An investment guru has warned investors to practice “extreme caution” as the Trump economy flashes warning signs.
Larry McDonald, founder of the investment research publication Bear Traps Report, told Fox Business viewers on Tuesday that they need to “be careful” as bonds begin to look more attractive.
“On the bond side, you know, this is a global story: Japan, U.K., France, all the yields are blowing out,” he told anchor Cheryl Casone. “And so, for investors watching us right now, the problem is, when interest rates go up, bond prices come down. At some point, bonds become a very interesting alternative to stocks.”
“And so that’s what you have to be careful for right now, because you’ve got the summer seasonality, which is really poor, usually between August and September,” he added. “But when bonds start to offer competitive returns relative to stocks, that’s when the risk-reward deteriorates.”
McDonald said the scenario was “very similar” to the summer of 1987, when the infamous Black Monday saw a sudden global stock market crash. The Dow plummeted about 22 percent in a single day, which remains the biggest one-day drop in stock market history.
“I’m not saying we’re gonna get a crash, but historically, when bonds start to threaten stocks at this degree, especially with global rates across the G7 going out, investors watching us right now, you have to have extreme caution,” he warned.
“So Larry, what’s the answer then?” Casone responded. “I mean, I understand the red flashing signals that you’re putting out there, but what is the fix, in your opinion?”
McDonald encouraged Americans to look at figures like Warren Buffet, the legendary investor, who’s sitting on a lot of cash.
“So that’s the alternative: stay away from the crowded trade when bonds become this kind of a threat,” he advised.
The Trump administration has been hard at work touting the supposed strength of the American economy, with the 80-year-old president flying out to the West Coast to promote tax relief initiatives.
On Tuesday, the yield on 30-year bonds issued by the U.S. Treasury hit 5.327 percent—a level not seen since 2007, when it topped out at 5.44 percent just before the global financial system began to fall apart.
