Activist short-seller Carson Block forecasts a stock-market plunge, says current valuations make 'no sense'

• Carson Block of Muddy Waters told Bloomberg that he thinks stocks will go down again after rallying from March lows, and that valuations don't make sense.

• "In the medium term, I just can't see equity values anywhere near where they are today," Block said Monday. "The underlying economy is on its knees and I just think that investors have yet to understand that and they have yet to see what it looks like when bankruptcies cascade through the economy."

• He's also betting against a cruise company amid the coronavirus pandemic, he told Bloomberg. He would not disclose the name of the company.
• Read more on Business Insider.

Carson Block, a famed activist short-seller and founder of Muddy Waters, said he thinks that stocks will go down again after rallying from March lows.

"The direction has to be sharply downward," Block told Bloomberg in an interview Monday.

US stocks are trading at levels Block said are hard to believe, given that the coronavirus pandemic has cratered global demand, which is unlikely to recover anytime soon.

The S&P 500 index has rallied roughly 27% from March 23 lows, following the swiftest-ever plunge into bear market territory. US equities now trade around 20 times estimated earnings, which is more expensive than February's all-time high for the measure.

"It makes no sense," Block said. "In the medium term, I just can't see equity values anywhere near where they are today."

He continued: "The underlying economy is on its knees and I just think that investors have yet to understand that and they have yet to see what it looks like when bankruptcies cascade through the economy."

The impact of the coronavirus pandemic on the economy has been severe — the US economy contracted 4.8% in the first quarter, 30 million Americans have filed for unemployment insurance in six weeks, and a number of other indicators have flashed red.

Read more: Quant megafund AQR explains why investors should be more worried about prolonged slumps than virus-style crashes — and details a 3-part process for protecting against them

But stocks have continued to grind higher, showing that investors have become complacent about risk, according to the report. Block said he hopes that the unprecedented fiscal and monetary stimulus to protect against the pandemic will be unwound more quickly than measures were following the Great Recession.

Still, he expects the steps to persist for the next four years at least, according to the report.

Block is making some current bets that aren't in his usual wheelhouse of uncoverng financial fraud — he's betting against a cruise company, which he would not identify, saying that cruise lines aren't viable in a world where COVID-19 hasn't been conquered.

He's also waiting for an end to investors buying on dips.

"The underlying economy will bring the capital markets down and that will disabuse investors of complacency," Block told Bloomberg. "I don't think that the capital markets can decouple from the underlying economy."