Zulauf: Systemic Change Is Coming

Includes: DIA, QQQ, SPY
by: Roger Nusbaum

Barry Ritholtz posted an interview he conducted with longtime Barron's Roundtable member, Felix Zulauf, that is a must read. There were a couple of things that really stood out to me but you should read it in its entirety.

Zulauf considers himself to be a global macro investor who places a lot of emphasis in how cycles work and impact markets. He structures portfolios to be long/short but with no leverage. He sees a lot of change coming, essentially calling for a whole new system (my read on his comments) due to the extent to which many problems around the globe have been kicked down the road. By trying to stunt cyclical declines they have created a secular or structural problem (again my read).

This money quote is really a what makes him tick sort of thing:

The markets tell you, relatively quickly, when you’re wrong. So I’m very risk-averse. I like to make money, but I hate to lose money. So I’d rather make a little bit less and not lose money.

There is a tie in here of course to what John Serrapere has written about previously. Serrapere calls his strategy 75/50, which means 75% of the upside with only 50% of the downside. I write about and try to implement something similar which I phrase as "smoothing out the ride" and avoiding the full brunt of "down a lot" while going along for the ride in an up market. For anyone new I quantify this based on where the S&P 500 is in relation to its 200 DMA. Zulauf always has relatively interesting things to say in the Barron's Roundtable (some of the others are very uninteresting) but did not know much about him before the interview.

Back to cycles, he believes that based on the US in 1938 and Japan in 1996 the rally from March 2009 will fully retrace and maybe go a little lower. One more "scare the hell out of them" decline certainly makes sense but the trouble I have with comparisons to the 1930s in this context is the extent to which money flows and the fact that the market has been democratized due to 401k plans. This is simply a fundamental dynamic that did not exist before and, while fund flows into equities are down, it is a complicating (in relation to his conclusion) factor.

The other item from Zulauf to mention is that he is very down on China. He believes "10% growth is over," citing overcapacity and housing affordability (the lack thereof) but as I read this part of the interview he seemed not as dour as Jim Chanos whom Barry mentioned but I may have read that incorrectly.

The other investor luminary to mention is Stanley Druckenmiller and the news that he is retiring. Here is a detailed writeup from Bloomberg (hat tip to the Money Honey blog via Facebook). I was struck by the intense emotion that losses and being wrong triggered. He is very competitive and being wrong took a toll.

This is difficult for me to relate to as I am not competitive and my issues with being wrong are more along the lines of trying to be right more than I am wrong, so when something does not go the way I expect it is not particularly worrying. Of course he is one of the most successful investors of all time and I am a jamoke in the woods.

This is instructive, however, as while his emotions clearly did not do him in terms of investment results there was an emotional consequence that accrued over time (per the article) which despite comments that he loved the task must have made it more difficult. In general terms being angry or scared does take a toll, even on the great ones.

I believe it is very useful to learn what makes people like this function. From the idea of taking bits of process from many sources to create your own process you can glean that these guys while wildly successful are not perfect.

Disclosure: None