Source: Wolf Street
Worst-case scenario ahead.
The S&P 500 has more than tripled over the past eight years; the Nasdaq has more than quadrupled. Practically everyone knows – even the Fed has gingerly admitted it – that the stock market is way overvalued, that price-earnings ratios for companies that have earnings have reached dizzying heights, and that the market is primed to unravel either on Tuesday or next year or whenever.
And there are lots of people who have pointed at the triggers, such as Trump’s inability to deliver on his tax-cut and infrastructure promises or the moment when the market finally gets it that the Fed is watering down the punch bowl.
Given the inflated levels of the market, and the amounts of liquidity that would suddenly evaporate, it would be an epic crash. That’s the theory. And it would make an equally epic buying opportunity for those with the liquidity to do so.
So the smart money is preparing for it. Among them are hedge fund manager Paul Singer and his clients. In his recent letter to investors, cited by MarketWatch, he explained how “all hell will break loose” and how he wants “to take advantage of it”:
Given groupthink and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like …), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.
Elliot’s hedge fund, Elliott Management Corp, had raised “more than $5 billion in about 24 hours” for just that event, Reuters reported on May 5. The firm has $33 billion under management not counting the $5 billion. That it took him only 24 hours to raise this much money shows how eager investors are to capitalize on the next crash. The money is set up to be drawn from investors over the next few years. They see it coming; they just don’t know when, and they want to be ready to benefit from it when it comes.