With the markets in whiplash mode, Joe McAlinden, founder of McAlinden Research Partners and former chief global strategist with Morgan Stanley Investment Management, believes volatility is going to stick around for a while, and we might see a correction double of what we’ve had so far. In this interview with The Gold Report, McAlinden bucks conventional wisdom to argue that an interest rate hike is good for gold and oil, and lays out his investing strategy for this period of market uncertainty.

The Gold Report: For more than a decade, you led Morgan Stanley Investment Management’s global investment strategy; now you own your own research firm based on your observations of the industry for more than 50 years. How do you explain the volatility in the markets right now and how should investors position themselves to prepare for what is coming?

Joe McAlinden: It has been a wonderful bull market, a wild ride going all the way back to 2007 when the market made its top. That was followed by a horrendous plunge. We’ve not only made that back, but the market has reached highs that were 36% above the 2007 highs. I had been concerned recently, however, that price-earnings ratios have become elevated and we are seeing other spooky similarities to the conditions that prevailed prior to the 1987 crash, including the absence of a more than a 10% correction for three years and a breakdown of small-cap stocks. The market could be vulnerable to some kind of major shock. I believe that the big shock is only beginning to unfold and that as it does, this correction will get considerably worse, perhaps double what we’ve had so far and maybe even worse than that.

TGR: What do you think the market expects the Federal Reserve Board to do?

JM: The market is hoping the Fed will bail them out by postponing the tightening, but I don’t think that’s going to happen. It is appropriate for the Fed to begin the tightening process now. It’s not the Fed’s job to regulate what’s going on in the stock market. It’s job is to maintain the purchasing power of our currency. The Fed is tasked with keeping inflation and inflation expectations stable and fostering full employment.

The U.S. government should not be in the business of trying to manipulate the stock market the way the central planners in Beijing do. We’re supposed to be a free market economy. The Fed should not allow monetary policy actions to be determined by what the Dow does on a given day. I think that, as some Fed officials have indicated, it should and will go ahead with the quarter-point move in September.

I am worried about the tremendous gap between the Federal Open Market Committee (FOMC) members’ expectations and the market’s perception about the path ahead for the federal funds rate. When you look out to 2017, the gap is about 130 basis points. That is a big deal because we all learned in securities analysis 101 that stocks are worth the present value of the future stream of earnings. In the case of high-growth equities, future earnings are a big part of the current value, especially when the discount rate is influenced by the current policy of zero interest rates in the U.S. So my concern is that a) the market is overvalued, b) there are these similarities to 1987, and c) the gap between market expectations and what the Fed plans to do needs to be closed. My guess is that as it closes, there will be downward adjustment in equity prices and bond prices.