Learning to Listen to the Market w/ Larry McDonald

Learning to Listen to the Market w/ Larry McDonald

welcome back to real Vision today it’s my great pleasure to host a conversation with Larry McDonald the author of this book how to listen when markets speak and founder of course of the bear traps report Larry welcome back to real Vision always a pleasure to have you with us thanks Ash great to be here Larry you you you can see from uh from all my uh side notes here um that I been reading assiduously L I have to say right here at the outset uh this is a really impressive book an impressive work of scholarship and yet you manage to make it accessible uh to a non-technical audience which is just an incredible feat it’s a comprehensive view of the world I’ve been really getting into this book first of all let’s just sort of frame it for folks uh who have not had an opportunity to buy it yet what’s the book about what inspired you to write it well you know Ash after my first book so my first book was about Leman Brothers I was a traitor there and you know it’s this is by the way for folks who may not know this is the New York Times bestselling a colossal failure of Common Sense uh broadly thought to be the definitive book about the Leman Brothers collapse from someone who is inside thank you Ash exactly and so what I quickly learned over the last like 14 like 16 years is you actually make a lot more money on the speaking tour than you do writing the book but it’s not about money it’s about the people the people that you meet in other words you know doing speeches in London and meeting with hedge funds Pension funds uh all kinds of mutual fund portfolio managers and so what we did was we kind of put together a kind of a a private club uh an investment Community behind me on on the Bloomberg terminal where we kind of have a conversation every day every week uh about what’s really happening in the markets and so what I wanted to do with with when markets speak is bring a lot of that Talent together and democratize information so you know younger investors can kind of pick up the book and then get a really a good lens on a buy side conversation and then also like you said a historical framework that kind of looks back but we’re using the we’re using history to kind of look forward to yeah L you start this book uh with the Reagan Administration uh the period perhaps when our current find cial Epoch began talk a little bit about the context here why start back in 1980 well you know I I was I I gave a speech from the National Bank of Abu Dhabi and I met James Baker Neil Ferguson and that was like a big moment for me because I I mean I was on a stage with sarosi I mean I was definitely over my skis and uh and it was a wonderful conference but meeting with Baker and and Ferguson they kind of opened my eyes to you know what what a multi po the first time I heard I didn’t know what is a multi-polar world versus a unipolar world and uh they described you know the period of 196 in the 60s to the 80s was more multi-polar and from the 80s to say 2020 was more unipolar and uh and so we wanted to start it off there in and U you know when you you think about the the collapse of the Soviet Union and you know that was a big moment you think of the end of the Vietnam War and so when those things when those events happened uh we started to shift into what’s called A unipolar World which is much more uh disinflationary your supply chains are you know faster and faster and faster and your less Global conflicts and uh more toward globalization which is very disinflationary and deflationary whereas once you enter a multi-polar world um that sets up for much more sustainable inflation forces which we can get into and that so that’s why we started it off you know in the 80s yeah talk a little bit about that about that broader context you talk about the the context of disinflation uh which most of us have come of age in I I think if gab if you could pull up that chart of the 10year treasury yield uh perhaps this might be the single most M important uh macro chart I don’t know if you can see it there on the screen Larry but this starts out uh about uh well my eyes aren’t that good so I can’t see it but I know what the chart looks like I’m guessing it’s the 81 is where that Peak is on the left uh and you see this just steady down hward slide of 10-year treasury yeld and this is you know for folks who may be watching this their entire career as an investor or their entire career on Wall Street spent during this period of time talk a little bit about what we’re seeing there and how it relates to the broader trend of disinflation and the broader macro context well once you go toward a a multi-polar world with large a large fiscal response so what I talked in my first book uh which is about as I said it was about Leman about the crisis and you can see on the chart there the big move down in yields post Leman post 2008 and then Co so you had back toback you know Leman and Co were two big events uh impacting the bond market and you know each day and each month and each minute that disinflationary forces take hold uh it really has a very uh incredible enabling the deceptive power over politicians right and so think about when Leman went down we we talk about this in the book where it was a four trillion fiscal and monetary response to the crisis four trillion but then uh Ash in the following years we quickly went into a period of the T party austerity in the US austerity in the UK brexit austerity in h Greece and so the whole planet went into what’s called an austerity regime where uh the fiscal restraint was over really over the top I mean uh and so to fast forward to the covid crisis and then the banking crisis of 2023 and 24 I guess you could say we had the New York Community Bank this year but most of the banking crisis last year uh the fiscal and monetary response 16 trillion so you’re talking about four times more uh four trillion versus 16 and that’s what gets you into a much more sustainable inflation regime uh and a much more you know much higher impact on bond Bond bond yields as that chart shows yeah I know you got a chart Teck you want to walk through uh let’s tee that up here because you’re able to unpack the thesis visually which I think is a very powerful way of looking and thinking about this topic well you know the first thing is um you think about the team Biden now every Administration when they’re in power heading toward a big election and this is a big one right they they’ll do whatever they can and whether it be republican or democrat in 2008 Republicans were gaslighting information around the crisis right they were basically in the first second quarter they were kind of pretending I’m a republican so you know um they were gaslighting the news cycle right basically downplaying any kind of inflation news all of 2008 and then when you had that election it was definitely impacted Obama was an incredible candidate but lo and behold you know it just wasn’t a very good uh environment for you know for you know team McCain or the Republican party to try to win an election in a financial crisis and so now here we are all these years later you get this huge fiscal and monetary response ke Biden wants to to win the election they’re trying to prevent a recession through excessive fiscal spending like I said 16 trillion of fiscal and monetary and so the net taale effect of that is um in a multi-polar world which we have you know much more Global conflicts today than we did um say you know five or six years ago and so the net result of that is higher gas prices more inflationary pressures and lo and behold you know CPI since this chart was made has bounced a lot and so you know always remember like gasoline uh is a pretty good leading indicator for um for CPI and so even though yeah if we could pull that chart up on the screen that Larry’s talking to I don’t know if folks can see it right now there it is yeah that that’s that’s if you can see there that that CPI has bounced a lot since then today pce came in hot so gasoline in a multi-polar world of really good leading indicator for inflation especially after that fiscal and monetary juice yeah and of course today as we’re having this conversation here on Thursday April 25th we just got a weak print on GDP so you essentially you have the two uh variables that the FED is trying to solve for moving in opposite directions inflation above Target growth below Target not ideal environment to be a central Banker yes and it’s very stagflationary and once again those you know that multi-polar world that kind of like 1965 to 1980 environment was very stagflationary and there’s a whole different set like your portfolio for that kind of world is so different than the 2010 to 2020 portfolio which we’ll get into one of the things I talk about in the book is um you know we’ve taken five million jobs Ash five million jobs out of the United States we’ve moved them around the world if you work in a call center in India you’re making 10 to you know 10 to 50 times more than your great great grand great grandparents and so um we’ve we’ve raised the standard of living dramatically around the world and so we’re creating all these new carbon consumers and we’re creating all this new kind of like all these new inflationary pressures and so as you can see there oil demand um as you decimate the Rust Belt you know there are fathers and you know walking around uh the Midwest right now in the Rust Belt in bad shape I mean life expectancy in the Rust Belt is is is declining at one of the fastest Paces in the last 100 years and so uh We’ve decimated the manufacturing basically the United States um we’ve globalized we’ve raised the standard of living globally uh in China and India and all throughout Emerging Markets but there’s a price to pay for that it’s not free right let’s talk a little bit about this first of all I know that these are very intensely politicized issues one of the things I love about real vision and this conversation with you Larry is we’re looking at facts here not feelings talk us through this chart this oil demand chart that we’re looking at what’s the significance and how does it play into the thesis you just discussed well there’s a billion people in India that don’t have air conditioning the first thing if you raise the standard of living dramatically in Emerging Market country with an average daily temperature close to 90 degrees in many of the Cities if you raise that standard of living dramatically through globalization there’s a price to pay for that it’s not free um the the this is a society that is consuming mopeds and air conditioning new demand is exploding uh we are creating a new generation of young upand cominging carbon soup carbon consumers throughout most of the emerging markets and this you know is going to be very hard to control because you can’t force Emerging Market countries into uh you know wind and solar very fast and if you all you have to do is look at the Paris climate Accord of 2015 a lot of those promises from 2015 from China and India have been thrown in the trash China’s coal consumption has exploded off the charts since the Paris climate Accord and so those are the real world you know indicators around Future Energy demand um one of the things we talk about next in the book is u a multi-polar world which you know with drone attacks on refineries in uh say Russia and the potential for that in the Middle East you know we never had to worry about that before and so we got that slide right uh coming up next I believe yeah so so this this sets up for like a lot of you know technology around drone activity sets up for a very uh interesting backdrop because you know when when the oil Market’s tight and you have all that demand coming from Emerging Markets uh in terms of energy demand and then all of a sudden you you know the market tightens because of refineries being hit by drones I mean that that quickly gets you into a very stagflationary environment once again this isn’t like Neil Ferguson says you know the famous economic historian this isn’t a book about gloom and doom this is a book about resetting your portfolio for a whole new world yeah we should say he’s a course written uh the preface uh for this book yeah very grateful to him and and so one of the things that you know I sat down with Charlie Munger in the book we sat down with David terer David Einhorn one of the things that Charlie taught me um you know I met with him in Omaha and he said one of the things that he and Buffett look at are Staples versus discretionary and so the you know Omaha is the famous birkar headquarters um I I I went to to the annual meeting there they invited me and I had a one-on-one meeting with a monger and Charlie just passed away God bless him but one of the things he talks about is like when you see the Staples outperforming the discretionary names so since December 21st the Staples are outperforming discretionary names by almost close to 12% and so when you you know this is how to listen when markets speak right that’s the book how to listen when Market speak so in an election year you have a lot of political narratives like in the media cycle people there’s a lot of people that don’t like Trump there’s a lot of people that hate Trump and and you just have to like look at the markets like so in a strong economy how come Consumer Staples which are really Recession Proof stocks like your clorox’s your Proctor and gambles uh you know your costos why are these stocks outperforming discretionary names by 12% since January it makes no sense right unless something is going on to the surface how to listen when Market speak and remember Ash the XL y right is 24% Amazon and Amazon is up close to 15% year to day so I’ll ask you as a market participant if Amazon is 25% of the XL Y and Amazon is up 14 15% year to dat how come consumer discretionary names are underperforming uh the Staples by that much and that tells you under the surface you know what really is H what’s really happening on the discretionary spending side yeah and it does sure look like a decline in everything else Larry I’m I’m glad you mentioned the Charlie Munger part of this book it’s one of my favorite sections Charlie merer was a great fan of a colossal failure of Common Sense which I thought was an interesting way that to pick that meeting off um but it is you know obviously Charlie merer who just left us age 99 by the way spent uh you know 70 80 some odd years studying markets but it’s fascinating something that you said that I think is really important here because obviously these issues particularly in the context of an election season can be highly politicized but your take on this I think uh as you said uh so eloquently is about resetting your view of markets about what all of these changes what are all of the things uh when you see students maybe screaming on your television what it means for markets how you need to position yourself how you need to think about those port P folio allocation decisions and this really in many ways uh is is kind of I guess you could think of it as on the one hand the Charlie Munger value trade and on the other hand uh the Kathy Wood growth trade uh it’s interesting to see and to think about it in that context talk a little bit about what we’re seeing right now with this chart oh it’s screen yet this is to me one of the most interesting charts in the world right now so the ewu if you can see on the on the left hand side you’re talking about and you could go back further I could go back further you go back a decade right and you can’t find one six-month period where Global value equities outperform the S&P you can’t find one six Monon 9month period where Global value stocks outperform the S&P right then all of a sudden in the postco world once we get into this 16 trillion fiscal and monetary response once we get into this uh multi-polar World we’re in a new world Everything’s changed now what blows me away is that the global value names are actually outperforming the S&P since 2021 you the see that Flat Line not by much but that says something when you go a decade with not any out performance right so clearly money is moving from now remember once you move in one of the core thesis of the book is the DCF model uh discounted cash flows and how investors look at stocks once you move into a sustained higher yield regime with higher inflation you want to be in names and and capital will start to flow into names of more value or companies that own assets um whereas unpack a little bit about how we got there because this is such an important point in the book I talk about the low inflation low yield period where we saw the bid get caught uh on the tech growth names because I think it’s very important for people to understand when they understand the context of your regime shift more toward value okay so let’s keep it simple let’s say you have a company that produces a software company that produces cash flows and they reinvest those cash flows over 10 years right and say it produces a billion dollars um that that billion dollars over 10 years because it’s it’s it’s it’s paying out over a long long period of time that month that billion dollars is worth less in an inflationary regime over that 10-year period was whereas let’s say you have a value company that produces cash now and has assets so think of Alcoa or think of any kind of copper company you know free Port macaran any type of oil and gas company Exxon those companies not only produce current cash but they have Assets in the ground that are really valuable in an inflationary regime so Capital moves from your growth stocks in in a sustained inflationary regime over toward your value names and so this is kind of like this next slide is a really telling signal and we we’re looking at okay the Dow Jones Industrial Average versus the NASDAQ and you can see there in 2020 uh sorry 21 to 22 all those blue dots um see how the blue dots go in patterns and then you go through long periods without any blue dots right and so when you move in 2022 we mov it into inflationary regime that was very certain and all of a sudden there were multiple days when the now Jones Industrial Average is outperforming the NASDAQ that’s capital moving into uh you know more value names and then when you go in when you’re as you can see on the Le hand side of the slide when you’re in a disinflationary when when disinflation is certain in many cases there you go years without any occurrences right so and that’s money where that’s those are years where the NASDAQ is just kicking the Dow’s butt right and so I think it’s it’s fairly ominous that on Friday last week we had one of these right we had a day where the NASDAQ outperform the Dow by close to close to two and a half% and I think that that should make people you know at least pay attention and what might that suggest based on the thesis Larry uh just well think about so from 198 uh 68 to 81 we’re in that multi-polar world with higher inflation so 68 to 81 when that decade finished um the Dow the Industrials the metals material and oil and gas were 49% of the S&P 500’s composition 49% okay so in a multi-polar world with sustained inflationary regime um the Industrials your metals and Mining your oil and gas they they start taking larger market share in the market and as of in the last like six months um the within the last six months that the Industrials the metals and Mining oil and gas they got down to 133% of the S&P 13 so from 49 at the top uh to 13 so our point is in the book if if you move back toward a multi-polar world with higher sustained inflation and higher yields you’re going to have um those groups oil and gas Industrials Metals they’re going to become they’re going to go from 133% of the S&P 500’s composition not back to 49 but I think for sure some somewhere near 30 and so and so that means you need a whole new portfolio just on a mean reversion basis alone hey sorry to interrupt again uh it’s R here from real Vision I’d love for you to subscribe to the channel get the notifications we have so many incredible conversations with so many amazing people it will really help you in your financial journey and your journey to understand just what the hell’s going on in this world anyway click subscribe get the notifications and enjoy let me ask you this one of the questions that I think people have uh when we talk about oil when we talk about natural resources fossil fuels in general I think some of the skepticism about those names uh stems from this a belief that we are going to be making this energy clean energy transition to Renewables uh to zero emissions non-carbon producing uh technology how do you think about that I know this is properly a question about physics rather than economics but but but why is there such a misunderstanding uh about where we are right now in terms of what are actual consumption demand is versus the ability of Renewables to deliver the energy that the world needs yes and so it’s it’s all about feelings and signaling virtue signaling and they mean well I mean there’s nothing wrong with having a goal of carbon neutral 2035 2050 It’s a Wonderful goal right but you know if you if you if you just look at the the supply of the materials on the planet Earth just look at Copper look at Cobalt look at all the ingredients that go into a producing a windmill right uh all the ingredients that go into solar our world because companies and governments have suppressed like right now in in Panama for example one of the most profitable one of the most high highly producing copper Assets in the world have been shut down by politics and you think of like esfg um let me give you a very quick stat say from 2010 to 2014 we were in What’s called the capital investment Boom for oil and gas Metals nuclear power everything was going crazy in terms of oil oil and gas nucle nuclear industry ran to a problem in 2011 with Fukushima but for the most part um we went up and an we C in capital Investments and oil and gas and metals and Mining exploded from 2010 to 2014 if we stayed on that current path from that from that from 2014 to today right now we’re in A3 trillion hole based on that capital investment boom so we’re three trillion behind but guess what Ash the global population from 2014 to 2024 is up almost a billion human beings it’s like 950 million so we’re suppressing uh the supply of energy through ESG through political Ambitions uh but meanwhile we’ve like I said we’ve taken all these jobs out of the Rust Belt we’ve we’ve enhanced the quality and the standard of living around the world and now uh we’re have we’re having a very sharp upward demand so we’re suppressing Supply and we’re juicing demand and that gets you an energy crisis probably in you know 2025 26 yeah when physics and feelings Collide physics always wins yeah that’s that’s a wow I’m gonna I’m gonna use that one that that that I should have put in the book uh okay Larry this next chart uh should scare you uh this is a chart of Interest costs servicing the US debt and what’s happened in the last few months let’s pull that chart up if we could gab okay so once again team Biden has gone all in and Yellen has W it’s you can say wisely strategically she’s been issuing tons and tons and tons of the last two years of T bills instead of bonds right so if you think back the last 50 60 years the percentage of T bills which are like six month three month Oney year bills uh being issued by treasury is you know like almost two c standard deviation greater than you know most times in other words we’re issuing so many t- bills and there’s a reason for that because if if she had issued lots of longer dated bonds and interest rates are going up there would be a ton more stress and volatility in the market because a longer dated Bond a 10year bond a 30 30-year Bond moves violently to interest rates right so by issuing lots of t- bills if you issue if you issue a trillion dollars of t- bills and interest rates go up um say 50 basis points or 1% those T bills because they’re so short data they’re not going to move in price you know it’s almost impossible to move a three-month or six-month t- bill in price unless you know the the country is defaulting but so what yellen’s done is she’s she’s jacked up the front end issuance now the problem with that is now um interest rates have gone higher Howell’s going higher for longer higher for longer there’s so much baloney in that statement because if you really go higher for longer um your interest expense if if you look there on on the left hand side you’re going to reset substantially um you’re going to reset dramatically in terms of your interest cost and that’s starting to happen now and so you know that’s that’s the that’s the setup is that’s why higher for longer probably doesn’t work they probably get forced into some type of QE but your your average weighted uh coupon would go from like two and a half to four and a half percent if you go higher for longer and that so your interest your annual interest on the debt would go from right now higher for longer this year gets you 1.4 trillion of interest and if you go higher for longer far farther than that um as you can see here this is this is the blood curdling gamble that treas is making this is this is the next chart gab we’re showing the the debt maturity profile yeah so the the reason why 15 trillion comes du in the next three years is because treasury like I said has been frontend loading all that issuance eight and a half trillion in one year and then 15 trillion over three and so the treasury treasury basically just like let’s run out the clock let’s prevent a recession we had a banking crisis and covid let’s get out let’s Boom the economy uh through quasi mmt modern monetary Theory whatever you want to call it and let’s let’s keep Trump out of office and we’ll deal with the rep repercussions later but this is what I’m getting into you get 15 and a half trillion next three years and if Powell really goes higher for longer right so this is I want Bill Leeman who’s my friend at CNBC I say Bill why don’t you ask how this question next press conference you know chair pile if you go higher for longer your average weighted coupon on all that debt on $15 trillion is going to go from 2.3 to 5.3% how can you go higher for longer your interest costs are going to go up to two trillion a year so higher for longer is complete BS and I think that’s gold and some of these hard assets know that Bitcoin knows that and that’s what’s I think there’s a lot going on behind the scenes yes since you bring up Bitcoin I want to mention uh this because you actually talk about your view of Bitcoin and cryptocurrency in the book uh obviously uh rational person would have a lot of skepticism after what happened with Sam bankman freed you can see my book behind me on the wall there that I co-wrote with Archer sinski and Elizabeth Bachmann about Sam bankman freed and the collapse of FTX talk a little bit uh I think probably uh we know uh and certainly viewers of of this program know about the excesses we’ve seen in the crypto space some examples of uh fraud which you point out in the book but also uh you talk about the hard monetary cap on bitcoin 21 million Bitcoin that can be minted ever uh you talk about that as something as potentially a hedge of inflation how do you reconcile those two points of view uh this idea that that cryptocurrency is clearly the Wild West in many ways and yet seems to have tremendous tremendous promise it it does and I’m a Bitcoin fan I what I what what I don’t like is people that you know uh the Pumpers uh you know the amount of of of pumping artists on Twitter and around the world uh it gets it when strippers are actively pumping a any kind of an investment product I I just take a pause right and so my point is in the book is the Bitcoin gold ratio when it gets down to like nine to say 16 that is when you want to sell your gold and buy your Bitcoin right um but the Bitcoin gold ratio when it gets up near say 28 to 35 historically the last couple years last like last like eight years you’re better off you know selling some Bitcoin and buying some gold and it’s just about like the Strategic asset allocation around a rich asset an asset that you know any asset that has four draw Downs of 70 um to 50% in like five or six years is extremely difficult but imagine putting like $10 million in a Bitcoin or you know a lot of money then all of a sudden that asset that that wealth of yours is going from like 10 million to 2 million back to 10 million back to the 4 million it’s that’s just you know the biggest draw down for gold in the last 15 years is 22% think about that that is a store of value that’s something you can put real money into right and not have to worry about those kind of draw so it’s not that I’m a Bitcoin enemy or fo I just think you want to buy it at the right time and you want to Beware of the pump artist that’s all spoken like a true Trader Larry okay on to the next chart this is the fiveyear auction now this is this is another one of the blood curlers right so so we were doing fiveyear auctions like within the last decade near 20 20 billion 20 to 30 billion um and now we’re up at 70 billion so it just shows you that you know that’s a tremendous amount of and so so for investors watching us right now one of the things that’s been happening is people have been shorting uh the fives and the twos into these auctions and then when the auction comes off and it actually you know comes off okay A lot of times the media will will go uh you know the fans of of different you know different political spheres will be oh my God oh my God Ash did you see that fiveyear auction oh my God it it was so beautiful it was very strong now meanwhile the fiveyear treasury sold off like 20 basis points into the auction you know what I mean so what what hedge funds are doing is they’re selling uh short lives in into these auctions and twos and so there’s a and that’s what’s putting a tremendous pressure on upward yields all right the next chart fed balance you what you were just talking about in terms of quantitative easing where you see the rubber meet the road in terms of these large scale asset purchases well this this is a good chart in the sense that it shows you um you know they made a decision when Silicon Valley Bank went down that that green explosion is like that’s easy right relative to to QT which is the red um so it’s quantitative tiing versus quantitative easing easing and so they have injected the most liquidity into the market in I think all time uh this year and over since last March to now and they are doing anything they can to you know and which like I said every political party has done this going back a hundred years right they will do anything they can to stay in power and but we just want people to know if you look there on the on the far right there’s a little bit of stealth QT tapering going on and um there’s some technical reasons for that but you just there’s an easing bias in the in the treasury and white house and like I said before U you know the the the treasury and the FED everybody’s kind of the assets asset prices globally are picking up on this kind of this easing bias which you can see in the chart L talk a little bit about the mechanism that the FED uses to do this to see that those sharp green lines uh going sky word there uh to be able to essentially buy assets quickly uh in emergency situations what’s what’s the mechanism how do they do it it’s you know it’s well you think about the the facility that the FED used to to to bail out the banks so the banks had these um like imagine interest rates were so low for so long right they suppressed rates and so the FED came up with this facility that would take hold to maturity assets off the bank books and um and give them cash and return give them cash and part of that what that chart that mechanism was that process and so so and so they’re injecting it’s it’s very technical they’re injecting money into into the markets through Bank Reserves and all different kinds of ways but um you could see why they’re doing it but one of the things that that in this this inflation scare over the last like six months has strengthened the dollar and that dollar strength once again we’re getting back toward that Global wrecking ball which I think the next couple slides look at all right this is what’s happening in emerging markets that slide up yeah so the dollar has ripped because inflation has revived and we we we were supposed to have six rate Cuts in 2020 four we’re now back to almost zero and so so because of inflation surprising to the upside the amount of hikes I’m sorry the amount of cuts uh we’re supposed to have six cuts and uh and now we’re back to almost zero so the amount of Cuts has has evaporated the dollar strengthened because you know the fed’s right now one of the most hawkish uh central banks in the world but there’s a price to pay for that and so the dollar strength has put a lot if you’re if you’re a truck driver in Brazil Ash right imagine like your real is a lot weaker and then you have to buy uh gasoline or you know oil in dollars and so it creates tremendous political pressure and stress in the world and the White House starts to hear about that behind the scenes Treasury and uh it really sets up for unsustainable you know Global dollar wrecking ball that will probably Force the FED into a reversal pretty soon all right let’s move on to the next chart and this gets back to how cheap so the dollar has been you know the FED has been saying higher for longer for like 18 months right and so that Hawk has shift over the last 18 months to strengthen the dollar because the fed’s you know everybody all the Global Investors if you’re in if you’re a billionaire in Europe or in the Middle East you and Yellen and and Powell are offering you that 5% two-year or that five and a half percent six-month t- Bill uh you know there just too attractive so that’s sucking dollars into the US that dollar strength is is creating an incredible buying opportunity like right now uh the eem ewz uh you want to be moving into Emerging Markets because they’re they’re just too cheap and um the ability of to go if T is really Limited in his ability to go higher for longer which we think he will is because for a whole bunch of different systemic risk reasons then uh your best trade over the next year year and a half it’s going to be you never want to marry emergy markets you just want to rent them for a couple years here and there and and that’s the case right here they’re just too cheap yeah and the next chart is dxy something that many of our viewers will be familiar with yeah so you can see there this is the JP so one of the Great so we run a Bloomberg chat with hedge funds mutual funds and Pension funds and one of the things that guys know guys and gals in the chat talk about is like the local currency bonds are great leading and they cater on risk and they kind of like because they get beaten up the most when you’ve got the dollar strength because they’re local currency in say Brazil or Pakistan or whatever what around the world there there’s in this in that ETF that that emlc there’s like 200 different bonds right and so that dollar strength there that ripping of the dollar every time it’s cheapened up Emerging Market local currency bonds and this ETF pays six six and a half percent and you have the you know a decent chance at you know $10 or $5 of price appreciation as well so once again when you have these big dollar rips you want to be looking at emerging market equities and Emerging Market uh fixed income all right next chart is the term premum on us treasuries uh this is an interesting one Larry because the world’s been upside down for so long explain what we’re looking at here well think about gold right and think about hard assets usually when you get a hot jobs number if you had like um in the last couple weeks or usually if you get a hot inflation number that forces the fan into more hawkishness typically gold would would would puke lower the last like five years we’ve seen that over and over and over again um but gold has actually been going up and so in a very mysterious way gold is trading the GLD is trading uh at one point was 22% above its 200 day moving average and that’s one of the highest points since 2011 right so it tells you that how much money is coming in gold and essentially what term premium is and we talk about this in the book we really do a good job of helping people understand it’s very important for the last 20 30 years in the world if you were an investor in bonds any kind of bonds whether it be Emerging Market countries or the United States or Europe uh the term premium is how much the global investor trusts a government on longer term bonds and so for the last 20 years um from the us we’ve had a very low term premium and and so investors globally trust the United States with passion and treasuries were a very secure investment and in a disinflationary regime but once you go into a sustained inflationary regime with a fiscal and monetary overdose and kind of an irresponsible uh Behavior coming out of Washington in terms of just you know running Reckless deficits both parties like I said in 2010 11 12 Republicans were forcing austerity onto the Democrats here Democrats are in the White House and the Republicans are actually joining another party that creates a term premium problem and that drives money into hard assets and Bitcoin and that’s what we see in the next chart and you can see how Bitcoin Bitcoin had the sniffer before gold uh gold is picked up but Bitcoin really you can’t really see it there on the chart but the performance of Bitcoin Bitcoin is the ultimate sniffer on where the fed’s going and on on problems at the fed and and gold is gold and silver are secondary but as you can see there as as we’ve gone into this higher term premium risk where Global Investors are starting to look at the United States maybe just maybe slightly more the US is slightly slightly slightly becoming more like an emerging market country in terms of the trust between the investor the bond holder and the government and so that is what is moving uh money into hard assets H the next chart shows a gold breakout versus the S&P exactly so this is this is your I mean if someone told you that gold is outperforming the S&P since 2018 since the fourth quarter of 2018 would you believe them but it it it is so gold as you can see there and it’s the rate of change Ash on the far right corner when you see that kind of rate of change uh that typically means there’s there’s something behind it and so as you can see that rate of change in 20120 there with that sharp move right and so you want to be wary here that you know gold is starting to outperform and that’s your money moving into hard assets relative to remember Financial assets are just paper certificates Ash right that’s all they are bonds and stocks gr growth stocks are just paper certificates right they’re not real assets and they’re they’re they’re promises in some ways from companies and governments and so when you have a term premium expansion and when you have that kind of Reckless Behavior in Washington you start to see this type of price action and you call that out very specifically in the next chart Hard assets versus Financial assets yes and so there there’s the the Dow um you know your your Dow stocks are starting to underperform as well so that that line moving down is gold outperforming the de and the next chart back to term Premia talk about that diverg that we see there this is the copper to gold ratio see this is a CL this tells you that something’s going on around ter premium because you see that correlation between so it’s the copper gold ratio versus 10 years 10year yields and for over a decade these two moved really in unison but once um you know Biden and Trump moved into a six and the FED moved into a 16 trillion fiscal and monetary response with no austerity behind it remember the Leman crisis was 4 trillion fiscal and monetary with a follow on austerity now we’re doing a fiscal and monetary of 16 trillion with no follow on a St that is creating money that’s that’s creating this chart people are know people people trust bonds less they and they’re they’re moving into to hard assets L you know one of the interesting things about this is that you as you mentioned the PO you know the the the Divergence in terms of for 4X the response uh to the postco crisis where the the covid crisis moving into the postco period one the things that’s interesting is somebody who is around uh watching markets in the 2008 2009 time frame people were screaming about it right there were people who were up in arms who were genuinely upset about it calls a for the Bond vigilantes to come out course never happen but why now is the response so muted when as you point out the actual policy action is for X grader you know what that is a great question that we should have address that in the book I think it became I think it was part of like the financial crisis and there’s a lot of people upset about the banks um and the bailout so by the way hugely upset and hugely upset on both sides of the political Spectrum if you remember yes and people were really hoping Obama would come down hard on the banks and there’s pictures of Jamie Diamond sitting next to Obama smiling that that I think it was that February in 2010 and so it was really a political outrage around okay we’re we’re we’re we’re bailing out we’re bailing and and but but the Obama team knew that they had to do that to really prevent a nasty nasty nasty recession and more depression so once again you know typically you want to let the business cycle function the longer you prevent the natural cleansing process from the business cycle of functioning the more you create these excesses right and so I think that that’s part of it all right uh next chart is long duration equities uh and this is uh clou this is the cloud computing ETF yeah so this was the hottest sector from 2019 to 2021 these are the like I said think of your DCF model your discounted cash flow um these companies basically invest in software and they invest they invest their Capital expenditures in the company and they don’t they don’t really pay high dividends uh they don’t produce a lot of cash and um but they grow but those are once again those are future cash flows whereas the cash cows are refiners and oil and gas companies if you look inside the the CZ ETF and look at the top 20 Holdings it’s a group of Big Value names you know your Exxon your shron and so they produce lots of near-term cash and like I said they have lots of Assets in the ground and so one of the great leading indicators um like right now the NASDAQ isn’t necessarily getting killed by hard assets yet but one of the classic leading indicators is uh kind of the tertiary growth names like like the software names and like the arc names and so I I think this is a classic leading indicator for the NASDAQ nasdaq’s going to have some big problems up against um you know value and hard Assets in the coming years and this is kind of a good leading indicator of that Larry if you wouldn’t mind I I want to read something to our listeners and our viewers because I think this is so important uh I’m skipping to the end here this is the uh last paragraph uh in Larry’s book I’m going to set it up now because I think it’ll give a little a little bit more context to everything that’s about to follow because to me Larry this is just such a clear statement that you’ve made here uh you’ve really uh you put your you you have the courage of your convictions to just come out and say what you think and it’s such an important Point uh for people to hear and understand as we talk about all of these charts and I quote this is again the last paragraph of the last chapter of Larry’s book how to listen when uh markets speak quote places where billions are made will not always be that way and sectors once delivered tiny returns if any at all could one day be highly profitable precious metals coal miners uranium copper rare Earths oil and gas once the great laggards of the stock market will be among the most heavily populated sectors in the coming years and big Tech will fall into the Shadows the world is about to witness the most epic migration of capital in the history of financial markets will your family’s wealth play a role in this and walk into that neglected Meadow of value stocks Commodities and hard assets or will it fade away with the last decades portfolio the choice is yours Larry reading that I mean the first thing is just how bold and decisive a call that is that you’ve made there and the second point is this is really pragmatic advice in terms of portfolio allocation obviously not Financial advice we’re here to do this for educational purposes but you come out and really state in a very clear and unequivocal Way what all these charts mean and what the thesis means talk a little bit about that paragraph and why you decided to end the book there well you know I there’s some soul searching going on because I believe that and um in all of our research in all of our like I said there’s no I in team we work with some of the best hedge funds and mutual funds and Pension funds in the world we host the daily conversation with them at the bear trap support and so that you know those kind of mentors give me you know a lot of confidence to make that call but you know there’s some things that like artificial intelligence that that we that really kind of like okay maybe this is different this time but every time you think it’s different this time and through my whole life in the 90s I mean I lived through this in the 90s you know we thought that Global Crossing and we thought that um companies like JDs unipay and Cisco they were like the obvious trades for this new Industrial Revolution with the internet and I look back and you know so many of people I know got burned by that thinking and it was the second and it was was like you said just there we like we say in the book it was the neglected sectors those neglected Parts you know your Match.com and other things behind the scenes you your Googles your Facebooks companies that developed over the next of five or 10 years that really were able to harness the internet and so we looked now at at um Nvidia and super micro computer and artificial intelligence and I just look at the commodity space and the power grid in the United States it’s 20 to 30 to 50 years old in some places um it’s going to require a$2 trillion rebuild uh the amount of copper it’s going to be needed to rebuild the power grid in the United States is just jaw-dropping and we just don’t have the supply of these Commodities to support um a lot of our in not just green initiatives but artificial intelligence initiatives so if you believe the Nvidia management team and if you believe all the different analysts on CNBC that are upgrading Nvidia then the best trades in the world are going to be maybe in the natural gas space in the copper space companies that will behind the scenes support this incredible you know industrial re Industrial Revolution so lar to get one layer more specific from that how do you then go about finding those potential winners in those sectors well in the next couple of pages we go through them and we have a team of you can share this with with the viewers um what we do is we triangulate information so you take a piece of information you put it into the palm of your hand and then you surround it with intelligence and so because we run a conversation on a weekly monthly basis with professional investors we will vet these ideas out to the group and we’ll take our own analysts and do research on the companies and these names in here are the names that we’ve come up with and it was through you know six nine months a year of vetting of of kind of looking at okay what do we want to like what’s behind the data centers what’s behind the terawatt hours uh what’s going to support like even even companies like generra right like gener if if if the power grid is stress then generra is a company that backs up the power grid so we got that idea from one of our institutional clients like six months ago or even a year ago and so because we had that power grid problem in Texas that did a tragic one so we’ve been having more and more of these power grid problems and people are starting to say okay if this hurricanes there power crid problem there so there’s all different ways to play it there’s companies that are going to back up an old grid and then there’s companies that are going to rebuild the old grid yeah I Larry I know we’ve got about 10 minutes left here and I I I want us to we can skip around here if there’s some points that you want to make that you think really important uh we can just jump through those charts yeah there’s a couple of charts coming up that are really cool uh South there’s um the charts that are in the AI section so one of them is ano which is U we we’ve we’ve been playing this name for years uh it’s trading it like the company’s bought back like 12% of the equity right chart number 30 yeah yeah Intero is producing uh almost 11% free cash flow yield the companies buying back onon of stock the last couple years essentially taking the company private and these natural these companies in in the in the Midstream are going to be um if natural gas gets you know because of European Demand with LNG all these new um LG facilities globally and then this artificial int intelligence you know you’re going to eventually have a much higher price of natural gas and then companies like like Intero that Intero that are in the value space they’re trading you know I think three4 you know three times e and they’re trading 11% pre cash flow yield uh the risk reward is like you know you look at okay you can 40% down but uh you know you could I could see you could see eight eight you could see this being a 10 bagger potentially and so you know that that’s one of them that we’re looking at all right we have we have um Southern Company versus I think uh the semiconductors is a good one it’s up 28 I think yeah so this this is kind of funny because I mean obviously the SMH is the most obvious trade right everybody knows like every Tom Dick and Harry as they used to say in the 50s knows the semiconductors are an AI play like the problem with that is like the these trades get too crowded and one you know think of Friday right super micro computer this is fascinating Ash these guys like when you report earnings if you’re going to do an upside surprise you have to do it by a certain date relative to the earnings date and because they didn’t come out with an upside like they’re like another upside um you know basically pre-announcement because they didn’t do that the stock dropped like 203% something crazy like was so that tells you that we’re getting so idiotic land in terms of froth there’s so many so many it’s this junkies buying options right people and which is fine they can gamble but they’re turning this space into like you know a casino whereas companies like Dom minion energy which are based in the South and you know that there’s a lot of these problematic data centers that are massive energy hogs in in Virginia and through throughout the South that are you know potentially big big problems for communities right so if you’re in one of these if you’re in one of these counties with one of these you know large data center uh platforms you’re you’re really uh you know you’re what are what are they going to do so what what what we think they’re going to do these energy companies are going to force the data centers to pay up a special rate because it’s not fair if you have one energy hog in one County and there’s going to be a lot of political push back on that so so the the profits uh from some of these companies uh that that will support the data centers uh is pretty interesting and then we have another chart where we look at um uh some of the uranium names as well but I think yeah that chart right there that we just flipped by the zero DTE uh chart chart shows the uh yeah that’s your that’s your explosion of the options yeah if we could just flash that up real quick yeah that’s you could see like that’s just that’s just AI turning the market into a casino and that’s once again that’s the FED uh offering a little bit of ACC combination you know in December and you know the animal spirits just taken off you know that’s people people buying single day options like that but in the nuclear space nextg so one of the things Ash I think is a great leading indicator in any commodity cycle right um so nuclear is a big part of this whole AI story and what what’s fascinating is the beginning of any commodity cycle the mothership uh is the commodity and that moves first and think of like oil in 2020 the bottom right the first first stage people moved into the to oil itself then you know late 2020 we started moving Exxon and Chevron and then you know lo and behold a year later people moving into Hess and people are moving into U Marathon petroleum and so another other words the first stage is very very um cautious in terms of the beginning of a commodity cycle and so with uranium over the last year you know we’ve been recommending uranium declines for almost three years and we started to play cico start we obviously played the it’s spra ETF but what we’ve noticed is uh NextGen and some of the small smaller players are starting to outperform and that’s a sign that the um that the cycle is maturing you’re moving into like maybe the second third ending and so that’s I think a pretty good leading indicator nxe it’s a speculative stock and it has lots of regulatory risk but uh your upside downside and also these small modular devices like these small nuclear uh these energy sources that might be so you literally could have somebody like an Amazon um you know buy a property you buy up a nuclear uh energy source for for their AI so so they for essentially for their own consumption it’s yeah for their own consumption top top top down and bottom up Larry you guys do a tremendous amount of work over there um let’s pull up one more chart before uh we have to wrap here uh which is number 24 because I think this talks to uh the the broader Trend that you’ve been talking about here uh this is Exxon versus Arc man maybe in a single chart this might say it all you know Kathy God bless her uh she’s had a tough you know she’s had a great run but the whole key to her thesis she’s been pitching disinflation and deflation for three years and once again long duration equities companies that produce growth and reinvest that those the potential dividends don’t pay dividends but they reinvested in a growth trajectory and then they try to pay you over 10 years in an inflationary regime those companies are worth a lot less and so um but in other side of the coin Exon Mobile that’ll pay you a near-term dividend today and has lots of assets if you move into that kind of sustained inflationary regime I mean you could see like BHP or Exxon like in five years from now you look at the top 10 Holdings inside the S&P or you know or inside the you the NASDAQ more so the S&P you could see like a BHP or an Exon being back in the top five right right now the top five is all Ai and you know meta Facebook obviously uh Apple Amazon and uh and Microsoft but we we think that the next stage of this is right now the vi the first stage victims are the long duration equities software Arc and there’s a whole bunch of them uh but the next stage will be when and this is this will be when the book really gets proven out and my fingers are crossed but I think it’s going to happen like within the next five years 10 years you will see your bhps your one of one or with these large Your Valet being in in the top 10 in the S&P your exons your Chevrons and whole new you know whole new asset cycle domination well here it is how to listen when markets speak uh I would encourage you all to go out and buy it much more detail uh then I have the ability to blunder through in real time with my questions uh and it’s a great read really really incredibly accessible book you know these are not easy subjects that you’re tackling here Larry but you write about this uh with both precision Clarity and simplicity I think uh if you’ve listened to this conversation uh it’s just a great way of being able to go through those points uh in a way that’s just incredibly accessible to readers and I and and I really appreciate what you’ve done here as we run out of time here Larry final thoughts key takeaways that you’d like to leave our listeners and our viewers with well just you know the burning desire to ask questions right and that’s the one thing about my career is you know I was a I was a retail broker in 90s and I had to work my way up all the way you know to the institutional side of the business very intimidating but over the years I’ve just built up a great reservoir of mentors and you know Steve Jobs said said this over 10 years ago like when you ask smart people for a favor in terms of learning they they typically say yes and you just keep asking so I’m a great asker and I think that’s the key there’s no IE in team I owe the whole book to you know a whole host of mentors uh that are in the book and um you know I think that’s the way to to broaden out your investment based knowledge M MCT you’re such a great guest we share that intense passion and curiosity uh for markets thank you so much for joining us thanks Ash thanks for watching thanks for listening we hope you enjoyed the video at real Vision we help you understand the complex world of Finance business and the global economy with in-depth analysis from real experts Join the Revolution at realvision tocom

In Larry McDonald’s new book, How to Listen When Markets Speak, he outlines the seismic shifts he sees on the horizon for the global economy — and,l just how few are prepared for those changes. Ash Bennington welcomes Larry, founder of The Bear Traps Report, to explore the lessons he lays out about how to navigate the new world ahead.

To find Larry’s book, please click here: https://rvtv.io/3JAPHi0

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