It’s a lonely time to be a bear.
As Wall Street recalls the 30th anniversary of Black Monday, the bulls have taken full control of the stock market.
The bull market born from the ashes of the Great Recession has kicked into high gear lately. The Dow has spiked nearly 6,000 points since the election of President Trump, who warned about a “big, fat, ugly bubble” as a candidate but now cheers each milestone.
The red-hot stock market may continue its rapid ascent, especially if Trump delivers his promise for “massive” corporate tax cuts. And even if not, healthy economic fundamentals and corporate profits should continue to support stocks.
Nonetheless, some bears are fighting the herd mentality on Wall Street by warning of serious trouble brewing just beneath the surface of the stock market. These market skeptics are reassured by the fact that betting against stocks wasn’t popular in 2007, either.
“The best time to be a bear is the loneliest time,” Jesse Felder, a money manager and founder of The Felder Report, told CNNMoney.
Here are some of the red flags these bears are warning about, including similarities between now and 30 years ago:
‘Disaster waiting to happen’
In 2007 and 2008, Chris Cole presciently bet that market volatility would skyrocket to levels no one had seen before. He took those crisis-era winnings and started Artemis Capital, a hedge fund that has amassed $210 million.
Today, the stock market is unusually quiet. The VIX, a popular barometer of market fear, recently hit a record low.
Cole thinks it’s a mirage, partly because popular trading strategies allow investors to bet on the low volatility itself. All those bets lead to even lower volatility — until something unexpected happens, like suddenly higher interest rates.
“Any shock to the system could cause this to unravel in the opposite direction, where higher volatility drives higher volatility,” Cole told CNNMoney. “This is a massive risk to the system. The only thing we’re missing is a fire.”
Cole sees parallels between today’s low-volatility bets and the hedging strategies known as “portfolio insurance” that many blame for exacerbating the 1987 stock market crash.
“This is a disaster waiting to happen,” said Cole. “In the event there is a fire, this can cause a massive explosion.”
Watch out for the ‘air pocket’
Kyle Bass, founder of Hayman Capital Management, is also having a flashback to 30 years ago.
“If you look at the all of the different constituencies of the market today, it resembles the portfolio insurance debacle of 1987 on steroids,” Bass told Real Vision TV in an interview released on Wednesday.
Bass fears that, once stock prices decline 4% to 5%, that will quickly morph into a 10% to 15% plunge. He isn’t sure about timing, but pointed to geopolitical trouble and central banks as potential triggers.
“Buckle up, because I think you’re going to see a pretty interesting air pocket. And I don’t think investors are ready for that,” he said.
It’s ‘last call’ for the bulls
Peter Boockvar, chief market analyst at The Lindsey Group, predicts the “overvalued” stock market will run into serious trouble as central banks hit the brakes on the stimulus measures they used to prop up economies after the crisis. He pointed to the Federal Reserve shrinking its balance sheet and the European Central Bank slowing its bond purchases.
“Historically speaking, central banks put us into recessions and bear markets. The same will happen this time,” Boockvar said.
He estimates that central banks will be pumping $1 trillion less money into markets.
“The liquidity spigot is going to be dripping instead of flowing. That’s a really big deal,” said Boockvar.
He conceded that stocks could run higher before eventually reversing.
“When it happens, I’m not sure,” Boockvar said. “But it’s central banks that typically end the party. And central banks are telling you it’s last call.”
The Everything Bubble
Felder, a former Bear Stearns hedge fund exec who now runs a newsletter and podcast, warns of “extreme valuations” in stocks, bonds, real estate and collectibles like fine art. He dubs it the “everything bubble.”
“I agree with the pre-election Trump,” said Felder, who turned very bearish on the market in the summer of 2016.
Legendary investor Warren Buffett, and much of the rest of the Street, argue that stocks aren’t that pricey right now. That’s because interest rates are near historic lows. Returns are so low on bonds that investors are willing to accept more risk in stocks.
Like other bears, Felder thinks that the stock market has been artificially propped up by help from global central banks and corporate stock buybacks instead of underlying economic growth.
That’s why Felder believes it’s “very likely” the stock market will return “zero or even negative” over the next 10 to 12 years.
Cash is king
Hedge fund manager Mark Yusko fears that an aging population, rising debt and deflation will suppress economic growth — and stock prices, too.
“The current investment climate is not favorable for excessive risk taking and…#CashIsKing,” Yusko wrote in his recent quarterly outlook.
Yusko, who manages nearly $3 billion at Morgan Creek Capital, is advising his clients to build up cash, “or even better, physical gold.” He warns of “very poor (likely near zero)” returns on traditional investments.
“At best, we are likely to repeat the decade following 2000, and at worst, we are on the verge of the 1930s,” Yusko wrote.