Stocks could drop 20% when Fed fights inflation: hedge fund founder
Fears of inflation already shook the market this week when the Nasdaq fell nearly 2%, but a hedge fund founder is sounding the alarm over a possible 20% collapse triggered by the Federal Reserve and an end to accommodative monetary policy in the US Pandemic time signals this year.
Satori Fund founder Dan Niles recently told Yahoo Finance that this week's hotter-than-expected inflation data, coupled with other central banks around the world already deviating from their simple monetary policies, is likely to lead the Fed to abandon theirs Restrict adjustment policy earlier than expected.
"If food, energy and protection prices are rising as fast as they are, the Fed will have no choice," he said, predicting the Fed could signal the start of a downturn for the monthly $ 120 billion per month Buying assets by the summer. "You can say what you want, but that reminds me to some extent that you said in 2007 that the subprime crisis was well contained. Obviously it wasn't."
For their part, Fed officials firmly believe that a spike in inflation is to be expected as a temporary reality of reopening the economy after the pandemic. The latest pressure from the Bureau of Labor Statistics released this week may have startled investors when it showed consumer prices rose at the fastest annual rate since 2008 for the month of April. This inflation metric differs from the Fed's preferred personal metric. The Consumer Spending Index (PCE) rose 4.2% over the past 12 months. The Fed has already signaled that it would be nice to remain accommodative even if inflation climbs above 2% in the recovery, as measured by its preferred metric.
But, as Niles points out, other economies around the world have already signaled their intention to turn away from the accommodative monetary policies put in place during the pandemic. The Bank of Canada was already starting to rejuvenate, and the Bank of England was the second G7 to speak about it - a phenomenon that Niles said could lead the Fed to act faster. In other countries like Russia and Brazil, interest rates have already risen.
"This process has already started in other countries around the world and I think the US will just lag behind and catch up, which is why it is so disruptive," he said. "None of this would honestly matter if valuations were low, but they are not. They are at record highs."
As Niles pointed out on his blog, the market's 10-year break-even inflation expectations are at their highest level since 2013. Inflation concerns, measured by 10-year government bond yields, have been artificially low with the expansion of the Fed Bond purchases. But talks about curtailing the $ 120 billion monthly purchase program could change this summer when Niles predicts the Fed will throw in the towel on its accommodative signaling. His thesis remains that a 10% to 20% correction would follow, hitting unprofitable growth names the hardest, as it did so far in 2021.
Dan Niles points out that inflation expectations have reached their highest level since 2013. In this graph, he highlights his thesis on the impact the Fed will have in reducing its $ 120 billion monthly asset purchase program. (Source: DanNiles.com)
"If the Fed suddenly starts pulling this after 13 years of giving you easy money, you need to rethink where you are investing for a better trade between risk and reward." He said, "And lower rating names that make a lot of money - that's where you want to be."
As a hedge fund manager, Niles revealed a mix of long and short positions, but stated that larger tech companies that have shown profitability like Google and Facebook may outperform unprofitable competitors who are not doing the same in an environment of rising interest rates Being able to show strength. Elsewhere, the energy sector and financial names like JPMorgan Chase (JPM) remain some of his favorite value games for the future.
Zack Guzman is an anchor for Yahoo Finance Live and a senior writer on entrepreneurship, crypto, cannabis, startups and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.
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