0:01

When people look at stock prices, you

0:03

don't want to look at the stock

0:05

price, you want to look at the

0:07

market cap. It's very difficult for a

0:09

$2.3 trillion company double, but the companies

0:11

that support this historic industrial revolution of

0:13

artificial intelligence, that's where the upside is

0:15

and kind of the second and third

0:17

tier names that don't get a lot

0:20

of attention. I'm

0:24

Mary Long and that's Larry McDonald, a

0:26

risk consultant and founder of the Bear

0:28

Traps Report. He's also a co-author of

0:30

the new book, How to Listen When

0:32

Markets Speak. Teacher Willard caught up with

0:34

McDonald to chat about why this market

0:36

cycle feels different from others, the possibility

0:38

of a dividend renaissance and why there

0:40

may be a bull market coming for

0:42

commodities. Well,

0:47

I've been thinking a lot about that. We

0:50

seem to be at an inflection point. I've

0:52

been listening to a lot of different podcasts

0:55

and talking to authors and

0:57

one of them that I talked to

0:59

recently said, we might experience a different

1:01

type of market. We might experience a

1:04

renaissance in dividend payments and less

1:06

buybacks. What do you think about the potential for

1:08

that kind of shift? Yeah,

1:12

a renaissance in dividend payments makes a lot

1:14

of sense in the sense

1:16

that certain companies are

1:18

producing lots of cash and there's been a

1:21

lot of different sectors. There's been a

1:23

capital retention management style

1:25

where companies are holding

1:27

capital and a lot of they're building up

1:29

cash and they want to return that cash

1:31

to shareholders. We've been

1:33

too much so in the

1:36

last 10 years, too much so on

1:38

the buyback programs. I think that there's

1:41

going to be some big political pushback

1:43

on the buybacks. I

1:45

think that that's a pretty

1:47

important point around dividends. I

1:50

just think that also the biggest point

1:52

that we make in the book from

1:55

this perspective is the passive

1:57

revolution. David Einhorn's in our book. hedge

2:00

fund manager, founder of

2:02

Greenlight Capital. And his point is that

2:04

once passive gets too big, and that's

2:06

your index funds owning lots

2:09

and lots of equities and lots

2:11

and lots of value, trillions, there's

2:13

about over 35 trillion tied to

2:15

passive investing through the S&P and

2:17

say that the NASDAQ. And

2:19

there's not a lot of eyeballs on

2:21

those ideas, because when passive investing gets

2:23

too big, those investors are just

2:25

passive. So in other words, there's not a

2:27

lot of homework, and there's not a lot

2:29

of due diligence, there's not a lot of questions

2:31

being asked of senior management. And that's

2:34

one of the points in the book, I think

2:36

is really important for our watchers and readers and

2:38

listeners right now. Yeah, I think

2:40

that's really true. And Jamie

2:42

Diamond's letter this this week from

2:44

JPMorgan Chase also addressed that idea

2:47

of how big those passive

2:49

investors are and what that means for the

2:51

market, what it means for things

2:53

like proxy statements that there are, that

2:55

all of these decisions are being made

2:58

mostly automatically now versus active

3:01

investors trading in and out of the market. Yes.

3:03

And so, so for the for the

3:05

viewer, they need to understand that they're,

3:08

you know, essentially your 401k has

3:10

been hijacked by, you know, 10

3:12

to 15 companies, maybe eight companies.

3:14

In other words, the market is so

3:16

big and so concentrated. And as the

3:18

higher it goes, the more money comes

3:20

in, and you get a lot of

3:22

chasing, right into full markets. And in

3:24

bear markets, you get a lot of

3:27

what we call capitulation selling. And

3:29

so what happens is when

3:31

you're too big on the passive side of the

3:33

market's going up and up and up, there's a

3:35

lot of inexperienced money coming in fast money, it's

3:37

not it's kind of what we call weak hands

3:40

and poker where it's coming in a chasing, chasing,

3:42

chasing. And the ownership, the

3:44

actual market itself is becoming more

3:47

concentrated and fewer and fewer and

3:49

fewer names. And that's very

3:51

important for people watching us right now. We

3:53

have a 401k. Yeah, very true. Another

3:56

thing you brought up in the book that I

3:58

hadn't quite thought that much about. about was

4:00

the impact of cheap credit between 2007 and 2019.

4:04

The way that it helped large businesses really

4:07

wipe out the competition because they had all

4:09

of this cheap money. Does

4:11

that shift a bit now if we've got capital

4:13

being more expensive? Is there any way that this

4:16

sort of levels out the playing field a bit?

4:18

I mean, like, is there a bright side to

4:20

this? Yeah, that's a good

4:22

point. So in other words, well, what we do

4:24

know in the Wall Street Journalist says is that

4:27

the percentage of profits from the

4:29

largest hundred companies, this is just

4:32

a blood curdling staff, it's gone from like,

4:34

in say the 1970s, 54, late 1960s, 70s,

4:36

54 to 60% of the profits were

4:42

in the top hundred companies. And

4:44

through the 80s and 90s, it's become more

4:46

and more concentrated. Now we think it's over

4:48

90%, 90%

4:51

of the of the coral

4:53

profits are within within those

4:56

hundred companies. So in other words, the

4:59

bigger companies are getting bigger and bigger

5:01

and bigger. To your point,

5:04

when interest rates were low, they could borrow money

5:06

at very, very cheap rates.

5:09

And that really, you know, that

5:11

helped the Home Depot's wipe out a lot

5:13

of local hardware stores, for example. And

5:16

now I think it'll take some

5:18

time, but your point is very correct,

5:20

but it's going to take

5:22

some time for this higher interest rate regime

5:24

to equal out the playing field. Yeah,

5:27

and we don't know how, none of us know how long

5:29

it's going to last. There's another

5:31

phenomenon in the book that you talk about that

5:34

I've been thinking about too, which is the aging

5:36

of America. I've been thinking about it in a different

5:39

way, I think, than you have, because you brought the

5:42

demographic time bomb, which is baby boomers,

5:44

they start moving money out

5:47

of stocks, they go into that,

5:49

maybe that traditional 60-40 portfolio, maybe

5:51

not investing deeper into bonds, maybe

5:53

some other areas. What

5:56

does that do in terms of the

5:58

passive situation that that you mentioned

6:00

and what happens next? Well,

6:03

so this is one of the most important parts

6:06

of our book, When Markets Speak, and that is

6:08

if you think about the

6:10

Lehman era, right? The post Lehman

6:12

world, it was about a $4 trillion

6:15

fiscal and monetary response, $4

6:17

trillion. And then

6:20

there was this massive, what we

6:22

call austerity regime in 2000, say

6:24

2010, 11, 12, with the election and

6:28

Republicans versus Democrats. And then we had

6:30

austerity in Europe. And so there was

6:32

a massive pressure on what

6:34

we call deflation or disinflation because

6:37

we had a smaller fiscal

6:39

and monetary response relative to now. And

6:41

then a lot of austerity immediately after.

6:43

Today, if you look at the response

6:46

to COVID and the

6:48

response to the banking crisis over the last

6:50

year and a half, which we had like

6:52

four banks, four so banks going there and

6:54

Silicon Valley bank and the New York community

6:57

bank and the

6:59

response today is not $4

7:01

trillion, it's $16 trillion on the

7:03

fiscal and monetary. And

7:05

so what that's doing is it's

7:07

creating a more sustained inflation regime. We're

7:10

seeing that now. We have

7:13

an election. You think about team

7:15

Biden, right? They know that the

7:17

2008 election, when

7:21

we had that banking crisis, that had a lot

7:23

to do with the outcome. President

7:25

Obama was an amazing politician, he

7:28

was a big help against John McCain in 2008, but the banking

7:30

crisis actually had a pretty great impact on

7:32

that election. And so what's happening

7:34

now is the team Biden and the

7:37

whole fiscal and monetary, they're

7:39

going all in, right? They don't, they wouldn't want to

7:41

have, they want to have a low unemployment rate. They

7:45

care a little bit less about inflation because

7:47

they want to prevent

7:49

that banking crisis from really kind

7:52

of what we call contagion, credit spray

7:54

contagion. And they put out the fire. And

7:57

so the problem is they've created a sustained inflation regime.

8:00

And that means that you needed an entirely

8:02

different portfolio from 2010 to 2020. You

8:06

needed a 60-40 portfolio, no big

8:08

deal, and a portfolio

8:10

that was heavy in growth stocks and

8:13

in what we call financial assets. And those are

8:16

growth stocks and bonds. Today,

8:19

in this new sustained inflation regime,

8:21

that 2020 to 2030 portfolio needs to look a

8:26

lot different. And that's one of the

8:28

most important things for people watching us

8:30

right now. And that's more

8:32

like maybe a 40% stocks, 40% bonds, 20%

8:34

commodities, a whole different asset

8:38

allocation risk parity. As we know

8:41

it, that 60-40 portfolio is dead.

8:43

And I'm happy to talk about

8:45

demographics if you care. I

8:49

want to talk about that 20% commodities because

8:51

that isn't something a lot of people are

8:53

talking about. Maybe we're a little bit more

8:55

aware of it over the last little cocoa

8:57

crisis, I think, has all of a sudden

9:00

made people pay attention to commodities. But

9:03

what do you think people are missing about

9:05

commodities? People for the most part don't

9:07

rush to invest in commodities at this point. Well,

9:11

the mind-blower is stat that's in the book.

9:14

It's say 2011, 12, 13 in that range.

9:18

The NASDAQ 100 was about the same

9:21

size as the energy sector. So

9:23

the NASDAQ 100 was about the same

9:26

size as the entire energy complex. Today

9:29

the NASDAQ 100 is about 18 trillion

9:32

larger than the energy space. Invidia

9:35

is 5% of the S&P, one

9:37

stock. 5% of the S&P. The

9:39

entire energy complex is about 3%, 3.5% of the S&P.

9:44

So you're right, people, there's two

9:46

parts of commodities. There's the commodity

9:48

equities that are a very

9:50

tiny part of the market now. And

9:53

then there's the commodities themselves. So the

9:55

commodities in terms of ownership of asset

9:57

classes is in one of the lowest...

10:00

spots in decades. And

10:02

that's once again, that's because we've

10:05

conditioned investors, this is so important

10:07

for people watching right now for

10:09

your foreword kit, we've conditioned investors

10:12

through 20 years of what we

10:14

call deflation, disinflation, that pushes

10:17

money into what we call financial

10:19

assets, growth stocks, and bonds. And

10:22

where commodities typically do

10:25

well is when you have inflation that

10:27

normalizes at, say, 3, 4, 5% and

10:29

stays there for a couple of years,

10:31

that's when you start to get a

10:33

flush of money into commodities. And if

10:35

you look behind me right now in

10:37

the markets, that's what's starting to happen.

10:39

Well, it seems like last year we were talking

10:42

so much about the

10:44

recession that never came. Like that was

10:46

the story of last year. This year,

10:48

as you mentioned, we're trying to get

10:51

to that magic 2%. So maybe Powell

10:53

starts cutting, it's looking less and less

10:55

likely as the year goes on. So

10:58

what are you seeing in that cycle? I mean, we

11:00

know that markets have

11:02

cycles. This cycle doesn't seem

11:04

to be going exactly the way ones

11:07

have in the past. Well, David

11:09

Einhorn, who's in the book, a famous and

11:11

famous hedge fund manager, he

11:13

talked to us, and he's talked over the years

11:15

about what he calls the jelly donut. And

11:18

it's a funny expression, but what it means

11:20

is that because the baby

11:22

boomers are turning about the oldest

11:25

boomer now is turning about 78, but

11:27

the boomers have 78 trillion of wealth.

11:30

The millennials only have about 9 trillion.

11:33

And so if you think about it, it's

11:36

to keep it simple, if you have $10 million

11:39

in a money market fund in Palm

11:41

Beach, and that's a very wealthy individual,

11:43

but just to keep it simple, your

11:46

income on that money in

11:48

the money market funds for two years ago was about

11:50

$80,000 a year. Fast

11:53

forward to now when you're getting close to 5%, that $10

11:56

million in a money market fund today paying

12:00

you close to $500,000 a year. And so I know where the point,

12:05

which was really impressive years ago, he felt

12:08

that if you cut interest rates too much,

12:11

the way the Fed did in that 2008, nine, 10, that disinflation

12:15

regime, it actually creates more

12:17

disinflation and deflation. Because those

12:20

boomers, you're really punishing the

12:22

savers. And people have to be

12:24

more careful with their money because they have less interest.

12:28

And now, the team Powell, in

12:30

all those rate hikes, have given

12:32

those wealthy people in Palm Beach,

12:35

essentially a 300% pay raise.

12:37

But at the same time, the

12:40

sad and really sad fact

12:42

is the bottom 60% of

12:45

Americans are in recession. The New

12:47

York Fed told us multiple

12:49

times in the last couple of years, the

12:51

bottom 30% of Americans only have

12:53

$400 in the check-in cap. That's the New

12:55

York Fed. That's the bottom 30%. But

12:58

that's a lot of people. And when

13:00

interest rates go up and inflation goes up, that

13:03

hurts that group. So if you look

13:05

at companies in the S&P 500, you

13:08

can clearly see a divergence where the

13:10

companies that face the bottom

13:12

50% of consumers are in a

13:15

lot more difficult place than

13:17

the companies that face those

13:20

top 20% of consumers that just

13:23

got that huge pay raise. Danielle Pletka

13:25

interesting. That makes me think a little bit

13:27

about what has been happening with dollar stores,

13:30

cutting their amount of stores and things that have

13:33

been happening on that end. Right. Yeah, that's an

13:35

interesting idea. I want to

13:37

talk to you also about what's

13:39

happening with outsourcing and now the

13:41

move to bring semiconductor manufacturing back

13:43

to the US. We have all

13:45

this money going to Intel and

13:47

Taiwan Semi. You

13:49

know, I find myself maybe a

13:51

little cautiously skeptical about how

13:54

much this is actually going to really

13:56

jumpstart growth. What are you thinking

13:58

about that turn? in outsourcing

14:00

now back to some form of

14:03

insourcing? Well, they mean well.

14:05

But unfortunately, what we talk about in

14:07

the book, When Markets Speak, is Republicans

14:10

and Democrats lectured us for

14:12

20 years that free trade was good. And

14:15

we basically took five million

14:17

jobs from the United States,

14:19

some of that's in the Rust Belt, manufacturing

14:21

jobs. We've moved them all over

14:24

the world to India, China, Bangladesh, all

14:26

these. The good news is, if

14:29

you're part of the Davos crowd, we've

14:31

raised the standard of living dramatically in

14:34

many parts of the world. We've really, if you're

14:36

working in a tall center in India, you're

14:38

making 50 times more than

14:40

your great grandparents. And so, but

14:43

guess what? Those people in developing

14:45

world that just got this big

14:47

pay raise, the first thing you

14:49

do in India, there's a billion

14:51

people in India that don't have

14:53

air conditioning, a billion people. So what

14:55

you're doing is, we're raising the standard

14:58

of living globally, we're increasing

15:00

carbon consumption. That's gonna create this kind

15:02

of like massive renaissance in terms of

15:04

carbon demand over the next couple of

15:07

years. And so that's part of this

15:09

whole new commodity boom. But then

15:11

on the other side of the coin, in the

15:13

United States, politicians now, because

15:15

Trump pledged to bring

15:18

back those jobs and hold. I mean,

15:20

Trump was like China, China, China. The

15:22

Democrats and Republicans have picked up on

15:24

that playbook around trying to bring jobs

15:27

back home. And they've created

15:29

different pieces of legislation that are designed

15:31

to do that. And unfortunately,

15:33

like you said, it's gonna take

15:36

a long time. And so it's

15:38

a lot of noise, but reassuring

15:40

bringing those jobs back is a

15:42

lot more inflationary than exporting them

15:44

around the world. And so that's

15:46

what this kind of crazy cocktail

15:49

because tariffs, Trump and Biden, Biden's

15:51

actually taken on its Trump tariffs,

15:54

and reshoring create a lot

15:56

more secular inflation. That's why

15:58

people watching us. right now

16:00

really need that whole new portfolio

16:02

for the next decade. We're talking

16:05

about colossal historic migration of capital

16:07

from one or two

16:09

asset classes over to the others. Well,

16:11

I'm thinking about the energy costs.

16:14

One of the things that I've

16:16

been thinking a lot about lately

16:18

too is data centers, AI, the

16:20

massive amount of demand and what

16:22

that's gonna do all over the world,

16:25

but especially in the US with our

16:27

energy grids. So, so much

16:29

of that, as much as we want to turn

16:31

toward green energy, but the bottom line is

16:33

we need to keep data centers

16:35

running and it's not necessarily gonna

16:38

come from solar power. This is

16:40

one of the most important parts

16:42

of the book when markets speak,

16:44

where we're talking about investing, where

16:47

people are looking at any kind

16:49

of new industrial revolution. This artificial

16:51

intelligence is just like the birth

16:53

of the internet. So what

16:55

happens is you have a lot

16:58

of awareness around a few different types of companies

17:01

that are leaders. Everybody rushes in and

17:03

we saw this in the nineties. I

17:05

lived through the nineties. We sold our

17:07

company, our dot-com company to Morgan Stanley.

17:09

I was on the front lines of

17:12

that industrial revolution of the internet and

17:15

people were piling to loosen, they're piling

17:17

into global crossing at Cisco. But

17:19

what we found is there were so many

17:22

other companies that harness the power of the

17:24

internet. Your match.com, your

17:26

Facebook, your Google, you can go on and on

17:28

and on. And it was the second,

17:30

third, kind of trades or

17:33

investment thesis that played out over time.

17:35

And those crowded trades didn't work out

17:37

so well. And that's where we look

17:39

at energy. If you look at,

17:41

if you say, look, just if you believe

17:43

say the people at Nvidia, the bubble in

17:45

2020, I'm sorry, 2022, it's

17:49

about 460 to 480 terawatt hours of demand coming

17:56

from these data centers. And

17:58

then, you know, if you believe. the

18:00

growth forecast and if

18:02

you believe the explosion of this

18:04

new artificial intelligence technology, we

18:07

think, and if we're talking to all different

18:10

consultants in the world, it could

18:12

be a thousand to two thousand

18:14

terawatt hours annually and that's equivalent

18:16

to potentially two Germanys or one

18:18

France combined in terms of new

18:20

energy demand. And so that means

18:22

that if you look around the

18:24

world at cheap natural gas or

18:27

if you look around the world at companies

18:29

that produce nuclear power or natural gas, but

18:32

these companies are extremely cheap relative

18:34

to the crowded AI trades and

18:36

it's going to be those companies

18:39

that produce and fund

18:41

and support the infrastructure for

18:44

AI that actually end

18:46

up being probably the 10 or 20 or

18:48

30 baggers whereas you

18:50

look at a company like Nvidia that's already

18:52

has a 2.3 trillion dollar

18:54

valuation for that stock to double, it

18:57

has to essentially go to five trillion

18:59

dollars, right? So it's a lot easier

19:01

for when people look at stock

19:03

prices, you don't want to look at the stock price, you

19:05

want to look at the market now, it's very difficult for

19:07

a 2.3 trillion dollar company double,

19:09

but the companies that support this

19:12

historic industrial revolution of artificial intelligence,

19:14

that's where the upside is and

19:16

kind of the second and third

19:18

tier names that don't get a

19:20

lot of attention. Speaking of big

19:23

ideas, another one that you bring up in the

19:25

book is the idea that the United States may

19:27

have become complacent about the dollar being

19:29

the reserve currency for the world. This

19:32

is interesting because we're seeing dollarization

19:34

in some countries, but we're also

19:37

seeing a move away from the

19:39

dollar as the reserve currency in

19:41

other areas. So what

19:43

are some of the push and pull here? Well,

19:45

you know, there's no question that the

19:48

dollar is not going to lose its

19:50

reserve currency status in the next decade.

19:53

But what we're trying to say is

19:55

that the hubris and complacency from

19:57

Washington, from both Democrats and Republicans

19:59

around. sanctions around property

20:02

confiscation. Listen, Putin's a

20:04

bad guy, did some bad things in Ukraine.

20:06

But when you use

20:08

sanctions and property confiscation to

20:10

that degree, all

20:12

the other players on the field

20:15

in the emerging market developing market space

20:18

are going to think twice about holding treasuries.

20:20

And that's why if you look at gold

20:23

and what we we wrote this

20:25

book over the last two years, and you know, I'm

20:27

really proud because gold is now making new highs. And

20:29

we predicted this in the book because central

20:31

bank ownership of gold is exploding.

20:34

And you can tell because the

20:37

ratio of say gold to platinum or gold to

20:39

silver is near 30 year

20:41

highs. And so that's pretty

20:44

crazy. Because what that's telling you

20:46

is the gold market is about

20:48

16 trillion in size, the silver

20:51

markets less than two trillion, bitcoins

20:53

around the same as silver. So

20:56

the big central banks in the world, the they

20:59

want to protect themselves or want to

21:01

protect themselves from sanctions or confiscation

21:03

of property. They will start

21:05

to move into other assets, they'll own less

21:07

treasuries. And you're seeing that in China, you're

21:09

seeing that in many countries. It's

21:11

not like we're going to lose the world's

21:14

reserve currency status. But there's definitely

21:16

a decay going on. There's

21:19

a matriculation out of dollars into

21:21

other assets. And that's going to

21:24

create and that's creating this incredible

21:26

move in Bitcoin and hard assets.

21:28

And that shouldn't also propel the

21:30

next big commodity bull market. So

21:33

just so to wrap up here, one of

21:35

the things that you say in the book

21:37

is the move toward those hard assets is

21:40

what's next. So as an investor,

21:42

are you looking more toward equities that

21:44

own those assets? Or how how how

21:46

does investors, how should they consider it?

21:49

Well, first, you need to remember a tech

21:51

stock that's long duration has like a 10

21:54

year group of cash flows, which is saying

21:56

you get a technology company that's going to

21:58

produce a billion dollars. the cash flows over

22:01

10 years and the company's going to retain

22:03

those cash flows and reinvest them. That

22:06

cash flow period, that

22:08

cash flow of 10 years, that company

22:10

is worth a lot less. That

22:13

tech company, that's what we call financial assets,

22:15

it's just paper. So you own a stock

22:17

of a company in technology, you own paper

22:20

in that company, it's a stock. And

22:22

those cash flows that you own over

22:24

10 years, they're worth a lot less. And

22:27

a lot of technology companies don't really own a lot

22:29

of commodity assets or anything

22:31

like that. They just own

22:33

the cash flows. But if inflation is

22:35

more certain over 10 years at a

22:38

higher point, then that stream,

22:40

that billion dollar stream of cash flows

22:42

over 10 years is worth a lot

22:44

less. And so what happens is those

22:47

growth stocks that are really popular and

22:49

really sexy, and really everybody has to

22:51

own them in a deflationary regime, because

22:53

in a deflationary regime, that's certain over

22:56

10 years, those cash flows are worth

22:58

a lot more. Now take

23:00

it on the other hand, our

23:02

asset companies like Altoa, companies

23:04

like Rio Tinto, companies like

23:07

Chesapeake in natural gas space,

23:09

they own tremendous reserves of

23:11

natural gas, of iron

23:13

ore, of nickel and

23:15

copper. They own the reserves in the

23:17

ground. And they own commodities

23:20

that typically are tremendous

23:22

inflation protection tools. And

23:25

so the types of companies,

23:27

the hard asset type companies is

23:29

very different than growth stocks. And

23:32

so the inflation regime, as you move from a

23:35

disinflation certainty regime to

23:37

an inflation certainty regime,

23:40

it's starting to move money

23:43

out of those kind of

23:45

financial assets into companies that

23:47

own and control lots of

23:49

deposits of hard assets. Fascinating.

23:51

The book is How to Listen When Markets

23:54

Speak. Larry, thank you so much for your time. Thank

23:56

you, Deidre. And well researched. I've done a lot of

23:58

these over the last two weeks. As always,

24:00

people on the program may have interest in the stocks they talk about,

24:02

and a

24:14

motley fool may have formal recommendations for or against,

24:16

but don't buy or sell stocks based solely

24:18

on what you hear. I'm Mary Long. Thanks

24:21

for listening. Thanks

24:30

for watching.