Markets guru Larry McDonald warns of 'off the charts' complacency — and says Warren Buffett's stock sales are a red flag

• Larry McDonald warned about inflation, complacency, and bank pressures in an interview with BI.
• The author and ex-trader said Warren Buffett slashing his Bank of America stake was a red flag.
• McDonald said tariffs and commodities may fuel price growth, and stock buyers are overlooking risks.

Investors are too relaxed about falling inflation and booming stocks, while Warren Buffett may be sending a distress signal about the banks.

That's according to former trader and author Larry McDonald, who told Business Insider in an interview that investor "complacency is off the charts."

The author of "The Bear Traps Report" newsletter and the former head of US macro strategy at Société Générale said he expected surging microchip stocks to experience a "sharp snapback in the next two to three weeks."

Nvidia rocketed nearly 70% in under three months to an unprecedented $4 trillion valuation, while rival Taiwan Semiconductor has soared around 60% to fresh highs over the same period, helping to lift the wider stock market to record levels.

Banking and Buffett

McDonald said banks were threatened by having on their books commercial real estate loans and multifamily mortgages that were issued at far lower interest rates than such loans would be now and are now worth much less on paper.

These have left key lenders such as superregional banks "dramatically wounded," McDonald said. He suggested that some investors were turning a blind eye and focusing instead on the Trump administration's promises of deregulation. This has left bank stocks trading at valuations that are "extremely unusual historically," McDonald said.

McDonald, who wrote "A Colossal Failure of Common Sense" about the collapse of Lehman Brothers, pointed to Buffett slashing his stake in Bank of America, which for years had been the legendary investor's second-largest holding after Apple.

The Berkshire Hathaway CEO pared his position by almost 40% from over 1 billion shares to around 630 million in the nine months ended March 31. "He sees something," McDonald said.

He speculated that Buffett, who's soured on lenders and exited several bank bets since 2020, is "probably selling a lot more now" and may have already cut the position to 500 million shares. Berkshire did not respond to a request for comment from BI, and investors will have to wait until Berkshire files its next portfolio update in mid-August to find out its latest BoA position.

Buffett was lauded online earlier this year for selling more than $130 billion in stocks in 2024 and building a record cash pile before the market entered a correction.

Prices and pressures

Headline inflation was 2.4% in May, only slightly above the Federal Reserve's 2% target, but McDonald disputed the idea it's under control.

“The Trump team wants to advertise low inflation because they see a window to cut," he said, referring to the president's campaign to pressure Fed Chair Jerome Powell to reduce interest rates.

McDonald said rising prices for copper and other commodities could reignite inflation, and “either tariffs or oil will start leaking” into it too, driving up bond yields in anticipation of the Fed raising rates and worsening banks' paper losses.

He said that resurgent inflation could disproportionately harm the bottom 60% of Americans by income, pinching their pocketbooks like in the 1970s when consumers were "so wounded."

McDonald also said credit-card companies charging interest rates as high as 29% are further squeezing households' finances, raising the risk of wider economic pain.

McDonald has repeatedly warned of market crashes, recessions, and inflation in recent years, but stocks have marched to record highs and the economy has remained strong. Investors may be shrugging off genuine threats, but that bullishness has paid off so far.