Contrarian Woo Warns of VAR Shock as Investors Misread War

(Bloomberg) — David Woo, the Wall Street contrarian who foresaw Donald Trump’s election in 2016 and how to profit from it, sees a much more dangerous world today with fewer investment options.

Most Read from Bloomberg

Markets haven’t adequately priced for the risk of a drawn-out war in Ukraine, according to Woo, who views it as a “dress rehearsal for the start of Cold War II.”

He’s particularly concerned by the prospect of a value-at-risk or VAR shock, in which a cycle of selling sweeps across asset classes, as happened after the “taper tantrum” in U.S. Treasuries in 2013.

“Risk parity funds are sitting on trillions of dollars of assets,” said Woo, a former strategist at Bank of America Corp. who has launched his own macro research forum. “As stocks and bonds both go down they’re going to see a massive spike in VAR, which will force them to capitulate and start to unwind.”

Woo sees stocks as “seriously mispriced” and the cost of derivatives to profit from volatility as “exorbitant.”

“Too many people think that U.S. stocks are going be a safe haven,” he said in an interview. “The next big portfolio shift is going to be out of U.S. stocks and into cash.”

As divisions widen between the U.S. and its Western allies on the one hand, and China and Russia on the other, tech stocks like Apple Inc. and Alphabet Inc. will lose some export markets and face greater supply-chain challenges, said Woo.

A cold war scenario in which the U.S. lost its global edge in technological innovation would also have implications for the dollar’s dominance in the global financial system, according to Woo, whose career has also included stints at Barclays Capital and the International Monetary Fund.

Read more: David Woo on What the Economists Got Wrong About the Stimulus

Chinese sovereign bonds are among the few securities in debt markets where Woo sees appeal. He reasons that there is little threat of inflation in China and the central bank is likely to ease monetary policy to bolster growth if needed.

By contrast, the Federal Reserve is preparing to lift interest rates off zero when it meets next week as it embarks on a tightening cycle to curb inflation. Many fear it could tip economies into stagflation — or even another recession — just two years since the pandemic forced the deepest slump in decades.

“I’m so worried because Covid was the first negative supply shock, now we’re getting the second negative supply shock,” Woo said. “The world has never had to deal with one negative supply shock in the last 20 years, let alone two, one after another.”

(Adds detail on inflation call in final two paragraphs)