Carson Block says stocks will go down, valuations don’t make sense

(Bloomberg) – Carson Block predicts price slump after returning after the Corona virus sold out in March.

“The direction has to be downward,” said the renowned short seller and founder of Muddy Waters Capital in a telephone interview.

Block finds it hard to believe that stocks are trading at their current valuations, although demand has been “hit” by the pandemic and is unlikely to recover as quickly. “It doesn’t make sense,” he said.

After crashing into a bear market at the fastest pace in existence, the S&P 500 index rose 27% from its March low. The U.S. stock index trades an estimated 20-fold profit, which is more expensive than an all-time high in February.

“In the medium term, I can only see stock values ​​roughly where they are today,” said Block. “The underlying economy is on its knees and I just think investors haven’t understood it yet and haven’t seen what it looks like when bankruptcies flow through the economy.”

More than 30 million people submitted unemployment claims within six weeks of the virus outbreak closing companies across America. The US economy shrank 4.8% year-on-year in the first quarter, the largest decline since 2008 and the first decline since 2014. Technology giants Amazon.com Inc. and Apple Inc. have been sobering on the impact of the pandemic.

Read More: Icahn says stocks are overvalued, viruses can cause “downward moves”

According to Block, current share prices show how “incredibly complacent” investors have become in terms of risk. While fiscal and monetary stimulus was needed to counter the economic impact of the pandemic, he hopes it will be “much earlier” this time around. Nevertheless, he assumes that expansionary monetary policy will be maintained “at least in the next four years”.

“Political dysfunction”

“What caused the pandemic is not a failure of politics,” Block said. But the effects will be “much worse than it should be due to” political dysfunction “”, as was the case with the Iraq war and the global financial crisis, he said.

Block, best known as an activist short seller, has made some short sales that don’t fit his typical approach to combating financial fraud. He said he was betting against a cruise company that he didn’t want to identify.

“I just don’t think cruise ships are viable in a world where we haven’t yet conquered Covid-19,” he said.

In the meantime, he observes how long the “muscle memory” of buying stocks lasts when the stock markets decline. For him there is a point at which this has to end.

“The underlying economy will bring capital markets to a standstill and keep investors from complacency,” said Block. “I don’t think capital markets can disconnect from the underlying economy.”

(Updates the markets in the fourth paragraph)

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