Investing legend Byron Wien breaks down his biggest concerns in markets right now - and explains why it will be tough to climb out of the next recession

REUTERS/Brendan McDermid

Byron Wien

• Byron Wien is still bullish on US markets and the economy, but is well aware of the investor concerns driving ongoing volatility.
• In an exclusive interview with Business Insider, the vice chairman of Blackstone's private wealth solutions group shared the areas of global markets that are concerning to him.
• He presciently called the market's 10% correction this year, and now thinks stocks will have a better year in 2019.

Byron Wien, the vice chairman of Blackstone's private wealth solutions group, has taken a stab at making big market predictions for the past 33 years.

His 2018 call for US stocks has proven partially correct: The S&P 500 has undergone not one, but two 10% corrections - unheard of throughout last year. But to perfectly fulfill the second half of Wien's call, the index needs to finish the year above 3,000.

It came within 60 points in September, and Wien thought he would be able to tick off this item on his list of 10 surprises.

"Suddenly the mood shifted because people began to be concerned that world growth was slowing," Wien said in a phone interview. He's still bullish on stocks and the US economy, but is clear-headed about the issues that are roiling markets and how they could be sources of volatility moving forward.

His biggest concern is none other than the withdrawal of liquidity by the world's largest central banks as they reduce the sizes of their balance sheets.

The combined assets held by the Federal Reserve, Bank of Japan, and European Central Bank surged from about $3 trillion in 2007 to a peak of more than $15 trillion this year. The banks are withdrawing from their crisis-era involvement in fixed-income markets that helped to create demand and prop up prices.

"Monetary policy has definitely swing around, and that's not favorable," Wien said.

Read more: The stock market looks like it's past the point of no return - and not even the Fed can save it from the next downturn

Wien says this development on its own is not enough to end the bull market just yet. However, it does remove what has been one of the most important drivers of stocks in this bull market. Moving forward, stocks will be lifted only by earnings, not central-bank liquidity or price-to-earnings ratios, Wien said.

Wien is also worried that the Fed and other policymakers do not have the complete toolkit to deal with the next recession.

On the fiscal-policy side, tax cuts and more government spending have put the budget deficit on pace to hit an estimated $1 trillion in 2019. And from a monetary-policy perspective, Wien said the Fed did not allow rates to rise enough so that lowering them would have a stimulative effect on the economy.

China could further complicate the Fed's actions, according to Wien.

"A drop of growth in China below 6% would cause the Fed to do more tightening than I suggest," he said. In turn, that could lift short-term bond yields above their longer-term counterparts - the dreaded yield curve inversion that has preceded every recession since the 1960s.

Wien is also concerned that the trade war could weigh on earnings growth at a time when there's concern about a peak.

On the plus side, he is optimistic that consumer spending will continue to keep the economy afloat as business investment weakens.

"I think stocks are poised to do better in 2019, Wien said. "But it certainly didn't look that way yesterday [December 4], so maybe I'm going to be wrong about the fact that we're forming a formidable platform for higher prices."