Larry McDonald of Bear Traps told CNBC, “All the Federal Reserve had to do was to say the balance sheet was on cruise control for 12 months. They didn’t do it because their trying to send a signal to Washington.”
What McDonald is referring to is the use of the mainstream media to send messages that would otherwise be illegal according to insider trading, market manipulation, and collusion laws. Company CEOs do it too. For example, if company A called up company B and both companies insiders discussed how bad business was and as a result both companies insiders sold their shares, that would be illegal. However, if company A said over the mainstream media that its business was really bad, and then company B heard that over the mainstream media and so both companies sold their shares, that would not be illegal. Even though the end result was the same, insiders were trading on publicly available information and so no insider trading rules were broken. This goes on more than people realize where CEOs use the mainstream media to send signals and get around insider trading laws.
McDonald is saying that the Federal Reserve is sending this kind of message to Washington. If the Fed called Washington and privately signaled something that Congress did insider trading on, that would be illegal. However, if the Fed publishes something in a policy statement that the entire public has access to, then they can communicate with Washington without breaking any laws. McDonald is saying that he has detected the Fed doing this insider-like signaling to Washington.
McDonald said, “When you’re long stocks today, think of deflation bets, we’ve been through 10 years of Brexit, trade wars, and COVID, so the entire investment community is set up in deflation bets. As of a week ago, there is $10 trillion in tech stocks which is mainly deflation bets. The Fed could have promised us more accommodation but they did not so they are concerned about Washington and they would like to see more fiscal help. They are concerned about a potential vaccine. So the fact they are not guaranteeing more accommodation, tech stocks are going to collapse. We’re going to see in our lifetimes and careers, the greatest migration of assets away from tech.”
Props to McDonald for really ratcheting up the drama as it makes for good TV but he’s wrong on his core points IMO. For starters, the Fed doesn’t have to use covert signaling to Washington. They’ve already come out and said dozens of times over the last 6 months that Washington needs to pass additional fiscal stimulus. It’s no secret that the Fed feels this way and they’ve been very verbal about that point. That sort of defeats McDonald’s point that the Fed is secretly saying something to Washington.
The other wrong point IMO is that tech stocks are a deflation play. Maybe 1% of total positions would view holding tech as insurance against deflation but 99% of market participants are holding tech because of the massive move of our entire society towards technology solutions during this pandemic which has caused big tech’s earnings and revenue to explode higher.
Larry McDonald, Bear Traps founder, warns of a serious correction coming in the Nasdaq. With CNBC’s Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Karen Finerman and Dan Nathan.