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Secretive Swiss Manager Sounds Dire Warning

Wednesday, June 13, 2012 | Teeka Tiwari

"I expect the disintegration to begin in the second half of this year.  That should lead the world into financial and economic chaos."

These are just a few of the pleasantries that this world-renowned Swiss money manager sees developing in the near future.

Riots in the streets... banks withholding your money... governments forbidding you from moving your money.  As insane as this all sounds, is it possible?

According to Felix Zulauf, not only is it possible, it is highly probable.  If these ideas were being put forward by anybody else, it would be easy to dismiss them as the fear mongering rantings of a perma-bear.

However Felix Zulauf is anything but that.  He is the former head of institutional portfolio management at the Union Bank of Switzerland (UBS) and a twenty year contributor to the Barrons Round table.  He manages a $1.7 billion fund out of Zug Switzerland and, in addition to all of that, his market calls to date have been eerily prescient.

He called for the market to peak in late March of this year, and he called the March 2009 low.  Clearly Felix Zulauf is no perma-bear, as he has demonstrated his ability to recognize when it’s time to buy the market as well as when it’s time to sell.

In a worst-case scenario Zulauf says "the potential exists for a broad-based nationalization of the credit system, capital controls and dramatic restrictions on financial markets.  Some might even be closed for some time."

The Biggest Financial Manipulation of All Time

What Zulauf is suggesting is that, as things become worse and worse, the pool of available "good collateral" -- that is, financial instruments (such as bonds and stocks) where institutions can park their money in relative safety -- is going to shrink.  We are already seeing the effects of his theory show up in the US Treasury and German Bund market, where yields are trading at all time lows. 

Investors are piling into Treasuries and Bunds because there is so little trust in other types of investment vehicles.  His (Zulauf's) fear is that this loss of "good collateral" could be the match that sparks a global deflationary spiral.

What is Deflation?

When the prices of goods and services drop so much that annual inflation rates turn negative, we are said to be experiencing deflation.  On the surface it would seem that deflation would be very beneficial to consumers.  After all, who complains when things go down in price?

Here’s the rub:  As prices drop, consumers put off their purchases, because they know if they wait they can get a better price.  Now imagine this effect compounded across the buying habits of hundreds of millions of consumers.  What happens is we start seeing a slowdown in consumer spending, which causes corporations to spend less, which leads to job cuts, which leads to even less consumer spending, which leads to more corporate cuts which leads to... I think you get it.

The technical term for this effect is a deflationary spiral.  The last time we experienced one was back in the Great Depression.  Just to show you how punishing a global deflationary spiral can be, view the graphic below that displays the massive drop in industrial production that took place during our last bout with deflation:

Surviving Deflation

The chances of a deflationary spiral actually happening are quite slim, but there are some steps you can take to both protect yourself from deflation while at the same time positioning yourself if a more normal type of economic recovery should take hold.

The key here is to hone in on blue chip companies that not only have a strong track record of paying ever-increasing dividends, but also dominate their industry.  You also want to make sure that they have low debt levels and that they sell a product that people will buy even in difficult economic times.

Many blue chip stocks fit this description and, as you identify them, you’ll notice that these are the companies that have been outperforming the market.

I’ll give you three that you can look at right now:  Wal-Mart (WMT), Kimberly Clark (KMB) and Altria (MO).

Each of these three stocks meet all of the criteria above and, most importantly of all, they are all breaking out to new highs while paying dividends of 2.35%, 4.90% and 3.63% respectively.

Teeka Tiwari signature
Teeka Tiwari
Chief Investment Officer
ETF Master Trader
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6/13/2012 4:42 PM

I agree and own gold coins to hopefully last us three years.  All 3 of my ETFs are paying dividends consitantly for years.  Coins and GLD total 20% of portfolio.

6/13/2012 4:42 PM

Dear Sir, walmart WMT has about 100 billion in debt. Walmart will go bankrupt when then they can no longer borrow money. --Wally

6/13/2012 4:48 PM

...good article... "...Here’s the rub:  As prices drop, consumers put off their purchases, because they know if they wait they can get a better price. ..." ...that's theory – but does it hold water? – ...I think not necessarily...the price of HDTV

6/13/2012 4:45 PM

Like it. Good for U for suggesting specific stocks!!

6/13/2012 5:08 PM

Thanks for sharing your insight and the results of your market knowledge, which is so much broader and deeper than ours as individual investors. Your article seems to reinforce the fact that the U S and the EU are fast approaching "The Keynesian End Point

6/13/2012 5:29 PM

I have tremendous respect for Felix Zulauf. However, he's often the darkest voice in the crowd. You tend to get a lot of credit by calling the situation dire, and then have it happen. Your three stocks are wonderful suggestions but not in Felix's scenario
Gary Conley2

6/13/2012 5:50 PM

How can you possibly say we are in a deflationary period? Where have you been? Obviously you haven't been shopping lately. Example -  14 months ago I purchased a family size case of toilet paper from Costco for $8.80 Prices for the same amount went to $9

6/13/2012 5:49 PM

As we are on the brink of experiencing a financial calamity, why would anyone want to own stocks in a deflationary spiral?? Paper and ink has been and will always be the problem, not the solution. Tangible assets such as gold and silver have never been wo

6/13/2012 6:18 PM

quite informative

6/13/2012 6:39 PM

Sir. I am in my 80's. I lived thru the 1930's. my mother earned 18 cents/hr. Cash was "KING", if you had it. When the banks close their doors, you are locked out & lost. We lived hand to mouth. You have no concept of the grinding poverty of the deflati

6/13/2012 8:21 PM

...thanks for comment, ALPHAMEG – you are absolutely right...I do NOT have a real, honest idea of that kind of poverty...I grew up in Sweden and my parents lived through that time, but they never talked much about it and I don't think they personally su

6/13/2012 9:13 PM

Good data there Gary, yes, grocery costs are way up. Heavily due to higher gas prices and the ill fated "corn to ethanol" project. Beef more than doubled and Pork was way up too. Bacon more than tripled in price. But now oil has dropped over 30% in the l

6/13/2012 9:26 PM

A good scary scenario, who knows.  But also good advice on the three stocks mentioned.  Thank you for both.
Don Larson

6/14/2012 2:36 AM

So . . . if Deflation is going to be the problem; let's, forget about Inflation - - and have the Fed run the Printing Presses non-stop.  In fact, I have been wondering why inflation hasn't been greater than it is; considering that Uncle Ben has increased

6/14/2012 4:33 AM

In my opinion, i think some of your observations are correct but i doubt whether Walmart and other two company.s stocks would be safe for investment in the scenario you told. I being a para-psychologist have also predicted that whole world economy might

6/14/2012 6:23 AM

commodity prices may go up except few.

6/14/2012 3:17 PM

practical, forward thinking!!!

6/14/2012 8:04 PM

one thing you seemed to miss with your mention of stocks to own is utilities companies. In the words of one investment adviser to me that has never left my mind. He said people can live without computers, tv, cars, etc etc, BUT NOT without some form of po

6/15/2012 1:16 AM

FACTS: Thanks for your response. All hell is breaking forth. Anticipate Greece will vote a new govt in on Sunday. Most surely they will drop out of the Euro soon. Almost immed. the drachma will be quoted 1/1 to the Euro, w/an immed. drop to 2 drachma/1 eu
Jason Wreight

6/15/2012 10:51 PM

 Maybe....( "in other words no matter what the need for a form of utility will never disappear.")..   but the  ability  to PAY  for  utilities can and  does disappear (as  is  happening  here in Australia currently.  Without  revenue (never
Jason Wreight

6/15/2012 10:44 PM

Well-put  and   concise  article  ~  and, I'd  suggest, a  no-brainer. But I suggest the  world's  beyond  the  boom-bust  cycle  thing, and that  when it all hits the fan   there  won't be  a  'recovery', let alone  stocks  worth
Jason Wreight

6/15/2012 10:57 PM

 Spot-on  ALPHAMEG.  Lots of  variations  possible, of  course, but all of them  will  confirm the  theme.  Your opinion about the  American  government  is  shared  around the  world;  but  most people  are  also  terrified  of havi

6/16/2012 2:30 AM

(I don't know if this will reach where it's supposed to...) Yes, Jason...fear of the unknown, however, most people don't think about anything, they have no imagination and so they fail to grasp the beautiful future that is very much possible without the d

6/16/2012 4:52 PM

Jason, you're a scary puppy but I do agree with you on most of your thoughts. Living in New Zealand takes away some of the stresses that will face the world in the coming years.. but hiding away somewhere will not spare you this time. We need to bounce i

6/16/2012 4:48 PM

Fear can sell a lot of advice.

6/16/2012 5:22 PM

...thanks again, ALPHAMEG – appreciate your insight. – I pretty much agree with all you're saying – only one thing one might want to add and that is that the Greeks were victims of US manipulations...(of the financial kind), so they found themselves

6/16/2012 6:11 PM

Excellent thoughts.

6/16/2012 8:02 PM

Right on man. That's why i never let anythiny that incorporates the use of fear manupute or influence my decisions.
Jason Wreight

6/16/2012 9:30 PM

 Couldn't agree  more, 'Follow the  Facts' (sorry about the previous  misdirection), and apparently  more  and  more  people  are  being pushed  to thinking in extreme  terms. 'Lazarus  Long'  said  Every  ruler  should have a  noose pe
Jason Wreight

6/16/2012 9:41 PM

 But  don't overlook  the  relativity, Gary.  Fifty  years  ago we  paid  NOTHING  for the  products  you mention; they weren't available and  certainly  wouldn't have been  considered  to be  necessary  enough to  spend  good  money

6/16/2012 10:17 PM

Hi Jason – I'm assuming this works now : ) ...well I agree with everything you hundred percent... There is so much to say and so much to discuss, it's hard to know where to begin and end...I've read so much these last ten, twelve years an
Jason Wreight

6/16/2012 10:24 PM

 Yep  Daytrader...("We need to bounce ideas off each other and figure out how to navigate our way through") The problem lies  in the  fact  that  'our  foes'   make the  rules  and  restack the deck  as and when they  please. One  thing

6/16/2012 11:28 PM

Hmmmmm!!! UBS--I thought a lot more of those guys were going to jail...

6/16/2012 11:41 PM

FACTS: Anticipate the final currency capitulatioin will be agreement by the still standing leaders, Germany & USA (Group of Eight). If the end play is lengthened, the USA will recover because with the monster oil finds in the oil shale zones, in the inter

6/17/2012 4:00 AM

FollowThefacts, very well said, I couldn't have put it better myself. I did exactly the very same thing, when my old CRT TV conked out, I went out and bought a brand new flat screen 52 inches HDTV back in November 2008 because I figured the time and p
Concerned Citizen

6/17/2012 4:30 AM

“WOW” That’s what I can say after reading this article and all of your comments. Riots in the streets... banks withholding your money... governments forbidding you from moving your money.  As insane as this all sounds, is it possible? It has put me

6/17/2012 5:21 AM

Don Larson, the reason why hyperinflation still has not occurred in the USA as it has in other countries that have expanded their money supply by the same amount as the US has is because the 3 trillion dollars created by the Fed out of thin air since the
John C

6/17/2012 6:05 AM

Goodness me, I think I will buy a gun and end it all now. Whoever said fear sells is correct, and fear gets the publics attention by far the most, and gets more headlines and sells more papers and gets more television viewers. One final thing about dire

6/17/2012 6:11 PM

...Thank you, ALPHAMEG – ...yes, I am aware of these's been reported that the US is already exporting oil – although not a net-exporter of mention the tri-city entities, but you added jerusalem...the tri-city states even have

6/17/2012 6:25 PM

..he he – yes – exactly! ("...we would still be without...") ...and this Samsung we got is working beautifully – we use "OTA" – "over the air" antenna and the picture quality is astounding. – Later I hooked up a "humble" stereo radio to the TV a

6/18/2012 2:01 PM

Creeping de-flation will effect all of us