Why Bonds Could Trigger Next '1987' Style Stock Market Crash | Larry McDonald

Lawrence McDonald (0:00)

Refined products are like, literally 1970s type crisis levels right now. Bonds are starting to offer equity like returns. If your money's doubling in nine years, that's an equity like return, and it starts to steal market share from equities. The Fed would have to go from potentially hikes to cuts really fast. That's gonna be really bullish for gold, silver and hard assets.

David Lin (0:22)

Larry, what are you most bullish on right now?

Lawrence McDonald (0:24)

Well, I mean, I think you got to look at-

David Lin (0:26)

Stocks are near record highs, but what if bonds are becoming a more attractive investment right now? And what if the rally in the major indices is masking weaknesses across the market? It's Tuesday, September 22nd, and our next guest sees a parallel with the months before the 1987 crash. Rising bond yields gave investors an alternative to stocks, even as equities continue to climb. So where should investors take profits? And why is our guest looking at consumer staples in Chinese technology stocks? Well right now in Kalshi, traders are pricing in a 60% chance that the 10-year treasury ends the year at 5.1% or higher. We're going to discuss the direction of the bond market and whether or not our next guest agrees with these odds. If you agree, a $50 trade can yield $76 if you're right.

Our next guest will give his prediction, so stay tuned. This video is sponsored by Kalshi, the largest prediction market in the United States. Unlike a sports book, you're trading peer to peer on real world events from economic data to political outcomes and the price moves based on public opinion, not a house. Go to the link in the description down below where scan the QR code here and new users who use my code LIN can get $25 in app credits when they trade $25.

Kalshi is CFTC approved and available in all 50 states, including California and Texas. Joining me now is Larry McDonald, founder of The Bear Traps Report and former Vice President of Distressed Debt and Convertible Securities Trading at Lehman Brothers. He worked there through its 2008 collapse and subsequently wrote a book called A Colossal Failure of Common Sense, which by the way, he says is trending right now on Amazon and we're going to find out why and whether or not that's actually an indicator for something to come. His latest book is called How to Listen When Markets Speak.

Welcome back to the show. Larry, good to see you.

Lawrence McDonald (2:13)

Thanks, David. Yeah, really excited. New York Times bestseller in one million copies sold between the two. Thank you so much for everything.

David Lin (2:21)

Well, thank you for providing us an excellent read. I'll put the links down to the books down below. You were telling me offline that you started to notice that your older book, actually the one about the Lehman Brothers collapsing is starting to trend randomly. I don't know if it is random. Maybe it's a market indicator. We'll talk about debt and market signals.

That's the theme of our conversation today. In your latest Bear Traps Report that you wrote on the 20th of September, you said that you likened this era to 1987 Back then, I think you were working for your father's brokerage at the time. The 10-year went from 725 to 950 And a 200 basis point move you wrote, moved in seven months, happened at the time. Stocks peaked in August 1987, and on Black Monday, the Dow fell 22% in a single session.

Now, what similarities can we draw from 1987 to today, just from the perspective of how bond yields and stocks are moving together?

Lawrence McDonald (3:19)

Well, it's two things are really important. Yeah, so I lived through that period where it was the summer of 87, and every time we had coffee with our great mentors, my dad's kind of collection of financial gurus back then, they kept on saying, and I didn't understand what this meant. Bonds are starting to offer equity-like returns. And I was like a kid, and I really didn't understand the significance of that. And I think what people have to understand is that between 2018 and 2021, 30 trillion of debt was issued with interest rates near zero.

So picture this in your mind. There's an Apple bond that pays 2.55 percent, matures in 2060 It's trading like 50 cents on the dollar.

And so what happens is when interest rates go up, bond prices come down. And when you have all across the universe in corporate bonds, in US treasuries, French bonds, UK bonds, there's a UK bond that was issued in 21 with like a 1.5 percent coupon, it's trading up 26 cents on the dollar. And by the way, in the UK, if you buy one of those bonds and you make a capital gain, I think there's no tax on that. There's a weird thing with the UK bond market. So the bottom line is, why should someone watch, why should someone watching us right now care about this?