‘Careful what you wish for’: Hedge fund manager warns Biden’s spending plan could pop stock market bubble

President-elect Joe Biden’s Covid spending plan could recreate the financial conditions seen in the run-up to the 1929 Wall Street crash, according to one hedge fund manager, with rising inflation potentially responsible for popping an “epic” stock market bubble.

The comments come shortly after Biden outlined the details of a $1.9 trillion rescue package designed to support households and businesses through the coronavirus pandemic.

David Neuhauser, managing director of small, Chicago-based hedge fund Livermore Partners, said that Biden’s spending plan appeared to be an attempt to mimic the “roaring 20’s” by getting people back into the workforce quickly.

“But beware, the ‘roaring 20’s’ led to the 1929 stock market crash and the Great Depression. So, be careful what you wish for,” he added.

If passed by the new Democratic-controlled Congress, the “American Rescue Plan” includes $1 trillion in direct relief for households, $415 billion to tackle the virus and roughly $440 billion for small businesses.

“We not only have an economic imperative to act now — I believe we have a moral obligation,” Biden said Thursday, as he announced his plan from his transition headquarters in Delaware.

The former vice president is set to be inaugurated on Jan. 20.

US President-elect Joe Biden delivers remarks on the public health and economic crises at The Queen theater in Wilmington, Delaware on January 14, 2021.

Jim Watson | AFP | Getty Images

When asked whether investors should be concerned that the president-elect’s spending plan could lead to an event like the 1929 stock market crash, Neuhauser replied: “I think so.”

“You are seeing this massive $1 trillion deficit spending due to a pandemic that has of course stopped the world in the past nine months and the goals of course are: ‘We are going to get a vaccine (and) we are going to come through this,'” Neuhauser told CNBC’s “Squawk Box Europe.”

“We still don’t know the dynamics as to how fast and swiftly we come through this. We also don’t know what global growth will look like in the future years, too.”

In the wake of the stock market crash of Oct. 29, 1929, the S&P 500 fell 86% in less than three years and did not pass its previous peak until 1954.

Neuhauser cited expectations that U.S. GDP (gross domestic product) could grow by 6% in 2021, but warned growth was likely to normalize at a rate between 2% to 3% in subsequent years. An aging U.S. demographic and massive corporate and government debt would also mean it is likely to be a “tough road ahead,” he said.

Neuhauser’s view is not consensus, however. James Sullivan, head of Asia ex-Japan equity research at JPMorgan, told CNBC Friday that Biden’s plan came in at more than twice the amount expected by the bank.

As such, it was a “positive surprise” for the market as well as for overall levels of U.S. economic growth in the coming years.

Separately, Goldman Sachs analysts in a note Friday increased their estimates of fiscal spending in the U.S. on the news.

They noted that Biden’s proposal went further than they expected on individual stimulus payments, unemployment benefits, state fiscal aid and public health funding, but stressed it faced hurdles getting through Congress.

Inflation warning

U.S. stock futures were lower on Friday morning, with contracts tied to the Dow Jones Industrial Average down 89 points, while the S&P and Nasdaq both traded in negative territory. Major U.S. indices are currently on pace to close lower week-to-date.

Nonetheless, the Dow and Nasdaq both registered a fresh all-time intraday high in the previous session, while the S&P closed around 0.81% off its record high.

“The market is trying to figure out which narrative that they should go with. And for the past nine months, almost in a straight line, it’s been up in terms of equity markets,” Neuhauser said.

“I think what ends up happening is (there) will so much be built into the market and (we) will eventually start to see factors of inflation take hold. Those are the things that ultimately pop the epic bubble.”

Earlier this week, data showed that U.S. consumer prices increased in December amid an uptick in the cost of gasoline, but underlying inflation remained relatively tame. The U.S. Labor Department said Wednesday that its consumer price index rose 0.4% last month after gaining 0.2% in November.

In the 12 months through to December, CPI increased 1.4% after rising 1.2% in November. The figures were broadly in line with economists’ expectations.

*story by CNBC