The Federal Reserve’s easy money policies have created gross distortions in the economy, which has left investors vulnerable to a stock market crash in 2016.
At least, that’s the opinion of Bill Fleckenstein. In August, the famed short-seller gave a sobering warning over the state of the U.S. stock market exactly three weeks before equity prices began plunging. In an interview with CNBC on Friday, Fleckenstein argues the end of the Fed’s easy money policies could set up the stock market for a “pretty nasty decline.” (Source: Man who foresaw August drop says markets are ‘uniquely vulnerable,’ CNBC, September 18, 2015.)
“The market is trapped because the Fed is trapped.” He explained to the Fast Money panel. “The Fed’s policies drove the stock market up to 2,100 on the S&P. They haven’t printed any new money in a year. The market hung on, but now it’s starting to deteriorate.”
“The elephant in the room that doesn’t get discussed; does the Fed’s policies work? […] I would argue that it is not. Yes, they have gotten the market higher and they have created some jobs. But all they’re doing is misallocating mountains of capital just as they did in the prior bubbles.”
As a result, Fleckenstein believes the market is “uniquely vulnerable.” Equity prices have plunged in the past few weeks and most investors feel the worst is over. However, the short-seller notes that only the Federal Reserve’s easy money policies have held up stock valuations. Even if the Fed doesn’t raise rates to starve off an economic collapse in 2016, there’s little in the way of catalysts to send prices higher.
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“There are a lot of companies that have problems and I think they’re going to go down,” Fleckenstein argues. “Everyone thinks the market is going to right itself. My view is it will go down and it continues to be uniquely vulnerable. The stage is still set for a pretty nasty decline.”
How can investors profit? Fleckenstein is bearish on the semiconductor space, which he believes could be hammered in the upcoming stock market crash. In previous interviews, Fleckenstein highlighted chip names like QUALCOMM Incorporated (NASDAQ:QCOM), Intel Corporation (NASDAQ:INTC), NXP Semiconductors NV (NASDAQ:NXPI), and Skyworks Solutions Inc. (NADAQ:SWKS) as prime short candidates. (Source: Stock collapse coming?, CNBC, August 3, 2015.)
“That’s my area of interest,” he explained. “I like to have catalysts. Especially if we’re at the early stages of a decline because people tend not to be too worried because we’ve gone up for so long. The companies I’m looking at have individual problems and I think that the market is vulnerable.”