According to CNBC, Larry McDonald, author of “A Colossal Failure of Common Sense,” which details the collapse of Lehman Brothers, another increase in inflation could have a significant impact on the US economy.
According to McDonald, one plausible explanation for this inflationary rebound is the price of oil.
With his investing newsletter, The Bear Traps Report, among other things, McDonald has made a career out of spotting and talking about large market risks.
Based on an uneasy balancing act between the U.S. Treasury market, the oil market, and struggling regional banks, one bestselling author and market risk expert believes that the recent stock market rally and the surprisingly robust U.S. economy are dependent.
According to CNBC, Larry McDonald, author of “A Colossal Failure of Common Sense,” which details the collapse of Lehman Brothers, another increase in inflation could have a significant impact on the US economy.
That inflationary rebound, according to McDonald, is probably going to be driven up by the price of oil. If that happens, long-term bond rates might rise, further pressuring local banks.
He predicted that one of these large regional banks would fail if oil were to spill here, about $20 from now, since the long end would rise. Numerous regional banks hold a significant quantity of long-term bonds and loans, which will lose value in the event that interest rates increase.
Despite indications that inflation may be sticky, a resurgence in the regional bank industry, and ongoing Middle East conflict that may jeopardize oil production, the equity market rally has persisted in the first quarter of 2024.
McDonald speculates that U.S. lawmakers’ actions may have contributed to the relatively subdued rally. In order to fund the American government, he claimed that Secretary Janet Yellen’s U.S. Treasury is “very dangerously, but brilliantly” issuing a large amount of short-term debt, which is aiding in the stability of long-term rates.
He claimed that for the past 18 months or so, Yellen has been buying a lot of short-term Treasurys and stifling market volatility.
But according to McDonald, a spike in oil prices would raise inflation expectations and, consequently, the long end of the Treasury curve, potentially bringing the US economy into recession.
While business financing is generally easy to obtain, consumer credit is extremely tight. “If the inflation rate really rises again, middle-class consumers will be hit first and a recession will result,” he said.
With his investing newsletter, The Bear Traps Report, among other things, McDonald has made a career out of spotting and talking about large market risks. Prior to joining Lehman Brothers, he was in charge of an investing newsletter focused on convertible bonds.