Former hedge-fund star says this is what will trigger the next bear market

By Barbara Kollmeyer

Critical information for the U.S. trading day

Tuesday's CPI data appears to have overshot some expectations on Wall Street and stock futures are selling off. And that seems to be dashing hopes of a May rate cut and may curtail the S&P 500's SPX waltz with 5,000.

Yet with Nvidia (NVDA) up another 47% so far this year, and AI driving a frenzy for companies such as ARM (ARM), and any others that get near it, not standing in front of the ChatGPT train seems wise for now. Indeed, Bank of America's latest fund manager survey shows no letup in the tech-stock buying.

Read: Arm's frenzied stock rally continues as AI chase trumps valuation.

What might take this market down eventually? Our call of the day from former hedge-fund manager Russell Clark points to Japan, an island nation whose central bank is one of the last holdouts of loose monetary policy.

Note, Clark bailed on his perma bear RC Global Fund back in 2021 after wrongly betting against stocks for much of a decade. But he's got a whole theory on why Japan matters so much.

In his substack post, Clark argues that the real bear-market trigger will come when the Bank of Japan ends quantitative easing. For starters, he argues we're in a "pro-labor world" where a few things should be playing out: higher wages and lower jobless levels and interest rates higher than expected. Lining up with his expectations, real assets started to surge in late 2023 when the Fed started to go dovish, and the yield curve began to steepen.

From that point, not everything has been matching up so easily. He thought higher short-term rates would siphon off money from speculative assets, but then money flowed into cryptos like Tether and the Nasdaq recovered completely from a 2022 rout.

"I have been toying with the idea that semiconductors are a the new oil - and hence have become a strategic asset. This explains the surge in the Nasdaq and the Nikkei to a degree, but does not really explain tether or bitcoin very well," he said.

So back to Japan and his not so popular explanation for why financial/speculative assets continue to trade so well.

"The Fed had high interest rates all through the 1990s, and dot-com bubble developed anyway. But during that time, the Bank of Japan only finally raised interest rates in 1999 and then the bubble burst," he said.

He notes that when Japan began to tighten rates in late 2006, "everything started to unwind," adding that the BOJ's brief attempts [to] raise rates in 1996 could be blamed for the Asian Financial Crisis.

In Clark's view, markets seem to have moved more with the Japan's bank balance sheet than the Fed's. The BOJ "invented" quantitative easing in the early 2000s, and the subprime crisis started not long after it removed that liquidity from the market in 2006, he notes.

"For really old investors, loose Japanese monetary policy also explained the bubble economy of the 1980s. BOJ Balance Sheet and S&P 500 have decent correlation in my book," he said, offering the below chart:

Clark says that also helps explains why higher bond yields haven't really hurt assets. "As JGB 10 yields have risen, the BOJ has committed to unlimited purchases to keep it below 1%," he notes.

The two big takeaways here? "BOJ is the only central bank that matters...and that we need to get bearish the U.S. when the BOJ raises interest rates. Given the moves in bond markets and food inflation, this is a matter of time," said Clark who says in light of his plans for a new fund, "a bear market would be extremely useful for me." He's watching the BOJ closely.

The markets

U.S. stock futures (ES00) (NQ00) extended declines as consumer prices rose by 0.3% in January and core prices rose by 0.4%. The yield on the 2-year BX:TMUBMUSD02Y shot up 14 basis points.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5,021.84   1.60%   4.98%   5.28%   21.38% 
   Nasdaq Composite                                                     15,942.55  2.21%   6.48%   6.20%   34.06% 
   10 year Treasury                                                     4.181      7.83    11.45   30.03   42.81 
   Gold                                                                 2,038.10   -0.17%  -0.75%  -1.63%  9.33% 
   Oil                                                                  77.14      5.96%   6.02%   8.15%   -2.55% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Biogen (BIIB) stock is down on disappointing results and a slow launch for its Alzheimer's treatment. A miss is also hitting Krispy Kreme (DNUT), Coca-Cola (KO) is up on a revenue rise. Hasbro stock (HAS) is plunging on an earnings miss, while Shopify (SHOP) is also down after results.

JetBlue (JBLU) is surging after billionaire activist investor Carl Icahn disclosed a near 10% stake and said his firm is discussing possible board representation.

Tripadvisor stock (TRIP) is up 10% after the travel-services platform said it was considering a possible sale.

In a first, Russia put Estonia's prime minister on a "wanted" list. Meanwhile, the U.S. Senate approved aid for Ukraine, Israel and Taiwan.

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The chart

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   ARM     Arm Holdings 
   PLTR    Palantir Technologies 
   NIO     Nio 
   AMC     AMC Entertainment 
   AAPL    Apple 
   AMZN    Amazon.com 
   MARA    Marathon Digital 
   TSM     NIO 

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-Barbara Kollmeyer

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02-13-24 0918ET

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