I first met Larry McDonald after the 2008 collapse of Lehman Brothers where he was working as vice-president of Distressed Debt and convertible Securities Trading. His best-selling book “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers,” tells the saga of how this happened and why it shouldn’t have. This was followed by his founding and becoming Editor of The Bear Traps Report, “an independent newsletter that focuses on global political and systemic risk, providing actionable trade ideas.”
I asked Larry to join me to look at everything from the Fed’s uncertainty-driven Wait & See policy stance to Trump’s Big Beautiful Budget bill, through the eyes of the market – from both the political and macroeconomic perspectives where he has so much expertise, and with a special look at the U.S. fixed income market where investors are getting increasingly nervous that buying long-term bonds may not be their best bet now – after all, once bitten, twice shy.
As fate would have it, just a couple of hours before we did our interview, a story broke that we had to discuss. President Donald Trump said Fed Chair Jay Powell should “resign immediately” if allegations from an administration official that the Federal Reserve Chair misled lawmakers about the details of a costly overhaul of the Fed headquarters prove to be true. Wow. Trump has been bashing Powell for months, over his unwillingness to cut rates. Powell has been a stalwart and appeared bullet-proof saying he would wait for the end of his term to leave. Could he now be forced out on a technicality? How this will affect markets and sentiment. Will it be shrugged off, or does it start unsetting investors?
So dive in and hear how Larry links Trump’s Powell bashing to his urgent desire to get interest rates down to boost the economy before the mid-term elections – this to maintain his party’s majority in Congress even as inflation will likely be rising as rate cuts prove to the wrong step to have taken. In terms of investments, he sees hard assets like commodities as the optimal strategic purchase. Why he sees an investment strategy borne of a political strategy that will play out on a fixed timeline that is set by the election cycle. It is worth your consideration. Larry’s words, just below.
Inflation concerns are lurking- 00:07:26.440
Larry McDonald: Well, Kathleen, you know our 1st book was published in 12 languages in New York Times bestseller, and what I want to bring to the audience today is what we call as triangulating information. So we have a Bloomberg chat behind me. It's a discussion with the smartest institutional investors in the World hedge funds, mutual Fund pension funds in more than more than 15 countries, and the view that I'm getting these are people that are very, very, very close to the White House is the White House has to put out this Pollyannish view on inflation because they know that all that means is really optimistic view on inflation. They know that the probability that inflation bounces is high and they're fearful because they want to cut rates. Now they want to get the rate cuts in interest on the debt. Kathleen is over a trillion dollars. They know they need to get the rate cuts in. And right now there's a little window right? There's a sliver of a window, but they want to talk up <tempered> inflation…inflation, calmness to try to get those rate cuts in now, or at least we'll try to work with the Fed to get them. Now.
From goal to nemesis/Brazilian’s know inflation beware 00:09:07.920
Larry McDonald: you know…our new book…has been a bestseller. It's been the top 5 in finance all year How to listen when Markets Speak! I sat down in Brazil with the CEO of BTG Pactual, Andre Esteves. Brilliant man. I consider him like the Warren Buffett of Latin America. And you know, he said to me, something that you know gives you that kind of blood curdling. You know moment where he says, Larry, you know inflation. Never forget it gets under the seat cushions, yes. Under the carpets, and it's so hard to kill. And he says just it's like the scene from the Terminator, just when you think it's dead, it comes back.
It's not just tariffs 00:09:55.280
…and that's what's about to happen: we can get into the charts, but the probability that we have a sharp inflation bounce because of not just reshoring, Trump's tariffs …But there's a lot going on in Washington with the new bill.
Beyond the valley of the tariffs: commodities stir 00:10:13.380
We're doing 2 trillion dollars deficits. As far as the eye can see. It's really a massive amount of fiscal overdosing which is going to cause a bounce in inflation. And so if you look at it differently, if you talk to different analysts, talk to different people looking at markets. The move in, say, commodities gasoline… CPI versus gasoline, commodities versus CPI…. Points to the high probability of an inflation bounce in the months ahead.
Do large dislocations loom? 00:11:14.990
Stan Druckenmiller has made this point. Some of his confidants are in our Bloomberg chat, and he's like, you know, you really need like 6, 7, 8% unemployment for a number of quarters to finally – finally - kill inflation.
Trump Tean’s Political plan is to run the economy hot through the elections 00:11:32.440
And so Stan Druckenmiller is basically telling us the same thing as Andres Estevez. And so the trump team wants to have their cake and eat it too. They want to try to stimulate the economy into the midterms…and not lose the White House. Remember, Trump was impeached twice. Right? So the last thing he wants is to be impeached again by the House, so he wants to win the House next November. That means he's got to kind of get that stimulus in the economy when you do that, you're going to reaccelerate inflation all over again. Druckenmiller is of the most famous hedge fund managers of all time. He was at the Soros organization, you know. He shorted the pound, one of the famous trades of all time. But he's just, you know, to this day he's probably the most successful family office in the world as a legendary investment manager.
It’s a window for electability more than opportunity 00:14:05.040
There's a scene in our book ‘how to listen when markets speak’ where I sit down with Dave Tepper and one of the best lines for investors is the market can handle one or 2 or 3 points of near term uncertainty. No problem when you go to 5 or 6, 4, 5, 6, or 7. The probability of a near term correction rises dramatically. So far, Trump's been making a lot of noise on Powell and the markets ignored it. You know, if that happens along with other developments in the marketplace, then it's going to mean a lot more. T
Trump will do all he can to get Powell out - the gloves are off 00:15:07.270
He fact that he's taken it up one more notch to, you know, kind of like a termination on a technicality. It points to how nervous they are. I mean. They are really nervous. They want to get rates down like I said, interest on the debt is high, and they feel like if they lose the window. If inflation reaccelerates in the 1st couple of quarters of next year, which I think the hot, the smart money that we talked to in the chat… they think we're going to have this snapback, and then the window is going to close. It's going to be very difficult for the White House to cut rates, so they're doing everything they can to push Powell out.
Hard assets! Buy them! 00:15:46.570
Larry McDonald: Well, you know Buffett has his highest cash position pretty much ever. There's a lot the only thing that's worked, and we were aggressive buyers of commodity equities in April and May, and our trade alerts. The lithium names some of the coal stuff, the copper names, the uranium names. So we've been buying risk on it. Hard assets are dramatically outperforming financial assets this year. Gold's up. 25% equities are almost flat. So we are Bullish on what we call hard asset type companies. We're bearish on the market, especially right here, because the only thing that's worked, Kathleen, since 2022 is sitting in the boat and waiting for an opportunity to buy chasing the market at highs really hasn't worked anybody that did that. In January or February you had a big drawdown in April. We had a drawdown last summer. We had a drawdown in 2023, or the drawdown in 2022. Raise cash just like Buffett is, and be there for a real good buying opportunity.
Full court press of market manipulation 00:17:17.170
Valuations are pretty crazy. You got Jamie Diamond selling JP Morgan stock at the most aggressive pace. He's essentially dumped 25% of his holdings in the last year. So there's another kind of famous investor, CEO, of one of the largest banks in America. And so if you look at the complacency in the market. The trust in the Trump team right now is at a really crazy high level. There was no trust in the Trump team on April 8th. And so, and if you look at the housing market with rates kind of creeping back up here, think of this, Kathleen, the 30-year Treasury, the Presdient’s team has thrown a lot of tricks out of the bag to try to drive down long end yields. That's where the SLR, the supplemental leverage ratio, could potentially be very bullish for bonds. This move with Wells, Fargo and the cap. and the fact that the Treasury Secretary and Trump are both telling you they don't want to issue that many longer dated bonds here. So they've done whatever they can to try to push longer dated bonds like our 30-year treasury, lower in yield.
The thrill isn’t gone, but the trust is 00:18:52.630
You know people buying bonds, you know, just don't trust governments like the United States with those endless 2 trillion dollar deficits. And people want to own shorter term bonds. They're really nervous about buying long term bonds. And essentially they look at Washington as smoking in the dynamite ship.
The short-term long-term ploy 00:20:26.200
You know, if you look Kathleen at emerging market countries when they get into trouble, they start to play around and hang out on the front end of the yield curve. All that means is issuing shorter dated bonds, and in November, before Bessent came in, office after Trump won, the Bessent team was very critical of Janet Yellen for issuing so many T-bills. The theory was that Yellen wanted to issue one year, T-bills, 6-month T-bills, 3-month T-bills. and you can issue those shorter-term securities instead of locking in longer-term bond yields. And now, even this week, the Bessent has come out and said, he's essentially agreeing with Yellen, who he was criticizing. He's like, why should we issue long dated bonds? When we can issue short dated paper one-year, 3-months, 6-month deals, cut rates with the new Fed, and then get rates down and then start to issue longer dated paper. The question is, can they control the long end of the yield curve?
At this point rate hikes mean immediate financial danger 00:22:13.250
Japan was the global bond. Yield anchor, and this is where you get into like this new regime, where trillions of dollars, Kathleen, between 2012 and 2021 trillions of dollars of bonds, commercial backed, mortgage-backed security Cmbs. All like trillions of dollars, was issued and sold to investors at one and a half to 2 and a half percent now yields on. Say, CMBs, if you look at the triple B tranches. Those are now up there. 6%. And so that means your bond price is a lot lower. Let me give an example. Apple has a CFO that issued tons and tons of bonds in 2021 and those there's a there's a 2.5% Apple bond that matures in 2060. Kathleen, it's trading at 55 cents on the dollar. It's backed by Apple that tells you that in the marketplace, all those trillions of dollars of bonds that were sold in recent years are probably trading from 40 to 60 cents on the dollar. They're sitting on bank balance sheets. They're sitting in insurance companies. They're sitting in central bank balance sheets. And that's the dirty secret. And that's why a lot of people are so concerned about getting rates down because is higher interest rates have actually created a lot of these losses that are sitting on a lot of balance sheets.
Huge sucking sound from the short end of the treasury market 00:24:30.250
In January we hit the debt ceiling. And what that means for people watching us right now is, there's been no new net debt issuance from Washington. So every bond that matures one's redeemed now because we just did the big beautiful bill. They need to catch up Kathleen on bond issuance. We calculate, and we're triangulating this information from our institutional clients in the chat. We believe it's $1.6 trillion between now and December 15.th That has to be sold to investors. Bessent has already told us they will want to issue that on the short end. What that's going to do is in the near term. It's going to drive up. Bill yields of one-year bills, 6-month bills, 2-year notes, that's going to drive up the front end of the yield curve. And so our yields are going to go up relative to the rest of the world that's going to suck money short term back into dollars.
The making of a dollar bull 00:25:32.250
Larry McDonald: So I think near term, there's a high probability, at least for the next couple of months of a dollar counter trend rally. We've had the dollar's worst 1st half since I think the seventies down 12%. I think the dollar from high to low. And so if they're going to issue a lot of front end paper, 1.5 trillion in a very short period of time 600 billion more than this same period last year. That's a lot of of higher bond yields that are going to suck money into dollars. And you're going to get a nice counter, trend, rally in the dollar.
Trump has an issue, an audience, a sales pitch, & tariffs 00:27:10.060
Larry McDonald: and the most recent time by a large majority of the people of the United States voters, and you have to think like, what are people thinking about? They're thinking about the 5 million jobs that have left the United States and gone to Bangladesh, India, China. Brazil. All over the world. So we've raised the standard of living globally, dramatically around the world. But we've decimated the rust up. When I when I wrote our new book, I went and visited families in Upstate, Pennsylvania, upstate, New York, and it's just ghost town after ghost, town after ghost town. So we finally hit the breaking point of frustration In America. Trump's, you know, trying to put out a sales pitch around. Okay, tariffs are going to bring jobs home. You're never going to manufacture Nike sneakers in the United States again. Right? You're never going to. Textiles are not coming back, but will tariffs force some companies to bring some types of technology, semiconductors, all kinds of specifically targeted tariffs bringing some jobs back to the United States. Yes, at the end of the day both Republicans and Democrats abandon. You could argue the middle class, and Trump's trying to stick up for that group. We're not saying he's going to be successful. But he's the first political candidate that's actually tried to use the tariff weapon to bring jobs back home, not saying he's going to be successful, but that's the sales pitch.
Fiscal juice fogs economic facts 00:29:42.340
Larry McDonald: and the fiscal juicing into the election by Team Biden, you know, trying to, you know, make things strong into the into. The election comes up to 16 trillion dollars. And so the only thing that we're seeing is the breakout in claims continuing claims, I should say that's been a very formidable issue. We're also seeing consumer discretionary equities dramatically underperform. And those are good recession leading indicators. But I think what happens is every time the economy starts to weaken a little bit, the fiscal spending offsets it, which, once again, almost guarantees us more sustained higher inflation.
BBB to the rescue and just in time 00:30:25.760
Larry McDonald: But this new bill, I think the economy was weakening. And now we're going to have another. You know, we have tax cuts. We're going to have some natural extension of tax cuts we're going to have. There's some stimulus in that bill. And I noticed this week the IWM. And that's the Russell 2,000. Those are companies that are more exposed to the United States, whereas the S&P 500 and the Nasdaq have 50% of their sales that are more globally. So I think that we're starting to get back into this wishful thinking back toward growth in the United States because of this new piece of legislation that just passed.
Few options from the deep debt pit 00:31:50.610
Well, at the end of the day, I think the bottom line is the only way to get out of a 37 trillion dollars debt hole…There's 2 ways Default, debt, jubilee, which we goes back to the Bible through many different civilizations, right? The debt, jubilee, or massage interest rates through artificial means below the rate of inflation. Then you can monetize the debt and get out of this hole. That's the only way out. And so that's what they're trying to do. That's why, when you see percent floating this, this, this SLR, this supplemental leverage ratio. All it means is trying to force the banks to buy more treasuries, and they're putting a gun on the table. They're using all these measures to try to massage interest rates below the rate of inflation.
Financial repression promotes hard asset purchases 00:34:28.290
If they <the government> say, listen, you guys have to own more treasures, and they use regulatory force on them to do that. That's a pretend, potentially useful tool to massage interest rates below inflation. That's what's called financial repression. And in that world that's where hard assets dramatically start outperforming financial assets. So hard assets are companies that own copper, nickel. uranium, oil, and gas. Those types of assets start to outperform financial assets which are just paper certificates, bonds and growth stocks.
The migration to hard assets is happening- 00:35:14.840
Yeah, that's what our model portfolio and the investors that we really trust, you know… Just look at David Einhorn Greenlight capital. You look at people like David. Looks like Warren Buffett. Right? Warren Buffett's been taking down his apple position by literally hundreds of billions of shares and buying more Occidental petroleum. David Einhorn's been buying things like Weatherford oil services companies, I think the best and the brightest are changing their portfolios over to companies that own assets that own natural gas, that own gold and silver, that own copper. Because if you go into a elevated inflation regime like a 1968 to 81 regime with higher bond yields globally higher inflation. higher, more global conflicts, a multipolar world in that world, the 1968 to 81, 1981 regime. That's where hard asset type companies dramatically start to outperform financial asset type growth stocks.
Larry McDonald, founder of THE BEAR TRAPS REPORT investment letter, is a political policy risk consultant to hedge funds, family offices, asset managers and high net worth investors. As former Managing Director, Head US Macro Strategy at Societe Generale, he's a frequent guest contributor on Bloomberg TV, CNBC, Fox Business, and the BBC.
Larry is a NY Times bestselling author, his book "Colossal Failure of Common Sense" is now translated into 12 languages. He ran a $500 million proprietary trading book at Lehman Brothers, made over $75 million betting against the subprime mortgage crisis and was consistently one of the most profitable traders in the firm.
His "Bear Traps" letter is one of the most highly regarded on Wall St. He's participated in 3 major financial crisis documentaries: Sony Pictures, Academy Award winning documentary the "Inside Job," BBC‘s "The Love of Money" and CBC‘s "House of Cards." He's delivered over 72 keynote speeches in 17 different countries, at Banks, Investment Firms, Conferences, Law Firms, Insurance Companies and Universities.
Lawrence 'Larry' G. McDonald is an author and CNBC contributor, currently founder of 'The Bear Traps Report', an investment newsletter focused on Political and Systemic Risk with actionable trade ideas and Macro perspective. Former Head of U.S. Macro Strategy at Societe Generale and former vice-president of distress debt and convertible securities trading at Lehman Brothers.
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