In 2005, years before the subprime mortgage crisis unleashed the Great Recession and left millions of Americans homeless, Larry McDonald was vice president of the notorious global financial services firm Lehman Brothers. As a young trader, he and many of his colleagues warned that something was amiss in the real estate market that year. It was “living in borrowed time,” years later he explained in a 2009 article. The New York Times articleand Lehman Brothers “are headed straight for the biggest subprime iceberg ever seen.”
But McDonald’s owners ignored his warnings, and the 158-year-old Lehman organization finally went bankrupt in 2008 after the housing bubble burst. The S&P 500 will continue to lose about 50% of its value during the 17-month bear market that ended in March 2009.
Now, McDonald, editor and founder of the widely read investment newsletter “The Bear Trap Report,” is warning that another stock market crash is on the way. He said the “Lehman Systematic Risk Indicators” he developed after the subprime mortgage crisis – including things like corporate default rates, short interest rates on the stock market and investor sentiment surveys – all flashing warning signs.
“[O]Your 21 Lehman systematic risk metrics are pointing to the highest probability of a crash or sharp drop in the next 60 days — the highest probability since COVID,” he says. speak CNBC Third, refers to the market drop caused by COVID in March 2020.
McDonald’s believes investors are ignoring the risk of a “credit crunch” following the failure of the company Silicon Valley Bank And signature bankas well as the sudden demise of the Swiss lending company Credit Suisse and its focus too much on the development of new technologies such as Artificial Intelligence and robotics.
“We’ve seen this before with Lehman, what happens is a shock hit, credit market begins to value risk, but stocks do not. They focus on things like artificial intelligence or things like the dot-com revolution of the ’90s,” he warned, nodding to the mistakes investors made before the dot bubble- com blew up, sending the stock plummeting in 2001.
McDonald noted that even after the Federal Deposit Insurance Corporation (FDIC) stepped in to save both uninsured and insured depositors at SVB and Signature Bank this month, banks US goods are still suffering hundreds of billions of dollars in unrealized losses. Mortgage-backed securities and U.S. Treasuries that make up the bulk of many banks’ holdings have fallen in value after a series of aggressive interest rate hikes by the Federal Reserve over the past year. These losses have led to significant instability at some banks, forcing many in the industry to tighten lending standards and prepare for the possibility of bank withdrawals.
McDonald’s said the banks’ problems are now starting to spread to the commercial real estate market due to slowing lending and he worries they could affect other sectors of the economy as The Fed raises interest rates to fight inflation.
The good news is that this is “not the Lehman event” that will cause a severe recession, “it’s just a slow-moving credit crunch, because the Fed is fighting it behind the scenes,” McDonald’s speak. But that doesn’t mean stocks are safe — a sharp drop is underway, he warned.
