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Passive investors face big losses as baby boomers start to dip into their savings, says Larry McDonald.
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The Fed can’t prevent a recession because the economy is cyclical and sometimes has to contract, he says.
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The founder of “The Bear Traps Report” predicted in May that the S&P 500 would end the year down 40% from here.
Investors in index funds are heading for disaster, and the Federal Reserve cannot stave off a recession forever, warned Larry McDonald.
“Passive investing idiocy will fall in FLAMES – everyone has the same stocks – all retirement plans at risk – older baby boomers and their $78,000,000 wealth is approaching $80 million and start cashing in,” the founder of “The Bear Traps Report” said. ” tweeted SATURDAY.
Instead of picking stocks themselves or trusting a fund manager to do so, passive investors put their money into index funds or exchange-traded funds that track a variety of stocks. Warren Buffett and Jack Bogle hailed index funds as a relatively safe and cheap way for unsophisticated investors to gain broad exposure to the stock market. In contrast, the likes of Peter Lynch and Michael Burry have lambasted passive investing as a bubble that mindlessly drove the valuations of the biggest public companies to dangerous heights.
McDonald’s tweet suggests it’s concerned that so many people have actually staked their savings on the handful of Big Tech stocks that dominate the market. He also appears worried that baby boomers, who hold much of America’s wealth, are starting to sell their stocks, paving the way for a severe market downturn.
The former Wall Street trader – and author of ‘A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers’ – warned in another tweet that the Fed cannot stop the economy from contracting .
“The Fed can do whatever it wants, but it cannot change the essential nature of capitalism,” McDonald said. writing Friday. “He can suppress animal spirits – good luck with the beach ball underwater.”
In an effort to combat historic inflation, the US central bank has raised interest rates from virtually zero to over 5% since the start of last year and signaled that it would continue to raise them. Inflation fell from a peak of 9.1% last June to 4% in May, while employment and consumer spending held up well. The brightening backdrop has fueled investor hopes that the Fed can beat inflation without dragging the economy down.
However, McDonald’s view is that the economy is cyclical and naturally suffers from downturns, and that animal spirits – human emotions that affect consumer confidence – cannot be controlled indefinitely. His belief appears to be that resilient consumer demand will eventually buckle under the pressure of rapidly rising prices and higher interest costs on mortgages, credit cards, auto loans and other types of debt. .
McDonald’s has been sounding the alarm on stocks and the US economy for several months. He told Insider in May that the S&P 500 could drop to around 3,000 points by December — a 40% decline from its current height to its lowest level since June 2020.
He pointed out that the Biden administration had reined in spending after the debt crisis, with a disappointing set of upcoming corporate earnings and banking sector woes prompting lenders to pull out.
Read the original article on Business Insider