent Barrens round table, you said, today

seems a lot like late nine. Are you implying that we're in a bubble? Are you implying we're about to enter another ten year period of wandering in the wilderness? What does late in that contact? Late nine means that we are late in a cycle that is going to peak, and then we have a a economic slowdown, recession, crisis, and then renewed stimulus. So we are very late in that economic cycle, and we are very late in the investment market cycle. Uh. The exact timing is very difficult

to forecast. I said at the beginning of the year the market should do very well into the summer. I expect a summer peak, then a correction into fall, and then another attempt on the upside into a peak, most likely in the first half of two thousand and eighteen. That worked out well in the European markets. We had a correction in Japan which was more sideways than down, and we didn't have any correction in the US market. The U S market just kept going. And there are

different ways a top could evolve. A top could be a long procedure of a rounding top, or it could be a procedure where the leading theme stocks go into a buying climax. We do not know the outcome. If the buying climax thing develops, it will probably develop over the next few months. And in a buying climax, thematic leaders usually double in the last six months. Really, so we're watching Amazon go through the roof. I'm not saying it it will be that that will spiked up, but

it could happen. It could be very crazy and uh and uh. Of course, the central Bank, I believe, is now very much concerned with rising inflation. As you know, the New York Fed is um is um um gathering its own ways of measuring inflation, and that inflation is close to three. So the New York Fed is the one guiding the Fed to a title policy. So you have you have the excessive building in the market in the lates stage of the cycle, and at the same

time you have the central bank moving against it. So that is usually late cycle stuff that sounds certainly sounds familiar. Here's the pushback, um, i'll you would hear from the balls. Global economy is expanding, it's doing much better around the world. US is is five percent or less unemployment, Japan is improving, Europe seems to be getting off of the trouble we saw to three or four years ago. Earnings are doing better around the world, and we're still very early stage

of main street participating in the rally. They've kind of been on the sidelines for a while and they're finally becoming more aggressive. How do you respond to those arguments, Well, it's it's absolutely right that the world economy is doing right now. It's sold driven by China. I think the US is the least dependent on China. It is um it is different from the e M universe, emerging markets and Europe. They are primarily driven by China. Trade with

China is as important as into European trade. Even in Europe. That's an this for a long time, but Europe is very dependent. The whole revival that you see now in Europe is driven by this uh strong economy in China and and and China. I be Eve is in a interesting position right now. You heard president speech last week, and in twenty twenty one, there is the one anniversary of the Communist Party, and it's very clear that they

want to have a strong economy at that time. If you want to have a strong economy in t one, you stimulate in twenty twenty. And they are central planners, right, so they're leading, So that means they have to take the pedal off the foot of the pedal in eighteen nineteen, and I think eighteen nineteen they will address the imbalances in the financial sector and that will slow down the Chinese economy in eighteen nineteen, and it will slow down

also the rest of the world. So we are entering a period we are sometimes in eighteen I would say, from the peak probably in the market is in the first to have the peak in the economy is probably from meat eighteen on, and then we slow down into twenty okay, if if that is correct, And twenty twenty two is the next National Congress and president she is probably the first leader who tries to run for a third time as president, so he wants to have a

very good economy in twenty one twenty two that means he has to first slow things down, restructure some of the imbalances in the system, because if he tries to carry through, he could he could backfire to him, it could be the worst of all worlds, namely a completely overheated situation with high inflation rates, etcetera, etcetera. And that's why I think the leader of the cycle, China, is

going to slow down next year. So the whole global economy is dependent on President She's re election desires in two As I said before, you always have to figure out what east light the leading theme in the market cycle. In the last cycle, it was really state in these cyclides, China, and that's why China is so important. China is the second largest economy and in ten fifteen years it will be the largest economy of the world. I don't even

think it's gonna take fifteen years. We have been speaking with Felix Zulov of Zulov Consulting and everywhere else that he's worked previous to that. UH. If you enjoy this conversation, be sure and stick around for the podcast extras, where we continue chatting about all things macro economics, investing, and global economy. UH. Be sure and check out my daily column on Bloomberg View dot com. You can follow me

on Twitter at Ridolts. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. I'm Barry Ritol. So you're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. Felix. Thank you so much for doing this. I mentioned earlier you and I had a conversation in two thousand and ten. I think it was over the phone. You're in Switzerland and I was in New York, You're in Zurich, and um that conversation where we had a long, in depth

discussion about macro issues and we spoke for about an hour. Really, the response to it and the idea that hey, everything doesn't have to be a short SoundBite. We don't need to do these five minute segments followed by a commercial, and we don't need to ask what's your favorite stock, when's the fed goot rays? Where's the DAL going to be next year? Instead get to a little more depth, really was the genesis of this show. So I have

you to thank for this. This, this, as I'm fond of saying, is the most fun I have all week. That's very flattering, thank you very much. So so we were talking UM during the break before about UM some of the challenges during UM ninety seven and ninety eight. Is this year looked like ninety nine is a ninety six? You said, this kind of looked like in some ways. Explain that. Well, in ninety eight we had. In ninety seven, we had the the Asian crisis. UH. China had devalued

in ninety four. It's currency by fifty percent, not fifteen five. That's good for sports, isn't it, and h and that got that got the tremendous kicking to China, but it hurt all the Asian economies, including Thailand and Malaysia, etcetera. And then we had the Asian crisis, and Asian crisis was for many a shock, and the central banks opened up the floodgates, and then we had markets going higher again. And then we had ninety eight we had LTCM and that was a big decline UH, and we had a

huge move in the currency markets. The whole world was short the end. I think Julian Robertson at that time that that was a big problem for him, and I talked to him about two weeks before it happened, because I was on the other side of the trade. We were long end short. I was long end short dollars because I expected another hit and and I did it

through options. And how did that trade work out? And I think I think dollar yen went in in two weeks time from one forty five or so to one oh eight or something like that, a huge move move in currency, and that usually takes years to do. Absolutely, so we had a great deal. We had. We were up over. Yes, that that was the currency trade that made it for us. I always traded currencies, I always traded commodities. I always traded fixed income and and stocks

and equities, so pretty much across the board. I was really at home in all the different DIASTA classes. Well, that makes sense because you're a top down macro guy. One of the things we didn't get to earlier that I have to ask you about is the global geopolitical situation. We have the rise of popularism around the world. Uh, Catalonian independence, I was just in Barcelona, was madness um Brexit, and then Trump in the US. Are there similar forces

driving all these things or are they wholly unrelated? And what does it mean to investors. No. I think they are all related in to to some degree and in some way, and I think it's a backfiring of too much globalization or an extreme globalization. Globalization in theory is wonderful because everybody who can produce something cheaper or better than anybody else does that and focuses on that, and then you trade and that is beneficial to all the consumers.

So in theory that's fine. But they are losers also. And when you look at the income statistics, um we have built a new middle class in terms of a big push higher in real income in Asia and the emerging economies over the last thirty years, but at the same time where the real income has declined or eroded in the industrialized economies middle class, and that has been the reason behind the Brexit and the Trump and rising populism.

They are the losers and they want to change. They are losers, or they fear to become losers, and they will. So anyone working in a factory in the US that have seen those whether it's textiles or electronics or automobiles, a lot of those jobs have gone overseas and they haven't been able to find something to replace that. Yes,

there's the same thing in Europe. And you know the big beneficiaries world the platform companies, those who have their tax is paid in places where the tax rate is very low, those who have production where labor costs is very low, and they sell their products worldwide. Those have the big windows and the shareholders of those companies, and

and I think that is backfirrowing. It's changing the political landscape because people are dissatisfied with their governments because it's sort like they are working primarily for themselves and the big companies, the establishment, so to speak. So there is a big push against the establishment. It's in Europe and you see it also in the US. So so let me let's drill down on that a little bit. When when you look at Brexit, it's hard to see how Brexit benefits just about anybody in in the u k.

Certainly it hurts London. We're seeing lots of jobs. I think UBS just announced they're moving a bunch of jobs to Switzerland and Germany away from London. But what does Brexit do for the rest of the Brits? And I guess you could ask the same question, what does trump is um do for the people who who either are working in in industries like coal or textiles that have

either left or on the down slide. Are these people have any realistic hope that their votes are gonna positively affect their lives or they just Hey, the current situation

isn't working, we want to try something different. In Europe, you have that situation where you have the European Union, and the European Union is a good idea or was a good idea originally, but the introduction of the euro made it an idea that moves towards centralization, and move towards centralization when you link currencies together of economies that are structurally completely different and different in terms of competence, it said, are you shouldn't have the Greeks borrowing at

the same radios you create, you create imbalances, You create imbalances, and the imbalances have to be rebalanced by transfer payments, and that by definition means more socialism, more redistribution, and that makes an economy less competitive in the term and the productivity and prosperity goes down. So it's a bad idea and one of the cornerstones of the European Union

and the free market is free movement of people. And that free movement of people in a in a area where you have completely huge differences in income and huge differences in west and huge differences in social security standards and social welfare, etcetera, creates migration movements and you get people moving from the poor places to the richer places. And so the UK got a lot of inflow from

Eastern Europe and the and the bridge. The people were afraid to lose their jobs to those people because they were working for less money and uh, and they feared they could lose their jobs and that's why they voted for Brexit. Actually, the UK leader Cameron was meeting with Brussels and Berlin before the Brexit vote and said, give us um a good point that we can open up a little bit or close the door to some degree, that we can have better control on migration. And they

denied it. Although migration in total in the EU is not a big problem and they are very dogmatic. And that creative Brexit And can the bridge turn around and say you could come here, but you don't qualify for social security or healthcare or whatever until after next years. That was the idea, but that was not tolerated by

the EU, and that's why we have this situation. I think if the BRIDGE are smart, and right now they are in political disarray, uh, but if they were smart, they could decide what sort of policy serves their own country best and do exactly that and position them to attract businesses and uh, and that would be very beneficial. At the present time, terrorism may Is has lost her compass completely. She will probably be a transition uh figure.

And you need a new government, a new leader to to make break sit work for the UK makes sense. Over the past few months, I've been in half a dozen European cities, in France and Spain and in Italy, and everybody wants to talk about Trump. The Europeans are fascinated sort of with a amused, oh U silly Americans type of questionings. So, what's happening in the States, what do you think of Trump? What do you think of what's gonna happen with Trump and China? What's gonna happen

with Trump and Korea? We get these questions where they're they're sort of like amused that this is not the usual situation, But there's an undercurrent of this is potentially very disruptive and very serious. So let me put the question to you, what's the European view of what's happened in America and how do you think this plays out? Well?

I differ from most of the Europeans. You know, they look at it and and find it ridiculous what's going on in in the US, and say, oh, those silly Americans, etcetera. You know that. I I think Trump went through the primaries and he beat fifteen members of the Republican establishment, and he was the only candidate who read the zeitgeist right, you see. And whether he has the character, the character and the personality to lead the US as a president

is another question. But he was elected for reasons to change policies, and and I think since Bennon has left, which was his ideological compass, in a way, I think it looks to me like the establishment has taken over at the White House, regained regained control. And I think this is not for good because this means Trump will not be able to deliver what he promised, and and and only a very small fraction, if at all, that means all the voters who voted for Trump will get disappointed.

And I think the next US president will come from a political side that is left of Bernie Sanders. Really absolutely, I think who's left of Bernie Sander? Yeah, I don't. I don't know the name yet, but I think you know, a lot of Democrats, the losers of globalization voted for Trump.

That makes sense, and and I think they will be very disappointed, and they will next time go with the socialist who promises them a better life and and and anti healthcare, guarantee education, and so we have we have rising socialism, not just in the US, we have it in Europe as well. We have rising socially. We also have rising nationalism because of of of globalization that has gone too far and created too many losers. We have

rising nationalism. Isn't it kind of black and white? They're like, you can't be a little pregnant, you can't be a little globalized. Either there's free trade and globalization or not. How do you have less globalization? Either you have tariffs and restriction on trade or it's open or am I

oversimplifying that? You know? Um, China entered the World Trade Organization in two thousand two, and they cheated every They stole technologies, they copied patterns notorious for that nobody ever intervened, nobody ever sanctioned them. If they had played again according to the rules, there would have been a different outcome, would have been a slower development process in China, and the globe realization problems so to speak, would have been

much smaller. But nobody sanctioned them. And um and I think that's the problem. You have a system in China, a central planning system that were run in the last twenty years for employment, not for profits, whereas in the World Trade Organization it really states that an economy should be run for corporate profits. You know, those are two ideologies that do not fit together in World trade organizations,

so that creates the problems. But the coming to geopolitics on that side, it's very important that if the world economy cannot grow enough over the next ten years, and I think this is a fair assumption given the demographics we have. If you look at the age class of up to sixty five years per year in the O E C D, China, Brazil and Russia in the in that in that area we had since the nineteen fifties every year twenty five to thirty million more people tremendous growth.

In two thousand and eight, we had fourteen people only new growth. Today we have one point seven for for two thousand and seventeen. Next year it's zero. Thereafter until two thousand and thirty five, the number declines to a negative twelve million, So you have a negative growth rate. Productivity growth has peaked and this declining, and and if you combine population growth and productivity growth, you know the

outcome will be very low economic growth. And that creates a fight for a more share of the I that doesn't grow enough, and that creates competition, it creates protectionism, it creates conflicts, and you have a situation where the hedgemon, the world hedgehum on the US, is being challenged by a new power, China. And for the first time a Chinese president said it very bluntly, we want to be number one in ten fifteen years. We want to be

number one. We want to close the gap of the leading corporations to the Western world, UH, and then surpass them. We want to be a major military power, and we want to make an influence on the world. UH. This

is quite a challenge. And when you look at history, you can go back the last time we had such a situation was about a good hundred years ago in the late nineteenth century early twentieth century, when the leading hedgeman was Great Britat, and to some degree France and Germany came up and they challenged them, and that led to conflicts. And I think we are in for rising conflicts in the world over the next tent to twenty years.

So that's that's an interesting structural framework for the next question, which is the US and China are such big trading partners. Were so reliant on them as a manufacturer. They're reliant on us as a consumer market, and we're separated unlike Germany, France and England were separated by the Pacific Ocean and

thousands of miles. Can we avoid the problems of the twentieth century with the two great powers in the twenty one century or is the same old routine going to play out and it ultimately leads to a very costly and damaging war. The hope is that he does not, of course, but the risk is that it does. And you know, the time period I described in the late nineteenth century and early twentieth century was very similar to today.

We had globalization, at that time. We had free capital movement at that time, so we had no capital controls, nothing, which came later during the wars and after the war, we had capital controls, rising nationalists. We had rising nationalism. We had migration, huge migration waves. There was a big wave coming to the US at that time. And you

had terrorism. And you had terrorism at that time against the establishment because the whole situation produced losers, and the losers were fighting against the establishment and that's why you had terrorisms. So we had I think we just had the hundredth anniversary of the bombing down on Wall Street. There's still could still see um damage on the buildings from where someone brought up a horse drawn carriage and and blew it up. You see, that's a century ago,

right about when you're talking. I think so. So it's not the same, but they are similarities, and there is you know, in the world, people act as they act and and people vote, and uh. To avoid conflict, you need to leaders who understand all that and want to work it out in a peaceful way. I don't see that situation with the current leaders playing out in a

peaceful way. Huh. It's interesting. So I'm trying to think of who is left of Bernie Sanders and yet is articulate and rational enough and intelligent enough to negotiate some sort of deal with China that everybody can live happily ever after. You know, protectionism and nationals is not here seeing Trump. It has been there before, but the election

of Trump made it bring up to the surface. So the next president, to wherever he or she will be, will continue on that policy line of protectionism and nationalism. I'm pretty sure about that. I wanted to ask you about, um, what's going on in the world of hedge funds Before I get to my favorite question, Let let me let me ask you this. So you ran a hedge fund for twenty years or so quite successfully, um, and your

performance numbers speak for themselves. The past ten fifteen years, we've seen hedge funds really underperform, and not just a little substantially five hundred a thousand basis points on average versus the SMP five D. Why is the modern hedge fund community having such And there are obvious exceptions, we could talk about the shore renaissance technologies or whoever, but by and large, the hedge fund community ain't doing so great.

They're they're about three trillion dollars, so it's a substantial amount of money. What do you see in this environment that's throwing U such a monkey wrench into into hedge funds. Well, the hedge fund by definition hedges part of its bets and and usually under performs in the bull market and makes money in a bear market. Then that adds up to a great long term performance. Uh. This bull market has been going on longer than usual, so it's one

of the longest bull markets in history. And I think most of us did not understand to what degree and for how long the central banks would intervene to the degrees they did, and I think that created a big problem for the hedges because us they had hedged bets out there when you should have been full leverage long you know. I think that's the that's the first problem. The second problem is that you have a situation where long only investors and not so sophisticated long only investors.

So the average guy from the street, he buys his stocks and he has great performance because it's just very it's just doing very, very well. Why do you need hedge funds for because you can do it yourself or the central bank is doing it for you. Uh and and therefore the attractiveness of hedge funds has declined. I think if we go back to a more cyclical environment where you have a down cycle, then the hedge funds will come back. Some will come back and and some

will not. Because in the last cycle you saw that a lot of the hedge funds that used to be hedge funds, as the world implies, world long own lee and they had a few handchees on just to charge the higher feast. But they will leveraged long only basically,

and they got and they got wiped out, you know. So, so you mentioned mom and pop or or the main street investor being long only, that they very much gravitated towards an indexing approach, be it e. T f s at black Rock or mutual funds at at Vanguard um. What does indexing due to price discovery? Some people are calling it distorative of the market. What do you think about the trend? Yeah, I mean it's been forty years in the making, but it's really since the financial crisis

that a lot of people have moved into indexing. What what is this stew to price discovery? What? What do you think the impact on investing is well, it makes it makes actually markets less efficient, and it should create opportunities for stock pickers over the long term, but it may to much longer until the discrepancies are discovered by the market because of indexing that is growing its share

of the market in general. So as long as this trend towards passive investment continues, it's very difficult for talented start pickers to create the extra returns because the value on their investments is there, but the market does not discover it until the passive investment fed is gone or is being reduced. Do you think that this is a fair that's going to go away or is this a secular change. Well, if it's a secular change, then it would have to do with a central planning type of

central banking for the long term. That would lead to an environment of ever inflated as surprises. It would lead to a much higher inflation over time, and it leads to much less efficient economy and um and the less productive economy and the less prosperous economy. I hope that it does not. My theories that it will. Uh so in the next downturn, the next recession, next crisis, you

will probably see that government's all over the world. We launch huge fiscal programs to support the system, fiscal programs, fiscal program we at the end, and then the central

banks on the writing it. So here's the question. With rates as low as they are, even though we've had a few increases, they're still historically very low, do central banks have any room to run monetary policy or is the next cycle them just giving the green light to two governments on the Keynsiean fiscal side, Go spend more, go, do infrastructure, stimulate the economy that way. We've done as much as we can with low rates and quee. Before

the cycle, I thought see was the bottom. Uh, Now I know that zero interest rate is not the bottom. I think next time it will be huge fiscal spending, huge fiscal spending, infrastructure spending to just employ the people and keep the system afloat, and it will be underwritten by central banks. Who else could do it? Central banks will do it. And that leads to a situation that I do that I dislike as a as a citizen of this world. I dislike because it leads to much

more central planning, higher government shares in our economies. Less prosperity, less freedom for individuals eventually. So so that's a good point where we're gonna move on to our standard questions. These are, um the favorite questions we ask all of our guests. UM, tell me something that most people don't know about your background. Well, I just said, I, Uh, the only times I went to university was as a speaker, never as a student. Um. Uh. The other thing, I'm

a happy family father, very modest person. Uh. And I'm a very happy and optimistic person, which is not your public person. As I know, I did not know you did not go to university. I certainly never would have guessed that. I bet a lot of people are unaware of that. Um. You mentioned Bob Farrell as an early mentor. Who else was a mentor of yours? Rico Clarici was my boss at UBS. I learned a lot from him.

He's a cycle guy, and he introduced me to deeper into the business cycles and the long waves and and all that stuff. And he's a good friend nowadays, not as close to the markets that as I am, but he was a great man in my career. He always He also taught me to write, you know, when I had to write the investment strategy for the bank. It was always very tough for me at that time, younger years, and then I handed it into him and he came back all read, you know, and it was so frustrating.

But over time I learned and he was a great teacher. So you went to university with him another with many people. I always say I went to the University of life. Well that's a fair statement. Um. What investors influenced your approach to looking at at markets? Who who do you think change the way you you view the investing world? I really didn't changed. I always have been a macro guy in my younger years. George Soros was uh inspirational

in that sense. I later thought that Stanley Drucon Miller, who is a few years younger than I am, probably played the macro side the best I know. I think he's a great, great guy. So, uh, those were the people that were influential that. That's a pretty good list, Soros and Drucker Millar, to say the least. Um, your favorite books. Tell us some of your favorite books, be

they fiction or nonfiction, investing or or anything. I like biographies. Um, a book that every serious student of the market should have read is one way Pockets that we talked about Jolio. Um, I loved those market Wizard books. Jack Schwegger, Yeah, absolutely, I loved those. Um. I also loved Barton Bags. Um Um hedge hedgehogging, Hedgehogging. That was. That was a great and entertaining book. You learned a lot. Um. Those were the Those are the type of books that I like.

And then uh history, economic history, loads of finance, things like that. Loads of Finance was wonderful. What biographies have you read recently? I have a stack of biographies waiting for me at home that I'm looking forward to get into. The recent book I read biography was the former chairman of UBS whom I knew very well, Um Holtzach, Mr Holtzach, Robert Holtzach. He was really the brain and driver behind making UBS great before the youngsters to coo and running

running against the wall, you know. And he always he always warned against those um fascinating investment bankers who always overdo it. He always warned against that. He praised me in the UBS Journal Internal Journal after the ash of eighty seven. He was the only one who praised me. And I created after that because I knew my career was over. Um any other biographies, I you know, it's it's my one of my favorite nonfiction areas to read.

Yesterday in the office. The person who wrote the Steve Jobs book, I'm forgetting his name, Walter somebody, Walter Isaacson. His new biography of Leonardo da Vinci just arrived. Leonardo, So that's on my list. Give me one more biography that you've enjoyed. It's quite sometime since I read the last one's Winston Churchill read and that everybody loves the Big Churchill biography. Let's let's talk about what has changed,

uh in the industry. What do you think is the most significant change in finance and investing and how has an impacted managing money? The biggest change is the intervention by the central banks and the compliance. I recently had lunch with a friend of mine who was the founder

of a listed private bank in Switzerland. They operate internationally, and he said to me, look, I'm the only entrepreneurial guy at the bank left because everybody else is dreaming by compliance, and I think in investing it's the same thing. So we have lost in a way the entrepreneurial spirit in the field of investment because the central banking intervention just kills it. Huh. That's that's that's quite fascinating. Uh.

What's the next major shift? If central bank intervention and and overregulation and compliance is what led us to today, where do you think things change in the future. Uh. I think that the fixed income market will suffer badly because the way we run our economic policies will eventually destroy the fixed income markets. So you're not just saying this as a market call. You're saying structurally, structually, we're creating problems for bonds. Structurally, Yes, is that corporate bonds,

treasuries or across the board. It's it's basically across the board, because eventually those bonds will end up on the government bonds will end up on the band sheet of central banks. The Bank of Japan already owns more than half of the j g B s. They own already about fifteen percent of the outstanding equities of the market. Um. The Swiss National Bank is probably one of the biggest individual shareholders of all all the large US stocks, corporations and

things like that. That is new. That is new, and I think it's here to stay and that is you're saying it's not very healthy. No it's not. It's it's it's destroying free markets, and it's it's destroying entrepreneurship in to some degree. So let me shift gears on you a little bit. Tell us about a time you failed and what you learned from that experience. UM. I missed the rise of the Japanese stock market after the crash

of eighty seven to new highs. It was the only stock market that went to new highs into late eighty nine. And that was the pain and the and it was painful for me because I was underway Japan and everybody was jumping on my back all the time. Was very painful, and I refused to join in, which probably was a mistake.

I suffered badly. I had enough um extra returns before from the crash, but it was painful, and I went back to my analysis and UH and I came to the conclusion that Japan would about peek and go down, and virtually on the first day of trading in nineteen ninety January second, I think it was in nineteen nine, I m I put out my big shots in the Japanese stock market, and I wrote it down for I think it was about twelve months or so. It it went forty six thousand, it went down fifty within six months,

and uh, and I made a lot of money. And and all my friends who have been japan bulls before always ridiculed me on the way up and on the way down. They were angry because they lost more than I in that year than what they have made before. And I made more than I have not made before. So how bad? How bad of a miss was it

missing the last year or two of the Japanese? It was mentally, it was psychologically, it was very bad and it and it really helped me to tighten my risk management procedures, because when you are wrong in the market, you increase the risk of making wrong decisions and mistakes. But you weren't short during that run. I was just but underweight. And that's a mistake and and and it hurts, but it's a relatively mild mistake versus being long into the collapse. Okay, I give you another. I give you

another mistake. I made um in night when gold and silver peaked. Silver peaked at fifty at fifty dollars, and um I I was aware that it peaked and I had sold out before or at near the peak, and then it went down to thirty five dollars from fifty to thirty five silver, and then I thought it is now going to bounce to forty five. So I wanted to be smart and I bought silver from for a trade from thirty five to forty five. And instead of going to forty five, he just continued to go down.

And I think at eighteen, I sold out with a fifty loss, and I turned the monitors up. I couldn't see it anymore, you know. I felt sick. And then I went back to the drawing board and doing my analysis, and I came to the conclusion, this thing goes down to ten and uh and I wait, and when we are in the range of ten around ten, I buy again, and I buy three times more than what I owned before.

And I did that. About six months later. We were there and I bought that much, and I I thought we could have a really for maybe six or nine months back to double basically, and he did double. And I was in San Francisco when silver hit. I saw the headline in the Wall Street Journal Silver hits twenty four, and I stayed up late at night in San Francisco to call my office in Zurich that that that morning,

said so I finally came out with the profit. But it was a long suffering, really really painful, really painful experience. It sounds like, so outside of the office, what do you do to relax? What do you do to stay mentally sharp? Um? I read a lot. I I love reading. I talked to friends to actually, I talked to many people. I like communication. I do some sports in winter ice key. In summer, I play golf. I go to the gym, um not too often, once a week or so. I

don't do enough sports. I I walk, I bike. I love outdoors, and I do that particularly where the ground is flat, like in Florida or an island. I have a domicile in the North Sea, so you have you have a home in in Geneva, Zurich in in zook Zo Beach is a suburb of Zurich, all right, And then we're in the North Sea. It's the most German island off the Danish coast. Cold suit. It's a very German, very German island. But I love the climate. I love the calmness there. I love the nature. Um, there are

four golf courses. You can bike, you can walk, you can enjoy the beach. There is a thirty mile beach you can walk. Can you swim there? You know it's cold, But I grew up at the River Rhine that is always called so I'm used to that. And we're in Florida, you spend time. I have a domicile of vacation domicile in in Naples, so it's lovely. I love it. But now we go down this weekend and uh, to look how it looks like, I think the landscape is pretty

much damaged. Right, Well, that's this is still We're still in the last few weeks of hurricane season. So yeah, I my golf clubs down there told me that they lost half the trees. Wow, that's amazing. So what sort of advice would you give to a recent college graduate or a millennial who came to you and said, I'm interested in a career in asset management? What would you say to them? Study history? Study financial history. Also on top of history, UM, look at the long term trends.

Try to understand what zeitgeist and changes in the zeitgeist mean for financial markets. Uh. And after having read and studied all that you go to the details that you need in your day to day business. You know, you you learn um analyzing a company, you learn analyzing an economy. You look at the main factors that are driving a cycle and learn how the cycle works. In at university they do not teach you how a business cycle works anymore.

It's basically mathematics calculations. But they do not tell you how people interaction work in the economy and in the markets. And our final question, what is it you know today about investing that you wish you knew thirty or forty years ago when you first started your career as an asset manager. Quite frankly, I'm glad I didn't know what I know today because I would not have been as aggressive then as I have been. You know, if I knew all the risks that I know today, I would

not have done as well as I have done. So, so a few good words about blind optimism and youth. Is that what you're saying? Absolutely, I think money management is a business for optimists because our system, it's a Fiat currency based system, it's a symmetric towards rising monetary inflation, and that is towards a rising asset prices and therefore a good um portion of optimism. NEIGHBORHOURDS. Thank you Phillips.

This has been absolutely fascinating. We have been speaking with Felix Zulov of Zulov Consulting formally zulof Asset Management, Union, Bank of Switzerland, Ubs, etcetera. If you enjoy this conversation, be sure and look up an Inch or down an inch on Apple iTunes, SoundCloud, Bloomberg dot com, overcast wherever fine podcasts are sold, and you can see uh the other hundred and sixty or so such conversations we've had previously. We love your comments, feedback and suggestions right to us

at m IB podcast at Bloomberg dot Net. I would be remiss if I did not thank the cracked staff we have here at Bloomberg who help us put together these wonderful conversations each week. Medina Parwana is my producer and audio engineer. Taylor Riggs is our producer and booker. Michael Batnick is our head of research. I'm Barry Retolts. You've been listening to Masters in Business on Bloomberg Radio.