RAOUL PAL: There's a 65% chance of a global recession
In July, Pal predicted that the Institute of Supply Management's (ISM) manufacturing index would break the key level of 50 late in 2015.
On December 1, the ISM broke the 50 level for the first time since the 2008 recession, reaching 48.6.
"I use the ISM as a guide to the global business cycle, not just the US cycle," Pal told Business Insider.
Pal said that the ISM correlates closely with global GDP and US GDP.
"Basically, ISM tracks GDP really well. It means GDP is falling, so growth in America is falling and growth is falling around the rest of the world," Pal said.
While manufacturing is only a small part of the US economy, it's an important one.
"If manufacturing is slowing down in America, it's slowing down in the rest of the world," Pal said, pointing out that export numbers are falling across the world, meaning that there's less trade going on.
That bodes ill for the stock market. With the ISM below 50, there's a 65% probability of a 20% fall in the S&P 500, according to Pal.
If the ISM gets to 47, it would be an 85% probability, Pal added.
He emphasized that this is only a probability, not a certainty. That said, Citi put out a research note on Wednesday putting a 65% probability on the US falling into recession.
Pal's recommendation is to buy US Treasury bonds. He said that the US dollar will probably continue to go up and that bonds tend to do well in that scenario.
Pal has made a number of bold predictions that have played out this year, including his bullish US dollar call.In December 2014 on RealVision Television, Pal predicted a rise in the US dollar, a fall in emerging markets, a devaluation of the RMB, oil going to $40, a global spread of deflation, a sharp fall in EU bond yields, and a flattening of the yield curves.
"It started with the strong dollar, spread into oil and then other commodities, spread into emerging markets, and now it's coming to America," he said.
Pal considers the latest manufacturing data as the spark that will increase the probability of a global recession, a further fall in global exports, an ongoing crash in global commodities, falling global equity markets, and the potential for an emerging-market crisis.
"The balance of probabilities says we have a much better chance of going into a recession than a boom," he said.
Pal, a Goldman Sachs alumnus, previously comanaged GLG's global macro fund, one of the largest in the world. He retired in 2004 at 36.
Since then, he's been publishing a research letter, The Global Macro Investor, which is read by the hedge fund elite. Pal is the cofounder of Real Vision Television, a subscription financial-news service.
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