US playing a 'very dangerous game' while Israel is at war, Bear Traps Report creator warns

The United States has lost a "key" stance on the world stage and is playing a "very dangerous game" amid the Israel-Hamas conflict, according to one New York Times bestselling author. 

"From say, 1968 to 2020, we were in a unipolar world where the United States was the key strong government in the world, and we had a lot of allies, we didn't have that many enemies and the currency was really kind of a dominant currency, whereas in a multipolar world, because of interest as a percentage of interest, next year, interest rates are going to be over $1 trillion, maybe a trillion-two. And so the military budget, the U.S.'s ability to be the world's policeman, all that's kind of dissipating," The Bear Traps Report founder Larry McDonald told FOX News Digital.

"Wars are extremely inflationary," he continued. "Wars, the trading routes, once they get a little bit complicated, it sets up where supply chains have to be backed up. And then governments like the United States, we just wrote Ukraine a well over $100 billion check. And guess what? For Israel, and what that country is going through and the type of ally, you can't write the Ukraine $100 billion check without opening up the checkbook for, say, Israel in wartime… All this creates just a hole on top of everything else that's going on in the United States."

In addition to macroeconomic factors like the power of labor unions, inflationary trends, higher bond yields and rising oil prices, federal agencies are now considering defense aid and sanctions amidst the warfare.

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The conflict has already claimed thousands of lives. If bombardment of Gaza continues, Iran's foreign minister said hostile parties may join the war.

McDonald, who is also known for writing a bestselling book on the Lehman Brothers collapse, expressed his belief that the probability of the conflict not escalating "is low," and therefore will add further stress on market assets, the Federal Reserve, the Treasury – and ultimately Americans’ pocketbooks.

"There's risk of definitely higher level of oil prices because of the stress that's coming in the Middle East," McDonald said. "The global population is up almost 700 million human beings, but your capital expenditures in oil and gas and metals is really in about a $2 trillion hole. And ESG is a part of that, the whole decarbonization movement has been scaring investors out of these companies, out of investing in these projects. So we have a massive underinvestment."

"And so in the next three to five years, we're going to see potentially $200 oil, $250 oil," the market expert added. "Pretty crazy, because we're massively underinvested in the key resources to really support the planet Earth."

He also noted three external factors that will "stop" the Fed’s aggressive rate hike campaign, as they try to stomp out inflation, which reached a four-decade high in July 2022.

"The banks are stressed. At the same time, we have this massive stress in the Middle East. We have a government shutdown potentially for November 17th. So if you're Powell, you're in a very difficult spot because you've got this crisis in the Middle East, with that geopolitical tension, very difficult to raise interest rates into that, you've got no House speaker and really a budget shutdown on November 17th," McDonald explained.

"The Fed is done," he continued, "and they probably cut rates by 100 basis points by next July."

During a press conference on Wednesday, Treasury Secretary Janet Yellen predicted limited economic impact from the war in Israel and Gaza, adding that nothing has suggested it will be "very significant." The Bear Traps Report founder equated her commentary to that of an airline pilot telling passengers "everything’s fine" when an engine goes out.

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"You could say it's irresponsible because she's not being honest," McDonald said. "At the end of the day, this is a conflict that, really, the probability that it goes away in a short period of time and the probability that it doesn't escalate is low."

"If you're Israel, this is, I think, 10 times more a horrific event to the people of Israel than with anything that we've experienced in the last 50 years," he expanded. "And it was so sophisticated and the breadth of it was so violent, and it just leads you to believe that it was orchestrated by not just Hamas. And so the probability that Israel makes some move on Iran or Iranian assets is high."

Yellen also teased in her speech further U.S. sanctions against Iran if their involvement in Hamas’ terrorist attacks are confirmed. McDonald warned over the implications of sanctions as "an overused tool."

"It's a weapon that should be used once, twice a decade. Unfortunately, they've been using this weapon I think almost every year to multiple countries. So you're using against Russia, Venezuela, using it against Libya. You've used these weapons of sanctions against so many different countries," McDonald noted, "so the sanctions have diminishing returns over time."

"That is another problem for next year with the dollar, because if the Fed's done hiking rates at same time the Treasury is using these sanctions again and again and again on multiple different countries, it just creates a whole backdrop where a lot of investors in the world, like Saudi Arabia, maybe they buy less Treasuries or it's just different countries in the world, China buying less Treasuries. So the sanctions game is very, very dangerous game," he continued.

With the possibility of U.S. defense aid being given to Israel as more than likely, McDonald estimated that it could add $1.4 trillion to America’s debt, plus interest.

"That's crowding out a lot of either defense spending, a lot of other discretionary, maybe it's money for schools, maybe it's cancer research. It's just crowding out a lot of things," the market expert said. "Then we have to sell more bonds to the public, and then if global investors are buying less bonds than they were, it sets up for just a totally new world of higher inflation, higher interest rates, and that sets up for you wanting to belong to a totally different basket of investments."

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Those investments include hard asset companies like Alcoa, BHP Billiton and the XME ETF for metals and materials.

"So companies that actually own assets and produce assets. And so that's the type of portfolio that's going to do much better in a multipolar world. So that's where we're really kind of reallocating that portfolio from growth to value," McDonald said. "We're moving into a new world where you really want to be in totally different assets than you were the previous decade."

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