Folks, today I am issuing an official Super Crash Warning. That means we are on the verge of a serious market crash in the near future, which I now predict will hit by summer, June 20, 2016, and it's not going to be a good one.
It must seem like I never have any good news for you, but it's my job to see the world as it is, not as I'd like it to be, and what I see is things getting worse by the day:
- FINANCIAL STOCKS ARE CRUMBLING. U.S. bank stocks have fallen 30% to 40% over the last few months, a very bad sign. Just look at the charts of Goldman Sachs Group Inc. (NYSE: GS), Morgan Stanley (NYSE: MS), Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), JPMorgan Chase & Co. (NYSE: JPM)… These stocks are very sensitive to systemic instability. Private equity stocks are getting crushed too – Apollo Global Management LLC (NYSE: APO), Ares Management LP (NYSE: ARES), KKR & Co. LP (NYSE: KKR), Blackstone Group LP (NYSE: BX), Carlyle Group (Nasdaq: CG), Fortress Investment Group LLC (NYSE: FIG). I warned you last week about Deutsche Bank (DB) and the coming collapse in European bank stocks – but if you look at their bonds and credit default swaps, the news is even more ominous. The thing all of these companies have in common is heavy exposure to the high debt levels that built up since the financial crisis. The market is telling us that it is very worried that the Debt Supercycle is over and that a lot of this debt isn't going to be paid back.
- ESTABLISHED HEDGE FUNDS ARE FAILING. The Wall Street Journal just reported that Orange Capital is shutting down after a decade in business. Meanwhile, Chase Coleman, one of the most successful Tiger Cubs, took a hit of 14% in January. Larry Robbins' Glenview Capital Management, one of the most successful managers over the last decade, lost an incredible 21% in January after being down 17% in 2015. Bill Ackman was reportedly down double digits again in January after a 20% loss in 2015. For many of the best managers in the hedge fund game, it seems the game has changed. They can't make money when the U.S. Federal Reserve isn't pumping massive amounts of money into the system – but that's because hedge funds were in a bubble like everything else, and the bubble has burst. It turns out that very few hedge fund managers can make money in today's world (I am happy to report that I am one of them – my own fund made good money in 2015 and even made a profit in January 2016, when markets were blistered with losses).
- THE HIGH-FLYING TECH STOCKS ARE GETTING CRUSHED. Check out Netflix Inc. (Nasdaq: NFLX), Amazon.com Inc. (Nasdaq: AMZN), LinkedIn Corp. (NYSE: LNKD), Tesla Motors Inc. (Nasdaq: TSLA), all down 15% to 20% so far this year. It's a bloodbath. Only Alphabet Inc. (Nasdaq: GOOGL) and Facebook Inc. (Nasdaq: FB) are doing well, and both are overvalued and due to come back to earth.
- THE DAMAGE IN THE HIGH-YIELD BOND MARKET CONTINUES. The junk bond market is essentially closed to new issues. While the U.S. Federal Reserve finally raised rates by 25 basis points (a move it will probably have to reverse), the market has raised the cost of capital for junk borrowers by hundreds of basis points. This means that many of these borrowers will not be able to refinance their debt when it matures in the next two to three years. That means these companies will default on their debts. Sports Authority is reported to be planning to file for bankruptcy before the end of February, another victim of the retail wars. There will be more as many retail company bonds are trading at distressed levels. The junk bond market will not bottom until late 2017 at the earliest. Junk bonds are among the most credit-sensitive asset classes around, and they are signaling that the economy is weak and big trouble lies ahead.
- CHINA – THE EPICENTER OF GLOBAL INSTABILITY – IS A TIME BOMB. It's not just the $30 trillion in debt. Société Générale came out last week with an important prediction that China will run out of foreign exchange reserves in a matter of months rather than years. That would unleash a currency crisis and banking crisis that spreads quickly throughout Asia, and it won't stop there. China is an economic and ecological disaster that threatens the entire global economy.
- MARKETS ARE LOSING CONFIDENCE IN CENTRAL BANKS… And that is the final straw. The Fed is being openly scoffed at by smart people. I've been doing this for years, but now people who used to limit their criticism of the Fed because they were worried about being politically correct (I never had that problem!) are deciding that telling the truth is more important. Instead of showing up on CNBC to sing the Fed's praises, they are pleading with the Fed to take action to prevent an economic cataclysm. But it's too late. The Fed waited too long to raise interest rates. ECB President Mario Draghi and Bank of Japan head Haruhiko Kuroda are saying they will do whatever it takes to push up inflation in Europe and Japan regardless of how much global instability it causes. But it is too late for them too. All they can do is cause more damage by destroying their currencies in a desperate attempt to delay the inevitable economic depressions that are going to swallow their economies.
How to Protect Yourself
The world has been taken to the edge of the cliff again by incompetent central bankers – and in the next few months, they are going to jump over the cliff. I don't want my readers to jump along with them. It must seem like I never have any good news for you, but it's my job to see the world as it is, not as I'd like it to be, and what I see is things getting worse by the day, but there are a lot of things you can do now.
- Keep buying gold and silver. They may be out of favor today, but they will save you tomorrow.
- Make sure you own dollars rather than euros and yen. The U.S. dollar is still the best of a bad bunch.
- Buy out-of-the-money puts on the S&P 500 as a hedge against the big stock sell-off I think is coming.
- Buy ProShares Short S&P 500 (NYSE Arca: SH), the short exchange-traded fund (ETF) that goes up when the S&P 500 goes down.
- Sell the equities you have and move into cash.
- And if you own junk bonds of any kind, sell them before it's too late.
Right now is the time to protect yourself, but you will have a chance to buy all kinds of assets at going-out-of-business prices in the not-too-distant future because, to be honest, a lot of companies may go out of business, but the ones that don't will be trading like they might. My job will be to tell you which ones won't and help you buy them when they are cheap enough to offer you attractive risk-adjusted returns.
In the meantime, you must protect yourself from the damage that is about to be unleashed by the incompetent central bankers who have destroyed the world.
Don't panic. Do act now. We are on the brink of the Super Crash.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.