How this bull market could unravel and what to watch for, according to Larry McDonald

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Lawrence McDonald, author of 'A Colossal Failure of Common Sense' and 'How to Listen When Markets Speak,' spoke with CNBC about his top concern for markets.

Larry McDonald, author of "A Colossal Failure of Common Sense" about the downfall of Lehman Brothers, told CNBC that another spike in inflation could have major repercussions through the U.S. economy.McDonald has built a career on identifying and discussing big risks in the market, including with his investing newsletter, The Bear Traps Report.The recent stock market rally and the surprisingly resilient U.S. economy are reliant on an uneasy balancing act between the U.S.

The price of oil is a likely candidate for that rebound in inflation, McDonald said, which could then push long-term bond yields higher in a way that puts even more pressure on regional banks. "Yellen is piling in, for like the last year and a half, into short-term Treasurys, and she's sucking the volatility out of the market," he said.But a spike in oil prices would push up inflation expectations and, therefore, the long end of the Treasury curve, according to McDonald, potentially pushing the U.S. economy into recession.

 

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