A decades-long bear market could hit the US stock market as the Fed gets serious about reducing its $9 trillion balance sheet, hedge fund manager Boaz Weinstein says

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Traders look on after trading was halted on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 18, 2020

  • The US stock market could fall into a decades-long bear market similar to Japan in 1989, according to hedge fund manager Boaz Weinstein.
  • Weinstein told the Financial Times the Fed’s quantitative tightening will drive the decline lower.
  • “I’m very pessimistic. There isn’t a rainbow at the end of all this,” Weinstein said.

Hedge fund manager Boaz Weinstein is warning investors about the potential of a decades-long bear market that will plague US stocks, similar to the decline that Japan’s stock market has been dealing with since 1989.

Japan’s Nikkei 225 index topped out in 1989 and never recovered those highs, as an ageing and declining population has sparked concerns of how the country will grow into the future. The Nikkei is still 30% below its all-time high. 

Weinstein, who runs the near $5-billion hedge fund Saba Capital, told the Financial Times that the Federal Reserve’s quantitative tightening policies will drive big declines in asset prices. In other words, don’t fight the Fed.

“I’m very pessimistic. There isn’t a rainbow at the end of all this. [Quantitative tightening] is going to be a real headwind for investors,” Weinstein told the FT. 

Weinstein is zeroing in on the Fed’s plans to reduce its near-$9 trillion balance sheet, which expanded considerably since the 2008 financial crisis and the onset of the COVID-19 pandemic as a series of quantitative easing measures were implemented to shore up liquidity in credit markets.

But now the Fed is on track to reduce its balance sheet by $95 billion per month, rolling off a combination of its treasuries and mortgage-backed securities holdings. And that will serve as a headwind as the Fed sells its bonds into the market, essentially sucking liquidity out of financial markets.

“There’s no reason that this difficult [economic] period will only last two to three quarters [and] … no reason to think we’ll have a soft landing or a shallow recession,” Weinstein said.

The Fed is still hoping for a soft landing even as it moves forward with more interest rate hikes, with the central bank highlighting in its September meeting minutes that the labor market still remains strong, with the unemployment rate sitting near multi-decade lows.

But Weinstein isn’t holding his breath, telling the FT that developed stock markets like the US “could certainly” follow the path of Japan’s Nikkei 225.

“That changed the psychology about whether being a stockholder is such a prized status,” Weinstein said.

Now investors have to grapple with a lot of headline risks, including Russia’s ongoing conflict in Ukraine, a slowing economy in China, and rising inflation and interest rates.

The hedge fund manager is holding onto credit default swaps as insurance against further equity losses, as he believes a recession will ultimately lead to corporate defaults and widening credit spreads.

“In this sell-off you have so many things that are problematic swirling around, some that are contradictory. There’s a lot of fear, but there’s been a lot of time for people to think about [the issues],” Weinstein said.

Read the original article on Business Insider