Lawrence McDonald, writer of “A Colossal Failure of Common Sense” and “How to Listen When Markets Speak.”
Scott Mlyn | CNBC
The latest inventory market rally and the surprisingly resilient U.S. economic system are reliant on an uneasy balancing act between the U.S. Treasury market, the oil market and struggling regional banks, according to one bestselling writer and market danger skilled.
Larry McDonald, writer of “A Colossal Failure of Common Sense” concerning the downfall of Lehman Brothers, informed CNBC that one other spike in inflation could have main repercussions by means of the U.S. economic system.
The value of oil is a possible candidate for that rebound in inflation, McDonald stated, which could then push long-term bond yields larger in a manner that places much more stress on regional banks.
“If oil rips here, like 20 bucks from here, it’s going to wipe out one of these big regional banks because the long end will go up,” he stated. Many regional banks have a excessive quantity of long-term bonds and loans on their books that may go down in worth if yields rise.
McDonald’s warning, and his new e book, “How to Listen When Markets Speak,” include the inventory market hovering just below file highs and the Dow Jones Industrial Average flirting with the 40,000 degree.
WTI crude oil, 1-year
The rally in equities has continued within the first quarter of 2024 regardless of indicators that inflation could be sticky, one other flare-up within the regional bank sector, and continued battle within the Middle East that could threaten oil manufacturing.
Part of the explanation for the fairly calm rally could be the actions of U.S. policymakers, according to McDonald. He stated the U.S. Treasury underneath Secretary Janet Yellen is “very dangerously, but brilliantly” issuing a variety of short-term debt to fund the U.S. authorities, which helps to maintain long-term charges secure.
“Yellen is piling in, for like the last year and a half, into short-term Treasurys, and she’s sucking the volatility out of the market,” he stated.
10-year Treasury yield, 1 yr
But a spike in oil costs would push up inflation expectations and, subsequently, the lengthy finish of the Treasury curve, according to McDonald, doubtlessly pushing the U.S. economic system into recession.
“There’s massive financial condition tightness on the consumer level, whereas financial conditions on the corporate level are relatively easy. … If inflation really picks up again, it’s going to start to go up to the middle class consumer and trigger recession,” he stated.
McDonald has constructed a profession on figuring out and discussing huge dangers within the market, together with along with his investing publication, The Bear Traps Report. He beforehand labored at Lehman Brothers and ran an investing publication round convertible bonds.
