'It's a clear bubble': A former Goldman Sachs hedge fund chief sounds the alarm on flailing stocks - and warns the nefarious effects of coronavirus have 'only just started'

• Raoul Pal, the former Goldman Sachs hedge-fund manager who founded Real Vision, leans on weakening global growth, burgeoning debt piles, and mediocre PMI figures to expound his bubbly view of equity markets.
• Pal is buying bonds. He says that it's an "easy trade," and will appreciate when equities take a tumble.
• He also notes the infancy of the coronavirus epidemic, and says that the impacts will be "meaningful and real."
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There's been no shortage of bubble talk percolating on Wall Street as of late.

A decade-plus bull market, equity valuations on the higher end of the historical spectrum, and a Federal Reserve that's made it clear they'll cut interest rates at the first sign of danger have added fuel to the fire.

Raoul Pal, the former Goldman Sachs hedge-fund manager who founded Real Vision, thinks asset prices have lost touch with reality.

"It's a really problematic market, particularly at the peak of bubbles and the peak of the cycle," he said on the "Stansberry Investor Hour" podcast. "We're in an over debt burdened, over leveraged, slow growth, risky world."

For the uninitiated, Pal retired at age 36 after quitting jobs at both Goldman Sachs and GLG Partners. He lives comfortably on a 140-person island in the Cayman Islands and spends his days writing market research, which comes with a hefty price tag of $40,000 per year.

Pal points to the the Institute For Supply Management survey - one of his favorite macroeconomic indicators - to bolster his thesis.

"I use the business cycle to understand where we are," he said. "It tells you - and it peaked a long time ago - so it tells us we're in the down phase of the great cycle, so we're expecting at some point a recession."

Pal has seen cycles come and go in the past, and he's learned one thing: Don't try to short the equity market.

"Even though it's a clear bubble - it's impossible not to even think of it as a bubble now - you shouldn't do anything about it. If you do, just own bonds," he said. "People tend to get confused and want to do the 'vanity trade' - as I call it - which is short equities."

Pal says that shorting equities is strategy that's fraught with volatility and risk. He wants to express his view of the equity bubble in the purest and simplest trade possible - and to him, that means buying the short end of the yield curve.

"The reaction function of the Federal Reserve say that if growth slows, they will cut rates," he said. "Therefore, own bonds. So that's an easy trade."

The role of coronavirus

If there's one variable that has Pal especially concerned about the well being of global economy, it's the coronavirus.

"It may be the thing that takes the equity market down," he said. "That whole process is only just started, and I think that will play out for the next couple of months."

Pal notes that the severity of the coronarvirus' impact on markets ultimately comes down to how people react. He says that this event will trade similarly to Gulf War I, Gulf War II, and 9/11 - events that shocked global demand and supply.

"You basically shut down all economic activity in China, which is truly astonishing," he said. "But again, it's not China necessarily, it's what everybody else looks at that, sees how China is reacting so strongly - and they know they have only one chance to react, and they better overreact."

Closing borders, terminating flights, and stopping the flow of people to and from China are a few examples Pal provided. All of which he says compound the effects of the trade tariffs that are already in place.

"This is a huge thing," he said. "What happens is when you compound that, you create big enormous black holes in the global economy, just when it's weak."

Pal concluded: "I think the impact on the global economy is meaningful and real - and there are going to be some real supply chain disruptions, from and to China that may break forever."

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