Key Words: His fund is already up 34% this year, and there’s more to come if the stock market crashes like he’s predicting

Key Words

Can “Papa Powell” keep the stock market afloat?


Getty

On Feb. 27, Michael Gayed called for a double-digit drop on the S&P 500. He followed that timely prediction in March with a forecast for a melt-up in stocks at the end of the month. He backed up that outlook in an interview with Bloomberg radio.

Clearly, he’s had his finger on the pulse of this volatile market since the coronavirus began spreading in the United States — just look at the 34% rally in his ATAC Rotation Fund
ATACX,
+2.05%

for proof that his methods, in this climate at least, are paying off nicely.

If he’s got it right again, the pain is far from over for investors.

“Risk-off is about to return in two waves — first bonds, then stocks. Two crashes,” Gayed, who also publishes the Lead-Lag Report, told MarketWatch over the weekend.


‘This feels like a home construction project. It’s going to cost more money and take longer than any estimates.’


— Michael Gayed

He explained that he sees a “significant risk” that the yield curve steepens in a way that will shock markets and trigger a crash in Treasurys
TMUBMUSD10Y,
0.699%

.

“Reflation bets are increasing everywhere, and oil printing a negative price in the face of that suggests there is a very real feeling that global central banks and governments will stop at nothing to counter the deflationary forces of staying at home,” Gayed said. “Factually, inflation expectations have been rising alongside food prices due to supply-chain issues. Combined with unlimited QE, which in the past has caused yields to rise, it looks like bonds collapse first before stocks.”

He also touched on a theme that has many investors, especially the mom-and-pop types, scratching their heads. How can stocks continue to rally against what’s shaping up to be a depression in the economy? “The greatest disconnect in history,” as Gayed describes it.

Read:Why this screenshot of Jim Cramer is ‘everything that is wrong with America’

Here he is talking about that “disconnect” last week with famed bear Marc Faber:

Ultimately, Gayed expects to see yields spike as they did prior to the 1987 crash.

“Should that occur, as I think is likely,” he said, “the conditions then would set up for another stock market crash afterwards as the overreaction to the reflation narrative comes to grips with the facts on the ground that life, at least for now, is going to look and feel very different for some time.”

Read:Beware, the market’s being supported by ‘nothing more than an ideological dream’

As for the timeline, Gayed said it could all take place before year’s end.

“This feels like a home construction project. It’s going to cost more money and take longer than any estimates,” he said of the pandemic. “In the absence of a vaccine, behavior’s changed in a way that will make any longer-term gains unjustified no matter how much money Papa Powell prints.”

For now, the market seems to have some wind at its back, with the Dow Jones Industrial
DJIA,
+1.90%

rising more than 450 points on Friday. The S&P 500
SPX,
+1.68%

and the tech-heavy Nasdaq Composite
COMP,
+1.57%

also ended firmly higher.

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