The Standard & Poor's 500 Index may fall as much as 24 percent and the euro might tumble to $1.20 if the U.S. economy slows further and Europe's debt crisis widens, said Raoul Pal, the former GLG Partners Inc. fund manager currently writing the Global Macro Investor strategy sheet.
The Standard & Poor’s 500 Index may fall as much as 24 percent and the euro might tumble to $1.20 if the U.S. economy slows further and Europe’s debt crisis widens, said Raoul Pal, the former GLG Partners Inc. fund manager currently writing the Global Macro Investor strategy sheet.
“I think with the European situation seemingly unresolvable, it’s likely we will see accelerated downside in the latter part of the summer,” Pal, who also worked in hedge- fund sales for Goldman Sachs Group Inc. and predicted the financial meltdown of 2008, said in a phone interview from Javea, Spain. “It does all depend on the U.S. economic data, but the highest possibility for me is we are going into a recession.”
The Citigroup Economic Surprise Index, which tracks the extent to which U.S. reports beat or miss forecasts, closed at the lowest since January 2009 on June 3 as employment and manufacturing data disappointed. The Stoxx Europe 600 Index is on course for the biggest weekly drop since March amid concern that Italy is being engulfed in Europe’s debt crisis.
Writing in the July edition of GMI, published July 1 and updated this week, Pal said the current situation resembles the conditions in early 2008, when the Institute for Supply Management’s U.S. manufacturing gauge was at 51.1, before it collapsed to 33.3 by the end of that year. The S&P 500 tumbled 54 percent from the start of 2008 to March 2009. The index slid 0.7 percent to 1,308.87 yesterday.
Factory Orders
The ISM factory index rose to 55.3 in June, the first gain in four months, the Tempe, Arizona-based group said July 1. The report eased concern the U.S. economy is stalling after the gauge slumped to 53.5 in May from 60.4 the prior month. Readings greater than 50 signal expansion.
The S&P 500 may reach 1,000 by the end of 2011, Pal said, though the index has a support level about 1,250, which technical analysts who follow charts say can act as a floor limiting losses. If economic reports improve, equities may rebound as they did last summer, he said.
Pal, who retired from managing money for clients in 2004 at the age of 36 according to the GMI website, said he’s been bearish on equities and bullish on bonds for the past 11 years as a “secular backdrop,” yet has during the period recommended buying equities at times to benefit from market upswings and the business cycle.
Treasuries Doubled
The S&P 500 has fallen 9 percent since the start of 2000, while Treasuries have almost doubled in the period, according to Merrill Lynch indexes.
Pal in December 2007 predicted the key U.S. interest rate would fall to near zero and that action from the Federal Reserve wouldn’t stop equities from declining. In June 2008 he said the economic recession would be “deeper and longer than people are forecasting” would send the S&P 500 as low as 800. The index fell from 1,385.67 on the day of the report to a 12-year low of 676.53 in March 2009.
In May last year he predicted that stocks would slump in a repetition of the 1929-1933 market crash, saying “I am actually now so nervous I can’t sleep at night.” The S&P 500 climbed 23 percent in the 12 months from May 21 as the Fed bought bonds and companies beat earnings estimates.
Euro Slide
The euro may fall to $1.20 from $1.41 yesterday as the region’s debt crisis worsens, Pal wrote this week, citing technical analysis charts. The move will be followed by a bounce, and the currency will then “finally roll over and head well below parity,” he wrote. He said he’s bullish on the dollar and Treasuries.
Austerity measures in Europe that aim to bring down bond yields from multiyear highs will hinder the task of lowering budget deficits, while bailing out Greece only perpetuates that country’s problems, he wrote.
“Deficit reduction in a slowing economy is next to impossible,” Pal wrote. “This is a real vicious circle. Delaying an eventual default is actually making things in Greece much, much worse.”
Problems facing the banking system and real-estate market in Europe are particularly noticeable on Spain’s Mediterranean coast, where he lives, the strategist said.
“The property market is still awful,” Pal said. “Properties are being sold at a 40 to 50 percent discount. Apartments don’t sell at all, at any price.”
“Spain is Lehman Brothers, whilst Greece is Bear Stearns,” Pal wrote in the report. The bankruptcy of Lehman Brothers Holdings Inc. in September 2008 was the biggest in U.S. history. The collapse came four months after Bear Stearns Cos. was rescued by a merger and preceded a 43 percent decline in the S&P 500. “Once Spain goes I think we will be heading into the vortex of multiple sovereign defaults,” he wrote.
Bloomberg
