Etai Friedman: 80% CRASH on the horizon, S&P may drop 1400 points
(TRUNEWS) Etai Friedman, the CEO of Eyal Capital Management LP, says the S&P 500 will crash 80% in the near future.
Friedman’s statement was made during an interview with Rick Wiles of TRUNEWS on Wednesday, while speaking about the impending global financial crisis.
Friedman said that the Tobin’s Q ratio of US markets — 1.1 for Q42015 — is showing heavy overvaluation, and a crash will likely bring the ratio down to 0.3. Such a drastic change would not only expose the illiquidity and under capitalization of many businesses, such as tech startups which have thrived under low interest rate policies, but drop the Q ratio .8 or rather 80%.
Tobin’s Q ratio was first devised in 1968 by economics Nobel laureate James Tobin, to show the true valuation of a company. The “Q ratio” as it is referred in financial circles is calculated as the market value of a company divided by the replacement value of the firms assets. The data is centrally gather by the US Federal Reserve.
Friedman said the Q ratio is closely tied to the stock market, noting that whenever the markets fall the ratio falls also.
Tobin said that only three or four times since 1909 has the Q ratio been as high or higher than 1.1, reaching a high of 1.28 in 1909. He added that in 2005 before the bank liquidity crisis, the Q ratio dropped to 0.55, and would have kept falling had The Fed not intervened with a bailout. This time, Friedman said, the value correction cannot be stopped and will drop the S&P 500 from 2000 to 600pts.
Why does this matter? The S&P 500 is the main US market index, and measures the overall health and movement of the 500 largest US corporations. A crash of 1400pts, which represents approximately $1.48 trillion of the $2.2 trillion index assets and $5.25 trillion of the $7.8 trillion benchmarked to the index, would gut America’s financial core. Based on what occurred during the great Depression, it would cause a wave of bankruptcies, severe price level and income drops, increased debt service costs, and mass unemployment.
Highlights from the Friedman interview:
- The Federal Reserve will not be able to bail America out of this next crisis, only options are NIRP, increased QE, and junk bond purchases.
- Between 2000-2007 US debt increased $20 trillion
- China is currently in a deep recession, shipping and commodities prices prove that 6.5% GDP growth is a lie
- World economy has reached it credit limit, next recession will be a de-leveraging not re-leveraging
- Due to weak retail data, Atlanta Fed will forecast negative GDP growth for 2016Q2, two negative quarters is the definition of a recession
- Preserving capital and assets is more important than short term gains
- Options for investors:
1) Get completely out of financial assets including corporate bonds and equities, hold 100% cash, drop excess and investment real estate
2) Hold cash in government treasury bonds
3) Trade volatility through shorting strategies
- A major financial event is necessary to begin the stock market crash. The demise of the petrodollar, massive bankruptcy inside the US, or the UK leaving the EU are examples of the magnitude needed.
- Hong Kong’s economy is contracting and may face a real estate collapse. In Q1 real-estate transactions decline 80% yr to yr, currently sitting at a 5 year low.
- Chinese capital flight into US through land, asset, and business purchases are evidence of this looming crash in Beijing, communism may even be overthrown during the chaos.
- Until the U.S. was taken off the gold standard and Alan Greenspan took over the Fed, the US economy had virtually no debt from the 1950’s to the 1970’s. The US economy now has $50-60 trillion in debt.
- San Fransisco will transform from a hyper-growth business economy, to a city of empty office space and residential real estate
- Advice to Millennial’s:
1) If working for a tech startup, find a new job with a company who is well capitalized, liquid, and profitable
2) Avoid debt at all costs, increased interest rates and currency devaluations will be unserviceable in future
Etai Friedman is CEO of Eyal Capital Management, LP., a family office at the moment that will soon be open to outside money by summer. Prior to Eyal Capital, Etai was head of Equity Derivatives Trading at MKM Partners. He has also worked at SAC Capital trading equity, credit, and volatility derivatives for Steve Cohen and his lieutenants. Etai started as an equity and index option market maker on the American Stock Exchange straight out of NYU. He currently controls multi million dollar portfolios and has keen insight into the global markets.
Etai Friedman | Eyal Capital Management LP
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