Dramatic' re-pricing across all financial assets coming as the Fed moves away from its 2% inflation target to this – Larry McDonald
Financial markets are about to witness one of the most epic migrations of capital in history as investors rush into hard assets, warned Larry McDonald, Founder of The Bear Traps Report and New York Times bestselling author of 'How to Listen when Markets Speak' and 'Colossal Failure of Common Sense.'
With the national debt approaching $35 trillion, there are only two ways out of the situation — defaults or printing more money, McDonald told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News.
"The only way to get out of that kind of debt hole is if you keep inflation above interest rates. That's how you monetize the debt," McDonald said. "That is why [the Federal Reserve] needs a much higher inflation target. It'll [be] a slow, manageable default. But it's the only way out of this colossal debt hole."
In order to tame inflation back to 2%, the Fed needs to keep raising rates, but it can't do that without triggering a 2008-like financial crisis, McDonald pointed out.
"[Powell] should raise rates another 150 basis points. But if you push rates up from here, you will very quickly bring on a financial crisis much worse than Lehman," he said.
Fed will have to raise its 2% inflation target
The Fed will have to cut rates to avoid a banking collapse and a brutal recession. However, first, it must raise the no-longer-attainable 2% inflation target. "[The Fed] will start circulating the white papers and working with other central bankers worldwide to pitch this in a group setting," McDonald noted.
The inflation shift talk can start as soon as the Jackson Hole Economic Policy Symposium, which takes place yearly at the end of the summer, he added. "If you have a 35 trillion debt hole, you need interest rates below the inflation rate, where you are wiping out debt with inflation."
McDonald also weighed in on the state of the U.S. banking sector, warning of a massive M&A cycle coming. Watch the video above for details.
Move into hard assets
According to McDonald, the U.S. is in a world of persistent inflation, where all asset classes will see a "dramatic" re-pricing as capital flees from financial assets into hard assets.
"The moment [the Fed] tips its hand, this creates a really bullish scenario for hard assets," McDonald stated.
A commodity bull market will dominate the financial landscape, with several metals looking at significant upside. For McDonald's top commodity plays, watch the video above.
McDonald sees gold reaching $3,000-$3,500 an ounce in the next 12-18 months. But he is even more bullish on another precious metal, pointing to one ratio "screaming" to sell gold and buy this metal instead. For insights, watch the video above.
McDonald also shared his price outlooks for silver, platinum, oil, and natural gas. Watch the video above for price targets.
Kitco Media
Anna Golubova
Tim Moseley