Inflation, central bank tightening, slowing consumption and a European energy crisis, among other factors, should stir significant troubles for economies around the world in coming months, Michael Taylor, Critical Mass Partners managing director, said on a webcast last week.
Taylor, hosted Thursday in a “Real Conversation” webcast by Keith McCullough, founder and CEO of research firm Hedgeye, said he expects things to “break badly and painfully” within a year in many places.
“This is the worst setup I have ever seen coming into stocks. And I said it in November coming into 2022 and I’ve said it all year,” said Taylor, who holds significant short and long positions and noted he is “up triple digits” on the year.
“I’ve had to modify the way that I trade and be a little bit more nimble about it because I’ve been of the mindset for this year … everything’s going lower, a lot lower. And I’ve changed that to actually trade these inflections and I don’t normally do that,” he said. “There’s just so much money to be made on trading both sides that … this is really an ideal condition to be nimble and active.”
Hedgeye’s McCullough titled the talk the “Biggest. Bubble. In. Capital. Market. History.”
“This is a Main Street, concentric market crash from China to El Salvador, to the biggest retail buying bubble,” McCullough said.
Taylor touched on the forces affecting economies and markets in the U.S. and globally, including rising energy and materials prices. Here are five economic predictions he made for the coming months.
1. Ailing U.S. Economy
The Federal Reserve Bank isn’t likely to pivot soon and has little choice but to weaken the U.S. economy — to a certain extent — according to Taylor.
“We’re going to have this period of time where we have tightening positions and a very quickly ailing economy,” he said, adding that there will be a lag time where the Fed can’t pivot and must stay the course on tightening.
“No matter what the Fed says they have one job, and that is to finance the Treasury and to make sure that the government can borrow money at a rate that is appropriate. And that rate that is appropriate is probably around 2%,” Taylor said. “So in my view the central bank has very little choice but to tank the economy until there is a spot on the yield curve where the government can fund itself.”
The U.S. government “has been wildly overspending and creating all of the growth” in the country’s gross domestic product for a decade, he said. “So if we have 3% growth in GDP, 5% is the government overspending,” he added. If the government balanced the budget, the U.S. at minimum would be at negative 2% GDP growth, he said.
“The cascading problem the Fed is very worried about, and they’re trying to walk this fine line in not tanking the economy too bad, is the tax receipts,” Taylor said. If tax receipts decline too much the government would have to borrow to maintain spending levels, which would mean turning to international buyers, who would demand higher prices, he explained.
The Fed might start to pivot and taper down quantitative tightening when jobless claims go up by 50 or 75 or 100 basis points, Taylor said.
(In the week ended Sept. 3, 222,000 people filed new claims for unemployment benefits. Jobless claims have fallen most weeks since mid-July and are down significantly from 361,000 a year earlier.)
Hedgeye co-founder and CEO McCullough said a Fed pivot to easing shouldn’t automatically be taken as a buy signal for investors. Taylor agreed but said a pivot would be a time to start looking at valuation.
2. Forced Home Sales
Businesses are already showing signs of slowing, especially around the housing market, according to Taylor, who predicted the U.S. would see distressed sellers in several months.
“Essentially every single builder who did flipping and spec homes over the past year is underwater badly on everything they did,” he said, citing the cost of goods sold, overvalued property and monetary policy.
“If you give people a trillion dollars in their pocket, they’re going to bid everything to the moon,” Taylor said.