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Season 3, Episode 26: David Hunter on the Coming Stock Market Bust

David Hunter of Contrarian Macro Advisors rejoins the podcast to provide updates on his prediction that stock markets are in the final stage of a parabolic melt-up that will be followed by a global bust.

Hunter’s initial targets for the S&P 500, Dow Industrials, and other U.S. stock market indexes have been breached, causing him to provide new, even more bullish, targets.

The bust will likely start with a ‘second-quarter swoon’ next year, caused by the Federal Reserve overreacting to inflation. The deflationary meltdown will then cause another overreaction by central banks and government fiscal policies.

Not intended as investment advice.

Content Highlights

  • Hunter’s new targets on the S&P, Dow, Nasdaq, and Russell 2000 (2:50);

  • Oil and oil stocks have peaked for this cycle (6:50);

  • The bust should happen about mid-way through 2022 and result in oil prices back in the mid-$20s range (8:25);

  • The cycle will end because the Federal Reserve tightens interest rates due to inflationary pressures (10:28);
  • Central banks around the world are withdrawing quantitative easing and some have even started to adjust interest rates higher. This will affect things and force the Fed’s hand. Resolution of supply chain issues would increase the pressure (15:54);

  • China will definitely play a major role in the bust, though Evergrande is probably just the tip of the iceberg (19:27);
  • What happens after the bust is an unprecedented flow of liquidity. Yes, even more than COVID. There will be bank failures, though more in Europe and Asia than the U.S. (21:17);

  • Central banks only have one tool to combat this, which is quantitative easing. They will be matched by fiscal stimulus. It will be “March of 2020 on steroids, basically. Multiple steroids” (26:07).

More Information on the Guest

  • Twitter: @DaveHContrarian (send him a direct message if you are interested in finding out more about his service).

Video Highlights

Transcript

Nathaniel E. Baker 0:35
All right. Very proud here to have David Hunter of Contrarian Macro Advisors back on the podcast. Welcome back, David, very excited to hear your updates on markets, you’ve been very prescient with your views here calling for and you even give us targets of the s&p 4500. You said the Dow would hit 36k, and that the NASDAQ would hit 15,000. Those have all been reached. And I want to quiz you and get your update here because you are now calling for a pullback. And that will then be followed by the final melt up the final parabolic portion, I believe of the melt up, which will conclude before a big pullback next year. So very curious on hearing your thoughts on that?

David Hunter 1:27
Sure. First of all, thanks for having me on. And yeah, I guess it’s been a while since we’ve talked because I’ve raised targets a few times since 4500. I’m now on the s&p at 5,300

Nathaniel E. Baker 1:41
Wow

David Hunter 1:41
42,000 on the Dow. 18,000 on the NASDAQ and 2900 on the Russell 2000. So we’ve got a ways to go. But we’re getting a lot closer. You know, this, this latest run has taken the Russell out of a year long consolidation, it has broken out. So I think for a lot of people the fact that it was going nowhere all year, had them bearish and couldn’t understand why I thought, you know, the small caps would ultimately outperform the big caps. But now that we’ve broken out I think people are getting on board, that thing will run. But you’re right. I do think it’s not necessarily going to happen. This, you know, the shorter term is much harder to call and yeah. But there was a setup there that says that we could see a pullback of maybe four to 6%. We’ve moved farther than I thought we would in the last week I talked about a pullback last week and said it was coming. I didn’t mean it was going to come imminently that day or the next day. But but you know it has moved out of you know, it’s broken out to new highs. So now it begs the question, is that pullback still in place? I think we’re a bit ahead of ourselves here. So I still think there’s some sort of pullback coming. We may not see it this week. But I think certainly in in coming days. But that’s not the big story. The really big story is that I think a melt up is getting underway. And a final melt up. We’ve really been in a melt up for a year. But but if I don’t melt up leg, I think is getting underway and will take us to those levels. And I actually think my, my current targets are still too low.

Nathaniel E. Baker 3:29
Wow. Okay, yeah. So 5300 on the s&p, that’s another upside of at least 15 to 18% of my quick maths are correct. So yeah, I mean, the pullback. I mean, what could maybe possibly cause that because we’ve had earnings this quarter, I’ve been very good beating estimates. And then we had the Fed yesterday, with a mostly dovish meeting, I guess the tapering of bond purchases was widely anticipated. And they have mostly punted on raising interest rates right now, and probably for the next, you know, six to nine months. But so what could potentially cause the pullback here, because also we had a big pullback in September.

David Hunter 4:09
Yeah, it really doesn’t take much. It’s just a technical three to 5% type move. So anything can kind of disrupt the market for a few days. But mostly what I see now that just has me saying, I doubt that we just keep going here is just then all of a sudden, everybody thinks November and December are seasonally strong, and it’s going to go straight to the end. So it can just be some little thing could be a Fed comment. It could be something over in China could be you know, something, you know, Europe could be UK raising rates, you know, anything like that could cause people and certainly could be a data release because we still are in that period that started the summer where the economy has slowed down. So you’re still going to be getting, you know, disappointing numbers, I think on some of those things. housing a retail or what have you. But it’s really the big story is that it’s only a short term, stair step down on the way to a much higher high. So I would not try to trade it. I do see still some things, particularly on the industrial side that those stocks have lagged here short term and looked like they could roll over and give you the all that kind of 5% pullback. So maybe it’s not going to happen. But I still think the setup is, is there to say it’s potentially there.

Nathaniel E. Baker 5:36
Okay, so overall bullish, but interestingly, here, you you also have some views, sector wise, and you say oil stocks have peaked? And what is that intermittent? Or is that include this final melt up that we would get?

David Hunter 5:48
Yeah, I think we have seen the peak in oil for this cycle. And I’ve said that starting a couple of weeks ago, yeah, that took a little while before, you know, when that didn’t happen immediately. People were starting to say you’re wrong, you’re wrong, that’s going to 90 is going to 100, it’s going higher. Because it was, you know, I called it at 84 or 85, went down to maybe 84. Again, 83, 84, and then went back up towards 85. And they thought it was on its way again, if you know, contract calls are not meant to be, you know, immediate next day, it’s saying we’re very close. And certainly a cycle call is not going to be something I can hit on the day or the next day. Of course, yeah. But but now that it has started to weaken, I see enough in there to say, Yeah, I think we’ve seen the highs in oil for the cycle. And also the highs for the oil sector stocks. XLE, for example, looks like next step down could take it down, you know, 10 to 15%. So, you know, everybody kind of got excited because of the momentum in oil in the last month or two. Obviously, gasoline prices have moved way up and oils moved up. I think it was a bit of what I call extrapolation fever, you know, people just jump on the momentum bandwagon and, and they kind of double discount what’s already in the in the market. So my view is we are going to see a bust. I pushed it a bit where it’s probably more of a second half 2022 story. But in that bust, it will add to global bust, it will really hit demand hard and oil. And I think he could see oil back into the 20s, you know, 25 or high 20s. From here, so not going to get there in the next few months. I think you’re gonna see this thing bounce around, could get down into the 60s and then back up and then, you know, work its way lower over the course of the next six or nine months. But But I do think the high water mark has probably been seen.

Nathaniel E. Baker 7:55
Interesting. And you say that despite we do have some secular tailwinds for oil and energy, we you know, we have all these supply chain issues. And demand is very strong. But that doesn’t you don’t think that oh, that’s enough to move things higher?

David Hunter 8:08
No. Again, these markets are discounting mechanisms, right. So they’re discounting, I was very bullish of oil through the mid to high 70s. And then I got the bandwagon said it’s going far enough for me. It pushed beyond that mid 80s. For a very short spike, you know, it wasn’t up there very long. But, you know, that’s markets discount ahead. And what we see what we see among investors, both institutional and retail investors, is they tend to look at the price today and use today’s fundamentals to justify higher prices. That’s already in the stocks. Now. It’s the fundamentals continue, and we we don’t see your oil impacted, and supply stays tight. I could be wrong, and it could go higher. But right now, what I see fundamentally and technically gives me confidence to say the odds favor this thing working lower that higher.

Nathaniel E. Baker 9:09
All right. Okay, let’s talk about next year then and the bust, which are you still saying that this is going to be caused by the Fed and by potentially a Fed overreaction?

David Hunter 9:18
Yeah, ultimately, when the cycle ends, and this is again global, so the Fed that piece of it and all central banks are but ultimately when the cycle ends, I think it will end because the Fed tightens and what I think is not easy to understand I you know, and and investors and traders tend to see things happening very immediate, but inflation’s likely to heat up here further. You know, the momentum behind inflation is strong. That’s going to ultimately forced to speed up the taper and move to tightening I think sooner than they would expect. And then the thing that I think people don’t always like Understand. And you know, I lived through the early 80s As an investor, as an institutional investor. So I remember, well, inflation, once it breaks out like that is not easy to attain. So it’s not just a matter of, you know, the Fed saying we’re gonna tighten now and they hike rates, and inflation just stops on a dime, they’re gonna tighten, look, inflation is gonna keep running, they’re gonna tighten again, look. And so they won’t know that they’ve over tightened until after the fact. And, and the other half of the equation is that we have a extremely highly leveraged system, globally, not just here. And we have a fragile system because of the pandemic. And when you add those two things together with the tightening, I think the the equation equals out to a bust.

Nathaniel E. Baker 10:53
Yeah. But you don’t think that it’ll happen that any tightening or adjustment of bond purchases beyond what’s been announced until the middle of next year?

David Hunter 11:02
I don’t know if it’ll be sooner than that. But it certainly won’t be in the next few months. So I think, probably through the first quarter, you’re gonna see the expected taper. But I think as you move into the second quarter, the it’s not, it’s just a guess, at this point. As to when inflation crosses over a point, you know, where Powell and the Fed say, we can’t just ignore this anymore. So it really depends on what we see in the next three or four months. But my guess is, if anything, they’re going to have to, you know, stop taper sooner and begin tightening sooner, which, if I were targeting, it’d be sometime in second quarter.

Nathaniel E. Baker 11:43
Second quarter. Okay. So before June 30. Now, it’s going to be Powell making a call? Or is there somebody else going replacing any thoughts on that?

David Hunter 11:51
Hmm, good question. If they do what they should do if Biden does what he should do, Powell should be reappointed. You know, I was a big critic of Powell, all prior to the pandemic, he had a, you know, a rough start to how you communicate, set policy and what he needed to do. But he’s learned he’s been a rapid learner. And I would say, in spite of all the criticism, he’s done a very good job through the pandemic, and has shown a calming force, when not all his governors were so calm. You know, I think that’s one of the big mistakes that’s been made. And certainly the last decade is allowing every governor that wants his face out there to, you know, come out with his own opinion. But it’s still Powell Fed. So if Biden’s smart, he’ll reappoint him and it takes one of these. He’s not having an easy time of it as president. This would be one place where if he did that, and take one thing he had to pay a lot of attention to off the table. However, you know, you know the story, too. There’s, there’s questions of whether the progressives really want to push brainer. And as Lael Brainard couldn’t get the job, I think that would be a big mistake, but then, you know, who knows?

Nathaniel E. Baker 13:13
Because she’s too dovish?

David Hunter 13:16
She is she’s very dovish. And I think the Fed, you know, has been plenty dovish, but, you know, I think you do have to still balance the two. You know, if she got into the role, maybe she will take on a more responsible role, you know, understand she has to kind of balance the, the two risks, but at least in in her kind of any comments she makes or her votes, she seems to be very much to the dovish side. And she’d also be more beholden to the progressive left in terms of modern monetary theory, etc, which I think is a joke.

Nathaniel E. Baker 14:01
And what about the governors they would then appoint because there’s a couple of them stepping down, if I’m not mistaken. How does that even work? I don’t even know if they appoint them or I guess they come from the individual.

David Hunter 14:11
Yeah. Some Some come from the the regional banks, presidents and regional banks, some are appointed depending on the role. They know the position that that’s leaving the Fed, so you probably have some of both coming. I have a feeling the Fed makeup is going to move more dovish, more dovish, and that’s okay. But you really need that that strong leader that and I do think Powell is that guy, so hopefully it gets reappointed. But you know, we won’t know for probably a couple months.

Nathaniel E. Baker 14:46
We have central banks around the world withdrawing QE and some are starting to tighten. Although the Bank of England this morning. They they passed. It said they were going to wait another month, Norway last week. Whenever was said they’re going to raise New Zealand raised last month. But the but it Do you think that any of that could increase the pressure on the Fed? How did these things work? The Fed claims they didn’t watch any of that. But of course they do. And of course, currencies move. So as other, do you think that’ll impact things and force the Fed’s hand a little bit?

David Hunter 15:18
Certainly. Worldwide monetary policy is something they pay close attention to, I don’t know what they say. And certainly Australia’s had a spike in rates recently, too. So it’s not just New Zealand, I, I do think there’s a possibility, because of the, you know, the weakness we had in the third quarter, that it takes a little bit of the pressure off around the world, this idea that we have to hike rates very quickly here. However, I do think if supply chain issues begin the resolve, that was the big hit to the third quarter, you know, autos, obviously, Chip shortages, hitting all those very hard, and there’s just no supply out there to get the sales. So I think that was probably the biggest part of the third quarter weakness. If that picks up in the fourth quarter, then, you know, you’re going to have more pressure on if If, however, the supply chain issues persist, and auto demand, I mean, auto supply, inventory, can’t meet demand, and they so you lose sales, then I think, you know, there’s possibility that you might actually find the central bank saying, gee, we kind of jumped the gun here. And maybe rate hikes aren’t as close as we thought. So a lot depends, I think, on supply chain here in the next few months.

Nathaniel E. Baker 16:50
What about China? There’s weird stuff going on there. I mean, ever granted, they seem to have now maybe dodged a bullet on that, but we don’t quite know yet. They haven’t moved rates, really. But it seems like there’s an awful lot of potential for problems there that could set things in motion. Any thoughts on that?

David Hunter 17:10
Yeah, China, China’s definitely going to be play a major role in the bust. I was out there on Twitter, certainly and elsewhere, saying I was pretty confident Evergrande was not the trigger to the bust. It’s, it’s a precursor of things to come. They’re certainly it’s the tip of the iceberg over in China in terms of their if we talk about leverage in the system, China’s the poster boy, because, you know, the there is just so much leverage there. They basically what everybody thought was such a miracle of an economy. I’ve said for many years, it’s not a miracle, it’s all about the debt, you know all about the leverage in their system, they’ve just, you know, leverage it up far beyond anybody in history. And that’s going to come back to haunt us that is one of probably the major factors in the bust. And I do think their property sector, Evergreen is just the beginning of it is going to be a big problem, and it will spill over into the world economy. So China, China is definitely a problem. I think it’s not a problem in next three months. So it’s, you know, yeah, as we get to the middle of next year, you better start worrying about it, maybe sooner. But I think into the certainly into the first quarter and probably through the first quarter, the likelihood is, you know, they can kind of manage things, as they always do.

Nathaniel E. Baker 18:41
Nice and your your view of the coming bust. And you also said this, that it would be precipitated by an overreaction and rate tightening and then would be followed by a flood, and even bigger flood of liquidity into the system than what we saw during COVID, which is kind of hard to fathom. And you’re sticking to that.

David Hunter 19:01
Yeah, I’m sticking that out. And I think it’s it’s by a country mile that it’s bigger. Wow. Yeah, I’ve said, we’ve grown the balance sheet from what three, seven to eight, eight half trillion here in the States. And the other central banks have done a lot. I would not be surprised see the Fed balance sheet on the other side of the bust at something over 20 trillion maybe approaching 30 trillion. And the reason and every central bank kind of following suit. So the reason for that is when this thing starts unwinding, the leverage in the system is huge. You’re gonna see major bank failures, I believe probably more concentrated in Europe and Asia than here in Australia is a risk. Canada’s risk today which it wasn’t in 2008. Our bank surprisingly because of war, maybe not surprising because of 2008 Nine are probably be in better shape than most of the world’s banks. It doesn’t mean we can’t have the spillover because of what’s going on in the overall global financial system. But its massive leverage, you know, you’re talking about 250 trillion, I think we’re up to 300 trillion in global debt. Now, imagine that we just grew another 50 trillion. It’s nonsense. And I think we throw these numbers around. But there’s implications to that. And so we have never, even in 2008, we have never been in a place where we are today in terms of debt and derivatives. And I think that’s the not only the wildcard I think that’s the story of this down cycle. Once it gets started, it’s going to be very hard until it hits bottom to stop it. And so people can say, Well, gee, if the Fed sees the market down, 20%, can’t they come right in and stop it? You know, no, this thing is going to take on a life of its own because of that leverage. And they’re, you know, there’s going to be, they’re going to have a problem, because like I said, inflation doesn’t roll over the minute you start tightening, they’re going to have the problem of what do we what do we choose to address, we’ve got inflation right away. And we’ve got the economy starting to come on, wow. If we, if we choose to stop tightening too soon. Inflation just gonna be even a bigger problem that we have to tighten even more, if we choose to address, you know, and of course, early on, they’re gonna think kind of, we can handle itself. If we, if we step in too soon to address the economy. Inflation goes, if we, if we address the economy, I mean, if we address inflation, economy is gonna go south in a hurry because of that leverage. So it’s leverage and fragility, I think people may not really be focused, because we came out of that March 2020, you know, second quarter soon. So fast, people may not really be focused on how many imbalances there still are. Not only in the US, COVID around the world. Statistically, it looks great. You know, we’ve come back so strong, but there’s so many problems out there because of what the pandemic caused. Yeah, lots lots of landlords ever received the rents 18 months to war, lots of people can barely, you know, afford their homes without government help. So, so it’s a lot of a lot of that kind of stuff.

Nathaniel E. Baker 22:33
But you do think that the central banks will err on the side of creating too much inflation rather than cutting the growth?

David Hunter 22:41
Yeah, probably the the easiest part of my prediction is the fact that is what the response will be, they won’t have a choice, what other tool is there, because this stuff comes, you know, 2008 Nine is a good example of how fast the Unwind comes once it starts July, late September, early October of 2008. And in six months time, we you know, remember, I mean, it bottomed in March. But remember what the attitudes were coming into that bottom, the world’s ending, you know, the things just beginning. So things go dire pretty fast. And the Fed has only one tool that can move that quickly, as as do all the central banks. And that’s QE. So you will see, you’ll also see matching that QE, Al pretty much dollar for dollar fiscal stimulus. So it’s March of 2020. on steroids, basic. You know, it’s, it’s multiple steroids.

Nathaniel E. Baker 23:44
Yeah, frightening stuff. Indeed, this all begs a question and maybe some thoughts on this. When you do have inflation, what assets can investors actually allocate to that will protect them? Gold has kind of been maybe one obvious one, but do you have any thoughts on that?

David Hunter 24:01
Sure. And I will say there’s, this is kind of a two step process. And I’m not talking trading, but just from the standpoint of the way these assets are going to move. You’re, you’re at the end of a cycle. As I say, you probably end this cycle in the first half of next year. So yes, inflation is breaking out. But it’s not as I keep hearing about the commodity supercycle there is a commodity supercycle that’s maybe we saw the bottom in commodities, you know, many, many months ago. But it’s not going to be a straight line from here to the other side of the bust. In Commodities, they’re going to get hit very hard in the bus. So those that are owning commodities today, at least own them if you want to own them through the bust at least own knowing that the volatility is going to be very large. Once we get through the bust, you so that I even think we will, as I’ve said, for many years, I think when the bust hits, it’s gonna be a deflationary bust. Very short one. But I think we’ll go from this inflation problem, because of the Unwind financially. And economically, you’ll see a very short term deflationary period won’t last more than a year or less, but, you know, assets will be hit very hard and values, commodity prices will drop very sharply. And, you know, overall, you could see the inflation indexes go negative. But on the other side, you’re gonna have all this money and fiscal expansion will trigger an inflation cycle, like we haven’t seen since the 1970s, early 80s. So I’m predicting by the end of the decade, you will have retraced the entire disinflation slash deflation move. And we’ll be back at the levels of the early 80s 20%, inflation 15% long been so. So in that environment, the asset that will be the top, the top assets will be commodities and industrial stocks, we haven’t seen that, other than in little pockets in 40 years, but with this will be much like the late 70s, early 80s. Those were the leaders, that means oil. Now, like I said, oil can get down into the 20s in the bust, but I believe oil, probably north of $400, by the end of the decade, you know, goal, you know, I’m calling for 2500, before the bus, you know, so in the next several months, I think it can fall probably back to here in the bus not a lot lower than this. And then in the next recovery cycle, can go to 10,000, and maybe even 20,000, who knows, by the end of the decade. So those are the kind of thing copper, you know, is I’ll use the futures prices for a quarter now, let’s say I think can get $6 in the first half of next year. And I think it, it probably heads down towards $2 in the bust. In the recovery cycle, I’m not sure $20 is a high enough target. So you’re gonna see prices in commodities like we’ve never seen. And so and it creates problems, obviously, in some respects for other areas. But I will tell tell you that there’s no doubt in my mind, that commodities will be one of the big leaders of the next cycle. And that growth stocks will suffer greatly, because of the headwind of facing interest rates going from the 10 year might get to zero and the bust. I think it will get to 15% by the end of the decade, if you go from zero to 15, over seven or eight years. Try to buy a growth stock in that environment.

Nathaniel E. Baker 28:03
Yeah, right. Yeah. More importantly, you can just put your money in savings if you’re getting 10 15%. I mean, that’s I don’t maybe won’t keep up with pace with inflation.

David Hunter 28:10
But still, you will. Yeah, you will. That’s a good, that’s a that’s a good segue into bonds, because you will see that what has what has paid off for people in the last 40 years certainly in, in, you know, with some ups and downs along the way, is that owning owning a long bond, when it was yielding 15. And just holding on to it until now, obviously was a huge, you know, you didn’t have to trade it a long time where you made multiples. The next cycle will be the opposite. And and if you held T bills for the last 40 years, you will you didn’t make anything. Every time you roll that you rolled it in for less interest, the it’s going to be the opposite and the cycle that follows the bust, you’re going to want to be short in your portfolio as possible. And your long bond is going to continue to deteriorate through the through the cycle, you know, so so it takes a whole different mindset. And obviously, you know, same is true in the corporate sector, you know, the shorter the better. You won’t want to reach out the risk curve and own junk, you’re going to want to be in the safest stuff. And I’m certainly going into certainly going into the bus. That’s true. But even in the next cycle, you’re gonna have to at least in the first few years of the cycle, have to kind of watch yourself in terms of your credits. So, so it’s gonna be a very different world.

Nathaniel E. Baker 29:42
Alright, well gave us a lot to unpack there. David, thank you so much for doing that. And thank you for joining the contrarian investor podcast. Again, maybe in closing, just remind our listeners and viewers where they can find out more about you and about your service.

David Hunter 30:02
Sure. I’m on Twitter most every day so they can find me there. My Twitter handle is @DaveHcontrarian. And I’m like, as I’m usually there, I sometimes respond to people sometimes don’t. But you know, I’m there tweeting. And then I do write a quarterly letter that is all macro based. And if people have any interest in that, the best way to find out about it is to direct message me on Twitter. And I will send you details. It’s, it’s a letter by subscription. So it’s not a freebie. And not everybody is not for everybody. But for those that are interested, just send me a direct message and I will get right back to you.

Nathaniel E. Baker 30:51
Cool, awesome. And reminder that if you subscribe to this service, you do not get David. He has his own service. There’s been some some errors some I don’t know if there’s miscommunicated. But if people subscribing and asking where you are, and you’re only a guest, you are not the whole podcast, but

David Hunter 31:08
yeah, I think some of the confusion probably also because you’re you’re contrarian, and yeah, that’s true. Yeah. And um, you know, my letter is contrarian value advisors. Right. So I think people may mistake that we’re not one in the same.

Nathaniel E. Baker 31:25
Yes, yes. And it’s a popular thing. Cool. Awesome. With that, we thank you all for listening. And thanks again to David for coming on. And we look forward to speaking to you again next time.