On this episode of Resilient Advisor, Jay Coulter sits down with Larry McDonald, author of How to Speak When Markets Listen, for a wide ranging conversation on the challenges and opportunities facing investors today.
They explore the future of the U.S. currency, extreme equity valuations, and the critical role of 52-week highs and lows in portfolio management. Larry’s unique insights offer valuable guidance for navigating today’s volatile markets.
Plus, we discuss Larry’s latest book and his approach to understanding market signals.
About Larry: The Bear Traps Report, created in 2009 by NY Times bestselling author Larry McDonald, now has over 1000 subscribers worldwide enjoying a political-risk overview across all asset classes. His book - "A Colossal Failure of Common Sense" - just ranked top 20 all time by the CFA Institute, featured in Netflix Academy Award Winner - "Inside Job." Larry has been a CNBC Contributor since 2013.
Check out Larry's Bear Traps Report: https://www.thebeartrapsreport.com/
Grab a copy of Larry's new book: https://www.amazon.com/Listen-When-Markets-Speak-Opportunities/dp/0593727495/ref=sr_1_1l
Transcript:
00:00
The economic world as we know it and the rules that govern it is over. We are witnessing a new era defined by sustained inflation, a series of sovereign and corporate debt crises, and a historic multi-trillion dollar migration of wealth. Few are prepared. Those are the first words on the inside cover of Larry McDonald's new book titled, How to Listen When Markets Speak, and he's our guest on this episode of The Resilient Advisor.
00:29
This is The Resilient Advisor Show with Jay Coulter.
00:37
Thanks for tuning into this episode of The Resilient Advisor. My name is Jay Coulter. Joining me today is Larry McDonald. Larry is the publisher of The Bear Trap Report and the author of A Colossal Failure of Common Sense, A Book About Lehman Brothers, and his new book, How to Listen When Markets Speak, which we're going to spend our time talking about today. Larry, thanks for coming on the show. Hey, Jay. It's great to be with you, my friend. Thank you. All right. As a Lehman alum myself, I really enjoyed, if that's the right word.
01:06
your book about the collapse of our former firm. You know, I get to work with a lot of younger advisors and most of them have no idea about what we went through back then. They can't even comprehend it. What is one lesson that you take from those days that should be eternal to all folks in our industry? Well, thank you, Jay, for bringing that up because I tell my wife once a month as a former Lehman trader, if we sell a million books, we'll break even on our Lehman stock.
01:36
I'm stuck. And, you know, it was a wonderful place to work. There were a lot of incredible traders. And I think the ultimate takeaway to today is that the fiscal and monetary response to Lehman was about $4 trillion. The fiscal and monetary response to COVID, the regional banking crisis of 2023, and then juicing fiscal into the election.
02:05
has been about 16 trillion. So thorough versus 16, full versus 16. Our first book was a New York Times bestseller. It's been ranked by the CFA Institute in the top 20 all time. But this new book really lays the foundation for for portfolio construction for the next decade. So let's dig into the book. So in there, you mentioned that you had the opportunity to spend some time with James Baker, President Reagan's closest advisor.
02:33
you mentioned that he told you and I'm going to read this quote, Larry, don't you don't ever want to live in a multipolar world. And a multipolar world, it is next to impossible to stabilize global markets, specifically, inflation. It's an awful place to be and I hope you never have to experience Larry. He didn't mince any words. Would you explain to listeners and viewers what he was talking about and how it sets some of the framework up for your book? Sure. Well,
03:03
When you have a New York Times bestseller, a book was published in 12 languages and we started doing these speeches and I was in the National Bank of Abu Dhabi and I met Neil Ferguson, incredible guy, I met James Baker, and the point that he was making, and Ferguson's made this point too, is that in a multipolar world, these superpowers have less control of the planet. In...
03:31
If you think of like 1968 to 81, coming out of the Vietnam War, global supply chains were not as smooth. There's a lot more inflationary pressures we have coming out of the Great Society with the Johnson administration. It's a lot like today, right? There's the fiscal overdosing then, fiscal overdosing now. Just look at like, okay, we have the situation in the Middle East, the ATM, the cash machine for Hezbollah,
04:01
uh... in hamas has been or aranean oil the cash flow that it's so it's very clear that if there was an election that that net yahoo in israel would have hit the oil assets and i think that once the elections pass they will hit the oil assets but the bottom line is in that kind of world where you've got two wars you've got global supply chains that are working as well uh... you've got a lot of things like
04:28
labor costs globally with strikes. And a lot of things are just different now. In a multipolar world, that element of inflation that's driven by global conflicts is really could chip the balance toward a real sustainable inflation trajectory. The one like we had from 1968 to 81, it came in three phases. And I think
04:56
We're in the exact same spot now. We just came through the first phase, and it was just very similar. 68 to 81, we had a big inflation spike from 1968 to 70. The Fed was able to get inflation back down from like 6.4 to now to 2.4. And then lo and behold, because of that multipolar world you mentioned, then we were off to the races with inflation again in that second round from 72 to 76. And I think we're just coming into that right now.
05:26
So to be clear, moving into a multipolar world that could turn out to be more inflationary than people might be thinking, my understanding your, your Yeah, the multipolar world, I think it's pretty, I can confidently say we're already in it. I mean, we've had a lot of global conflicts, whether it be, you know, Ukraine, I mean, think about the United States spending $120 billion. I mean, that's an incredible amount of money. And that money is going to ooze around the planet, right? And so, and then all
05:56
everything that comes with supply chain problems and everything that comes with the Zvezdan Canal, right? They're attacking our ships. We can't get all supplies through there. We can't get commodities through there. All that's really juice to sustain inflation. So I think we're in a really powerful multipolar world on a scale of one to 10 to take it up to a 10 in terms of bad. That would
06:25
really strikes those oil assets. Because then oil would go to $80 to $90 a barrel. And then all of a sudden, Fed policy in Washington is completely, they would lose control, right? They would have completely lost control over inflation. They would have to basically force a nasty recession to kind of calm down inflation. Larry, preparing for this interview was a lot of fun. You can see I dog-tagged this book.
06:55
the way through. I had to hone it down into questions for this interview. And this is one of my favorites. In your book, you say that the dodos of the future will be those who cling to their ailing growth stocks. Well, you talk about a way to trigger some talking heads in the media today. You also go on to note that oil, gas, and industrials and materials accounted for 49% of the S&P 500 in 1981. And by 2021, it had dropped to 12%.
07:24
And then you make the case for why this dynamic is going to revert back. How do we need to be thinking about inflation, deflation, and asset allocation? Well, thank you, Jay, for all that thoughtful research, because I do these all the time. And it's just a pleasure when someone digs in and it makes it makes the conversation so much better, I think. And it's just one thing that we talked about in the first book is election years are very powerful. And if you think of like I've spent I've done.
07:54
hundreds and hundreds of interviews on CNBC and the media. So I've gotten to know a lot of the media players at Fox and Bloomberg and CNBC. And I can tell you for a fact that in election years, the economic data is a lot of times skewed. Like think of the Bush administration 2008, the whole thing was sugarcoated. That's why the financial crisis was such a surprise, right? To so many people, I'd pretty get blindsided because.
08:19
It was election year, Bush wasn't running, but McCain was, and the Republican Party wanted to keep control of the White House. And they really sugarcoated a lot of economic data. And then lo and behold, we had the data turn after the election. And I think it's very similar to now, where data is been sugarcoated with all that juicy fiscal policy.
08:46
We've got a deficit that's almost 6.5% of GDP. That's like a World War I, World War II type level. And so we're deficit spending, it's creating a lot of government jobs that's basically pumping up the jobs data. But now when you come in past the election and go into the new administration potentially, that's when they do a lot of kind of house cleaning. If Trump were to win, it sets up a real dynamic where
09:16
they blame the former administration. Same thing with Kamala. If Kamala Harris wins, you know, then she's in office for four years so she can really blame them. She can throw a lot of dirt on the Biden team, right? And say that she was, you know, out of control. She's the vice president. And so you're gonna see a lot of that. And that's why that sets up for, I think, a real sustainable, like, inflation bounce next year, which I can get deeper into. Yeah, we definitely wanna get into that.
09:43
inflation is one of the bigger concerns in my audience and not just how inflation is impacting their client portfolios, but but their clients as well. And I think you have some great talking points around that. But first, in the book, you talk about Josh Brown's concept of the endless bid, and then how later it could become the endless offer. This is in a chapter called the dark side of passive investing, where you make the case for why investors need to be skeptical of passive investing. It's quite compelling.
10:13
Would you walk the audience through how you think about passive investing today? Okay, it all comes down to the risk-free rate. And Josh was a brilliant strategist, thought leader. One of Josh's points was that, you know, interest rates were so low and the boomers were young enough and had a lot of money. When he made that statement, it was like 2010 years ago, I think.
10:41
So the boomers had a lot of money and interest rates were zero. And the boomers were the oldest boomer today is about 79. So the oldest boomer then was about 69. So two things were going for passive investing. The boomers, which represent about 79 trillion of wealth, 79 trillion. Um, so they were young enough and there was zero interest rates.
11:11
Essentially the Fed was suppressing the cost of capital in juicing the market today the 30-year Treasury's like upwards of 2.3 2.4 percent and In the last year and a half. We've had rates higher the 10 years been kind of Breaking out again not bringing out to the to the old eyes But breaking up for the local eyes and so when you have the risk free rate in five years and ten years and two-year Treasuries
11:41
that high and at the same time the oldest boomers are now 79. So if you just talk to any financial advisor, you take the client's age and that's the percentage of his assets or his or her assets that should be in bonds, the basic rule of thumb. So an 80 year old investor should have 70 to 80% of their money in some type of fixed income or cash.
12:10
a younger person can have more money in the market. So for those two reasons, we're coming into a period where the 79 trillion bucks that's in the hands of the boomers, eventually that money's gonna make its way to the millennials, but there's gonna be this transition period where the boomers have to get a little bit more cautious, and equities have gone up a lot. And so the probability that there's, with rates up here, it won't, it's almost like a 1987 crash situation.
12:40
where I'll never forget going through that with my dad. I was in his broker's firm and rates popped in the summer of 87. And at some point, and it won't take that much now because it's for a lot of reasons, a lot of leverage out there, but if rates pop another 20, 30 basis points up, you're gonna see a lot of wealth move from stocks over to bonds and people, and that's gonna, that would create.
13:06
potential crash situation over the next six, nine months. Let's go a little deeper on that. For the advisors that are building portfolios today, when you talk about rates going up, are you referring to the short term or the long end of the curve? Short term rates or the long end of the curve? It's the long end. You're right. If the feds already cut 50, I think they cut 50 because they, interest on the debt now is 1.1 trillion.
13:34
We argued over the last and the bear trap support that they had to cut 100 just to get interest on the debt that front end is where they're financing it. And if they don't get the front end down, then interest, the average weighted coupon on the portfolio today, think about this, the average weighted coupon on the US government debt portfolio is 2.6%. And the T-bills on the front end of the curve are four and a half.
14:05
If they don't get any, and the long end is four and a half, so the curve is very flat, and so if they don't get the front end down, then interest on the debt's gonna go to like 1.5 trillion from 1.1, 1.5 trillion very quickly, and then the Fed at some point would have to come in and support the bond market with buying bonds. That would get you a much weaker dollar. That gets you the real colossal migration.
14:34
Historic or my greatest I can see it as good as day. It's coming at us There that would put it right now. There's 23 trillion in the NASDAQ 100 all this passive money All this like at least five or six or seven trillion bucks is gonna go from financial assets, which are stocks You know growth stocks and and and bonds over to a good portion is gonna go to hard assets And that's your your come on your companies that actually own
15:02
things in the ground, they own assets they own, whether it be platinum, palladium, gold, silver, whether it be natural gas, oil, these are the types of investments that are going to be a much larger percentage of the S&P 500 over the next five years. Larry, in your book, you have a whole chapter dedicated to commodities and hard asset investing. I feel that there really hasn't been a whole lot of great press around these asset classes over the past maybe two generations.
15:31
How should financial advisors and investors look at investing in commodities and hard assets going forward? Well, the first thing you do is just look at the top, like 1981, what are the top stocks in the S&P? And you had some gold miners in the top 20, you had some oil names, Exxon was forever, forever, Exxon was the top market cap company in the S&P. And so you think that
16:00
One of the things that we talk about in the book is we took five million jobs out of the United States and we moved them around the world to emerging markets. And so if you're in India and you're working on a call center, you're making about 50 times more than your grea And so countries like India are growing at a very, very fast pace relative to the rest of the world. It's so...
16:28
The Davos crowd meant well. We've decimated the United States. I mean, there's fathers going, you know, there's fathers in the Midwest that are really addicted to opioids because they're so tragically depressed and decimated by all these jobs leaving the United States. And life expectancy in states like Pennsylvania and New York is coming way down because people are not living longer because of all that stress of losing
16:58
their livelihoods and having to go from working in a very high paying job to a very low paying job. And so we've taken these jobs, we've moved them around the world, so we've increased that standard of living globally. So we're creating a lot of carbon consumers, but we haven't really invested in the infrastructure to support all this new demand. So capital expenditures, if you look at capital expenditures in oil and gas and metals.
17:26
in the 2010 to 2014 period, 2010 to 2014. That was on a trajectory that if we kept that to today, we're essentially in a three trillion dollar hole. And what's gonna happen is around 25, 26, the demand for energy from around the world, relative to the supply of what we've, you know, we've suppressed the supply, that's gonna create a pretty nasty energy crisis. And that's.
17:55
But the bottom line is my point is over the next like 5, 10 years, you're going to see a BHP or Exxon or Chevron in those top 10, 15 names in the S&P because energy and materials are probably going to go from say 7% of the S&P to maybe close to 20%. And so we're not going back to 1980 where industrials...
18:21
materials and energy were 49% but we're going back to 30% from 12% and that's where you get to reconstruct your portfolio. Forget about the 2010, everybody's in the 2010 to 2020 portfolio, everybody's along the same thing and it worked for a long time because we had a very, very certain, certain deflationary world and now we're moving into, even though we're in denial because they talked about that election year, they want to really talk, they really want us to believe
18:51
that lower inflation is sustainable. So there's like that election year brainwashing of the public, you know, everything's fine, inflation's coming back to 1, 2%, and that's what has everybody so deeply, deeply embedded into this 2010 to 2020 portfolio. But once people start to realize that inflation is now at a much higher long-term trajectory, that's where you get much more higher bond prices, higher inflation, that gets you that move.
19:19
from financial assets to hard assets. All right, well, I wanna talk about the portfolio allocation percentages that you recommend in the book. But before we do, if you're an investment advisor today and you have discretion over your clients' assets and you feel that you need a five, 10, 15% allocation to real assets and commodities, where do you think advisors should look to gain that exposure today? Well, there's two things. There's the commodities and the commodity equities.
19:49
So at the early stage of the bull market, think of like oil stocks in 2020, 2021. The first stage is people go into the commodity. And so there are ETFs like the SLV for silver, the PALL for palladium, the PATM for platinum. And so if you're in gold today, which has done incredibly well,
20:18
you want to be diversifying away from gold and into the other metals because gold is a 16 and a half trillion dollar market and the other metals in the commodity side, all these ETFs, platinum and platinum are around $300 billion. So think of like 16 and a half trillion versus platinum, maybe 400 billion. And so all the gold that we're buying could fit into the Olympics, Olympic swimming pool.
20:46
but all the platinum and palladium, nevermind, would go to your ankles in that same pool. So you want to start thinking about having an allocation toward the commodities themselves, and then the commodity equities. And so I would say, between those two, I think you could be up to 50% of the portfolio construction in commodities and commodity equities. That would be aggressive, but I think that, I mean, if you...
21:15
If you look back to 1968, 1981, that type of portfolio destroyed the S&P. I think the S&P was flat for a good decade there. Larry, some investors have some concerns over precious metals ETFs and whether they would be able to withstand the crisis that they're in the portfolio to help protect against. Do you have any concerns about the ETF structure for precious metal investing?
21:42
Yes, but I also have some concerns about the, about the top, like say the top three stocks in the S and P at one point in the last month, they got up to 24% of the S and P in the top three stocks. I think it was 24. If you look back the last 15 years, that number used to be the top three stocks used to be 8%, 9% max. And so there's a lot of danger in the S and P.
22:11
especially if you go to that endless offer, you could have a situation where passive, and this sounds crazy, but if there's so much wealth in there, and if there's something that happens in the market, you could literally have the market just shut down for as pertinent period of time to allow people to get out of these crowded, crowded, crowded trades. In terms of the commodities themselves, like the SLV or the GLD, yes, there are...
22:41
technical issues around the gold and silver that these funds hold and How much gold actually hold relative to demand? Yes those things you want to talk That's why you need your advisor You know to to put you in the right direction and keep you out of trouble and we saw this with the USO in 2020 the USO is an oil ETF they had this thing structured where a lot of these commodity ETFs are in the rolling the futures right and
23:09
I say well the futures is very expensive because they're basically the fund manager like every month by the front end and they had the whole fund in the front end of the curb and it was a disaster and then they had to actually re-change the prospectus and they had to like basically instead of owning just the front two months they own the front five and that saved the fund. The fund was like could have gone down because of the-
23:34
kind of miscalculation in that kind of portfolio instruction. Yep, that's right. As my friend Dan Weisskopf likes to say, structure matters. Larry, in your book, How to Listen to When Markets Speak, you lay out a hypothetical allocation for the 2020s. I want to read it off for viewers and listeners, and then tell us your thinking around these allocation percentages. So you're recommending a 10% allocation to cash.
24:03
40% allocation to stocks, 30% to bonds and 20% commodities. How did you land here? What was the thought process? Well, the 60-40 portfolio, and I'm really proud of the book. Robert Ben Battenberg worked on it with us. He's our CFA, our strategist. And then like I said before, I talked to David Tepper in the book. I mean, legendary investors are in this book. I sat down with Charlie
24:33
And one of the things David said to me back in 2021, he was really questioning risk parity because that's talking about another crowded trade. Everybody was long this 60% stocks, 40% bonds portfolio, the 60-40 and there was a, just look at the RPAR ETF, R and then PAR, and this, the 60-40 portfolio, 60% stocks and 40% bonds.
25:03
that has dramatically underperformed. Einhorn was like spot on. And that's because we had that nasty inflation period in 2022, so it killed the performance of risk parity. And so we made this prediction in the book, we wrote the book two years ago, it came true, but I got those ideas from some really incredible fund managers. And now if inflation bounces,
25:29
It's gonna do another day and it's gonna continue to hurt risk parity. Just look today, there's an Apple bond out there that it's the 2.55% due in 2016. It's a long duration bond. It's trading at 61 cents on the dollar J. Let me think about this. This bond was issued at like 102 or traded at 102 in 2021. It traded at 102, it's at 61 J. Let me think about it.
25:59
It's a $1.5 billion bond. I think it's 1.7. So it's a $1.7 billion face, and those bonds are only worth a billion now. So it's a $700 million loss on just that one bond, Jay. That one bond. And multiply that times all the bonds. So when interest rates go up, bond prices go down, and if they've sustained inflation, then all of this portfolio is stressed. So this is why we wanted to say,
26:29
a good chunk and now I would even frame it up to even more commodities in terms of the bond quotient right now going to the new year, which I never want to get into. There's a real ticking bomb for the first quarter next year after the election in terms of the bond market, but recommend like a lot of cash, a lot of commodities, maybe like 40, 40, 50% cash commodities and 50% stocks.
26:59
And not a lot of not a lot of bonds right now. Yeah, wow. Well, let's dig into it. What are you concerned about going into the first quarter of next year? And what I mean by bonds, you can own two year bonds, right? Two two year treasuries, that's fine. But so put your in your mind, you're Janet Yellen, you have an election to win in 2024. But your spend your government spending all this money, I mean, two $2 trillion a year.
27:30
What do you do? If you need to borrow $2 trillion, Jay, if she had issued $2 trillion of five and 10 year bonds, those bonds would have moved like this in the market violently because interest rates up, interest rates up, bond prices down. That's the way bonds work. Interest rates up, bond prices down. But what she did was a very conniving, dangerous move.
27:59
She didn't want to have all that ball on volatility in election year. So what did she do? She has stacked the deck on T-bills. And T-bills don't move. So imagine if you're issuing two, imagine if you're issuing $2 trillion of T-bills and interest rates go up. Because they mature in less than one year, they don't move. So you have two choices.
28:27
You're Jenny Yellen you can issue two trillion of longer dated bonds five or ten year bonds Those guns those bonds are gonna move violently in an election year. It's two trillion bucks We should we should show you what happened to the Apple bond, right? That's just one example But if if Apple issued a T bill which is so she's called call it Apple again a T bill or the United States government That matures in less than six months. It's not gonna move Jay, right? So what she did was
28:55
she sucked the bond volatility out of the market in election year to help the administration. And don't get me wrong, I'm not making a partisan move here. This is something, like I said, the Bush administration pulled every trick in the hat, right? So to try to help McCain. So this is something that goes back, you know, 50s, 100s, almost 100 years of games, right, that people play in elections. But now the next Treasury Secretary, Jay, you have
29:23
You have in 2024, 25 and 26, 15 trillion J of bonds that have to be rolled over. And a lot of those bonds are in T-bills. So the next treasury secretary has to issue much longer dated bonds because Yellen has stacked the deck against the next administration. So one of the things when you talk to, we run a Bloomberg, you probably see the computer moving behind us, we run an institutional chat on Bloomberg with hedge funds, mutual funds and pension funds.
29:53
It's one of the largest platforms in the world with the professional investors. And the conversation that I'm hearing now from the billionaire fund managers, uh, they could have run a lot of, a lot of family office money, a lot of institutional investors. They think that we're going to have a list trust moment in the United States and like the first quarter of next year when the new treasury secretary has to start issuing longer dated bonds. And we just don't have, remember
30:21
One of the things I talked about in the book, sanctions, confiscation of property in Russia, we just don't have, because of the, we've abused the sanctions on all the emerging market countries over the last decade. And Republicans and Democrats, there's nothing to do with politics. Republicans and Democrats have abused sanctions. And then the Ukraine war kind of forced the United States into draconian wealth confiscation, private property confiscation of Russian assets. So all of these emerging market countries
30:50
are just not buying as many bonds and there's a lot of interest to change. Listen to this. So let's just say there's $40 trillion of denominated debt. The bonds in the world now pay a lot and all these new bonds have issued in the last year, they pay these high coupons, much higher coupons, double, triple what they used to be, like 2020, 21. So these countries have all this cash and you know what they're doing? They're buying gold and they're hedging their way out of
31:19
bonds because everybody's max table max long US government bonds and so because of all the sanctions and the kind of the abuse from the government US government of last decade Emerging market countries foreign governments central banks are whole they don't want to hold as many So we're gonna have this like less global demand for bonds of next couple years an Incredible new supply of bonds and it's gonna force the Fed to come in and be the buyer of last resort And that's once again, that's what gets you
31:49
this real spectacular move into hard assets and commodities. Gosh, there's so many potential follow up questions there. Let's just start with one that I know my audience would care about. And that's the impact of that scenario on real estate prices. So if they're artificially bringing down short term rates, and longer term rates, 1020 year paper starts going up, obviously that was going to drive up mortgage rates, what happens to housing here in the United States? Well,
32:18
Yeah, so the first stage is, and it's happening now, look at the home builders, the way they're acting in the last couple weeks. They're buckling. And so if you look at the financing in the mortgage market right now, I think we're up to 7% on the longer-dated mortgages. And so that's gonna crack the market, but then the Fed steps in, Jay, and then starts to, at some point, starts to hold down interest rates on the long end, or they,
32:48
it depends on where they try to hold rates down, but they'll hold rates down in some part of the curve and that will Create a weaker dollar Inflation inflation is going to be great for real estate But there's two stages to it. There's like the first stage Which we're coming into now where you get you get higher inflation. You get higher bond yields that cracks the market You get to move down Uh, then you get the the response from the fed
33:16
and move back up. That's like a two year trade. But overall, I mean, inflation is really great for real estate. Like once again, you wanna be a long hard ass. Yeah, it's great for real estate if you own it, not for some of the younger generation, most of the younger generation that haven't been able to leg into it yet. Right. With its own set of consequences, right? That's what you see on the campaign trail, Kamala Harris. I mean, they're creating all these like wacky new
33:46
programs to try to like support younger people that need to get into these homes, but they've created all these digital locations. But that's just going to, that kind of any kind of program like that from the government that feeds more capital into potential homeowners or home buyers, that's just going to support prices. And so it's just a classic thing with governments, right? And the Fed and monetary fiscal policy.
34:15
When you play with a serpent in a cocktail, and the unintended consequences of what they've done since COVID, like I said, the fiscal monetary response to COVID, to the banking crisis to 23, and then the election year juicing of the fiscal is 16 trillion bucks. And they've created so many unintended consequences that they're gonna have to come up with all these different plans to get around and these solutions. And it's gonna be very interesting. In your book,
34:44
how to listen when markets speak. You make the case for why America's position as the world's premier reserve currency will weaken. At a high level, what do we need to be thinking about? Well,
35:00
What I talked about before is around all those central banks and the coupons, that's the big thing. So there are so long government bonds, there's literally, I think, 40 trillion of dollar denominated debt at least. It's so, just those coupons alone are driving money into gold. But then there's the element of like, okay, China. China's very exposed to the US bond market.
35:30
they're buying a lot less bonds than they used to. Japan, aging population, they're buying more, but they're not gonna be there to really make up for the rest of the world. So in terms of your bond sales, if you don't have enough global buyers of bonds, let me give you an example. The two-year treasury auction this week, there's just, we do auctions all the time, right? We do auctions.
36:00
every week. But to give you an example, the average two year treasury auction is like $70 billion, Jay. Now, if you go back to 2019, we were like, you know, $20 billion auctions 20 to 25, maybe 30. So this is just the two year, this is just one auction of many. So we're trying to sell like $70 billion. And there was a five year auction, I think today. And so
36:28
It was a two year auction yesterday, five year auction today. So these auction sizes are like way above like think of Lehman Brothers, how bad that crisis was in the auction sizes today are I think double Lehman levels, which was like trying to pay off this huge financial crisis. And so if the global investors are not there in size, that once again, forces the Fed into support the bond market and that gets you that big trade. But
36:58
in terms of the reserve currency status over time, because we have to use inflation to monetize the debt. The only way you get out of a $35 trillion debt hole, Jay, the only way of $35-36 trillion is to keep interest rates below the rate of inflation. So interest rates below the rate of inflation, it's called financial repression. And that's what monetizes the debt. That's how you get out of it.
37:27
And when you do that, you weaken the currency over time. And so we're not going to lose the reserve currency status. But are we going to go you know, are we going to cut the US market share way down in the next five years? Yeah, we're going to be you know, a much smaller player than we used to be. Larry, in your new book, on page 50, specifically, there is a chart showing the impact of the Fed stimulus on the S&P 500.
37:57
For listeners, there's a direct undisputable correlation in this chart between the S&P 500 and the Fed's balance sheet going back to 2008. They're given everything that we just spoke about. And with both political parties fully committed to more and more debt. Do valuations even matter anymore for equities?
38:18
Okay, so right now we're trading at 22 times forward earnings, which is one of the most extreme, you know, one of the most extreme levels in terms of forward earnings. So that's in terms of, you know, what earnings are supposed to be next year. And so with price for perfection, and not only that, but the risk free rate relative to equities is points toward.
38:46
Everything ever model everything I can tell you we're coming into another lost decade for stocks because Historically whenever we're this stretched Where bonds are getting more and more competitive to stocks? You go through a period of time. We've had in the last 60 years, I think we've had two or three ten year periods where equities were flat Now
39:13
Where equities have done well, like you said, is when the Fed's doing quantitative easing or this past year in some ways we're doing kind of stealth quantitative easing because the Fed was, the Treasury was issuing so many T-bills and there's a lot of games being played behind the scenes. So there's a lot of things they did to get, they just want to get us through the election. But next year, and as inflation bounces, it forces...
39:43
us into an entirely different playbook. So yeah, the probability that we go, you know, say five to 10 years with equities flat from here is very, very high. Very final question. Viewers, listeners, I highly recommend you go pick up a copy of his new book, How to Listen When Markets Speak. If you're a financial advisor, it actually makes for a great conversation piece with any prospects or clients that are intellectually curious about the market.
40:11
And inside of there, you have all of these inserts that you call investors take note. One of them, I thought, that caught my eye that I thought my listeners would appreciate is your lens on the importance of the 52 week high and 52 week lows. What do investors and advisors need to know about that important metric? Well, one of the things that David Tepper, when I sat down with David, he wants to measure capitulation. And you want...
40:41
And this is for like, this takes so much discipline because testosterone is the great enemy to investing. When I sat down with Charlie Munger, he said, the hardest thing to do, Larry, is stare at a screen all day and do nothing. But what Tepper was getting at is that if all you ever did the last 30, 40 years is buy stocks in size when new lows of the New York Stock Exchange were 1,500, 1,600, 1,700.
41:11
And then sell them slowly over 10 years That has been the best formula historically for any I mean literally it You would crush the S&P if you somehow had the ability to do that I just noticed that right now that buffets the rate of change in Warren Buffett's cash portfolio at Berkshire is
41:39
really violent and very sharp and Buffett is the known if you look back at the history of Berkshire They to pleat their cash when there's a lot of new lows on the New York Stock Exchange I don't know what number they look for they're just looking for valuations, but the bottom line is investors should take note the rate of change in Buffett's cash portfolio Over the last like year
42:08
has been, I think, one of the smartest, most violent in terms of additional cash. So he's basically preparing for one of these moments that Tepper's talking about. And that's something I think we want to, that's why you want to have that heavy cash component, because you want to be there for those moments when the mad mob is heading for the exits. Well, Larry, thanks for taking the time to come on the show. Viewers, listeners, pick up a copy of How to Listen when markets speak.
42:38
wherever you buy books and check out his website, the bear traps report at bear traps report.com Larry, thanks for coming on. Thanks, Jay. It's great to be with you.
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