“Be afraid!” That’s the message billionaire investor Paul Tudor Jones wants to give to Janet Yellen and investors.
According to a Bloomberg report, Tudor is saying publicly what many money and hedge fund managers are privately telling investors: Stocks have risen to unsustainable levels and a stock market crash may well be imminent.
“The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75% over two-plus years. That measure – the value of the stock market relative to the size of the economy — should be ‘terrifying’ to a central banker,” Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him.
Tudor isn’t alone waving warning flags. Guggenheim Partner’s Scott Minerd said he expects a “significant correction” this summer or early fall, and Willowbridge Associates macro manager Phillip Yang was even willing to put a number on it, predicting a stock market plummet of between 20% and 40%.
This underscores the problem facing the Federal Reserve as it tries to “normalize” interest rates. Tudor rightly points out that Fed monetary policy since the 2008 crash has “bloated stock valuations.” That’s a more technical way of saying the central bank blew up a giant stock market bubble.
Last spring, Yahoo Finance reported an analysis showing that 93% of the entire stock market move since 2008 was caused by Federal Reserve policy. As we’ve said before, any attempt to significantly raise rates will likely spark a giant taper-tantrum.
Bloomberg cited another multi-billion dollar hedge fund manager who warned rising interest rates will create a significant problem for the business sector, saying it will mean fewer companies will be able to borrow money to pay dividends and buy back shares.
“About 30% of the jump in the S&P 500 between the third quarter of 2009 and the end of last year was fueled by buybacks, according to data compiled by Bloomberg. The manager says he has been shorting the stock market, expecting as much as a 10% correction in US equities this year.”
So what will finally prick the stock market bubble? Nobody really knows for sure, but there are plenty of pins lying around that could do the job.
Geopolitical tensions continue to rise with the ongoing conflict in the Middle East threatening to explode into a firestorm, and the US and North Korea are seemingly determined to maintain a collision course.
There is economic uncertainty in Europe as Brexit moves forward, with talk about a more generalized unraveling of the EU. There are also question marks surrounding the Trump administration. The so-called “Trump effect” spurred the y hope of major policy reforms nudged markets even higher since the election, but it could be running out of steam.
Expectations for major overhauls in healthcare and the tax code, along with massive infrastructure spending have run headlong into political reality. In fact, the president has seemingly reversed many of the positions he took during the campaign, creating a great deal of confusion.
In a word – there is a lot of uncertainty out there – and a lot of pins to pop a bubble. Is it any wonder many investors are piling into safe havens like gold and silver? – Peter Schiff
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