John Burbank, the hedge fund manager who in 2015 warned of a China-led global economic slowdown, said he expects a “major” Chinese currency devaluation and a U.S. recession within the next year as debt levels rise and central banks are stymied on monetary policy.

China will enter a liquidity crisis with the largest sum of non-performing debt in the world, Burbank, the founder of $4.1 billion Passport Capital, said in a May 5 investor letter. The U.S. economy will contract at a time when the Federal Reserve has the fewest options in history to cut interest rates, he said.

“For both it will be a normal ending after decades of extending their booms,” Burbank said in the letter obtained by Bloomberg. “We think this is a time full of peril and repositioning that heralds either the start of a new market reality, i.e. inflation and too much liquidity, or the beginning of the liquidation.”

Burbank, who bet against U.S. housing a decade ago, is among the U.S. macro investors to sound the alarm on global markets. Billionaire Stan Druckenmiller said last week that the U.S. equities bull market has "exhausted itself" and George Soros contends China resembles the U.S. slump of 2007-08. Sluggish global growth is calling into question the effectiveness of central-bank stimulus especially in the U.S. where investors are concerned the Fed will be slow to tighten monetary policy.

Fed Response

“The Fed policy response now seems to be a function of global growth concerns rather than domestic considerations,” Burbank said. “This essentially brings forth a period of global monetary policy convergence rather than the anticipated divergence.”

Hedge fund manager Paul Singer is also raising concern about the economic outlook. “The dips last fall and in January are likely to be leading indicators of more severe dislocations in the future,” he said in a letter to clients obtained by Bloomberg. The money manager, whose firm Elliott Management oversees $28.1 billion, said quantitative easing and regulatory pressures have raised risks in global markets while fundamentals haven’t improved.

Burbank’s $1.1 billion equity fund lost 2.5 percent in the first quarter and his $446 million special opportunities fund slumped 3.8 percent. The hedge fund industry lost an average 0.6 percent in the same period, according to Hedge Fund Research Inc. Steve Bruce, a spokesman for San Francisco-based Passport, declined to comment.

There will be “substantial” opportunities to make money once the “massive dose of central bank anesthesia wears off financial markets,” Burbank said, adding that the dollar will resume rising “once markets embrace the fundamental truth of the consequences of divergent monetary policies.”

Yuan Wagers

Burbank didn’t predict how much China’s yuan would weaken. The currency is little changed against the dollar this year, while slumping 4.3 percent against a trade-weighted basket of currencies.

Wagering against the yuan was a popular bet among hedge fund managers including Third Point’s Dan Loeb earlier this year. Druckenmiller said last week that the nation’s debt has grown by the equivalent of Brazil’s gross domestic product per year even as the economy has slowed from a nominal growth rate of 15 percent to 5 percent.

“This is an extremely toxic cocktail for companies that have borrowed at 10 percent expecting 15 percent sales growth,” he said at the Sohn Investment Conference in New York. “Our strong suspicion therefore is that a large part of this growth is just credit flowing to otherwise insolvent borrowers.”

In May 2012 Burbank said the U.S. and the rest of the world would slip into a recession. Based on that view, he wagered that global stocks would fall. Instead, the MSCI World Index of equities returned 17 percent that year.