Larry McDonald says how the bull market will unravel this time | Wilnesh News

A best-selling author and market risk expert says the recent rally in stocks and the unexpected resilience of the U.S. economy hinge on a precarious balancing act between U.S. Treasury markets, oil markets and troubled regional banks.

Larry McDonald, author of “The Great Failure of Common Sense,” about the collapse of Lehman Brothers, told CNBC that another surge in inflation could have a significant impact on the U.S. economy.

MacDonald said oil prices could be a factor in the rebound in inflation, which could push up long-term bond yields and put more pressure on regional banks.

“If the price of oil here collapses, say to $20, one of these big regional banks is going to be wiped out because long-term earnings are going to go up,” he said. Many regional banks have large amounts of long-term bonds and loans on their books and if earnings As interest rates rise, the value of these bonds and loans declines.

McDonald’s warning and his new book, “How to listen when the market talks” With stocks hovering below all-time highs, Dow Jones Industrial Average Flirting with level 40,000.

Stocks continued to rise in the first quarter of 2024 despite signs that inflation could be troublesome, regional banks are flaring up again, and ongoing conflict in the Middle East could threaten oil production.

MacDonald said part of the reason for the relatively quiet rebound could be the actions of U.S. policymakers. He said the U.S. Treasury under Treasury Secretary Janet Yellen has done a “very dangerous, but excellent” job of issuing large amounts of short-term debt to fund the U.S. government, which has helped keep long-term interest rates stable.

“Yellen has been buying a lot of short-term Treasuries over the past year and a half, and she’s taking the volatility out of the market,” he said.

But McDonald said soaring oil prices will push up inflation expectations and push up the long end of the national debt curve, potentially pushing the U.S. economy into recession.

“Financial conditions at the consumer level are severely tight, while financial conditions at the business level are relatively loose… If inflation does pick up again, it will start to trickle down to middle-class consumers and trigger a recession,” he said.

McDonald has devoted his career to identifying and discussing significant risks in the markets, including in his investment newsletter, The Bear Trap Report. He previously worked at Lehman Brothers and wrote investment communications on convertible bonds.