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(PRO Views are exclusive to PRO subscribers, giving them insight on the news of the day direct from a real investing pro. See the full discussion above.) When subprime mortgage lender New Century Financial went bankrupt in early 2007, it was a canary in the coal mine for a housing crisis that wouldn’t fully spread until 2008, bringing down the economy and markets with it. There are certain pockets of the lending market today with early signs of trouble — not heralding something on the scale of the Great Financial Crisis, but perhaps a slowdown in borrowing and the economy if the woes spread, according to Larry McDonald purveyor of the The Bear Traps Report and author of “How to Listen When Markets Speak.” “We’re starting to see some of the things we saw in 2007, 2008, but it just hasn’t gone up market yet,” said McDonald. “We’ve seen this show before.” McDonald is first looking at the struggling shares of student lenders Navient and SLM Corp, otherwise know as Sallie Mae. Both stocks are down big this quarter, while the S & P 500 is up nicely on expectations for a rate cut. One would think two lenders would be up on similar sentiment, with borrowing set to pick up with more reasonable rates. But they are not. NAVI 3M mountain Navient, 3 months The analyst thinks these stocks are foretelling trouble to come with student lending as the Trump administration, led by Education Secretary Linda McMahon, restarts collection of debts suspended during the Covid pandemic and extended for years by the Biden administration. SLM 3M mountain SLM Corp., 3 months That’s a monthly bite set to come out of millions of consumers’ wallets, McDonald reasons, and the resilient consumer has been a major bullish underpinning of this market. “Say you had a $400 a month student loan payment, and then you gave like two to three years where they didn’t have to pay it,” said McDonald. “So imagine 60 million people all of a sudden, they didn’t have to make the $400 payment. Now they do.” Auto lending is another pocket showing strain, with subrime lender Tricolor Holdings the latest in the sector to file for bankruptcy. Fifth Third Bancorp found alleged fraud with Tricolor, according to Bloomberg News . McDonald is also keeping his eye on buy-now-pay-later companies … a stock like Upstart Holdings , which has also been weak this quarter. UPST 3M mountain Upstart holdings, 3 months “The tertiary financials … second, third tier … are definitely telling you this is a subprime problem,” said McDonald. The tipping point will be when these troubles begin to show up in spreads on asset-backed security (ABS) loans and that has not occurred yet, according to McDonald, but he is watching closely. “Once it goes into ABS, asset backed securities… you remember the CDOs and all that problem in the financial crisis? That’s when it starts impacting the big banks,” said McDonald, referring to complex collateralized debt obligations. “But it’s very much like 2006, or seven, where you start to see the first, second, third inning of a big problem.” When will market wake up to this? McDonald’s worries are juxtaposed against a stock market hitting new highs on a daily basis on hopes a looser Fed will patch up any economic dislocations. But he thinks it won’t be that easy and soon these problems, along with a reckoning on sky-high Nvidia valuations and overexuberant AI forecasts from companies like Oracle , will begin to hurt the market and the economy. McDonald, whose clients include many large hedge funds, says the trades discussed the most in that group are ones going long hard assets and commodities. McDonald has talked about gold miners in the past and recently added copper miners to that trade as well. He’s not alone in that respect, with Goldman Sachs recently making gold miners one of its top recommendations to clients for year-end. Hard assets will be in demand as the economy slows, inflation stays high and the Fed is forced to inject more liquidity into the system, the analyst said. “I think there’s a high probability that inflation’s normalizing up at a high, high level,” said McDonald. “If the economy slows down and inflation stays sticky, that’s a much higher level of stagflation … I think we’re on a collision course for that.” (See the video above for the full discussion.)
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