Cryptocurrency- US stocks might climb for weeks or months before plunging 50%, Phillip Toews told Insider.
- The investor warned ballooning global debt has fueled inflation and virtually guaranteed a crash.
US stocks might climb for several weeks or months, but they will ultimately suffer a roughly 50% decline, Phillip Toews has warned.
"I wouldn't be surprised at all to see another month or even quarter of surging asset prices," the Toews Asset Management CEO, who oversees $2.2 billion of client funds, told Insider in a recent interview.
Investors have sent the S&P 500 up 5% and the Nasdaq Composite up 13% this year, largely because they expect the Federal Reserve to shift from hiking interest rates to cutting them later this year.
Toews described the hoped-for pivot as an "imaginary best friend," and underlined the risk that rising asset prices fuel stubborn inflation. Within the past year, the Fed has hiked rates from nearly zero to upward of 4.5% in response to surging prices, and could lift them higher still if the threat persists.
The investor cast doubt on the market's rally this year, reiterating his view that decades of carefree private and public spending have caused global debt levels to balloon to unsustainable levels. The flood of liquidity has boosted asset prices to heady highs that he doesn't expect to persist much longer, especially as rising rates are making it more expensive to service the debt.
"Ultimately, we're going to have a massive compression event that will influence not only the value of financial assets and risk assets, but it will change GDP growth," he said.
Instead of a gradual slump in prices, Toews is bracing for a "more rapid, disorderly decline based on just the froth in the markets" with some "punishing down days" for investors. Stock prices could plunge from an average of 20 times trailing-12-month earnings to below 10 times — around a 50% decrease.
"For a bear market capitulation — baked in at this point — I think we need to be way down there at some great valuations," he said.
The money manager told Insider he was potentially bullish on stocks in the short term, but very bearish in the longer term. He cautioned the threat of a crash might not fade until the Fed truly brings the pace of price increases under control.
"I think it continues until inflation is fully tamed in a real durable way," he said.
Toews' investing strategy aims to capitalize on rising asset prices but minimize the pain caused by market downturns. His funds rely on trend-following algorithms to quickly get out of positions when sentiment sours, and options to hedge their long bets.
"We embrace the boom, but we acknowledge the potential of a kaboom," he said.