Larry McDonald has warned carefree tech investors are “smoking in the dynamite shed.”
The founder of “The Bear Traps Report” expects further banking turmoil to tank the stock market.
The former Lehman Brothers trader cautioned last month that stocks could plunge 30% by May.
Tech-stock bulls are at high risk of blowing up as mounting pressures on US banks threaten to crash the equity market, Larry McDonald has warned.
“A lot of these people are smoking in the dynamite shed,” the founder of “The Bear Trap Report” told CNBC about the tech investors trumpeting their favorite stocks on TV.
McDonald flagged Britain’s bond-market disaster, the sudden failure of Silicon Valley Bank and Signature Bank, and UBS’ emergency takeover of Credit Suisse as signs of stress in the global financial system. Early signs of a credit crunch and ongoing turmoil in the regional-banking sector suggest there’s more trouble ahead, he said.
“This is a rolling crisis,” he declared, cautioning that the Federal Reserve’s interest-rate hikes are “draining the banking system.”
“From credit cards to all different types of companies, credit default swaps are rising on many different financial institutions,” he continued. “When you see that, be very careful with US equities.”
Credit default swaps (CDS) serve as insurance against a company defaulting on its debts, and become more expensive as the perceived risk of a default grows.
McDonald is a former Lehman Brothers trader and the author of “A Colossal Failure of Common Sense,” which chronicles how the investment bank ended up collapsing in September 2008 and sparking a global financial crisis.
He warned on March 8 that US stocks could plummet as much as 30% by early May, as higher interest rates choke the economy and frustrated investors switch out of equities into bonds. Higher rates can hinder spending by increasing borrowing costs, and they lift yields on bonds, boosting their appeal relative to stocks.
McDonald’s collection of 21 systemic risk indicators were signaling “one of the highest probabilities of a crash in the stock market looking out 60 days,” he said at the time.
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