Stock markets have been on a wild ride this year, leaving investors guessing for months when the time will come to buy the dip.
However, one top hedge fund manager has warned that the economic outlook is gloomier than many realize, and stocks could be left suffering for years, or even decades.
Boaz Weinstein, who founded New York City–based Saba Capital Management in 2009, told the Financial Times in an interview published on Monday that he was “very pessimistic” about what will happen to markets when central banks undo the stimulus programs they put in place to fight soaring inflation.
“There isn’t a rainbow at the end of all this,” he warned. “There’s no reason that this difficult [economic] period will only last two to three quarters [and] no reason to think we’ll have a soft landing or a shallow recession.”
Saba Capital—where Weinstein serves as CIO—was one of the world’s top-performing hedge funds at the height of the pandemic in 2020, according to the FT, and its Master Fund is up by around a third so far this year.
As of September, Saba had $4.8 billion worth of assets under management.
Weinstein said in Monday’s interview that quantitative tightening—the reversal of central banks’ bond-buying programs, which sees them selling debt back into markets—was going to create “a real headwind for investors.”
Many top economists have warned that the Federal Reserve could cause “all kinds of trouble” by tightening too fast in its battle to tame inflation. Johns Hopkins’ Steve Hanke cautioned earlier this month that the Fed was on track to cause a “whopper of a recession” by tightening U.S. monetary policy too much.
In recent months, the Fed has ramped up the unwinding of its $9 trillion balance sheet while carrying out a string of interest rate hikes.
Japan comparison
Weinstein pointed to Japan, which grappled with a decade of economic stagnation after an asset bubble burst in the early 1990s when the rapid tightening of monetary policy prompted the collapse of equity and land prices. He predicted that developed markets “could certainly” follow in the footsteps of Tokyo’s Nikkei 225 index—which is still around 30% lower than the all-time high it reached in 1989.
According to Weinstein, the correction of the overvalued Nikkei “changed the psychology about whether being a stockholder is such a prized” status.
Inflation, rising interest rates, spiraling energy costs, the war in Ukraine, and concerns about the Chinese economy were all creating murky waters for investors trading in the current bear market, he added.
So far this year, the S&P 500 has shed 21% of its value, while the tech-heavy Nasdaq Composite is down 31% since the beginning of 2022.
“In this selloff you have so many things that are problematic swirling around, some that are contradictory. There’s a lot of fear, but there’s been a lot of time for people to think about [the issues],” Weinstein told the FT.
“This year has been like a horror movie but with five monsters—you don’t know what to focus on, so you deleverage.”
Editor’s note: The headline of this article previously referred to Boaz Weinstein as a billionaire. This has now been corrected.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.
