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Renowned macro investor Felix Zulauf predicts the end of the liquidity cycle in early 2024, leading to struggles for stocks and bonds. He warns about extreme positioning in the bond market and the potential decline of the US dollar. Zulauf discusses assessing sentiment in the stock market, the impact of interest rates, and the vulnerability of the market at the end of a rally. He also touches on digital assets, inflation predictions, and the significance of geopolitical risks including ongoing conflicts and the potential for World War III.
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Quick takeaways
- The liquidity cycle is expected to come to an end in early 2024, leading to potential sharp declines in the stock market or spikes in bond yields due to unexpected outcomes when consensus forecasts align.
- Investors should exercise caution and be aware of the risks posed by geopolitical tensions and the transition to a multipolar world order, as these risks are not fully priced into the stock market.
Deep dives
Liquidity cycle and market positioning
According to macro investor Felix Zulaf, the liquidity cycle is currently in a rejuvenation phase, driving a recent rise in stocks and bonds. However, Zulaf believes this liquidity cycle will likely come to an end sometime in early 2024 due to global factors not in line with the consensus view. He points out extreme bullishness in the bond market and declining bond yields, contrasting with the consensus view of weakening economy and declining interest rates. Zulaf suggests that when consensus forecasts align, unexpected outcomes such as a stronger economy can occur, leading to either a sharp decline in the stock market or a spike in bond yields. He advises caution and expects trends to reverse in the first quarter of 2024.
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