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Short-seller Jim Chanos says the idea that the Fed will always save the stock market is dangerous

Jim Chanos, president and founder of Kynikos Associates.

Reuters

  • Don’t expect the Fed to keep coming to the rescue of the stock market, legendary short-seller Jim Chanos suggested.
  • “I think it’s a very dangerous idea to uphold,” he told CNBC on Monday.
  • Chanos said the Fed’s series of rate hikes in 2018, which tanked stocks, was a “big error.”
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Relying on the Federal Reserve to keep bailing out the stock market from sharp losses is rash, according to veteran short-seller Jim Chanos.

“The idea of a Fed put and that the Fed is always going to be there to bail out my bad investment decisions is really not cogent investment policy to hold onto for a long time,” the Kynikos Associates boss said Monday on CNBC’s “Halftime Report.”

“The fact that it will bail out the stock market at some pre-determined level of losses… I think it’s a very dangerous idea to uphold.”

US equities continued to sell-off early Tuesday after a dramatic intra-day turnaround that saw major indices close in positive territory in the previous session. A combination of risks and investor concerns over tightening Fed policy, surging inflation, slow-moving growth, and geopolitical risks have all contributed to market weakness.

The S&P 500 remains 7.5% lower so far this month, while the Nasdaq has lost 11.4%. 

The market remains under pressure ahead of the Fed’s two-day meeting, after which chairman Jerome Powell will brief the media on Wednesday.

Investors are skittish about the outcome of this press conference, for which Goldman Sachs predicts could include Powell saying that the Fed will raise interest rates at every subsequent meeting this year.

That would mean more than seven rate hikes this year, compared to the four or five currently priced in by the market. A more aggressive Fed policy has fueled worries about slowing growth, after roughly two years of ultra-loose monetary policy in the US.

The central bank last raised the benchmark rate in a series of rate hikes in 2018 to prevent a further run-up in inflation, as part of its strategy of withdrawing some of the emergency measures it put in place to protect the economy after the global financial crisis.

Chanos said raising rates was a “big error” by the Fed, as stocks tanked in December 2018 after the central bank pressed ahead with tightening monetary policy.

He said despite the nervousness in the market, his hedge fund is still holding a small net long. He said investors should avoid stocks with high-flying valuations.

The short-seller is one of several high-profile investors to warn against the extent of market manipulation in 2021, blasting meme-stock traders as immature and greedy.

Read More: The founder of a networking site for ultra-wealthy individuals breaks down the top 3 strategies its millionaire members are using to beat inflation

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