Greg Jensen has warned that investors are delusional if they think the Federal Reserve can keep inflation under control.
At the SALT hedge fund conference in New York this week, the co-chief investor predicted a decline in corporate earnings, as well as stubborn price increases.
He said that the US is at the center of a global financial bubble and that the Pandemic has permanently changed the world.
This is the first thing. It's the belief that we're going to return to pre-COVID pricing that's the biggest mistake priced into markets right now. Inflation is expected to come down to a little under 3% over the next 18 months or so, and that will be without much of a recession.
There are two It will be impossible for the markets to have a combination of good earnings growth and low inflation.
There are three. It's not a good idea to think that things can return to normal, that the worst is behind us, and that we have had a drawdown. We are still in the early stages of dealing with a completely different world than before. Jensen highlighted how globalization, financial markets, and government influence have changed.
There are four. As growth starts to turn down, you'll have inflation staying stubbornly higher than markets are expecting. The more risky part of the downturn will be created when it becomes clear that earnings are falling and rates are rising.
There are five. Assets are still high despite the downturn. The decline is small compared to the fundamental conditions. When people think it's not a temporary blip, it will get scary. The bottom will come in at that time.
There are six. The recession is likely to last longer than a crash. It's hard to say if it will be three years or one year, but the magnitude is likely to be large.
There are seven. There is a chance that the market won't react to the European crisis until it's deeply upon us. The invasion of Ukraine by Russia has caused food and energy prices to go up, eroded economic growth, and put political and fiscal pressure on European governments.
There are eight. It is priced to be the greatest economy going forward, and not have major problems. The US is the center of a financial bubble. According to Jensen, assets that don't generate cash flows to support their valuations are most at risk of declining when the Fed raises interest rates.
There are nine. The bear markets can last a long time. You can go to Japan and have a bear market for 25 years. You have to be prepared for that now, and you have to know that.
There are ten. The US, UK, and Europe all have the same cycles. There are areas that look relatively attractive in a world of rising risk premiums. There are parts of Latin America and commodities that are less sensitive to growth than other assets.
The market faces more pain after Wall Street warned that stock valuations are too high.
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