Recession Around The World (Uncut) 04-20-2025

Recession Around The World: Market Correction Of ‘Cyclical Degree’ Not Over | Felix Zulauf

So all the bad stuff that I have been expecting late last year is really now in the price at the lows of April 7. And I’m not sure which scenario plays out, whether we will have one big correction and this was it, or whether we will have a temporary recovery into early third quarter, and then another decline when the bad earnings and the disappointments come through. Felix Zouloff returns to the show. He is the founder of Zouloff Consulting.

He’s made a number of very important correct calls on my show last quarter, about this quarter. We’ll revisit what he said exactly. And his grim forecast for what’s next doesn’t look great for investors this year.

He’ll explain why. Zouloff, welcome back to the show. Good to see you.

Thank you, David. It’s always a pleasure to be back. A lot of uncertainty right now.

Let’s unpack this uncertainty and volatility. But first, let me play for the audience a short clip of what you told me back in December of last year. You made a very appreciate call.

Let’s just take a listen. Of uncertainty around how some of these more, I would say, controversial policies will be implemented around 2.1. Yes. Yes.

I think it will be due to uncertainties. And on top of that, you have another economic element. You know, if Musk and Raman Swamy are successful and cut out what they said, that would be dramatic.

Even if they cut out only half of what they said, it would be a trillion U.S. dollars. And a trillion U.S. dollars is about three and a half percent of GDP. Yeah.

The uncertainty around the policies implemented, we know that Raman Swamy is no longer part of Doge. But can you just evaluate how Q1 has played out relative to your expectations? You called for a big market crash in Q1. You were correct.

You call for a lot of uncertainty in Q1. You’re also correct. Yes.

I said that Trump really has to introduce the big changes that he wants to make during his legislation in the first nine months of his term. And therefore, the first half of 2025 would be the high-risk period. And he has demonstrated that.

He came up with tariffs that shocked the world. And obviously, I think that’s a negotiation tool. But in shocking the world, it creates a lot of uncertainty and it will probably trigger a recession around the world this year.

Then Doge is not quite as successful as Musk and Raman Swamy said at the beginning. But they cut some out of it, of the government expenditures. And that together with the uncertainty creates a weak economy.

The economy in Europe has already been weak. So there will be a recession. The economy in China has already been weak.

You know, the official numbers they publish are not the real numbers. The economy is much weaker than what the numbers say. And that means we have a lot of uncertainty because the old framework of how the world traded with each other is gone.

WTO is gone. Globalization in the old framework is gone. And the uncertainty means that entrepreneurs and corporations are holding back with investments.

They stand by. They want to see how this plays out. And that means less investments.

That means less jobs. And that means less income. And that means a recession.

And consumers have been stretched and they overspent. And the savings rates are low in most economies, not all, but most economies in the Western world. And therefore, I think the consumer will hold back because people are losing jobs.

They fear about their jobs and they save more and they spend less. So I think there is a recession coming or whatever you call it, a weak period economically in 2025. And 2025 is a transition year.

What this means for the market is that we have a correction of cyclical degree. I called for about a 20% correction in most indices, which has happened so far. April 7 was the low.

We had at the April 7 low, we had the most pessimism in years. Bank of America’s global fund manager came out as the most pessimistic survey in 25 years. The two months change in US equity allocation by those fund managers was the biggest slump ever seen in 25 years.

So I think we had a lot of pessimism. The consensus is now calling for a hard landing for a recession and expecting down earnings. So all the bad stuff that I have been expecting late last year is really now in the price at the lows of April 7. And I’m not sure which scenario plays out, whether we will have one big correction and this was it or whether we will have a temporary recovery into early third quarter and then another decline when the bad earnings and the disappointments come through.

Ideally would be if the market went down and retested the lows of April 7 and ideally undercut it marginally to shake out the weak money and then on non-confirmation technically and then rally again. And that will be the low for the year and we will go into a continuation of the secular bull market into 26 and 27. 25 will still be rough because of the news flow, but eventually the trade situation will be fixed.

Maybe not complete with China, but with most other countries it will be fixed and repaired, I believe. And that means that the market can rally and I expect the market to hit the 7500 or so in 27. So I’m turning more constructive.

If we see a retest or a break, a marginal break of the lows at 48.35 in the S&P 500, I would turn very bullish and for tactical reasons one has to be constructive in below 5000 and looking for higher prices later on. But both scenarios are possible and I let the market tell me which way we should go. So you have to be very tactical.

Before we continue with the video, let me tell you about the importance of protecting your personal data privacy. Your personal data is constantly being collected, sold, and exposed online. From big breaches to shady data brokers sites, your private information like your name, address, birthday, phone number, it’s all out there.

And it’s easier to find than you actually think. That’s why I recommend today’s sponsor Delete.me. I use it to remove my personal details from hundreds of data broker websites. It’s quick to set up, easy to use, and it actually works.

Once you submit your info, you’ll get a privacy report in about a week showing exactly where your data was found and removed. And it doesn’t stop there. Delete.me keeps monitoring these sites year round to make sure your data doesn’t pop back up.

Go to joindeleteme.com slash davidlin and use the promo code davidlin to get 20% off at checkout. Link down below or scan the QR code here. Take back your privacy today.

So we’ll come back to your longer term forecast in just a bit, how you turn more constructive in the following years. But Felix, let’s go back to your call about why the economy is slowing down. You said that the economy is weaker than the data suggests.

So two part question. First, what data are you looking at that would dispute official government numbers? And second, if Trump did not implement the policies that he did this year, which you expected last year, would you still expect a recession? Well, I meant the official numbers in China. I think those are dictated numbers.

Those are not reflections. And, you know, you build a career on what the autocratic system tells you to do and not going against you. So everybody is pushing the numbers up a little.

I didn’t mean it for the Western world. I think the Western world, the data is lagging and the improving data we have seen in Europe particularly, and also in China to some degree, has been the front running of the tariffs. And everybody was front running the tariffs and therefore the numbers look better for the last three months.

They will deteriorate again. And the second question was? Last year you had called for policy uncertainty to create volatility. You’ve been correct.

Let’s assume we remove Trump completely and the White House completely. Would you still expect an economic contraction, notwithstanding policy? Well, the contraction was about due because the upswing has lasted a long time. It was fed on huge government spending.

You know, over the last four years, the US government took on 40% of GDP in new debt. And this was a tremendous stimulation that went into the economy. And I think the Trump administration is trying to cut back.

And Doge is part of that. And they are, you know, discovering USAID where they spent money and they are cutting there. So that all means that the government’s money that is getting cut back means that somebody has less income.

So one guy’s income is the other guy’s spending and vice versa. And therefore, the economy has been slowing already. And when you look at the Atlanta Fed now cast, we are in negative territory in the current indicators based on what’s available in terms of published indicators so far in the economy.

So I think this is no secret that the economy is slowing. Whether it will be an official recession or not, that’s really not important. The important thing is that with the slowing of the economy, earnings will disappoint.

And you see it already that company after company is coming out, revising their forecasts. And that is hurting the stock price. Because, you know, in the market, we are not trading facts.

In the market, we are trading expectations. And when expectations change, then prices change also. I’d like to play for you now a clip from Powell’s recent presentation at the Economic Club of Chicago.

This is interesting. And I think the interviewer asked some very important questions. Take a listen.

Well, let me turn to financial markets. We’ve seen some volatility, especially stock market volatility. I mean, the levels of the VIX are up to the levels they were in the early days of the pandemic, coming off somewhat now.

Some people believe the Fed will intervene if the stock market plummets, the so-called Fed put. Are they correct? I’m going to say no with an explanation. So what I think is going on in markets is markets are processing what’s going on.

And, you know, it’s really the policies, particularly the trade policy. And really, the question is, where is that going to come in? Where is that going to land? And we don’t know that yet. And until we know that, you can’t really make informed assessments that would still be highly uncertain.

Once you know what the policies are, it will still be uncertain what the economic effects will be. So markets are struggling with a lot of uncertainty. So is he right? Like, let’s say the stock market, let’s say the S&P goes down below 5,000 points.

The Fed really isn’t going to do anything just because of that? Well, the Fed has two objectives. One is the economy, full employment, and the other one is inflation. And actually, there is a third objective, and that is to keep the system properly working.

And if the market declines beyond 20%, that’s when the Fed usually gets nervous and in the past has intervened. It’s much more difficult this time because the inflation rate is above the target, and the inflation will likely go up with tariffs introduced, as Trump suggests, and the uncertainty. And it’s distorting supply chains, of course.

And all of that means that it’s much more difficult for the Fed to intervene as in the past. And therefore, maybe instead of 20%, the Fed put is at 25% to 30% or something like that. But obviously, when asset prices decline by 20% or more, that means that the balance sheet effect on consumers is a negative one and affects spending, consumer confidence in spending.

And you already see in the consumer confidence numbers how they are plunging. You know, they have declined dramatically. And therefore, this means spending or future spending by the consumer will be slower than what it has been or would have been without the stock market declining.

So the stock market has an immediate effect on the economy. And I would even go as far as saying it’s much more important for the economy what the stock market does than for the stock market what the economy does. You know, it’s sort of a reflexivity, a George Soros theory.

The stock market or financial markets influence the real economy to a much higher degree than the real economy influences financial markets. And I think that has increased. That change has increased because financial assets today are at historic highs, so to speak, on a long-term basis relative to the activity of the economy or the size of the economy.

And that’s why financial markets have become so important. And it’s a little bit like the tail wagging the dog and not the other way around. That’s mostly through the wealth effect.

If people who own assets have higher asset valuations in their portfolio, they’re likely to spend more. And also, if company valuations expand, they’re more likely to invest more. That’s right.

Yes. When, you know, when your balance sheet increases because as the prices go up and you feel wealthier, you are more generous in your spending behavior than when it goes the other way. And we see it already.

I can tell you I’m in Florida where a lot of vacation people are around. And even in March, which is high season here, I could walk into the upscale restaurants at six o’clock and get a table without reservation and the restaurant was not full. And that is very different from what it was a year ago.

Here’s another question asked to Powell about bond yields. So we’ve we’ve seen volatility also in the bond market. And at a time when usually there’s a traditional there’s a flight to safety, we saw yields on the German bond and the Japanese government bond come down.

But we saw yields on U.S. treasuries go up. What do you attribute this to? So I would just say the same thing. I think it’s very hard to know in real time.

I’ve had a lot of experience with significant moves, for example, in the bond market where there’s a narrative that people land on. And then two months later, you look back and go, that was completely wrong. So I think it’s very premature to say exactly what’s going on.

Clearly, there’s some de-levering going on among hedge funds in levered trades and things like that. It’s also, again, it’s the markets processing historically unique developments. OK, what’s your response to the question? Why are bond yields for the U.S. going up or has gone up in the beginning of April, but all the other yields going down? You know, the ratings in terms of geopolitical power, in terms of economic size, in terms of politics or military power have shifted dramatically over the last 25 years.

And the unipolar U.S.-centric world order is gone. It is not existing anymore. Now the U.S. is destroying the world’s trade system, a rule-based system, because it simply does what it wants to do without really visiting what the rules are.

And this destroys or ends the rule-based system that actually the U.S. have introduced in 1947. And that means it has long implications for the U.S. assets, for the U.S. dollar, because you see the changes we have gone through over the last few years are such that the Bretton Woods system of fixed exchange rate was based on the U.S. dollar and the U.S. dollar that was gold-backed. The U.S. moved away from the gold backing, they moved away from the Bretton Woods system, and the trading system at that time was designed that all the international trade was settled on U.S. dollars.

That’s not the case anymore. Over the last few years, trade is settled more and more in other currencies than the U.S. dollar. So the U.S. dollar is losing influence.

Now this means that central banks of different nations do not have to keep U.S. dollars as reserve currency for payment of future imports, because they can hold other assets, euros, gold, or they can print their own money to pay for. And this is a big change. And the implication is that a huge amount of U.S. dollars overhang is in the market and could be sold.

And the U.S. has started a trade war when the foreigners are financing their deficits. You know, 40% of the budget deficit in the recent years has been financed by foreigners. And the trade balance, of course, has created a lot of dollars in the hands of foreigners.

So foreigners own $7.2 trillion of U.S. treasury debt, and they own $4.6 trillion of corporate U.S. debt, and they own over $18 trillion of U.S. equities. They can sell those equities and those debts. And I think that is what is happening.

The U.S. dollar has lost its status that it once had as the major reserve currency. It will not be replaced by another currency, because there is none of that size. But the need to hold U.S. dollars is not there anymore.

And therefore, foreigners can sell U.S. dollars. And when the U.S. becomes aggressive against its trading partners, they can, of course, begin to sell U.S. treasury assets. And that’s what they have done.

The Japanese were big sellers in those days. And it’s really interesting that the question that was posed is really different from what happened in the past. Whenever you had a panic in the market, capital fled to the safest asset, which were U.S. treasuries.

That’s not the case anymore. It just meant the dollar was going down and U.S. treasury prices were going down and yields were going up. This is a structural change, as many others that we are seeing in the marketplace.

And it’s all triggered by a different behavior of the U.S. who wants to force its trading partners to another or very different behavior than in the past. So instead of using diplomacy, which would have been the better way, the Trump administration is bullying all others, which create tremors in the markets and behavior by other nations that could backfire to the U.S. So in general, all of this means the structural change that the U.S. going forward will have higher interest rate levels than it used to have in the past, said Therese Baribos, because of this dramatic change. You know, it’s not just a change in trade.

This has repercussions throughout many other areas, and it changes the world dramatically. And people have to understand that. Yes, the narrative that investors in other foreign countries perhaps have dumped the treasury market or treasuries to buy gold, which is why gold is now about $3,300 an ounce.

Does that narrative make sense to you? Absolutely. I mean, we have seen, you know, for a while when the war in Ukraine started and the U.S. and other Western nations sanctioned Russia and froze Russia’s assets, and some are trying to use the income of those assets to finance the war in Ukraine and things like that, that told many other nations in the world that are not so friendly with the U.S. or the West, that something has changed and the U.S. dollar cannot be their reserve currency any longer. And that’s when the run in gold really started.

And they prefer to own gold, which they can store at home physically, instead of having dollars that are basically in the U.S. or the U.S. can freeze it anytime they want it. And that would not make sense to them. The BRICS countries are not buying U.S. dollars as a reserve currency anymore.

That’s over. That’s gone. So what then is the ultimate safe haven asset for investors who want to weather this storm that you’re talking about in 2025? Is it still the treasury market then? Is it gold? Something else? Well, safety per se doesn’t exist in a world that goes through structural changes or that will bring on chaos, conflicts, sanctions, protectionist moves, and potentially even war.

Safety as such does not exist. But the perception is that gold could be the safe haven. Now, gold has had a dramatic run up and I’m a long term bull on gold for many reasons.

And I think the way gold is moving, it’s moving toward the buying climax here in the 3000s somewhere. So I’m expecting a buying climax. And when we see the buying climax, which is an acceleration of the uptrend, and then a dramatic volume increase and price increase, and then a reversal.

Once we see that, we probably start a multi-month correction that could be painful. It could be several hundred dollars on the downside. That does not mean that I’m not long term bullish any longer.

I am. But it means that a long pause will come. A safe asset that always goes up in price does not exist in this world that I just described.

What about real estate as a longer term safety hedge? Well, you see in many US cities how commercial real estate is behaving. And a real estate expert told me, I think a year ago or so, that Manhattan office real estate is worth zero because it has declined so much and there is outstanding debt to it. So the value of it is virtually zero.

And there is nothing safe, even real estate. I think US real estate has peaked again. It had a good run in the last few years, but real estate home prices have peaked.

We see it even here in Florida, which has been a very hot market, that the residential area has peaked and prices are coming back. Volume has declined dramatically. Realtors are complaining about slow business, etc.

So I think it’s correcting. For an investor, of course, owning his own home is the first step to build wealth. And that’s important because it’s your home, it’s your castle.

Nobody can kick you out. And you know what the financing costs are, which you can determine yourself with a long term mortgage for a long, long time. So that’s the first step in building your wealth.

And that asset is precious, but it’s idealistic. It’s not an investment that will go up forever. I remember a realtor who told me, I think it was in 2007 when I told him home prices here in Florida will decline.

And he said, waterfront property does never decline. It never has. And I said, then this will be an exception.

It will. And it did. And it was brutal.

So there is nothing that goes up forever. The world moves in cycles. People’s behavior is cyclical.

Crowd behavior is cyclical. The economy is cyclical. Despite the intervention of the authorities and financial markets are cyclical.

And therefore things go up and things go down, asset prices. And we have to live with that. And if you cannot cope with that, then you better put together a portfolio of some real estate, some gold and some equities and you forget the financial markets forever.

You think that bond yields, especially the longer end of the curve will move in the opposite direction of stocks, which is what happened in 2022, which is to say bonds and stocks will fall in value together this year? I’m not so sure. I think the downside in yields at the long end is very limited. We are now above 4%.

We could go into the mid 3% if there is a recession, but we will not go back to 2% or lower because we are in a structurally completely different environment. The bond trade of 40 years declining inflation and interest rates is over. It bottomed in June 2020.

I wrote a report. This is the sale of a generation for bonds. And I gave a speech with the title, the buy of a generation for bonds and stocks in 1981.

So the structural, the secular trend change is for rising interest rates, rising inflation rates, rising interest rates and declining bond yields. I think the bond market longer term over the next five, seven years or so is much more risky than the stock market, in my view. Okay.

And then finally, you said you were more constructive on the stock market and risk assets post 2025. What will prompt a recovery in future years? Well, as I said, the world economy is going to slow and we will see recessions here and there. And when you see recessions in an environment where governments really need some growth or the system fails, then you will see them attacking and coming up with stimulation of all sorts.

I think the Trump administration will try to attack by cutting tax rates. Donald Trump said everybody making less than $150,000 should not be taxed or should tax free. This is fiscal stimulation.

You see Germany has just concluded a major investment and spending program for defense, for infrastructure, some green deal type of energy stuff of over 1 trillion euros. 1 trillion euros of new debt means that total German government debt goes from 2.5 to 3.5 trillion euros. This is fiscal stimulation.

You will also see that China will have no choice but to eventually step forward and increase fiscal stimulation because they are trapped in a deflationary process. So we see fiscal stimulation and everybody will go deeper into debt. And of course, the investors are not interested to buy that debt.

So therefore, I expect that central banks will eventually move to another sort of QE from later this year on and through 26. And if they do not go into QE, they will at the very least create a very steep curve to make it attractive for the banks to buy the debt and refinance it with cheap central bank money. So this is the way we are going to move to fiscal and monetary stimulation.

And I’m not so sure it will create high real growth. Economically speaking, I think we will have rising nominal growth, rising inflation, rising interest rates and rising asset prices. And that’s the way I see it for the next two years from a 25 low, either in the second quarter or in fall.

Excellent. Thank you very much, Felix. Excellent overview of current market conditions and future forecasts.

Where can learn from you? You can go to our website felixzulauf.com. Very simple. felixzulauf.com. Okay. We’ll put the website down below.

So make sure to follow Felix there. Thank you again for now and take care. We’ll speak again soon, Felix.

Appreciate your time. Thank you, David. Thank you for having me.

All the best. Thank you for watching. Don’t forget to like and subscribe.