- Mark Yusko, the CEO and CIO at Morgan Creek Capital Management, has a stark warning for stock-market investors over the next decade.
- He cites an unsustainable environment of aging demographics, increasing entitlements, huge budget deficits, ballooning debt, and bank weakness as causes for a perpetual quantitative easing program.
- Yusko says these central-bank policies are creating a growing disparity between those who hold assets and those that do not.
- He thinks that markets may need to correct as much as 60% in order to get back to what he deems fair value.
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Mark Yusko — CEO and chief investment officer at Morgan Creek Capital Management — thinks US markets are in a sticky situation.
“Here we are 11 years into an economic expansion and we’re still using tools as if we’re in the depths of the global financial crisis,” he said on the investing-focused “Jelly Donut Podcast.” “That’s because the banks are fragile and there’s too much debt in the system.”
Yusko thinks that US markets are in something he refers to as QE4. But when he says that, he doesn’t mean the fourth iteration of quantitative easing, he means QE four-ever.
“When you issue massive amounts of debt, you only have a couple choices: You can either pay it back, you can default on it, or you can inflate it away or devalue your currency away,” he said.
To Yusko, the only real choice is the third: inflate/devalue. Aging demographics, increasing entitlements, massive budget deficits and burgeoning amounts of debt will force the Federal Reserve and other central banks to keep printing presses running hot. In his mind, the first two options (pay it back or default) aren’t likely.
Today, he’s seeing this same scenario play out in Japan and Europe. Both countries’ central banks have slashed rates and implemented stimulus programs.
“Everybody knows that if we actually raise interest rates the government can’t afford to service the debt — and individuals can’t afford to service the debt — corporations can’t afford to service the debt, and the Ponzi unwinds,” Yusko said.
He added: “We’re definitely in a bubble.”
An artificially propped market
Yusko notes how quickly the Fed reversed course in late 2018 after a series of rate hikes resulted in an almost 20% drawdown in the S&P 500 within a few short months.
To him, this was just a normal reaction to a market being artificially propped up by policy. But the more meaningful takeaway is that the market is bound to reject a similar action (rising rates) in a similar manner (sell-off) — and that leaves central banks with limited choices moving forward.
“One hundred percent of the gain in stocks last year was multiple expansion. Earnings were actually down.” he said. “Multiples went up because people thought they could pay more for future earnings because interest rates were falling.”
He continued: “The fallacy of that logic is if interest rates are falling, that means future growth is going to be lower, future profits will be lower. You should actually pay a lower multiple. But nobody thinks like that.”
Yusko thinks this kind of behavior is clearly irrational — and he says that all of this stimulus is causing a disparaging amount of wealth inequality. Those who own assets are reaping the rewards, while those who don’t are being left behind.
“Eventually, these governments will essentially devalue the currency — destroy the currency — and so the average person gets totally screwed,” he said. “The people at the top of the pyramid love this because the value of assets — scarce assets; real estate, collectible cars, art, wine, stocks — those things go ballistic.”
With all of that under consideration, Yusko relays a stark warning for stock investors over the next decade.
“We’re at this point where the future return for equities is likely to be close to zero,” he concluded. “My feeling is we’ll probably have a correction back to fair value — that could be 40, 50, as much as 60% down — and then a rally on the second half.”
He concluded: “So kinda like a bad first half, good second half to the decade, but over the whole decade you don’t make any money.”