On October 20 I attended a private seminar in New York City and listened attentively to one of Switzerland’s best money-managers to get a perspective on the global market crisis.

There are only a few global-minded investors I really consider when it comes to gaining investor insight. The majority of today’s money-managers are too mainstream and remain obsessed with beating their benchmarks. What a waste of time.

My favourite market seers in Europe include Marc Faber and Felix Zulauf.

I’ve been following Felix Zulauf’s career for about 15 years. In 1990, he founded Zulauf Asset Management AG in Zug, Switzerland and currently manages money for global investors in the Zuluaf Europe Fund, which is actually up in a disastrous 2008. Zulauf was bearish starting in 2006 and positioned his funds accordingly.

Soft Depression

Zulauf believes we’re entering a soft economic depression. If not for the government’s backstops on October 13 to prevent further stock and credit market seizures, a depression would have followed. Zualuf is convinced the markets would have crashed.

His prediction of a severe recession will take the S&P 500 Index down all the way to 550, possibly 500, or 35% lower from current levels. Stocks have already plunged 40% from their October 2007 highs. Zulauf is adamant; “U.S. stocks are still not cheap. The S&P 500 Index trades at 1.7 times book-value and the Dow more than 3.5 times book. This is still expensive.”

The Swiss advisor now predicts a very different world will emerge as a result of widespread government nationalization of banking. These efforts, started in the West, will send the wrong message to emerging markets, also likely to follow the same course of full or partial nationalization. This will also mark the end or suspension of the globalization theme whereby markets will gradually be closed to foreign competition amid a marked increase in government regulation of financial markets. He also expects foreign currency controls as economic distress accelerates.

According to Zulauf, a “soft depression” lies ahead. And Europe might be the focal point because the banking system there is worse than in the United States.

“There’s a disaster unfolding in Eastern and Central Europe. These countries are now unwinding leverage, namely Hungary, Romania and Bulgaria. They’ve borrowed heavily in foreign currencies and now have to pay those funds back as bank liquidity dries. Hungary, for example, has borrowed heavily in Swiss francs, at low rates, and, with the forint collapsing, the debt burden only grows more acute. Eastern Europe remains the high risk focal point in Europe because of these chronic deficits.”

The End of the Euro?

Zulauf also believes Italy, Greece and Spain will eventually exit the single European currency, or the euro. He seriously doubts the euro, in its current form, will survive beyond ten years as government deficit ceilings are breached amid a bulging credit crisis. The 15 members comprising the euro-zone must keep budget deficits at 3% of GDP or lower in accordance with the Maastricht Treaty.

Europe went through a major currency crisis in 1992 when the euro’s predecessor, the ECU (European Currency Unit) plunged in September 1992 following the exit and devaluation of the British pound and Italian lira. Both countries were suffering from high interest rates, recession and rising unemployment; the ERM, or European Exchange Rate Mechanism, proved too challenging to continue and both countries finally let their currencies float freely by September 17. Betting the pound would devalue months before, Quantum Fund founder, George Soros, earned more than a billion dollars shorting the pound.

Toxic Bank Debts Transferred to Governments

According to Zulauf, banks have transferred their toxic assets or securities to government balance-sheets; the bad debts have not disappeared. In this case, governments will be responsible for holding these illiquid securities and, increasingly, other bad investments or even non-performing loans. This makes government debt or bonds a bad long-term investment since central banks and finance ministries are collateralizing near worthless paper.

Another experienced guru alluded to a similar point two weeks ago on CNBC.

Legendary hedge fund investor, Julian Robertson, Jr. of the Tiger Funds (1980-2000) is betting on rising long-term interest rates in the United States as the cost of Treasury issuance goes ballistic over the next few years. In his eyes, government debt is a bad bet.

Best Buying Opportunity in a Generation

Despite his bearish tone, Zulauf believes global equities will offer one of the best buying opportunities in a generation sometime over the next 24 months. This includes real estate. He’s expecting stocks to stage a powerful bear market rally off the October lows but beyond a big move, he think the economic landscape is still deteriorating and earnings forecasts are too aggressive. Still, after the next big drop, he does believe stocks will be trading at incredibly low levels.

Zulauf is sticking to selective shorts, holds very little equities and is long short-term government bonds and gold, including a short-term hedge on the yellow metal. Though long-term bullish, he believes gold might dip to $650 on this correction.

The only stock market sectors Zulauf believes are worthy in this environment are food and beverages and some major oil companies. Aside from these groups he’s very light on equities.

Commodities will continue to suffer until China’s economy stabilizes. China will do everything it can to boost domestic consumption and might experience a mild recession, claims Zulauf. Until China’s economic growth accelerates in mid-2009, commodities will remain under pressure.

As for the U.S. dollar, the Swiss money manager ties its strong performance versus all currencies (except the yen) since mid-July to the destruction of credit and a shortage of dollars. The world is hungry for liquidity and the hedge fund world is deleveraging. He doubts the dollar’s rally will extend beyond the first half of 2009 and recommends holding gold in a Swiss bank account.