Scott Minerd, Global Chief Investment Officer at Guggenheim Partner, at the 2020 World Economic Forum in Davos, Switzerland on Jan. 21st, 2020.
Adam Galica | CNBC
Guggenheim Partners Global CIO Scott Minerd said in a letter to clients that the elevated prices in financial markets show a “cognitive dissonance” from economic reality that has created a dangerous bubble among debt assets.
Liquidity from the Federal Reserve and other central banks and increased demand for bonds from ETFs are masking the problems in the market, Minerd said, and the coronavirus outbreak is an example of an economic shock that could prick the bubble. The money manager said GDP growth in China in the first quarter could be as bad as negative 6%.
“This will eventually end badly. I have never in my career seen anything as crazy as what’s going on right now,” Minerd said.
The U.S. stock market has shrugged off the initial sell-off that occurred as the outbreak gained steam, and bond yields continue to hug historical lows. Minerd pointed to low yields for bonds rated BBB or lower and oversubscribed sales of new bonds as examples of a credit market that is overly bullish.
“In the markets today, yields are low, spreads are tight, and risk assets are priced to perfection, but everywhere you look there are red flags,” Minerd said in the letter.
Minerd told CNBC last month at the World Economic Forum in Davos, Switzerland, that he preferred stock to bonds because of elevated prices in the credit market, but that accommodative policies from central banks could continue to allow asset prices to rise.
Since then, however, the coronavirus outbreak has grown significantly, leading to travel restrictions and temporary factory closures in China and companies around the world warning that the outbreak would hurt them in the coming year. There are now more than 60,000 confirmed cases around the world, and some researchers believe that number is too low.
Minerd said on CNBC’s “Fast Money” on Thursday that some investors are underestimating the impact that the outbreak will have on the Chinese economy.
“In that sort of environment, people are not going to go to work. You’re not going to get output, and it’s unlikely that we’re going to return to any sort of level that was consistent with the pre-Lunar Holiday,” Minerd said.
Minerd said the outbreak has caused to scale back his projections for global growth and increased his concerns that the credit market is not accounting for economic risk.
If the outbreak were to continue and China’s economy was further hampered, the slowdown will spill over even more dramatically into other parts of the world and could cut oil prices roughly in half to $25 a barrel, Minerd said.
Minerd, whose firm has more than $275 billion in assets under management, said last May that a Guggenheim model called for the stock market would fall dramatically over the summer, a prediction that did not come true.
He said in the new letter that investors should stay invested the highest-quality securities that offer acceptable return, even if prices seem too high. However, whether caused by the coronavirus or some other economic shock, the market will eventually correct itself, Minerd said.
“We are either moving into a completely new paradigm, or the speculative energy in the market is incredibly out of control. I think it is the latter. I have said before that we have entered the silly season, but I stand corrected,” Minerd said at the end of his letter. “We are in the ludicrous season.”
