Raoul Pal: The stock market is behaving the way it did back in 2000

Closely-followed former global macro fund manager Raoul Pal gave a dark warning for the US stock market and the global economy.

Pal said that the structure of the market right now reminds him a lot of 2000. He pointed out that it’s been a complicated market that’s up sharply and down sharply in these short-term swings, but over longer periods of time it’s really done nothing. He added that this volatility has been scaring both the bulls and the bears. In other words, everyone is losing money.  

“And in the meantime, the economy, which at first wasn’t clear that it was weakening, now appears to be weakening,” he said. “And that was a similar set up in 2000 where everyone started getting chopped around. Nobody knew what was happening. The leadership was getting lost— Apple and other firms have lost their leadership. Back in 2000 it was Microsoft—same kind of thing. It just feels like everyone is willing the market to go up, but something is going wrong in the overall underlying dynamics of the market.”

Pal has been expecting this recent stock market rally to peak out. He’s also looking out for a topping out of the economy. For this, Pal has been looking at the Institute of Supply Management’s (ISM) manufacturing index as an indicator.

“I look at the business cycle and I look at the business cycle by the ISM survey,” Pal said, pointing that the ISM survey peaked in 2011 and has been gradually declining ever since.

“What you know is that cycle is pretty predictable. And so you know in due course, the economic cycle will weaken and we’ll get a recession. And if we look at the length, it looks like it’s coming, normally it would come either now or in the next twelve months. The probability is that a recession is coming. Then we look at what happens to stock markets in a recession, they tend to fall. I’m worried that the US economy is weak, the global economy is already weak, and that’s going to bring some stress on the stock market.”

As for investment ideas, Pal thinks there’s a big opportunity to be long bonds, specifically long the ten-year bond. He thinks that the yield will go down to 0.5%. He thinks there’s the probability of a rare situation where the US Dollar goes up and gold goes up. He also thinks the stock market is “potentially in for a rock road.”

In the late fall of 2014, Pal nailed the trade of 2015 when he predicted that oil would fall to $40 a barrel.

On Monday, WTI oil rose about $46 per barrel, a 6-month high. Pal expects oil prices to fall again.

“People spend a lot of time looking at oil prices and analyzing supply and demand and who said what in Iran. But really when you map it, it’s exactly the same as the dollar index. So really it’s the dollar because oil is priced in dollars. The dollar has fallen recently, it means the price of oil goes up, and vice-versa. I think the dollar potentially goes higher in due course, in which case the oil price will probably peter out somewhere around here.”

Pal, a Goldman Sachs alum, previously co-managed GLG’s global macro fund, one of the largest in the world. He retired in 2004 at age 36.

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He now authors a research letter, The Global Macro Investor, which is read by some of the most prolific hedge fund managers. Pal is also the co-founder of Real Vision Television, an online subscription financial-news service.


Julia La Roche is a finance reporter at Yahoo Finance.

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