While most asset managers have been growing increasingly skeptical and gloomy in recent weeks (despite a few ideological contrarian holdouts), joining the rising chorus of bank analysts including those of Citi, JPM, BofA and Goldman all urging clients to "go to cash", none have dared to commit the cardinal sin of actually predicting when the next crash will take place. On Sunday a prominent hedge fund manager, One River Asset Management's CIO Eric Peters broke with that tradition and dared to "pin a tail on the donkey" of when the next market crash, one which he agrees with us will be driven by a collapse in the global credit impulse, will take place. His prediction: Valentine's Day 2018. Here is what Peters believes will happen over the next 8 months, a period which will begin with an increasingly tighter Fed and conclude with a market avalanche: “The Fed hikes rates to lean against inflation,” said the CIO. “And they’ll reduce the balance sheet to dampen growing financial instability,” he continued. “They’ll signal less about rates and focus on balance sheet reduction in Sep.”
Inflation is softening as the gap between the real economy and financial asset prices is widening. “If they break the economy with rate hikes, everyone will blame the Fed.” They can’t afford that political risk.
“But no one understands the balance sheet, so if something breaks because they reduce it, they’ll get a free pass. The Fed has convinced itself that forward guidance was far more powerful than QE,” continued the same CIO.
“This allows them to argue that reversing QE without reversing forward guidance should be uneventful.” Like watching paint dry. “Balance sheet reduction will start slowly. And proceed for a few months without a noticeable impact,” he said. “The Fed will feel validated.” Like they’ve been right all along.
“But when the global credit impulse reverses, it’ll be a cascade, an avalanche. And I pin the tail on that donkey to be Valentine’s Day 2018.”
*) Of course, the global credit impulse is something that we have been exclusively warning about for the past 4 months...
But "apparently" it wasn't until Citi's report last week which explained it's all that matters...