- David Hunter, the chief macro strategist at Contrarian Macro Advisors, says we may be on the cusp of “the largest financial crisis in history.”
- Hunter breaks his apocalyptic forecast into two phases. Each one is distinct and aligns with a different timetable.
- He said he expected a massive “melt-up” rally to take place in the next few months, ultimately setting the stage for an 80% stock crash.
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When it comes to market forecasts, David Hunter, the chief macro strategist at Contrarian Macro Advisors, doesn’t beat around the bush.
“I think we’re going to see something that includes a very large financial crisis — probably the largest financial crisis in history — including major bank failures, not so much here, but Europe, maybe Asia banks, and also 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 market veteran — separates his ominous call into two phases, both of which are part of the same overarching “bust.”
There are many facets to Hunter’s forecast, so it’s important to account for each properly. Here’s how he divvies it up:
Phase 1: It includes a “melt-up” scenario for stocks. During this time, Hunter said he thought the S&P 500 could rally to anywhere from 4,200 to 4,500 points, alongside a Nasdaq composite that could touch 15,000.
Catalysts include: Central-bank liquidity, the passage of a stimulus package, shifts in sentiment, and bullish momentum begetting bullish momentum.
Timeline: The next two to three months.
Phase 2: The unwind. In this period, Hunter forecast a swath of bankruptcies, bank failures, involuntary liquidations, an 80% stock crash, and a massive expansion of the Federal Reserve’s balance sheet to as much as $20 trillion in response.
Catalysts include: A central-bank misstep, lack of government assistance, immense debt buildup, and time (some businesses have been closed and without revenue since March).
A ‘fake-out sell-off’
According to Hunter, the original fallout stemming from the coronavirus was a “fake-out sell-off.”
“So I was a little taken by surprise by the sell-off — the magnitude of sell-off,” he said. “I expected a 10% pullback from the highs of February, and we obviously got 30%-plus. But I took a look at the work and said, ‘No, this does not take away the melt-up scenario.’ In fact, this is kind of a fake-out sell-off.”
Though it coerced his forecast to the fast track, he said that episode was a mere blip on the radar of a much larger debt- and leverage-fueled trend that’s been building for years. It’s a phenomenon he’s previously referred to as a “supercycle,” which stretches from one economic depression to the next.
In the near future, he said he thought the colossal amount of debt and leverage that the financial system is predicated on would start to falter. After all, large percentages of the global economy are running at a fraction of their normal capacity.
That’s why Hunter says it’s too soon to give the all clear.
The Fed’s role
According to him, the bridge between the two phases has been supported by Federal Reserve liquidity — and he thinks it’s bought the market a few quarters of reprieve. In his view, that’s why things are relatively calm in the market, for now. In the next few months, Hunter said he saw the S&P 500 rallying to about 4,200 to 4,500, forming a secular top in the process.
Though the Fed seems to have commandeered a heroic role in uplifting markets, Hunter thinks it may serve as the catalyst for the impending downfall, he said.
With financial markets now awash in capital, and the prospects of a viable vaccine rising every day, Hunter said the Federal Reserve — and potentially other central banks — may have to rein in investor exuberance. If that happens, and the Fed pulls the rug out from under the market, Hunter said it could kick-start a series of cascading failures.
“So — the second phase of the bust — you’ve got, still, an awful lot of fragility in the system, big chunks of the economy that are nowhere near getting the benefit of the recovery, and all those things start coming back at you,” he said. “And if the Fed pauses, I think this thing could unwind very fast. And let’s remember, this is a global bust. So it may not even be the US that’s the main problem next year.”
If that happened, Hunter said he would expect the Federal Reserve to expand its balance sheet to as much as $20 trillion to try and save the financial system and quell markets. However, he thinks those efforts will ultimately be ineffectual. To put things in perspective, the Fed’s balance sheet is about $7 trillion today. This time last year, it was about $4 trillion.
“And when people…