'The largest financial crisis in history': A 47-year market vet says the COVID-19 crash was merely a 'fake-out sell-off' — and warns of an 80% stock plunge fraught with bank failures and bankruptcies

  • David Hunter, the chief macro strategist at Contrarian Macro Advisors, thinks we may be on the cusp of "the largest financial crisis in history."
  • Hunter breaks his apocalyptic forecast into two phases. Each one is distinct and aligns with different timetables.
  • He expects a massive "melt up" rally to take place in the next few months, ultimately setting the stage for an 80% stock crash.
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When it comes to market forecasts, David Hunter, the chief macro strategist at Contrarian Macro Advisors, doesn't beat around the bush.

"I think we're going to see something that includes a very large financial crisis — probably the largest financial crisis in history — including major bank failures, not so much here, but Europe, maybe Asia banks, and also a lot of involuntary debt liquidation," he said on "The Contrarian Investor Podcast."

"The first phase started in March," he added.

Hunter — a 47-year market veteran — separates his ominous call into two phases, both of which are part of the same overarching "bust."

There are many facets to Hunter's forecast, so it's important to account for each properly. Here's how he divvies it up: 

Phase 1: Includes a "melt up" scenario for stocks. During this time, Hunter thinks the S&P 500 could rally to anywhere from 4,200- 4,500, alongside a Nasdaq composite which, by his estimate, could touch 15,000.  

Catalysts include: Central bank liquidity, the passage of a stimulus package, shifts in sentiment, and bullish momentum begetting bullish momentum.

Timeline: Potentially, the next two to three months.

Phase 2: The unwind. In this period, Hunter's forecasting a swath of bankruptcies, bank failures, involuntary liquidations, an 80% stock crash, and a massive expansion of the Federal Reserve's balance sheet to as much as $20 trillion in response.

Catalysts include: A central bank misstep, lack of government assistance, immense debt build-ups, and time (remember, some businesses have been closed and sans revenue since March).

Timeline: 2021

A 'fake-out sell-off'

The way he sees it, the original fallout stemming from the coronavirus was a "fake-out sell-off."

"So I was a little taken by surprise by the sell-off — the magnitude of sell-off," he said. "I expected a 10% pullback from the highs of February, and we obviously got 30% plus. But I took a look at the work and said, 'No, this does not take away the melt up scenario.' In fact, this is kind of a fake-out sell-off."

Although it coerced his forecast to the fast track, that episode, in his mind, was a mere blip on the radar of a much larger, debt-and-leverage-fueled trend that's been building for years. It's a phenomenon he's previously referred to as a "super-cycle," which stretches from one economic depression to the next.

In the near future, he thinks the colossal amount of debt and leverage that the financial system is predicated on will start to falter. After all, large percentages of the global economy are running at a fraction of their normal capacity.

That's why Hunter thinks it's too soon to give the all-clear. What's more, add in a few trillion of government and Federal Reserve stimulus into the equation, and now we're even deeper in debt. 

The Fed's role

To him, the bridge between the two phases has been supported by Federal Reserve liquidity — and he thinks it's bought the market a few quarters of reprieve. That's why things in the market are relatively calm — for now.  In the next few months, Hunter sees the S&P 500 rallying hard to around 4,200- 4,500, forming a secular top in the process.

Interestingly enough, although the Fed seems to have commandeered a heroic role in uplifting markets, Hunter thinks it may serve as the catalyst for the impending downfall. 

With financial markets now awash in capital, and the prospects of a viable vaccine rising everyday, Hunter thinks that the Federal Reserve — and potentially other central banks — may have to rein in investor exuberance. If that happens, and the Fed pulls the rug out from under the market, Hunter thinks it'll kick-start a series of cascading failures.

"So — the second phase of the bust — you've got, still, an awful lot of fragility in the system, big chunks of the economy that are nowhere near getting the benefit of the recovery, and all those things start coming back at you," he said. "And if the Fed pauses, I think this thing could unwind very fast. And let's remember, this is a global bust. So it may not even be the US that's the main problem next year."

When this happens, Hunter sees the Federal Reserve expanding its balance sheet to as much as $20 trillion to try and frantically save the financial system and quell markets. However, he thinks those efforts will ultimately be ineffectual. To put things in perspective, the Fed's balance sheet resides around $7 trillion today. This time last year, it was about $4 trillion. 

"And when people say, 'Well, if you think the Fed's going to print money, why can't they just stop the bust?'" he said. "And I go, if you look at the history of the Fed, the Fed is reactionary. It's not anticipatory."

He continued: "I have no doubt that they're going to react. I have no doubt that they will get there, but it won't be to head it off. It will be in reaction to, rather than in anticipation of." 

Clearly, Hunter thinks that by the time the Fed tries to hamper the unwind, it'll be too little, too late. He's repeatedly said "There's a lot of things you can't reach with money, and a lot of things you can't fix," in previous interviews, in reference to this exact issue.

In the end, Hunter thinks the pressure will be too much for the financial system to bear when the confluence of debt, bankruptcies, and leverage finally come home to roost. 

"We've got two historic events ahead of us just in the next year: the melt up and then the bust," he said. "And both of those are bigger than anything we've seen in the post-World War II era." 

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