After Federal Reserve Chair Jerome Powell indicated the bank isn’t finished raising rates, one market expert has warned a crash could come in a matter of days.
“They’re playing catch up, and while they were doing quantitative easing in 2021, inflation started to rage and now they’re trying to catch up,” The Bear Traps Report founder Larry McDonald said Wednesday on “Mornings with Maria.”
“Our 21 Lehman systemic risk indicators that look at equity and credit point to one of the highest probabilities of a crash in the stock market looking out 60 days,” McDonald, who is also known for writing a best-selling book on the Lehman Brothers collapse, cautioned.
The withdrawal of capital from middle-class families has been “spectacular,” McDonald argued, as the Fed continues its most aggressive rate hike campaign since the 1980s to crush decades-high inflation. Although the consumer price index has slowly fallen from a high of 9.1% notched last June, it remains about three times higher than the pre-pandemic average.
On Tuesday, Powell stressed on Capitol Hill that the central bank policymakers are prepared to pick up the pace of rate increases, as they’re expecting to go higher than previously thought.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in remarks prepared for delivery before the Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
McDonald argued that for every 1% increase in rates, $50 billion is taken “out of the pockets of middle-class families.”
“Auto loans right now are approaching 14%, almost 20% of auto loans are one thousand a month, and so the middle-class families are getting hammered here,” the expert pointed out. “So the consumer pressures are violent, but on the high end, the wealthy are doing well with excess savings and higher interest rates.”
According to the Bear Traps Report founder, the average American investor is making a smarter move by recognizing there’s now a choice between stocks and bonds — and one might currently be more profitable than the other.
“Ten million in cash today generates $510,000 a year in Treasuries. Wow. Think about that: a year ago, you’re talking that this was $70,000. We have to do the math here, common sense,” McDonald explained. “You’ve been in the market for two years in these moronic fang stocks that have gone nowhere, the most crowded trade on earth. You’re flat to down after two years, and now you’re looking over at a money market fund or a one-year treasury, and you get $510,000 of interest risk-free when a year ago you were getting 70.”
The market crash trigger, he further predicted, will come from the S&P earnings missing estimates big time.
“Everybody’s expecting, [Wall] Street is expecting $226, that’s priced for perfection. So what happens is, when we deteriorate in jobs the next two, three months, that will bring into question the S&P earnings, and the S&P earnings are probably $190, so that’ll trigger it,” McDonald said.