×

Why the Fed will have to reverse course: Raoul Pal

After the Dow, S&P 500 and Nasdaq all closed in correction territory, one widely followed investor says it's about to get a lot worse.

"If you look at S&P earnings, for example, they have not been at these kinds of levels ever outside of a recession," Raoul Pal, publisher of the Global Macro Investor, told CNBC's "Fast Money" traders after Wednesday's closing bell. "There are so many indicators that we're in a recession. You see global growth and it's suggesting that the market should go lower and it's based on the fact that the global economy is getting worse."

And if the U.S. is actually in the recession that Raoul believes is true, he has two big predictions.

First, it's time to do what "no one" is doing and be long Treasurys via the TLT exchange-traded fund.

"I think the 10-year-yield is going to see half a percent," Pal said. "Not this year, probably by next year. That's the same as Germany, Sweden, Finland. Pretty much across the developed world, 10-year yields are at 50 basis points. Nobody is in the bond market. It's a position that nobody's in, and it's a good opportunity."

Bond prices and bond yields are inversely correlated — so as the prices of bonds rises, the yield drops.

The U.S. 10-year Treasury yield closed at 2.10 percent on Wednesday.

Pal says that in order to reach 0.5 percent, the Fed would have to reverse its decision to raise rates.

"I don't think it'll be QE next time, I think it'll be something else. Negative rates, some sort of targeted fiscal stimulus by the Fed," Pal said.

Secondly, Pal said, it's time to short developed markets such the U.S., Europe and Japan.

"Developed markets like the U.S., Europe and Japan are going to play catch-up to the downside," he said. "If the U.S. economy continues to weaken, it's easy to see the S&P at 1,600" this quarter.

The short trade involves waiting out a correction in the markets today and then shorting that correction, all under the assumption that things will only get worse from here.

He said that early in the year, many traders jump in with large short positions and then get washed out by February and March.

"And usually at that time, it's the time to reset the positions properly, and then they should trend longer," Pal said. "Wait for a correction and short the correction — rather than shorting weakness."

The iShares Emerging Market ETF, the EEM, has fallen more than 33 percent since its high in April. Pal said a similar fall will spread to the developed economies.