A noted short seller is predicting that the U.S. stock market crash is imminent.
Founder of research firm Muddy Waters LLC Carson Block, who is known for alleging fraudulent accounting practices in publicly traded Chinese companies, says he remains bearish on the U.S. stock market and described the recent rally as a “dead cat bounce.”
“I would say that this does feel like it is a dead cat bounce because how much more ammunition really do policymakers have?” he told Reuters in New York on Wednesday. (Source: “Short seller Block calls U.S. stocks rally ‘dead cat bounce’,” Reuters, March 9, 2016.)
A “dead cat bounce” is a small, short-lived recovery from a prolonged decline or bear market followed by the continuation of the downtrend.
As of Wednesday’s close, the benchmark S&P 500 Index had gained in 12 out of 18 sessions since its February 11 52-week low of 1,810, restoring more than 10%. The Dow Jones Industrial Average has pared its year-to-date losses to 1.8%.
“I just don’t know if there are that many more bullets that central banks could fire,” said Block, who argued that the Bank of Japan’s negative rates, which were adopted in late January, have backfired. (Source: Ibid, Reuters.)
Block’s comments came a day before the European Central Bank (ECB) cut its key lending rate to zero from 0.05% and pushed the rate on its deposit facility to minus 0.4% from minus 0.3%. (Source: “U.S. stocks move higher as ECB stimulus overshadows drop in oil prices,” MarketWatch, March 10, 2016.)
The surprising move shot equities higher in Europe and the U.S. as it assuaged investor concerns about global economic slowdown on hopes that the European economy will continue to strengthen.
The ECB’s move also came a week ahead of the Federal Reserve’s policy meeting on March 15 and 16. The U.S. central bank has said it is on a path to raising rates, which differs from the ECB’s current moves.
Block said on Wednesday that he has long been very skeptical of the fundamentals of the U.S. economy. A stock market crash could be coming.
“I don’t feel that there have been permanent solutions that have been introduced,” he said.
He added that there has been a tremendous amount of misallocation of capital as a result of loose monetary policies.
“We knew this years ago when we saw companies issuing debt to buy back stock and pay out dividends,” Block said. “We knew that we would be at a point in a few years where when these companies were just really, maybe not mortally wounded, but seriously wounded.” (Source: Ibid, Reuters.)
How can investors profit from the coming stock market crash? Block repeated that he was targeting European companies and credits rated just above “junk” status, or “BBB-,” for shorting opportunities.