Larry McDonald: Upcoming Rate Hikes will Inflict more Pain than Normal
Tom welcomes a new guest to the show, Larry McDonald. Larry is a New York Times bestselling author, CNBC contributor, and Political Risk Expert. He created The Bear Traps Report, a weekly independent Macro Research Platform focusing on global political and systemic risk with actionable trade ideas.
Larry discusses how bad leverage has become in the markets today. Small rate changes now create huge amounts of interest payments. The Fed will be unable to hike rates for long and that will be bullish for metals. The Fed is very far behind the curve. Many foreign countries including Poland, Brazil, and Russia, have hiked rates several times, while the Fed has yet to take any action.
Credit markets are weakening quickly, particularly in Europe, and inflation is becoming rampant. The yield curve could soon become inverted. Companies like Costco do well in recessions and are now outperforming.
Larry explains how the dollar desperately needs another ‘variant’ crisis to save the day. This is due to the economics of capital flows moving outside of the U.S. economy. Today’s media complex needs shock to capture the public’s attention. We’ve seen an incredible tailwind for stocks, bonds, and growth stocks.
He explains the effects of risk on with miners and notes that silver can underperform gold in certain situations. Most economists have no understanding of risk management. Any shift from a hawkish to a dovish stance by the Fed can cause silver to outperform.
Tesla and other electric car companies are seeking ten-year contracts for certain commodities like magnesium, silver, and copper. These are not unlike the typical uranium contract. From here, silver miners could easily have 7x upside potential.
Their economic model helps them find the capitulation lows. Larry notes that we’re currently approaching peak market exhaustion.
Holding metals for long periods is often a poor strategy. The early parts of a commodity cycle are going to be key for investors. Currently, aluminum equities are crushing gold in performance terms.
There is little room for error in the oil markets. Should demand spike and ESG continue to constrain the industry, we could see a large price shock. The energy demand alone from places like India and China will surprise in the coming years. ESG and Covid have crushed capital investment in energy and it’s going to take time to turn this capital deficit around.
Lastly, Larry examines the relationship between the VIX and Bitcoin. Bitcoin gets hit hard when risk enters the markets.
Time Stamp References:
0:00 – Introduction
1:16 – Market Risks Today
4:45 – Rates & Inflation
6:58 – Bond Markets
12:00 – Dollar Problems
16:06 – Miners Outlook
18:48 – Silver Mis-Priced
24:55 – Platinum Fundamentals
27:40 – Miners & Timeframes
30:36 – Buying Right
34:30 – Taking Profits
37:54 – Oil & Demand
43:36 – Bullish Action
46:58 – VIX & Bitcoin
49:23 – Wrap Up
Talking Points From This Episode
- How excess leverage is cornering the Fed and the possibility of a recession.
- Why the dollar thrives on crisis.
- His expectations for silver to outperform.
- Energy and why he expects further supply shocks.
Larry McDonald is a New York Times bestselling author, CNBC contributor, and Political Risk Expert. He is also the creator of The Bear Traps Report, a weekly independent Macro Research Platform focusing on global political and systemic risk with actionable trade ideas.
Thought-provoking Larry McDonald presents his captivating views on the Trump Administration, U.S. Financial Crisis, European Sovereign Debt, and China’s Economic Meltdown – spiced with actionable risk indicators, risk management lessons, and sprinkled with humor.
In 2016, Larry McDonald joined ACG Analytics in Washington D.C., as a partner with a unique skill set, as one of today’s leading political policy risk consultants and strategists. From 2011 – 2016, he was Managing Director and Head of U.S. Macro Strategy at Société Générale.
In 2010 he founded an investment research firm which publishes the The Bear Traps Report, focused on Political and Systemic Risk with actionable trade ideas. Larry makes weekly appearances on CNBC as a contributor focused on political and economic risk and opportunities.
In late 2006, as Vice President at Lehman Brothers, he led his team into betting against the subprime mortgage market, profiting the firm over $2 billion before its demise. In 2009, he wrote the international bestseller A Colossal Failure of Common Sense, The Inside Story of The Collapse of Lehman Brothers – translated into 12 languages, selling over 400,000 copies.
Prior to working at Lehman, he was the co-founder of Convertbond.com, a website that provided convertible securities information with news, valuation, terms and analysis tools for convertible bonds, convertible preferred stocks, and other convertible securities. Convertbond was acquired by Morgan Stanley in 1999.
Larry McDonald’s proprietary risk indicators and risk management lessons are designed for Family Offices, Sovereign Wealth Funds, Hedge-Funds, and any investment group working to avoid the dangerous pitfalls in the post-Lehman financial markets.
McDonald was featured in the Academy Award winning documentary: Inside Job, and also featured in National Geographic’s award winning documentary: The 2000’s. He is a regular contributor on Bloomberg TV and Radio, Forbes, CNBC and Fox Business.
Larry has delivered over 125 keynote speeches worldwide. He details the complexities of the political policy implications of the Trump Administration and their relationship with Congress. Larry also adds the Lehman factor to his speeches, “why it was allowed to fail”, and above all – valuable risk indicators which help investors avoid the aftershocks that continue to rock the global economy until today. His presentations are thought-provoking and captivating.