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Need to Know: This hedge fund manager who made winning bets in 2020, says investors should brace for a decades-long bear market

On the heels of last week’s bullish turn for stocks, the setup is looking slightly less positive for Monday. Hong Kong stocks may be affecting the mood with a giant slump after China’s leader cemented his power.

And we’re entering Fed blackout period ahead of next week’s meeting that’s expected to deliver yet another three-quarters of a percentage point rate hike. As Miller Tabak + Co.’s chief market strategist Matt Maley tells clients, we can’t go back to 2021, when many were getting richer than they should have been.

“If we had tried maintain what we had a year ago, it would have been like getting drunk…and then trying to stay drunk…to avoid a hangover.  What the Fed is trying to do is to keep a bad hangover from becoming a horrendous one…but they’re also trying to make sure we don’t get drunk again……….It’s a very tough job,” he writes.

That brings us to our call of the day from hedge fund Saba Capital’s founder Boaz Weinstein, who warns of a “real headwind” for investors from central bank tightening that could trigger a decades-long bear market, such as seen in Japan. And he lays the best bets in this gloomy atmosphere.

“I’m very pessimistic. There isn’t a rainbow at the end of all of this,” Weinstein said in an interview with the Financial Times that published on Monday. “There’s no reason that this difficult [economic] period will only last two to three quarters [and]..no reason to think we’ll have a soft landing or a shallow recession.”

Weinstein may be worth listening to for a couple of reasons. Firstly, his flagship fund reportedly returned 73% in 2020 for its bets against junk bonds. Trading credit default swaps, which insure against company defaults, remains a big part of his strategy.

The manager also reportedly won big by taking the other side of a trade in 2012 by JPMorgan’s “London Whale” trader Bruno Iksil, who racked up a $6 billion loss for the bank.

As for how he’s playing a lengthy bear market for stocks, Weinstein is putting his money on credit-default swaps because he thinks a recession will trigger more corporate defaults and lead to dramatic widening of credit spreads. He cautions against equity market options, which he said won’t pay off unless stocks dramatically plunge.

Weinstein says that big market plunge hasn’t come yet because because too many “problematic things are swirling around, some that are contradictory,” such as war, inflation, energy crisis and China woes. So investors have had time to slowly absorb the bad news, and reduce risk at that pace.

“This year has been like a horror movie but with five monsters — you don’t know what to focus on, so you deleverage.”

The markets

Stock futures
ES00,
+0.31%

NQ00,
+0.11%

were mixed, with bond yields
TMUBMUSD10Y,
4.179%

TMUBMUSD02Y,
4.483%

pulling back and the dollar
DXY,
+0.33%

modestly higher. Oil prices
CL.1,
-1.03%

are also under pressure. Silver
SI00,
+0.65%

was getting a bid.

The buzz

Hong Kong stocks
HSI,
-6.36%

fell 6% in worst-one-day loss since 2008 after Chinese Premier Xi Jinping was nominated for a third term and unveiled a cabinet stacked with loyalists who may be more focused on ideology than the economy. Watch U.S.-listed Alibaba
BABA,
+0.22%
,
JD.com
JD,
-0.02%

and Baidu
BIDU,
-2.29%
,
all of which got crushed in Asia.

China data was mixed. Third-quarte growth of 3.9% was still the slowest in decades, home prices fell the most in more than 7 years, factory production sped up and retail sales slowed.

JetBlue
JBLU,
+2.14%

reports Monday in a huge week for earnings, with Alphabet
GOOGL,
+1.16%
,
Twitter
TWTR,
-4.86%

and Texas Instruments
TXN,
+3.90%

on Tuesday, Microsoft
MSFT,
+2.53%

and Meta Platforms
META,
-1.16%

on Wednesday and Apple
AAPL,
+2.71%

and Amazon.com
AMZN,
+3.53%

on Thursday.

Read: Big Tech has been an earnings refuge for years, but safety is no longer a sure thing

PMI data is due at 9:45 a.m., in a week that will bring data on the housing market, third-quarter GDP, and Fed-favored inflation gauges. The European Central Bank, along with Japan and Canada’s central banks are due to meet this week.

Former U.K. Chancellor of the Exchequer Rishi Sunak is set to become the country’s new prime minister, with U.K. bonds rallying as prospects for Boris Johnson to return fade.

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The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:

Ticker

Security name

TSLA,
+3.45%

Tesla

GME,
+3.65%

GameStop

NIO,
+2.19%

Nio

AMC,
+2.20%

AMC Entertainment

APE,
+9.88%

AMC Entertainment preferred

MULN,
+7.30%

Mullen Automotive

BABA,
+0.22%

Alibaba

RIGD,
+0.25%

Reliance Industries

AAPL,
+2.71%

Apple

TWTR,
-4.86%

Twitter

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German climate activists toss mashed potatoes at a Monet

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton

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