- David Hunter, chief macro strategist at Contrarian Macro Advisors, believes we could be on the verge of “the biggest financial crisis in history.”
- Hunter divides his apocalyptic prediction into two phases. Everyone is different and follows different schedules.
- He assumes that a massive “melt-up” rally will take place in the next few months, which will ultimately create the conditions for a stock crash of 80%.
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When it comes to forecasting the market, David Hunter, the chief macro strategist at Contrarian Macro Advisors, doesn’t talk around the bush.
“I think we’re going to see something that involves a very big financial crisis – probably the biggest financial crisis in history – including major bank failures, not so much here but in Europe, maybe in Asia, and also with a lot of involuntary debt liquidation”, he said on “The Contrarian Investor Podcast”.
“The first phase started in March,” he added.
Hunter – a 47-year-old market veteran – splits his ominous reputation into two phases, both of which are part of the same overarching “bust.”
Hunter’s prognosis has many facets, so it’s important to properly consider each one. Here’s how he divides it:
Phase 1: Includes a “meltdown” scenario for stocks. During that time, Hunter believes the S&P 500 could rise to 4,200-4,500 alongside a Nasdaq composite that he estimates could reach 15,000.
Catalysts include: Central bank liquidity, the passage of a stimulus package, a shift in sentiment and an upward momentum that creates an upward momentum.
Timeline: Possibly for the next two to three months.
Phase 2: Relaxation. During this period, Hunter predicts a string of bankruptcies, bank failures, involuntary liquidations, an 80% stock crash, and a massive expansion of the Federal Reserve’s balance sheet up to $ 20 trillion.
Catalysts include: A central bank misstep, lack of government support, immense debt build-up and time (remember, some companies have closed since March and have run out of revenue).
A “fake-out sale”
The way he sees it, the original fallout stemming from the coronavirus was a “fake sell-out”.
“The sell-off surprised me a little – the extent of the sell-off,” he said. “I was expecting a 10% drop from the February highs and we have obviously hit more than 30%. But I looked at the work and said, ‘No, that doesn’t take away the melting scenario.’ In fact, this is some kind of fake sell-out. ”
While that put his prediction in the fast lane, for him this episode was just a slip on the radar of a much larger debt and leverage trend that has been developing for years. It is a phenomenon he used to refer to as the “super cycle” that extends from one economic crisis to the next.
In the near future, he believes that the massive debt and leverage that the financial system relies on will stall. After all, much of the world economy is running at a fraction of its normal capacity.
That’s why Hunter thinks it’s too early to give the all-clear. Also, add a few trillion government and Federal Reserve stimuli and now we’re even deeper in debt.
The role of the Fed
For him, the bridge between the two phases has been supported by Federal Reserve liquidity – and he believes it has given the market a few quarters of calm. Therefore, things are relatively calm in the market for the time being. Over the next few months, Hunter sees the S&P 500 climb hard to around 4,200 to 4,500, forming a mundane spike in the process.
Interestingly, although the Fed appears to have played a heroic role in emerging markets, Hunter seems that it could act as a catalyst for impending doom.
Given the capital markets in financial markets and the daily growing prospect of a viable vaccine, Hunter believes the Federal Reserve – and possibly other central banks – may need to contain investor exuberance. If this happens, and the Fed pulls the rug out from under the market, Hunter believes it will trigger a number of cascading errors.
“So – the second phase of bankruptcy – you still have a lot of fragility in the system, big parts of the economy that are nowhere near benefiting from the recovery, and all of these things are coming back you,” he said. “And if the Fed pauses, this thing could unwind very quickly. And let’s remember, this is a global bankruptcy. Perhaps it is not even the US that will be the main problem next year. ”
In this case, Hunter sees the Federal Reserve expand its balance sheet up to $ 20 trillion to save the financial system and suppress the markets. However, he believes that these efforts will ultimately be ineffective. To put things in perspective, the Fed’s balance sheet is around $ 7 trillion today. Last year around this time it was about $ 4 trillion.
“And when people say, ‘Well, if you think the Fed is going to print money, why can’t they just stop the bankruptcy?'” He said. “And I go, if you look at the history of the Fed, the Fed is reactionary. It is not anticipatory. ”
He continued, “I have no doubt that you will react. I have no doubt that they will get there, but it won’t be to distract it. It will be more of a reaction than an expectation of. “” ”
Hunter clearly believes that it will be too little and too late if the Fed tries to obstruct its resolution. He has repeatedly said in previous interviews, “There are many things that money cannot do and many things that cannot be repaired” in relation to this very problem.
In the end, Hunter believes that when the confluence of debt, bankruptcy and leverage finally comes home, the pressures on the financial system will be too great.
“We don’t have two historic events ahead of us until next year: the melt and then the bust,” he said. “And both are bigger than anything we’ve seen in the aftermath of World War II.”