David Rosenberg issues bubble warning in credit market: It will tear into stocks

David Rosenberg is pretty certain he knows how the bull market in stocks will end.

The Gluskin Sheff chief economist and strategist expects widening spreads will tear it apart.

"The corporate bond market is today’s bubble, just like the mortgage market a decade ago was the bubble back then," he said Monday on CNBC's "Trading Nation."

Rosenberg, who referred to the corporate bond market as the "elephant in the room," suggested that it's just a matter of time until it blows up and puts stocks at risk.

“Something tells me in the next six months that we’re going to have a dramatic widening in credit spreads," said Rosenberg. "I know what happens in the tail end of every Fed tightening cycle."

A credit spread is the difference in yield between a corporate bond and its Treasury equivalent. If they are widening, bond investors believe corporate balance sheets are getting riskier and want more in return for that risk compared with a government bond.

Rosenberg has been known as a perma-bear for most of his career. However, he became one of the first Wall Street strategists to become bullish as the United States was digging itself out of the 2008 financial crisis.

"You always know that the bubble that was created by the previous mass of monetary accommodation comes out of the wash. This time around I’m not even saying it’s the equity market, per say. It’s probably more in the corporate bond market," he said.

According to Rosenberg, the United States is on the final leg of an economic expansion — a view he's held for a couple of years. But now, the end game may be closing in on investors.

"Liquidity [is] always your best friend in a bull market. Before you know it, in a bear market it runs away scared," Rosenberg said. "That’s the one thing you have to keep in the back of your mind. Late cycle, liquidity starts to matter a lot more than earnings do."

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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