Guggenheim’s Scott Minerd Warns Another Archegos-Style Blowup Is “Highly Likely”
Bankers around the world probably enjoyed a good laugh at Credit Suisse’s expense when it was reported the other day that Morgan Stanley had quietly started selling blocks of the Archegos stocks (with permission from Bill Hwang) before half a dozen prime brokers agreed to try and organize an “orderly” firesale – that is, until Morgan Stanley and Goldman Sachs broke ranks and sought to dump it all.
And while markets absorbed the fund’s blowup without much disruption, as the dip in the index was bought almost immediately, even if most of the “Archegos” stocks (Viacom, Farfetch, Tencent, GSX, Discovery and others) still haven’t filled the gap, buy-side firms have been trying to gauge the risk of more blowups like this, or even the possibility that a sustained pullback in stocks might trigger a wave of blowups that could lead to the contagion which economists had feared might arise from Archegos (which has been flagged as the biggest hedge fund blowup since LTCM). One trader who spoke to Zero Hedge on Wednesday ranked the risk of more hedge fund blowups as second most-likely risk facing markets behind a sustained pickup in inflationary pressures.
At this point, that view isn’t a novel, or contrarian, position. And in a phoned-in (literally) interview with Bloomberg TV this week, Guggenheim’s Scott Minerd warned about the risk of another Archegos-style blowup in the near-term future, even as he said he expects equities and bonds to continue rising (a call that investors might want to take into consideration after Minerd’s call to buy the dip in bonds last month proved correct).
“We need to have more faith in the willingness and ability of our government to print money…as long as we continue to expand the size of the Fed’s balance sheet (along with global balance sheets) there is more and more fuel to keep global asset prices appreciating,” Minerd said. “We’re going to see equity prices significantly higher and bond prices higher..”
Minerd’s interviewer, Bloomberg News’s Sonali Basak, pressed him about potential sources of contagion risk, even suggesting sub-prime auto loans, but Minerd replied that he wasn’t worried about the American consumer – he’s more worried about Europe.
“I’m not particularly worried about stress coming out of the consumer sector, but the place I’m really focused is a number of hot spots, one is Europe. Europe has been slo in the vaccination process…and as they continue to drag along…I don’t think the world is anticipating a world of slow growth or the repercussions from it,” Minerd said.
Over-levered hedge funds and family office vehicles also deserved scrutiny, Minerd said.
“We’ve had all this leverage built up in the system that’s not transparent,” he warned.
Narrowing in on the risk of another repeat of the Archegos collapse, Minerd said “I think it is highly likely that we will have another situation like that…these things are out of the blue…they can continue to cascade until the market corrects and flushes the risk out of the system,” he said.
“With VIX now at levels we haven’t seen in a year, complacency is rising quite a bit, and I could see us being very vulnerable to something arriving out of the blue…that can’t be predicted.”
Minerd was also asked about SPACs, one of the hottest topics in financial markets this year. While Minerd says he sees more regulation coming to SPACs as investors find that the projections they were sold on don’t always measure up to reality, his firm has found a lot of ways to trade them profitably.
“Interestingly enough, I just mentioned SPACs, and one of the things we have been doing is looking to buy some of the SPACs that have been closed over the past few weeks who are trading at a discount to their NAV,” he said.
“The downside is you get the rate of Treasury bills if you decide not to go into the deal, and the upside is if the sponsor finds a really good investment, you could still double or triple your money.”
Although he sees more upside for markets generally speaking, Minerd said at this point it might be prudent to take some risk off the table. “I’m happy with 88% of a move…I can leave that last 10% for somebody else.”
Watch the full interview below:
Wed, 04/07/2021 – 17:00