Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Philo Zulov. What can I tell you?
Speaker 1: He is a legendary investor whose career spans back to
Speaker 1: the late sixties. He has had numerous spectacular calls, very
Speaker 1: often contrarian and against the grain. They have the unique
Speaker 1: advantage of not only being um against the popular voice,
Speaker 1: but being correct. His long term track record has been wonderful.
Speaker 1: He's created an immense amount of wealth for his clients.
Speaker 1: UH in fact essentially retired from running other people's money
Speaker 1: to set up a family office to manage his own money.
Speaker 1: He currently is operating a consulting firm out of Zurich
Speaker 1: where he's advising all sorts of institute utians, governments, high
Speaker 1: net worth families about the economy, what they're what the
Speaker 1: global intervention by central banks and governments means for future growth,
Speaker 1: Why we need to be aware of the role of
Speaker 1: China going forward. UM. I have a UM really long
Speaker 1: term set of gratitude for to Felix. When I first
Speaker 1: began playing with the idea of UH. These longer form
Speaker 1: interviews He was one of the very first people I
Speaker 1: reached out to a mutual friend. UH introduced us and
Speaker 1: we did a conversation in two thousand and ten that
Speaker 1: really was UH the predecessor to Masters in business. So
Speaker 1: if if you enjoy these conversations, really you have Felix
Speaker 1: to think, he's the one who who sent me on
Speaker 1: the path for this. I could talk about his track
Speaker 1: record and all the other things he's done over his
Speaker 1: career endlessly, but rather than listen to me continuing to
Speaker 1: babble with no further ado my conversation with Felix Zulof.
Speaker 1: My special guest today is Felix Zulov. He is a
Speaker 1: legend in the asset management business. He began his career
Speaker 1: as a trader for Swiss Bank, moved up to research
Speaker 1: and portfolio management in New York, Zurich, and Paris. In
Speaker 1: nineteen seventy seven, he joined the Union Bank of Switzerland
Speaker 1: and Zurich managing global mutual funds, eventually heading the institutional
Speaker 1: portfolio management unit and becoming the global strategist for UBS.
Speaker 1: He founded his own hedge fund, zulof Asset Management, in
Speaker 1: which allowed him to independently practice his own investment philosophy.
Speaker 1: Felix also runs Zulof Consulting out of Zurich, Switzerland. I
Speaker 1: don't even know how much more of your your background
Speaker 1: I could read. You've a member of the Baron's round
Speaker 1: Table for thirty years, have developed just a legendary reputation,
Speaker 1: and you are also one of the people who inspired
Speaker 1: the idea for Masters in business. When we had an
Speaker 1: interview way back in two thousand and ten, Felix Zulof,
Speaker 1: Welcome to Bloomberg. Thank you very much, Berry. Great to
Speaker 1: to be get your guest here. And I I like
Speaker 1: to hear that I inspired you. You definitely did so.
Speaker 1: So I I gave that background of the early career
Speaker 1: of yours. Um, what motivated you into the investment business?
Speaker 1: What what drove you in that direction? You know, I
Speaker 1: was a college dropout actually, and my parents requested that
Speaker 1: I lawrened solid profession and that was the profession of
Speaker 1: a bank at that time. At that time, it was
Speaker 1: still a solid profession and and you didn't need a
Speaker 1: college degree for that. I didn't need a college degree
Speaker 1: for at and I went to a bank and worked
Speaker 1: for a bank as an intern. They educated me. It
Speaker 1: was very boring. Banking was very boring at that time,
Speaker 1: and once I went to the investment department, it became lively.
Speaker 1: You know, something started to move, and I was interested
Speaker 1: to see what made things move. And I asked the
Speaker 1: people there and I got so many answers, and I
Speaker 1: figured out very quickly that they had no clue. So
Speaker 1: I wanted to learn what made those things move. And
Speaker 1: there were no opinion leaders in Europe at that time.
Speaker 1: That was in the late sixties, early seventies. So I
Speaker 1: looked for the US because there were some opinion leaders
Speaker 1: and I read them and I made the decision that
Speaker 1: I wanted to be able to make those decisions like
Speaker 1: they and found my opinion on solid research. So this
Speaker 1: is how it happen. So so give us some of
Speaker 1: the names of the U s opinion leaders that attracted
Speaker 1: you in the late sixties and early you know, the
Speaker 1: one that inspired me the most was Bob Farrell. So,
Speaker 1: the legendary Bob Farrell, uh first technician at Merrill Lynch
Speaker 1: ran the research department. Am I am I getting his
Speaker 1: CV correct. He ran a market analysis department. It was
Speaker 1: a technical analysis department at that time, and I think
Speaker 1: he is the dean of technical analysis and had a
Speaker 1: department of about twenty people at that time. By the way,
Speaker 1: you're not the only person who have referenced Bob Farrell
Speaker 1: as a huge influence. I could give you a list
Speaker 1: of of a dozen people. What was it like working
Speaker 1: with Bob Farrell. Well, I spent a few weeks as
Speaker 1: an intern at Bob Farrell's department. He sent me right
Speaker 1: next to Bob practor at the desk. Really uh, and
Speaker 1: I heard about one, two, three, four, fives and and
Speaker 1: a b c s and things like that, and I
Speaker 1: wave and you don't strike me as an Elliott wave
Speaker 1: of technician. I I looked at it, and I learned it,
Speaker 1: and I read the books. And Bobby is still a
Speaker 1: colleague of mine. I visited him a few times at
Speaker 1: his home in Gainesville, Georgia. UM. But I figured out
Speaker 1: after some years that all of a sudden, you see
Speaker 1: threes and fives and abc s everywhere, and it pollutes
Speaker 1: your mind, you know, And it is there is a
Speaker 1: subjectivity to the to the theory. It can be very
Speaker 1: helpful at times, but it is one of many tools
Speaker 1: to say, to say the least, what did you learn
Speaker 1: from working with Bob foul Bob Farrell. Um, he's a
Speaker 1: modest man, a true gentleman, and a very good friend.
Speaker 1: And I learned from him not only the modesty. I
Speaker 1: learned from him house sentiment changes over time. He gave
Speaker 1: me a booklet very early, uh, the One Way Pocket.
Speaker 1: That's a classic and very small, little, very small little
Speaker 1: booklet was written one hundred years ago in nineteen nineteen seventeen,
Speaker 1: and it describes what happened in the Wall Street brokerage
Speaker 1: firm by the action activity of the clients. And he
Speaker 1: chose how sentiment changes over a full cycle in the
Speaker 1: stock market, from the lows, the bottom to the peak
Speaker 1: and and and that really made a big impression on me.
Speaker 1: So I started to learn that. So around shortly after
Speaker 1: that time, nineteen seventy three, you identified markets as having
Speaker 1: been very toppy, and you short of the market broadly,
Speaker 1: pretty much right before the seventy three seventy four bear market,
Speaker 1: which was a fifty seven percent collapse in US equities.
Speaker 1: What led to that decision and what did you? Um,
Speaker 1: what was your thinking like back then? That was before
Speaker 1: I met Bob Farrell. Uh, And yes, I met an
Speaker 1: English gentleman, a good friend of mine when I worked
Speaker 1: at a brokerage firm in Paris, and he showed me
Speaker 1: technical analysis, pointed figures and cycles and all that stuff.
Speaker 1: And I did my analysis and I came to the
Speaker 1: conclusion that the market is due to top and to
Speaker 1: go into a bare market. That was before the first
Speaker 1: hike in oil prices and the first oil crisis hit,
Speaker 1: and I speculated my The owner of the shop asked
Speaker 1: me to to become a salesman at in Paris. I
Speaker 1: was an intern at that time. I was twenty three
Speaker 1: years old, and he said I should play with my
Speaker 1: own money, and I said I do, but I don't
Speaker 1: have enough. So he asked how much do you need
Speaker 1: and I said, UH, have a million. At that time
Speaker 1: that was a lot of money. And he gave me
Speaker 1: the half million and I started to build a short
Speaker 1: position on credit. Marchin UH and I wrote, I wrote
Speaker 1: the whole market down, and I was almost killed in
Speaker 1: the bear market really in UH in fall of nineteen
Speaker 1: seventy three. It was brutal from someone to fall. So
Speaker 1: I learned. I learned the business the hard way with
Speaker 1: my own money, right hardly hard way, and and painfully.
Speaker 1: Let's talk a little bit about the early days at
Speaker 1: at UBS. You started in the mutual fund and research department,
Speaker 1: you worked your way up to global strategists over the
Speaker 1: course of five years, and then you ran the institutional
Speaker 1: portfolio department a few years after that. That's a pretty
Speaker 1: quick rise to the top of a major bank. What
Speaker 1: what were you doing that had you stand out so
Speaker 1: much from your peers. Well, I think it was a
Speaker 1: different time than it is now, and I was ahead
Speaker 1: of my peers because I didn't go to university. I
Speaker 1: worked it up the hard way. I was a speculator
Speaker 1: and a practitioner, and I read probably more books than
Speaker 1: those guys who went to university teaching business and learning
Speaker 1: business and economics. So I was way ahead of that
Speaker 1: in terms of knowledge and practice experience. When I was
Speaker 1: in my upper twenties and I ran, I ran mutual
Speaker 1: fund at UBS, US equity mutual fund by the way,
Speaker 1: and I I outperformed. I did very well. I was
Speaker 1: an aggressive young man at that time. Then they merged
Speaker 1: research and mutual funds and I had to be on
Speaker 1: top of being a mutual fund manager, I had to
Speaker 1: be a research analyist, which I which I hated. Really,
Speaker 1: I I didn't like it because I'm not the stock
Speaker 1: picker and company analyst, although I I did produce research,
Speaker 1: research reports and things like that, but I I was
Speaker 1: in love with macro and that is my field of
Speaker 1: expertise and that's where I feel home. And so I
Speaker 1: was given the position of the global strategist at an
Speaker 1: age of thirty virtually, and I was the global strategies
Speaker 1: for the whole group worldwide when I was thirty, and
Speaker 1: that was way ahead of my peers at that time.
Speaker 1: And you sort of described this as being unburdened by
Speaker 1: a classical education as an advantage. Absolutely, I think I
Speaker 1: learned the business from the practical side and not from
Speaker 1: the theoretical side. I read and started the theory near
Speaker 1: next to it, but it was not the driving force.
Speaker 1: I was a practitioner, and I wanted to learn the
Speaker 1: theories behind what makes the world moving and what makes
Speaker 1: markets moving. But it was not that the theories that
Speaker 1: the world is moving like this and therefore stocks or
Speaker 1: bond prices have to do this or that. You know it.
Speaker 1: I started from the other way around, so you you
Speaker 1: didn't have any bad ideas to unlearn, That's right, you know,
Speaker 1: I have the best stock picker I know in in
Speaker 1: Europe with an outstanding track record. He's a dentist by education,
Speaker 1: and he then went into consulting business consulting and learned
Speaker 1: all that, but he was never biased by learning the
Speaker 1: theories early on in his career. And so I think
Speaker 1: this is an advantage, or it can be an advantage.
Speaker 1: In my case, it was you've been doing the Baron's
Speaker 1: round Table for thirty years and you announced this year
Speaker 1: is going to be your last. Tell us the thinking
Speaker 1: behind that, what what led them to invite you, and
Speaker 1: what did you decide? Okay, three decades is plenty. I
Speaker 1: visited Barons in early nineteen six, and I did so
Speaker 1: because I was asked to do so from the bank.
Speaker 1: The bank wanted to have a better saying and the
Speaker 1: better world in the world of investments, and so they
Speaker 1: sent me on a mission to see the media, etcetera.
Speaker 1: And I you in New York at the time. I
Speaker 1: was in Switzerland at the time, and I visited Barns
Speaker 1: and I gave an interview and the title of the
Speaker 1: interview was Investors Hell and Traders Paradise, and that's what
Speaker 1: I said. It was in early eighty six and I
Speaker 1: said the market would move sideways, up and down and
Speaker 1: up and down. Great for traders, but horrible for investors.
Speaker 1: And I said in that interview that the Soviet Union
Speaker 1: was bankrupt and would decay, and as a result of that,
Speaker 1: interest rates would decline, inflation would decline, interest rates would
Speaker 1: decline for many years to come. And Ellen Abels and
Speaker 1: then wrote me a letter and invitational letter to join
Speaker 1: the Baron's round Table. And that's how it happened. And
Speaker 1: then thereafter was eighty seven when I was running the
Speaker 1: institutional portfolio management at UBS and Zurich, and I did
Speaker 1: something that probably nobody ever did before or after. I
Speaker 1: went to zero equities and we were unloading equities for
Speaker 1: weeks and weeks and weeks. And I was criticized by
Speaker 1: general management for doing that, but it was because in
Speaker 1: the early eighties eighty two, I increased or I pushed
Speaker 1: the bank to increase equity to sixty, which at that
Speaker 1: time was unheard aggressive for a continental European to be
Speaker 1: a fifty fifty. Absolutely, absolutely, and then I wanted to
Speaker 1: cut back in in summer of eighty seven. By the way,
Speaker 1: in the summer of eighty seven, the S and P
Speaker 1: five hundred was up about thirty five percent year to date.
Speaker 1: That that was up a is that a fair number.
Speaker 1: I think it was not from the bottom or from
Speaker 1: the year from year date before the crash, it was
Speaker 1: mid thirties and maybe even not tell you. I cannot
Speaker 1: tell you the exact number, but it was way up.
Speaker 1: It was huge way. It was way up. And I
Speaker 1: wanted to cut back, and the investment committee followed, and
Speaker 1: we decided to cut back, and then general management intervened
Speaker 1: and uh, and I thought they should care about their business,
Speaker 1: and we did the investment side. And I that's why
Speaker 1: I made an extreme example a statement that we go
Speaker 1: to zero, and I ordered all my portfolio managers to
Speaker 1: go to zero equities. But I explained them why. I
Speaker 1: explained them the reason. I didn't know that the crash
Speaker 1: was coming. I expected declined for the next six months
Speaker 1: or so, as opposed to in a day and picked
Speaker 1: the trough almost four almost The market went just about
Speaker 1: flat on the year after the crash. Is that about right?
Speaker 1: I really do not know. I'm gonna I'm gonna say
Speaker 1: that's ballpark that maybe that maybe, but we did very well.
Speaker 1: We we were up a lot markets down a lot,
Speaker 1: and unlike the US market, the European markets kept going
Speaker 1: down for another month after the crash. And interestingly, in
Speaker 1: in Switzerland, where you had registered chairs and barrel shares,
Speaker 1: registered chairs could not be bought by foreigners. So a
Speaker 1: clever smart investment bank or he created warrants on registered chairs,
Speaker 1: and those warrants all had a premium of up to
Speaker 1: running for another year to two years. And I, for myself,
Speaker 1: I shorted all those warrants because at that time you
Speaker 1: could shorten on in the future on margin. So all
Speaker 1: those warrants were down about or so I had a
Speaker 1: good year, to say the least. Let's talk a little
Speaker 1: bit about the Great Financial Crisis, because you said some
Speaker 1: really interesting things both before and after, and I wanna
Speaker 1: discuss that a little bit. Heading into the crisis, you
Speaker 1: were fairly bearished. Tell us, Uh, tell us what the
Speaker 1: thought process was in the early two thousand's before the
Speaker 1: financial crisis, well before we had the Asian crisis in
Speaker 1: the nineteen late nineteen nineties, and we had Ellen Greenspan
Speaker 1: running the FED. And I knew Alan Greenspan before he
Speaker 1: became FED chairman. Uh. He was an advisor to UBS
Speaker 1: at that time, and we met Davis were months to
Speaker 1: discuss the world affairs, and his focus will not that appropriate,
Speaker 1: but he is a great historian. And I detected because
Speaker 1: it was the time of the late seventies early eighties
Speaker 1: when we went from rising inflation to declining inflation, and
Speaker 1: I asked some lots of questions about deflationary processes, and
Speaker 1: he was very concerned about another traumatic nineteen thirties and
Speaker 1: from then on, and you can really go back into
Speaker 1: statistics from nineteen eight seven on, that trauma sort of
Speaker 1: guided monetary policy. It was always too easy for way
Speaker 1: too long, and this led to the excesses that we
Speaker 1: have seen before. First the Asian crisis, then we had
Speaker 1: Night with a big decline in the market, and then
Speaker 1: we have we have LTCM and and all that and recovery.
Speaker 1: And due to his fear, he flooded the markets, you know,
Speaker 1: he flooded the system and and that created the excesses thereafter.
Speaker 1: And the excesses was monumental. You had a simple telephone
Speaker 1: stocks trading at hunter times earnings and things like that.
Speaker 1: I very specifically remember because of the White two K fears,
Speaker 1: the FED flooded the system with liquidity in October and
Speaker 1: over the next six months the NASDAC doubled gain in
Speaker 1: six months. All that traces back to easy al Yeah,
Speaker 1: that and and so you had excessive valuations, and then
Speaker 1: you had rising inflation and rising interest rates, and that
Speaker 1: broke the market, no doubt. The early two thousands, everything
Speaker 1: priced in dollars or credit spiraled out of control, that's right.
Speaker 1: And then we had that crisis, and that crisis again
Speaker 1: triggered the next stimulation, you know, support of the system,
Speaker 1: the next stimulation. And then you had also the economic
Speaker 1: policy of making housing available for every American even if
Speaker 1: they cannot afford them, and and all that, and that
Speaker 1: created the next big excess, which was the land cycle.
Speaker 1: And in the center of that cycle was housing, primarily
Speaker 1: US housing, but also housing in Spain or wherever in
Speaker 1: the world around the world. Global boom and uh. And
Speaker 1: it's always important to see what's the driving factor and
Speaker 1: the driving theme in the cycle ease. So in the
Speaker 1: last cycle it was housing, really state, and in the
Speaker 1: current cycle it's China. That's that's fascinating. Now you have
Speaker 1: a reputation as a perma bear. But in March of
Speaker 1: two thousand and nine you came out and said, hey,
Speaker 1: we're overdue for a substantial rally. Thirty I believe is
Speaker 1: what you had said. And you were pretty much within
Speaker 1: days of the low, weren't you. I think it was
Speaker 1: one day away from the low. Uh. And it is
Speaker 1: in print in Barrens. I said, now the next six months,
Speaker 1: we'll see twenty five to rally, and then we'll see
Speaker 1: he could fall back once again. But I'm not sure.
Speaker 1: We have to assess it as as as we see it.
Speaker 1: It's happened. So that raises the question in my mind,
Speaker 1: from whence does this reputation as a perma bear come from.
Speaker 1: That's not a very bearish statement from yeah, and I'm not.
Speaker 1: I'm not the perma bear. But the label was given
Speaker 1: to me after the eight seven crash because I called
Speaker 1: that downturn, and I made very statements, and unlike most
Speaker 1: others in the industry who are reluctant to make very statements,
Speaker 1: I call them as I see him. So whenever everybody
Speaker 1: else who might be bearish is reluctant to speak up,
Speaker 1: I do. And and that gave me that label, which
Speaker 1: is absolutely wrong. In the early nineteen eighties, you know,
Speaker 1: I was going around as a raging bull. It was
Speaker 1: a time when you could buy a blue cheap type
Speaker 1: of stocks, like a union level. You could buy at
Speaker 1: the that was lower than the dividend yield, and nobody
Speaker 1: wanted to turn bullish because everybody was sitting in money
Speaker 1: market that was so high returns at their time, and
Speaker 1: I was pounding the table and nobody was listening. So
Speaker 1: I do not get the reputation of a raging bull.
Speaker 1: I got the reputation of a bear because of the
Speaker 1: eight seven experience. I believe. Let's talk a little bit
Speaker 1: about the current environment, which seems to be giving a
Speaker 1: lot of people, especially on the hedge fund side fits.
Speaker 1: What makes today such a different era than than what preceded,
Speaker 1: And I'm not saying it's different today, I'm saying what
Speaker 1: is what is the you mentioned earlier? Every cycle has
Speaker 1: a different driving force. What's the driving force in this cycle? Well,
Speaker 1: the driving force in this cycle is China. But the
Speaker 1: cycle is somewhat different from previous cycles because we have
Speaker 1: after Night, after two thousand and nine, we have really
Speaker 1: entered central planning in a way, because the central banks
Speaker 1: have taken over to manipulate financial markets to the degree
Speaker 1: that they move prices where they want to have them,
Speaker 1: and that is a new element, and that is distorting
Speaker 1: a lot of things that used to work well in
Speaker 1: previous cycles and do not work as well in the
Speaker 1: current cycle. So that's a distortion. And the question is
Speaker 1: whether this is a permanent distortion that will be with
Speaker 1: us forever in the future, or whether this is a
Speaker 1: temporary distortion. My my understanding is that it is probably
Speaker 1: a permanent distortion. So so here's the pushback to that,
Speaker 1: because we've heard variations of that argument from from many quarters.
Speaker 1: And the other side of the argument is, hey, we've
Speaker 1: always had the government sticking its fingers into markets. Following
Speaker 1: the Great Depression, well it wasn't the central Bank. We
Speaker 1: rolled out FDIC insurance for depositors, and the new SEC
Speaker 1: was introduced. You had a huge set of policies after
Speaker 1: World War Two to stimulate the economy, and then in
Speaker 1: the seventies we went off the gold standard. So arguably
Speaker 1: the government has always been sticking its fingers where it
Speaker 1: doesn't belong. That's absolutely right. But it sticks more and
Speaker 1: more of its fingers into where it doesn't belong, and
Speaker 1: this is a trend, and the trend is then reflected
Speaker 1: that the government share of our economies is on the
Speaker 1: rise as as a trend, and the interference is on
Speaker 1: the rise, and the free markets are on a decline.
Speaker 1: And and this is the change. I think it's a
Speaker 1: structural secular trend change that we have seen. It started
Speaker 1: very slowly in eighties, after seven with the central banking
Speaker 1: becoming more biased to asymmetric expansionary policy. And after oh
Speaker 1: nine it was two more steps forward in that process.
Speaker 1: And I think central banks cannot go back to where
Speaker 1: it was because if they tried, they would break the system.
Speaker 1: You knew Alan greenspand personally, he very famously was an
Speaker 1: iron rand acolyte. He believed in free markets. How is
Speaker 1: it that this free market libertarian economist put us on
Speaker 1: such a track to government management of markets. You know,
Speaker 1: it's one thing to commentate and in theory what should
Speaker 1: be done and what's right and what's wrong. It's another
Speaker 1: thing to be the guy who pulls the trigger, makes
Speaker 1: the decision, and is responsible for that decision. And as
Speaker 1: soon as you are responsible, you move more slowly, more cautiously,
Speaker 1: and you rather air on the side of making it
Speaker 1: better for the world, not worse or less painful, not
Speaker 1: more pain And unfortunately that is true for the short term,
Speaker 1: but in the long run the outcome is exactly the opposite.
Speaker 1: You make it less painful in the short run, but
Speaker 1: you make it more painful in the long run. So
Speaker 1: at the most recent Barrens round table, you said, today
Speaker 1: seems a lot like late nine. Are you implying that
Speaker 1: we're in a bubble? Are you implying we're about to
Speaker 1: enter another ten year period of wandering in the wilderness?
Speaker 1: What does late in that contact? Late nine means that
Speaker 1: we are late in a cycle that is going to peak,
Speaker 1: and then we have a a economic slowdown, recession, crisis,
Speaker 1: and then renewed stimulus. So we are very late in
Speaker 1: that economic cycle, and we are very late in the
Speaker 1: investment market cycle. Uh. The exact timing is very difficult
Speaker 1: to forecast. I said at the beginning of the year
Speaker 1: the market should do very well into the summer. I
Speaker 1: expect a summer peak, then a correction into fall, and
Speaker 1: then another attempt on the upside into a peak, most
Speaker 1: likely in the first half of two thousand and eighteen.
Speaker 1: That worked out well in the European markets. We had
Speaker 1: a correction in Japan which was more sideways than down,
Speaker 1: and we didn't have any correction in the US market.
Speaker 1: The U S market just kept going. And there are
Speaker 1: different ways a top could evolve. A top could be
Speaker 1: a long procedure of a rounding top, or it could
Speaker 1: be a procedure where the leading theme stocks go into
Speaker 1: a buying climax. We do not know the outcome. If
Speaker 1: the buying climax thing develops, it will probably develop over
Speaker 1: the next few months. And in a buying climax, thematic
Speaker 1: leaders usually double in the last six months. Really, so
Speaker 1: we're watching Amazon go through the roof. I'm not saying
Speaker 1: it it will be that that will spiked up, but
Speaker 1: it could happen. It could be very crazy and uh
Speaker 1: and uh. Of course, the central Bank, I believe, is
Speaker 1: now very much concerned with rising inflation. As you know,
Speaker 1: the New York Fed is um is um um gathering
Speaker 1: its own ways of measuring inflation, and that inflation is
Speaker 1: close to three. So the New York Fed is the
Speaker 1: one guiding the Fed to a title policy. So you
Speaker 1: have you have the excessive building in the market in
Speaker 1: the lates stage of the cycle, and at the same
Speaker 1: time you have the central bank moving against it. So
Speaker 1: that is usually late cycle stuff that sounds certainly sounds familiar.
Speaker 1: Here's the pushback, um, i'll you would hear from the balls.
Speaker 1: Global economy is expanding, it's doing much better around the world.
Speaker 1: US is is five percent or less unemployment, Japan is improving,
Speaker 1: Europe seems to be getting off of the trouble we
Speaker 1: saw to three or four years ago. Earnings are doing
Speaker 1: better around the world, and we're still very early stage
Speaker 1: of main street participating in the rally. They've kind of
Speaker 1: been on the sidelines for a while and they're finally
Speaker 1: becoming more aggressive. How do you respond to those arguments, Well,
Speaker 1: it's it's absolutely right that the world economy is doing
Speaker 1: right now. It's sold driven by China. I think the
Speaker 1: US is the least dependent on China. It is um
Speaker 1: it is different from the e M universe, emerging markets
Speaker 1: and Europe. They are primarily driven by China. Trade with
Speaker 1: China is as important as into European trade. Even in Europe.
Speaker 1: That's an this for a long time, but Europe is
Speaker 1: very dependent. The whole revival that you see now in
Speaker 1: Europe is driven by this uh strong economy in China
Speaker 1: and and and China. I be Eve is in a
Speaker 1: interesting position right now. You heard president speech last week,
Speaker 1: and in twenty twenty one, there is the one anniversary
Speaker 1: of the Communist Party, and it's very clear that they
Speaker 1: want to have a strong economy at that time. If
Speaker 1: you want to have a strong economy in t one,
Speaker 1: you stimulate in twenty twenty. And they are central planners, right,
Speaker 1: so they're leading, So that means they have to take
Speaker 1: the pedal off the foot of the pedal in eighteen nineteen,
Speaker 1: and I think eighteen nineteen they will address the imbalances
Speaker 1: in the financial sector and that will slow down the
Speaker 1: Chinese economy in eighteen nineteen, and it will slow down
Speaker 1: also the rest of the world. So we are entering
Speaker 1: a period we are sometimes in eighteen I would say,
Speaker 1: from the peak probably in the market is in the
Speaker 1: first to have the peak in the economy is probably
Speaker 1: from meat eighteen on, and then we slow down into
Speaker 1: twenty okay, if if that is correct, And twenty twenty
Speaker 1: two is the next National Congress and president she is
Speaker 1: probably the first leader who tries to run for a
Speaker 1: third time as president, so he wants to have a
Speaker 1: very good economy in twenty one twenty two that means
Speaker 1: he has to first slow things down, restructure some of
Speaker 1: the imbalances in the system, because if he tries to
Speaker 1: carry through, he could he could backfire to him, it
Speaker 1: could be the worst of all worlds, namely a completely
Speaker 1: overheated situation with high inflation rates, etcetera, etcetera. And that's
Speaker 1: why I think the leader of the cycle, China, is
Speaker 1: going to slow down next year. So the whole global
Speaker 1: economy is dependent on President She's re election desires in
Speaker 1: two As I said before, you always have to figure
Speaker 1: out what east light the leading theme in the market cycle.
Speaker 1: In the last cycle, it was really state in these cyclides, China,
Speaker 1: and that's why China is so important. China is the
Speaker 1: second largest economy and in ten fifteen years it will
Speaker 1: be the largest economy of the world. I don't even
Speaker 1: think it's gonna take fifteen years. We have been speaking
Speaker 1: with Felix Zulov of Zulov Consulting and everywhere else that
Speaker 1: he's worked previous to that. UH. If you enjoy this conversation,
Speaker 1: be sure and stick around for the podcast extras, where
Speaker 1: we continue chatting about all things macro economics, investing, and
Speaker 1: global economy. UH. Be sure and check out my daily
Speaker 1: column on Bloomberg View dot com. You can follow me
Speaker 1: on Twitter at Ridolts. We love your comments, feedback and
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry Ritol. So you're listening to Masters
Speaker 1: in Business on Bloomberg Radio. Welcome to the podcast. Felix.
Speaker 1: Thank you so much for doing this. I mentioned earlier
Speaker 1: you and I had a conversation in two thousand and ten.
Speaker 1: I think it was over the phone. You're in Switzerland
Speaker 1: and I was in New York, You're in Zurich, and
Speaker 1: um that conversation where we had a long, in depth
Speaker 1: discussion about macro issues and we spoke for about an hour. Really,
Speaker 1: the response to it and the idea that hey, everything
Speaker 1: doesn't have to be a short SoundBite. We don't need
Speaker 1: to do these five minute segments followed by a commercial,
Speaker 1: and we don't need to ask what's your favorite stock,
Speaker 1: when's the fed goot rays? Where's the DAL going to
Speaker 1: be next year? Instead get to a little more depth,
Speaker 1: really was the genesis of this show. So I have
Speaker 1: you to thank for this. This, this, as I'm fond
Speaker 1: of saying, is the most fun I have all week.
Speaker 1: That's very flattering, thank you very much. So so we
Speaker 1: were talking UM during the break before about UM some
Speaker 1: of the challenges during UM ninety seven and ninety eight.
Speaker 1: Is this year looked like ninety nine is a ninety six?
Speaker 1: You said, this kind of looked like in some ways.
Speaker 1: Explain that. Well, in ninety eight we had. In ninety seven,
Speaker 1: we had the the Asian crisis. UH. China had devalued
Speaker 1: in ninety four. It's currency by fifty percent, not fifteen five.
Speaker 1: That's good for sports, isn't it, and h and that
Speaker 1: got that got the tremendous kicking to China, but it
Speaker 1: hurt all the Asian economies, including Thailand and Malaysia, etcetera.
Speaker 1: And then we had the Asian crisis, and Asian crisis
Speaker 1: was for many a shock, and the central banks opened
Speaker 1: up the floodgates, and then we had markets going higher again.
Speaker 1: And then we had ninety eight we had LTCM and
Speaker 1: that was a big decline UH, and we had a
Speaker 1: huge move in the currency markets. The whole world was
Speaker 1: short the end. I think Julian Robertson at that time
Speaker 1: that that was a big problem for him, and I
Speaker 1: talked to him about two weeks before it happened, because
Speaker 1: I was on the other side of the trade. We
Speaker 1: were long end short. I was long end short dollars
Speaker 1: because I expected another hit and and I did it
Speaker 1: through options. And how did that trade work out? And
Speaker 1: I think I think dollar yen went in in two
Speaker 1: weeks time from one forty five or so to one
Speaker 1: oh eight or something like that, a huge move move
Speaker 1: in currency, and that usually takes years to do. Absolutely,
Speaker 1: so we had a great deal. We had. We were
Speaker 1: up over. Yes, that that was the currency trade that
Speaker 1: made it for us. I always traded currencies, I always
Speaker 1: traded commodities. I always traded fixed income and and stocks
Speaker 1: and equities, so pretty much across the board. I was
Speaker 1: really at home in all the different DIASTA classes. Well,
Speaker 1: that makes sense because you're a top down macro guy.
Speaker 1: One of the things we didn't get to earlier that
Speaker 1: I have to ask you about is the global geopolitical situation.
Speaker 1: We have the rise of popularism around the world. Uh,
Speaker 1: Catalonian independence, I was just in Barcelona, was madness um Brexit,
Speaker 1: and then Trump in the US. Are there similar forces
Speaker 1: driving all these things or are they wholly unrelated? And
Speaker 1: what does it mean to investors. No. I think they
Speaker 1: are all related in to to some degree and in
Speaker 1: some way, and I think it's a backfiring of too
Speaker 1: much globalization or an extreme globalization. Globalization in theory is
Speaker 1: wonderful because everybody who can produce something cheaper or better
Speaker 1: than anybody else does that and focuses on that, and
Speaker 1: then you trade and that is beneficial to all the consumers.
Speaker 1: So in theory that's fine. But they are losers also.
Speaker 1: And when you look at the income statistics, um we
Speaker 1: have built a new middle class in terms of a
Speaker 1: big push higher in real income in Asia and the
Speaker 1: emerging economies over the last thirty years, but at the
Speaker 1: same time where the real income has declined or eroded
Speaker 1: in the industrialized economies middle class, and that has been
Speaker 1: the reason behind the Brexit and the Trump and rising populism.
Speaker 1: They are the losers and they want to change. They
Speaker 1: are losers, or they fear to become losers, and they will.
Speaker 1: So anyone working in a factory in the US that
Speaker 1: have seen those whether it's textiles or electronics or automobiles,
Speaker 1: a lot of those jobs have gone overseas and they
Speaker 1: haven't been able to find something to replace that. Yes,
Speaker 1: there's the same thing in Europe. And you know the
Speaker 1: big beneficiaries world the platform companies, those who have their
Speaker 1: tax is paid in places where the tax rate is
Speaker 1: very low, those who have production where labor costs is
Speaker 1: very low, and they sell their products worldwide. Those have
Speaker 1: the big windows and the shareholders of those companies, and
Speaker 1: and I think that is backfirrowing. It's changing the political
Speaker 1: landscape because people are dissatisfied with their governments because it's
Speaker 1: sort like they are working primarily for themselves and the
Speaker 1: big companies, the establishment, so to speak. So there is
Speaker 1: a big push against the establishment. It's in Europe and
Speaker 1: you see it also in the US. So so let
Speaker 1: me let's drill down on that a little bit. When
Speaker 1: when you look at Brexit, it's hard to see how
Speaker 1: Brexit benefits just about anybody in in the u k.
Speaker 1: Certainly it hurts London. We're seeing lots of jobs. I
Speaker 1: think UBS just announced they're moving a bunch of jobs
Speaker 1: to Switzerland and Germany away from London. But what does
Speaker 1: Brexit do for the rest of the Brits? And I
Speaker 1: guess you could ask the same question, what does trump
Speaker 1: is um do for the people who who either are
Speaker 1: working in in industries like coal or textiles that have
Speaker 1: either left or on the down slide. Are these people
Speaker 1: have any realistic hope that their votes are gonna positively
Speaker 1: affect their lives or they just Hey, the current situation
Speaker 1: isn't working, we want to try something different. In Europe,
Speaker 1: you have that situation where you have the European Union,
Speaker 1: and the European Union is a good idea or was
Speaker 1: a good idea originally, but the introduction of the euro
Speaker 1: made it an idea that moves towards centralization, and move
Speaker 1: towards centralization when you link currencies together of economies that
Speaker 1: are structurally completely different and different in terms of competence,
Speaker 1: it said, are you shouldn't have the Greeks borrowing at
Speaker 1: the same radios you create, you create imbalances, You create imbalances,
Speaker 1: and the imbalances have to be rebalanced by transfer payments,
Speaker 1: and that by definition means more socialism, more redistribution, and
Speaker 1: that makes an economy less competitive in the term and
Speaker 1: the productivity and prosperity goes down. So it's a bad
Speaker 1: idea and one of the cornerstones of the European Union
Speaker 1: and the free market is free movement of people. And
Speaker 1: that free movement of people in a in a area
Speaker 1: where you have completely huge differences in income and huge
Speaker 1: differences in west and huge differences in social security standards
Speaker 1: and social welfare, etcetera, creates migration movements and you get
Speaker 1: people moving from the poor places to the richer places.
Speaker 1: And so the UK got a lot of inflow from
Speaker 1: Eastern Europe and the and the bridge. The people were
Speaker 1: afraid to lose their jobs to those people because they
Speaker 1: were working for less money and uh, and they feared
Speaker 1: they could lose their jobs and that's why they voted
Speaker 1: for Brexit. Actually, the UK leader Cameron was meeting with
Speaker 1: Brussels and Berlin before the Brexit vote and said, give
Speaker 1: us um a good point that we can open up
Speaker 1: a little bit or close the door to some degree,
Speaker 1: that we can have better control on migration. And they
Speaker 1: denied it. Although migration in total in the EU is
Speaker 1: not a big problem and they are very dogmatic. And
Speaker 1: that creative Brexit And can the bridge turn around and
Speaker 1: say you could come here, but you don't qualify for
Speaker 1: social security or healthcare or whatever until after next years.
Speaker 1: That was the idea, but that was not tolerated by
Speaker 1: the EU, and that's why we have this situation. I
Speaker 1: think if the BRIDGE are smart, and right now they
Speaker 1: are in political disarray, uh, but if they were smart,
Speaker 1: they could decide what sort of policy serves their own
Speaker 1: country best and do exactly that and position them to
Speaker 1: attract businesses and uh, and that would be very beneficial.
Speaker 1: At the present time, terrorism may Is has lost her
Speaker 1: compass completely. She will probably be a transition uh figure.
Speaker 1: And you need a new government, a new leader to
Speaker 1: to make break sit work for the UK makes sense.
Speaker 1: Over the past few months, I've been in half a
Speaker 1: dozen European cities, in France and Spain and in Italy,
Speaker 1: and everybody wants to talk about Trump. The Europeans are
Speaker 1: fascinated sort of with a amused, oh U silly Americans
Speaker 1: type of questionings. So, what's happening in the States, what
Speaker 1: do you think of Trump? What do you think of
Speaker 1: what's gonna happen with Trump and China? What's gonna happen
Speaker 1: with Trump and Korea? We get these questions where they're
Speaker 1: they're sort of like amused that this is not the
Speaker 1: usual situation, But there's an undercurrent of this is potentially
Speaker 1: very disruptive and very serious. So let me put the
Speaker 1: question to you, what's the European view of what's happened
Speaker 1: in America and how do you think this plays out? Well?
Speaker 1: I differ from most of the Europeans. You know, they
Speaker 1: look at it and and find it ridiculous what's going
Speaker 1: on in in the US, and say, oh, those silly Americans, etcetera.
Speaker 1: You know that. I I think Trump went through the
Speaker 1: primaries and he beat fifteen members of the Republican establishment,
Speaker 1: and he was the only candidate who read the zeitgeist right,
Speaker 1: you see. And whether he has the character, the character
Speaker 1: and the personality to lead the US as a president
Speaker 1: is another question. But he was elected for reasons to
Speaker 1: change policies, and and I think since Bennon has left,
Speaker 1: which was his ideological compass, in a way, I think
Speaker 1: it looks to me like the establishment has taken over
Speaker 1: at the White House, regained regained control. And I think
Speaker 1: this is not for good because this means Trump will
Speaker 1: not be able to deliver what he promised, and and
Speaker 1: and only a very small fraction, if at all, that
Speaker 1: means all the voters who voted for Trump will get disappointed.
Speaker 1: And I think the next US president will come from
Speaker 1: a political side that is left of Bernie Sanders. Really absolutely,
Speaker 1: I think who's left of Bernie Sander? Yeah, I don't.
Speaker 1: I don't know the name yet, but I think you know,
Speaker 1: a lot of Democrats, the losers of globalization voted for Trump.
Speaker 1: That makes sense, and and I think they will be
Speaker 1: very disappointed, and they will next time go with the
Speaker 1: socialist who promises them a better life and and and
Speaker 1: anti healthcare, guarantee education, and so we have we have
Speaker 1: rising socialism, not just in the US, we have it
Speaker 1: in Europe as well. We have rising socially. We also
Speaker 1: have rising nationalism because of of of globalization that has
Speaker 1: gone too far and created too many losers. We have
Speaker 1: rising nationalism. Isn't it kind of black and white? They're like,
Speaker 1: you can't be a little pregnant, you can't be a
Speaker 1: little globalized. Either there's free trade and globalization or not.
Speaker 1: How do you have less globalization? Either you have tariffs
Speaker 1: and restriction on trade or it's open or am I
Speaker 1: oversimplifying that? You know? Um, China entered the World Trade
Speaker 1: Organization in two thousand two, and they cheated every They
Speaker 1: stole technologies, they copied patterns notorious for that nobody ever intervened,
Speaker 1: nobody ever sanctioned them. If they had played again according
Speaker 1: to the rules, there would have been a different outcome,
Speaker 1: would have been a slower development process in China, and
Speaker 1: the globe realization problems so to speak, would have been
Speaker 1: much smaller. But nobody sanctioned them. And um and I
Speaker 1: think that's the problem. You have a system in China,
Speaker 1: a central planning system that were run in the last
Speaker 1: twenty years for employment, not for profits, whereas in the
Speaker 1: World Trade Organization it really states that an economy should
Speaker 1: be run for corporate profits. You know, those are two
Speaker 1: ideologies that do not fit together in World trade organizations,
Speaker 1: so that creates the problems. But the coming to geopolitics
Speaker 1: on that side, it's very important that if the world
Speaker 1: economy cannot grow enough over the next ten years, and
Speaker 1: I think this is a fair assumption given the demographics
Speaker 1: we have. If you look at the age class of
Speaker 1: up to sixty five years per year in the O
Speaker 1: E C D, China, Brazil and Russia in the in
Speaker 1: that in that area we had since the nineteen fifties
Speaker 1: every year twenty five to thirty million more people tremendous growth.
Speaker 1: In two thousand and eight, we had fourteen people only
Speaker 1: new growth. Today we have one point seven for for
Speaker 1: two thousand and seventeen. Next year it's zero. Thereafter until
Speaker 1: two thousand and thirty five, the number declines to a
Speaker 1: negative twelve million, So you have a negative growth rate.
Speaker 1: Productivity growth has peaked and this declining, and and if
Speaker 1: you combine population growth and productivity growth, you know the
Speaker 1: outcome will be very low economic growth. And that creates
Speaker 1: a fight for a more share of the I that
Speaker 1: doesn't grow enough, and that creates competition, it creates protectionism,
Speaker 1: it creates conflicts, and you have a situation where the hedgemon,
Speaker 1: the world hedgehum on the US, is being challenged by
Speaker 1: a new power, China. And for the first time a
Speaker 1: Chinese president said it very bluntly, we want to be
Speaker 1: number one in ten fifteen years. We want to be
Speaker 1: number one. We want to close the gap of the
Speaker 1: leading corporations to the Western world, UH, and then surpass them.
Speaker 1: We want to be a major military power, and we
Speaker 1: want to make an influence on the world. UH. This
Speaker 1: is quite a challenge. And when you look at history,
Speaker 1: you can go back the last time we had such
Speaker 1: a situation was about a good hundred years ago in
Speaker 1: the late nineteenth century early twentieth century, when the leading
Speaker 1: hedgeman was Great Britat, and to some degree France and
Speaker 1: Germany came up and they challenged them, and that led
Speaker 1: to conflicts. And I think we are in for rising
Speaker 1: conflicts in the world over the next tent to twenty years.
Speaker 1: So that's that's an interesting structural framework for the next question,
Speaker 1: which is the US and China are such big trading partners.
Speaker 1: Were so reliant on them as a manufacturer. They're reliant
Speaker 1: on us as a consumer market, and we're separated unlike Germany,
Speaker 1: France and England were separated by the Pacific Ocean and
Speaker 1: thousands of miles. Can we avoid the problems of the
Speaker 1: twentieth century with the two great powers in the twenty
Speaker 1: one century or is the same old routine going to
Speaker 1: play out and it ultimately leads to a very costly
Speaker 1: and damaging war. The hope is that he does not,
Speaker 1: of course, but the risk is that it does. And
Speaker 1: you know, the time period I described in the late
Speaker 1: nineteenth century and early twentieth century was very similar to today.
Speaker 1: We had globalization, at that time. We had free capital
Speaker 1: movement at that time, so we had no capital controls, nothing,
Speaker 1: which came later during the wars and after the war,
Speaker 1: we had capital controls, rising nationalists. We had rising nationalism.
Speaker 1: We had migration, huge migration waves. There was a big
Speaker 1: wave coming to the US at that time. And you
Speaker 1: had terrorism. And you had terrorism at that time against
Speaker 1: the establishment because the whole situation produced losers, and the
Speaker 1: losers were fighting against the establishment and that's why you
Speaker 1: had terrorisms. So we had I think we just had
Speaker 1: the hundredth anniversary of the bombing down on Wall Street.
Speaker 1: There's still could still see um damage on the buildings
Speaker 1: from where someone brought up a horse drawn carriage and
Speaker 1: and blew it up. You see, that's a century ago,
Speaker 1: right about when you're talking. I think so. So it's
Speaker 1: not the same, but they are similarities, and there is
Speaker 1: you know, in the world, people act as they act
Speaker 1: and and people vote, and uh. To avoid conflict, you
Speaker 1: need to leaders who understand all that and want to
Speaker 1: work it out in a peaceful way. I don't see
Speaker 1: that situation with the current leaders playing out in a
Speaker 1: peaceful way. Huh. It's interesting. So I'm trying to think
Speaker 1: of who is left of Bernie Sanders and yet is
Speaker 1: articulate and rational enough and intelligent enough to negotiate some
Speaker 1: sort of deal with China that everybody can live happily
Speaker 1: ever after. You know, protectionism and nationals is not here
Speaker 1: seeing Trump. It has been there before, but the election
Speaker 1: of Trump made it bring up to the surface. So
Speaker 1: the next president, to wherever he or she will be,
Speaker 1: will continue on that policy line of protectionism and nationalism.
Speaker 1: I'm pretty sure about that. I wanted to ask you about, um,
Speaker 1: what's going on in the world of hedge funds Before
Speaker 1: I get to my favorite question, Let let me let
Speaker 1: me ask you this. So you ran a hedge fund
Speaker 1: for twenty years or so quite successfully, um, and your
Speaker 1: performance numbers speak for themselves. The past ten fifteen years,
Speaker 1: we've seen hedge funds really underperform, and not just a
Speaker 1: little substantially five hundred a thousand basis points on average
Speaker 1: versus the SMP five D. Why is the modern hedge
Speaker 1: fund community having such And there are obvious exceptions, we
Speaker 1: could talk about the shore renaissance technologies or whoever, but
Speaker 1: by and large, the hedge fund community ain't doing so great.
Speaker 1: They're they're about three trillion dollars, so it's a substantial
Speaker 1: amount of money. What do you see in this environment
Speaker 1: that's throwing U such a monkey wrench into into hedge funds. Well,
Speaker 1: the hedge fund by definition hedges part of its bets
Speaker 1: and and usually under performs in the bull market and
Speaker 1: makes money in a bear market. Then that adds up
Speaker 1: to a great long term performance. Uh. This bull market
Speaker 1: has been going on longer than usual, so it's one
Speaker 1: of the longest bull markets in history. And I think
Speaker 1: most of us did not understand to what degree and
Speaker 1: for how long the central banks would intervene to the
Speaker 1: degrees they did, and I think that created a big
Speaker 1: problem for the hedges because us they had hedged bets
Speaker 1: out there when you should have been full leverage long
Speaker 1: you know. I think that's the that's the first problem.
Speaker 1: The second problem is that you have a situation where
Speaker 1: long only investors and not so sophisticated long only investors.
Speaker 1: So the average guy from the street, he buys his
Speaker 1: stocks and he has great performance because it's just very
Speaker 1: it's just doing very, very well. Why do you need
Speaker 1: hedge funds for because you can do it yourself or
Speaker 1: the central bank is doing it for you. Uh and
Speaker 1: and therefore the attractiveness of hedge funds has declined. I
Speaker 1: think if we go back to a more cyclical environment
Speaker 1: where you have a down cycle, then the hedge funds
Speaker 1: will come back. Some will come back and and some
Speaker 1: will not. Because in the last cycle you saw that
Speaker 1: a lot of the hedge funds that used to be
Speaker 1: hedge funds, as the world implies, world long own lee
Speaker 1: and they had a few handchees on just to charge
Speaker 1: the higher feast. But they will leveraged long only basically,
Speaker 1: and they got and they got wiped out, you know. So,
Speaker 1: so you mentioned mom and pop or or the main
Speaker 1: street investor being long only, that they very much gravitated
Speaker 1: towards an indexing approach, be it e. T f s
Speaker 1: at black Rock or mutual funds at at Vanguard um.
Speaker 1: What does indexing due to price discovery? Some people are
Speaker 1: calling it distorative of the market. What do you think
Speaker 1: about the trend? Yeah, I mean it's been forty years
Speaker 1: in the making, but it's really since the financial crisis
Speaker 1: that a lot of people have moved into indexing. What
Speaker 1: what is this stew to price discovery? What? What do
Speaker 1: you think the impact on investing is well, it makes
Speaker 1: it makes actually markets less efficient, and it should create
Speaker 1: opportunities for stock pickers over the long term, but it
Speaker 1: may to much longer until the discrepancies are discovered by
Speaker 1: the market because of indexing that is growing its share
Speaker 1: of the market in general. So as long as this
Speaker 1: trend towards passive investment continues, it's very difficult for talented
Speaker 1: start pickers to create the extra returns because the value
Speaker 1: on their investments is there, but the market does not
Speaker 1: discover it until the passive investment fed is gone or
Speaker 1: is being reduced. Do you think that this is a
Speaker 1: fair that's going to go away or is this a
Speaker 1: secular change. Well, if it's a secular change, then it
Speaker 1: would have to do with a central planning type of
Speaker 1: central banking for the long term. That would lead to
Speaker 1: an environment of ever inflated as surprises. It would lead
Speaker 1: to a much higher inflation over time, and it leads
Speaker 1: to much less efficient economy and um and the less
Speaker 1: productive economy and the less prosperous economy. I hope that
Speaker 1: it does not. My theories that it will. Uh so
Speaker 1: in the next downturn, the next recession, next crisis, you
Speaker 1: will probably see that government's all over the world. We
Speaker 1: launch huge fiscal programs to support the system, fiscal programs,
Speaker 1: fiscal program we at the end, and then the central
Speaker 1: banks on the writing it. So here's the question. With
Speaker 1: rates as low as they are, even though we've had
Speaker 1: a few increases, they're still historically very low, do central
Speaker 1: banks have any room to run monetary policy or is
Speaker 1: the next cycle them just giving the green light to
Speaker 1: two governments on the Keynsiean fiscal side, Go spend more, go,
Speaker 1: do infrastructure, stimulate the economy that way. We've done as
Speaker 1: much as we can with low rates and quee. Before
Speaker 1: the cycle, I thought see was the bottom. Uh, Now
Speaker 1: I know that zero interest rate is not the bottom.
Speaker 1: I think next time it will be huge fiscal spending,
Speaker 1: huge fiscal spending, infrastructure spending to just employ the people
Speaker 1: and keep the system afloat, and it will be underwritten
Speaker 1: by central banks. Who else could do it? Central banks
Speaker 1: will do it. And that leads to a situation that
Speaker 1: I do that I dislike as a as a citizen
Speaker 1: of this world. I dislike because it leads to much
Speaker 1: more central planning, higher government shares in our economies. Less prosperity,
Speaker 1: less freedom for individuals eventually. So so that's a good
Speaker 1: point where we're gonna move on to our standard questions.
Speaker 1: These are, um the favorite questions we ask all of
Speaker 1: our guests. UM, tell me something that most people don't
Speaker 1: know about your background. Well, I just said, I, Uh,
Speaker 1: the only times I went to university was as a speaker,
Speaker 1: never as a student. Um. Uh. The other thing, I'm
Speaker 1: a happy family father, very modest person. Uh. And I'm
Speaker 1: a very happy and optimistic person, which is not your
Speaker 1: public person. As I know, I did not know you
Speaker 1: did not go to university. I certainly never would have
Speaker 1: guessed that. I bet a lot of people are unaware
Speaker 1: of that. Um. You mentioned Bob Farrell as an early mentor.
Speaker 1: Who else was a mentor of yours? Rico Clarici was
Speaker 1: my boss at UBS. I learned a lot from him.
Speaker 1: He's a cycle guy, and he introduced me to deeper
Speaker 1: into the business cycles and the long waves and and
Speaker 1: all that stuff. And he's a good friend nowadays, not
Speaker 1: as close to the markets that as I am, but
Speaker 1: he was a great man in my career. He always
Speaker 1: He also taught me to write, you know, when I
Speaker 1: had to write the investment strategy for the bank. It
Speaker 1: was always very tough for me at that time, younger years,
Speaker 1: and then I handed it into him and he came
Speaker 1: back all read, you know, and it was so frustrating.
Speaker 1: But over time I learned and he was a great teacher.
Speaker 1: So you went to university with him another with many people.
Speaker 1: I always say I went to the University of life.
Speaker 1: Well that's a fair statement. Um. What investors influenced your
Speaker 1: approach to looking at at markets? Who who do you
Speaker 1: think change the way you you view the investing world?
Speaker 1: I really didn't changed. I always have been a macro
Speaker 1: guy in my younger years. George Soros was uh inspirational
Speaker 1: in that sense. I later thought that Stanley Drucon Miller,
Speaker 1: who is a few years younger than I am, probably
Speaker 1: played the macro side the best I know. I think
Speaker 1: he's a great, great guy. So, uh, those were the
Speaker 1: people that were influential that. That's a pretty good list,
Speaker 1: Soros and Drucker Millar, to say the least. Um, your
Speaker 1: favorite books. Tell us some of your favorite books, be
Speaker 1: they fiction or nonfiction, investing or or anything. I like biographies. Um,
Speaker 1: a book that every serious student of the market should
Speaker 1: have read is one way Pockets that we talked about Jolio. Um,
Speaker 1: I loved those market Wizard books. Jack Schwegger, Yeah, absolutely,
Speaker 1: I loved those. Um. I also loved Barton Bags. Um
Speaker 1: Um hedge hedgehogging, Hedgehogging. That was. That was a great
Speaker 1: and entertaining book. You learned a lot. Um. Those were
Speaker 1: the Those are the type of books that I like.
Speaker 1: And then uh history, economic history, loads of finance, things
Speaker 1: like that. Loads of Finance was wonderful. What biographies have
Speaker 1: you read recently? I have a stack of biographies waiting
Speaker 1: for me at home that I'm looking forward to get into.
Speaker 1: The recent book I read biography was the former chairman
Speaker 1: of UBS whom I knew very well, Um Holtzach, Mr Holtzach,
Speaker 1: Robert Holtzach. He was really the brain and driver behind
Speaker 1: making UBS great before the youngsters to coo and running
Speaker 1: running against the wall, you know. And he always he
Speaker 1: always warned against those um fascinating investment bankers who always
Speaker 1: overdo it. He always warned against that. He praised me
Speaker 1: in the UBS Journal Internal Journal after the ash of
Speaker 1: eighty seven. He was the only one who praised me.
Speaker 1: And I created after that because I knew my career
Speaker 1: was over. Um any other biographies, I you know, it's
Speaker 1: it's my one of my favorite nonfiction areas to read.
Speaker 1: Yesterday in the office. The person who wrote the Steve
Speaker 1: Jobs book, I'm forgetting his name, Walter somebody, Walter Isaacson.
Speaker 1: His new biography of Leonardo da Vinci just arrived. Leonardo,
Speaker 1: So that's on my list. Give me one more biography
Speaker 1: that you've enjoyed. It's quite sometime since I read the
Speaker 1: last one's Winston Churchill read and that everybody loves the
Speaker 1: Big Churchill biography. Let's let's talk about what has changed,
Speaker 1: uh in the industry. What do you think is the
Speaker 1: most significant change in finance and investing and how has
Speaker 1: an impacted managing money? The biggest change is the intervention
Speaker 1: by the central banks and the compliance. I recently had
Speaker 1: lunch with a friend of mine who was the founder
Speaker 1: of a listed private bank in Switzerland. They operate internationally,
Speaker 1: and he said to me, look, I'm the only entrepreneurial
Speaker 1: guy at the bank left because everybody else is dreaming
Speaker 1: by compliance, and I think in investing it's the same thing.
Speaker 1: So we have lost in a way the entrepreneurial spirit
Speaker 1: in the field of investment because the central banking intervention
Speaker 1: just kills it. Huh. That's that's that's quite fascinating. Uh.
Speaker 1: What's the next major shift? If central bank intervention and
Speaker 1: and overregulation and compliance is what led us to today,
Speaker 1: where do you think things change in the future. Uh.
Speaker 1: I think that the fixed income market will suffer badly
Speaker 1: because the way we run our economic policies will eventually
Speaker 1: destroy the fixed income markets. So you're not just saying
Speaker 1: this as a market call. You're saying structurally, structually, we're
Speaker 1: creating problems for bonds. Structurally, Yes, is that corporate bonds,
Speaker 1: treasuries or across the board. It's it's basically across the board,
Speaker 1: because eventually those bonds will end up on the government
Speaker 1: bonds will end up on the band sheet of central banks.
Speaker 1: The Bank of Japan already owns more than half of
Speaker 1: the j g B s. They own already about fifteen
Speaker 1: percent of the outstanding equities of the market. Um. The
Speaker 1: Swiss National Bank is probably one of the biggest individual
Speaker 1: shareholders of all all the large US stocks, corporations and
Speaker 1: things like that. That is new. That is new, and
Speaker 1: I think it's here to stay and that is you're
Speaker 1: saying it's not very healthy. No it's not. It's it's
Speaker 1: it's destroying free markets, and it's it's destroying entrepreneurship in
Speaker 1: to some degree. So let me shift gears on you
Speaker 1: a little bit. Tell us about a time you failed
Speaker 1: and what you learned from that experience. UM. I missed
Speaker 1: the rise of the Japanese stock market after the crash
Speaker 1: of eighty seven to new highs. It was the only
Speaker 1: stock market that went to new highs into late eighty nine.
Speaker 1: And that was the pain and the and it was
Speaker 1: painful for me because I was underway Japan and everybody
Speaker 1: was jumping on my back all the time. Was very painful,
Speaker 1: and I refused to join in, which probably was a mistake.
Speaker 1: I suffered badly. I had enough um extra returns before
Speaker 1: from the crash, but it was painful, and I went
Speaker 1: back to my analysis and UH and I came to
Speaker 1: the conclusion that Japan would about peek and go down,
Speaker 1: and virtually on the first day of trading in nineteen
Speaker 1: ninety January second, I think it was in nineteen nine,
Speaker 1: I m I put out my big shots in the
Speaker 1: Japanese stock market, and I wrote it down for I
Speaker 1: think it was about twelve months or so. It it
Speaker 1: went forty six thousand, it went down fifty within six months,
Speaker 1: and uh, and I made a lot of money. And
Speaker 1: and all my friends who have been japan bulls before
Speaker 1: always ridiculed me on the way up and on the
Speaker 1: way down. They were angry because they lost more than
Speaker 1: I in that year than what they have made before.
Speaker 1: And I made more than I have not made before.
Speaker 1: So how bad? How bad of a miss was it
Speaker 1: missing the last year or two of the Japanese? It
Speaker 1: was mentally, it was psychologically, it was very bad and
Speaker 1: it and it really helped me to tighten my risk
Speaker 1: management procedures, because when you are wrong in the market,
Speaker 1: you increase the risk of making wrong decisions and mistakes.
Speaker 1: But you weren't short during that run. I was just
Speaker 1: but underweight. And that's a mistake and and and it hurts,
Speaker 1: but it's a relatively mild mistake versus being long into
Speaker 1: the collapse. Okay, I give you another. I give you
Speaker 1: another mistake. I made um in night when gold and
Speaker 1: silver peaked. Silver peaked at fifty at fifty dollars, and
Speaker 1: um I I was aware that it peaked and I
Speaker 1: had sold out before or at near the peak, and
Speaker 1: then it went down to thirty five dollars from fifty
Speaker 1: to thirty five silver, and then I thought it is
Speaker 1: now going to bounce to forty five. So I wanted
Speaker 1: to be smart and I bought silver from for a
Speaker 1: trade from thirty five to forty five. And instead of
Speaker 1: going to forty five, he just continued to go down.
Speaker 1: And I think at eighteen, I sold out with a
Speaker 1: fifty loss, and I turned the monitors up. I couldn't
Speaker 1: see it anymore, you know. I felt sick. And then
Speaker 1: I went back to the drawing board and doing my analysis,
Speaker 1: and I came to the conclusion, this thing goes down
Speaker 1: to ten and uh and I wait, and when we
Speaker 1: are in the range of ten around ten, I buy again,
Speaker 1: and I buy three times more than what I owned before.
Speaker 1: And I did that. About six months later. We were
Speaker 1: there and I bought that much, and I I thought
Speaker 1: we could have a really for maybe six or nine
Speaker 1: months back to double basically, and he did double. And
Speaker 1: I was in San Francisco when silver hit. I saw
Speaker 1: the headline in the Wall Street Journal Silver hits twenty four,
Speaker 1: and I stayed up late at night in San Francisco
Speaker 1: to call my office in Zurich that that that morning,
Speaker 1: said so I finally came out with the profit. But
Speaker 1: it was a long suffering, really really painful, really painful experience.
Speaker 1: It sounds like, so outside of the office, what do
Speaker 1: you do to relax? What do you do to stay
Speaker 1: mentally sharp? Um? I read a lot. I I love reading.
Speaker 1: I talked to friends to actually, I talked to many people.
Speaker 1: I like communication. I do some sports in winter ice key.
Speaker 1: In summer, I play golf. I go to the gym,
Speaker 1: um not too often, once a week or so. I
Speaker 1: don't do enough sports. I I walk, I bike. I
Speaker 1: love outdoors, and I do that particularly where the ground
Speaker 1: is flat, like in Florida or an island. I have
Speaker 1: a domicile in the North Sea, so you have you
Speaker 1: have a home in in Geneva, Zurich in in zook
Speaker 1: Zo Beach is a suburb of Zurich, all right, And
Speaker 1: then we're in the North Sea. It's the most German
Speaker 1: island off the Danish coast. Cold suit. It's a very German,
Speaker 1: very German island. But I love the climate. I love
Speaker 1: the calmness there. I love the nature. Um, there are
Speaker 1: four golf courses. You can bike, you can walk, you
Speaker 1: can enjoy the beach. There is a thirty mile beach
Speaker 1: you can walk. Can you swim there? You know it's cold,
Speaker 1: But I grew up at the River Rhine that is
Speaker 1: always called so I'm used to that. And we're in Florida,
Speaker 1: you spend time. I have a domicile of vacation domicile
Speaker 1: in in Naples, so it's lovely. I love it. But
Speaker 1: now we go down this weekend and uh, to look
Speaker 1: how it looks like, I think the landscape is pretty
Speaker 1: much damaged. Right, Well, that's this is still We're still
Speaker 1: in the last few weeks of hurricane season. So yeah,
Speaker 1: I my golf clubs down there told me that they
Speaker 1: lost half the trees. Wow, that's amazing. So what sort
Speaker 1: of advice would you give to a recent college graduate
Speaker 1: or a millennial who came to you and said, I'm
Speaker 1: interested in a career in asset management? What would you
Speaker 1: say to them? Study history? Study financial history. Also on
Speaker 1: top of history, UM, look at the long term trends.
Speaker 1: Try to understand what zeitgeist and changes in the zeitgeist
Speaker 1: mean for financial markets. Uh. And after having read and
Speaker 1: studied all that you go to the details that you
Speaker 1: need in your day to day business. You know, you
Speaker 1: you learn um analyzing a company, you learn analyzing an economy.
Speaker 1: You look at the main factors that are driving a
Speaker 1: cycle and learn how the cycle works. In at university
Speaker 1: they do not teach you how a business cycle works anymore.
Speaker 1: It's basically mathematics calculations. But they do not tell you
Speaker 1: how people interaction work in the economy and in the markets.
Speaker 1: And our final question, what is it you know today
Speaker 1: about investing that you wish you knew thirty or forty
Speaker 1: years ago when you first started your career as an
Speaker 1: asset manager. Quite frankly, I'm glad I didn't know what
Speaker 1: I know today because I would not have been as
Speaker 1: aggressive then as I have been. You know, if I
Speaker 1: knew all the risks that I know today, I would
Speaker 1: not have done as well as I have done. So,
Speaker 1: so a few good words about blind optimism and youth.
Speaker 1: Is that what you're saying? Absolutely, I think money management
Speaker 1: is a business for optimists because our system, it's a
Speaker 1: Fiat currency based system, it's a symmetric towards rising monetary inflation,
Speaker 1: and that is towards a rising asset prices and therefore
Speaker 1: a good um portion of optimism. NEIGHBORHOURDS. Thank you Phillips.
Speaker 1: This has been absolutely fascinating. We have been speaking with
Speaker 1: Felix Zulov of Zulov Consulting formally zulof Asset Management, Union,
Speaker 1: Bank of Switzerland, Ubs, etcetera. If you enjoy this conversation,
Speaker 1: be sure and look up an Inch or down an
Speaker 1: inch on Apple iTunes, SoundCloud, Bloomberg dot com, overcast wherever
Speaker 1: fine podcasts are sold, and you can see uh the
Speaker 1: other hundred and sixty or so such conversations we've had previously.
Speaker 1: We love your comments, feedback and suggestions right to us
Speaker 1: at m IB podcast at Bloomberg dot Net. I would
Speaker 1: be remiss if I did not thank the cracked staff
Speaker 1: we have here at Bloomberg who help us put together
Speaker 1: these wonderful conversations each week. Medina Parwana is my producer
Speaker 1: and audio engineer. Taylor Riggs is our producer and booker.
Speaker 1: Michael Batnick is our head of research. I'm Barry Retolts.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.