Late-Cycle Sentiment Emerging, Melt-Up Likely

Late-Cycle Sentiment Emerging, Melt-Up Likely – Felix Zulauf / Financial Sense

“I really think that we are seeing the beginning signs of a melt-up in parts of the stock market,” he said. “Because it’s late-stage, I do not know how long the market will run. I think sometime in the first half [of 2018] we will see the peak.”

This cycle peak is difficult to judge, however, because conditions are so abnormal, Zulauf stated. In a normal cycle, the peak usually comes when inflation rates go up, central banks begin to tighten, the economy is running on all cylinders, and corporate profits are strong.

We see some of these signs now, but not all of them. Fed tightening is an exception among other central banks, Zulauf noted. And other risks appear to be rising, he added.

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“Markets are not always a one-to-one reflection of economic reality,” he said. “There are many other factors. The cycle is very old, and there are a lot of geopolitical issues that are very fragile and could go in the wrong direction.”

Near-Term Conditions Deteriorating

The US consumer isn’t in great shape, Zulauf noted. We do see rising real income, but the savings rate has dropped to a multi-year low recently, he noted.

“That is not the precondition for a sustainable extension or advance of the economy,” he said. “I really think that the US economy is tired, and the tax stimulus, if it comes — and I think we will see something — may extend the expansion by another year or so. But I do expect that 2019 and 2020 will be a window for recession.”

Many economists and analysts have questioned this type of thinking, arguing that global growth is strong. Zulauf acknowledges that fact, but he added that the rest of the world is very highly dependent on China.

“As China goes, so goes the rest of the world, with the exception of the US,” he said.

The most important points in the future are 2021 when the Communist Party celebrates its one-hundredth anniversary, and in 2022, when the next National Congress is held to pick new leadership. He suspects President Xi wants to break tradition and attempt to hold a third term.

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