Stephen Roach believes the record market rally is getting dangerously close to folding.
The Yale University senior fellow, who was Morgan Stanley Asia chairman for five years, suggests investors are in denial when it comes to the risks associated with U.S. trade tensions. Roach predicts the threat could spark a prolonged sell-off and make the mighty greenback look very attractive before the end of year.
"If we move towards the midterms and there is still some lingering tension on the trade front, cash is going to be a very good place to be," he said Monday on CNBC's "Trading Nation."
Even though President Donald Trump claimed victory Monday on trade with Mexico, Roached warned there's still too much uncertainty in the trade arena. Roach, one of the leading authorities on Asia, is particularly concerned about China because it's unlikely the country will succumb to Trump's demands.
"I hate to throw cold water on the party, but Mexico is certainly not China. Mexico is much more about outsourcing," said Roach. "The China battle is more about industrial policy and China's aspirations to grow industries of the future in artificial intelligence and autonomous vehicles."
His thoughts came as the S&P 500 and tech heavy Nasdaq hit all-time highs. The Nasdaq surpassed 8,000 for the first time ever. The Dow didn't reach a record high, but it traded above 26,000 for the first time since Feb. 2.
Roach acknowledged momentum is dominating the stock market right, but he's sticking by his Wall Street is "too complacent" thesis and the belief stocks are vulnerable to a painful decline..
The big question: When?
"That's a real stab in the dark here. It's hard to know exactly how the market is going to decipher the tugging and pulling on this trade issue," Roach said. "But to the extent that the markets are extrapolating Mexico into other major bilateral deals, that could be setting it up for a major disappointment."
The White House did not respond to a request for comment.