Larry McDonald.Larry McDonald
Passive investors face big losses as baby boomers start to yank their savings, Larry McDonald says.
The Fed can’t forestall a recession as the economy is cyclical and has to shrink at times, he says.
“The Bear Traps Report” founder predicted in May the S&P 500 would end the year down 40% from here.
Investors in index funds are barreling toward disaster, and the Federal Reserve can’t stave off a recession forever, Larry McDonald has warned.
“Passive investing idiocy will go down in FLAMES – everyone long the same stocks – all the retirement plans at risk – the oldest Boomers and their $78T of wealth are near 80, starting to cash out,” the founder of “The Bear Traps Report” tweeted on Saturday.
Instead of picking stocks themselves or trusting a fund manager to do so, passive investors put their money in index funds or exchange-traded funds that track a variety of stocks. Warren Buffett and Jack Bogle have praised index funds as a relatively safe, cheap way for unsophisticated investors to gain broad exposure to the stock market. In contrast, the likes of Peter Lynch and Michael Burry have blasted passive investing as a bubble that has mindlessly raised the valuations of the largest public companies to dangerous highs.
McDonald’s tweet suggests he’s concerned that so many people have effectively bet their life savings on the handful of Big Tech stocks that dominate the market. He also seems worried that baby boomers, who hold a large chunk of America’s wealth, are beginning 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” — cautioned in another tweet that the Fed can’t stop the economy from contracting.
“The Fed can do whatever it wants, but it can’t change the essential nature of capitalism,” McDonald wrote on Friday. “It can suppress animal spirits – good luck with the beach ball under water..”
In a bid to combat historic inflation, the US central bank has…