Transcription
And I think what's happening today, we're in the early stages of a real credit crisis that's coming out of private credit.
Looking now at the current situation, any similarities you can draw between right now, 2026 and maybe 2007?
And so those things are markets ignoring a potentially catastrophic credit event that is brewing and going unnoticed. That's what we're here to find out with our next guest, Lawrence Macdonald, founder of the Bear Traps Report. Lawrence was formerly at Lehman Brothers as VP of distressed debt and convertible securities trading from 2004 to September 2008, during which his division made $75 million betting against the subprime mortgage market and essentially betting against Lehman itself. Let's find out what Lawrence sees in terms of risks for 2026.
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Lawrence, welcome to the show. Good to see you. Thanks for being here.
Thank you, David. Thanks for having me.
So, Lawrence, the WTI oil price went to above $100 for the first time since 2022. It briefly touched $119 before coming back down to around $92 right now as we're speaking intraday March 9th on Monday. And as we're speaking, the S&P 500 is down about 40 basis points. NASDAQ is flat. So, mixed bag for the equities markets today. Gold is down. Bitcoin is up almost 3%. And importantly, the VIX is spiking up to now 27. It's now at the highest level since middle of 2025. So, what is causing this volatility besides the Iran conflict, which we know about and we'll talk about in more detail, but besides tensions and an open war in the Middle East, what else may be causing market volatility, what other risks are markets responding to right now that some investors may not be paying attention to? Lawrence?
Well, the intraday reversal is pretty short-term bullish because it's very rare that you have this kind of an intraday reversal. So, that's something to always note. But net net the financials are lagging. If you look at the semis and some of the technologies sector that's they're up on the day up one or two percent. But the financials are still lagging. And I think at the end of the day, everyone's focused on the Middle East. But as we talk about in our first book, The Colossal Failure of Common Sense, the Lehman inside Story, it's been published in 12 languages. It's a New York Times bestseller, and it's all about credit risk contagion. And the way the the truth bleeds out one drop at a time. The investment banks on Wall Street, they want to keep everyone invested. They want everyone fully invested. They're not going to really tell you the truth. And it's very clear if you listen between the lines over the last 6 months with private credit. They lectured us and lectured us and lectured us again in October and November that private credit risks were idiosyncratic. They were isolated to sayric color and first brands. But since then we've had maybe almost over a dozen different examples of either defaults or bonds that were marked at par and then marked to zero in a very short period of time. Credit, the word credit comes from the Greek word credite like you you just need that trust. Once the trust is broken, the if once the trust is broken, then there's a rush to the banks. And I think what's happening today is that they promised all these financial advisors, all these financial advisors quarterly liquidity on an asset class that is the most illiquid in the world. And that is we're in the early stages of a real credit crisis that's coming out of private credit.
Let me draw your attention to this article from the FD. Um, this is exactly what you're talking about. BlackRock limits redemptions at private credit fund as outflows swell. BlackRock is limited withdrawals from one of its flagship private credit funds following a surge in redemptions as investor retreat investors retreat from the asset class and questions about credit quality intensify. The asset manager's $26 billion HPS Corporate Lending Fund, which it acquired as part of its 2021 $12 billion takeover of private credit specialist HPS Investment Partners last year, approved 54% of redemption request in the first quarter according to a letter sent to investors in the vehicle. Is this normal behavior Lawrence?
No, it's it's not. And it's it's we've had a number of these where they promise people quarterly liquidity, 5% a quarter, but the requests are coming in much greater than that. And that's because trust was broken last year. And high net worth individuals are calling their financial advisor demanding exit liquidity. And what happens is when you have uh when I sat down in in our book How to Listen With Markets Speak, I sat down with Charlie Munger in Omaha and he always said, he goes, "Larry, beware of the three L's and the three M's." And I said, "Well, Charlie," and this is Warren Buffett's right-hand man for years. I was in Omaha. We sat down and I said, "Charlie, what are the three L's?" And he said, "Liquor, ladies, and leverage, right? That leverage in the system that is much greater than than than people than meets the eye." And then I said, "Well, what are the three M's?" He said, "Mark to market, marked to model, and mark to myth." And that's what's going on with private credit where you've got a lot of these securities that were marked really at a fake level, but because they promise quarterly liquidity, now the mark to myth, it becomes a reality because what happens is the funds have to raise capital. They have to sell securities and all of a sudden we we know where the the bodies are buried. We know where the securities are trading. And so if there wasn't this kind of run on the bank, we wouldn't even know where these securities should be trading. But because they promise quarterly liquidity to lots of investors, right now in the last month, we're starting to see this unwind and it's becoming very public for the first time that the books have been massively mismarked.
What additional credit risks do the Iran conflict present? In other words, will the Iran conflict I guess worsen credit conditions in corporate America?
Well, if inflation normalizes at a higher level, which it is, all of a sudden we don't get those global yields down enough, there's just hundreds and hundreds of billion trillions of dollars of securities that need rates to come down. Whether it be commercial real estate, whether it be private credit, there's a lot of securities that are really was sold to investors in the previous regime, that low interest rate regime. So if oil and this crisis in the Middle East, and because of that, you know, that obviously that big move in oil prices, if that forces global rates to stay up here and prevents rate cuts, you look at the Bank of England today, all of a sudden rate hikes are starting to come back into the picture because of this this big move in LNG and gas and oil. So inflation expectations are rising, but if you look at it in the UK, we've never seen the central bank, the Bank of England cut hike rates with unemployment this high. All right? So that's where you're seeing this oil kind of like this stagflationary world, which we talk about in the book. It's like this world where geopolitical risks, multipolar world creates financial stress through higher bond yields and energy prices and that keeps rates higher, creates a stagflationary world and that should push a lot of capital from financial assets, which are bonds and tech stocks, over toward hard assets.
How high does inflation have to be to qualify for stagflation by the way? Currently the CPI has been trending lower in the last couple months. So I'm wondering if you think this is going to pick up significantly.
Right. So if you listen to the Fed, they constantly have been in denial of stagflation. Powell said, "I don't see the stag or the inflation." Like he they really kind of joking about it really. They don't they're very arrogant. There's a lot of hubris. Um, I would say on a scale of 1 to 10, a 1970s stagflation would be 10% unemployment and 7% interest rates. That's like the crazy stagflation level from like 1980, '81. That's not the case. But if you think of where we were the last 10, 15 years with rates at zero and unemployment at unemployment rates at low levels, we're not going to go back to the 1970s stagflation. But yeah, are we going to go 20, 30, 40% maybe 50% of the way back? Yes. And and that's a big big game changer for a lot of investors watching us right now.
You currently track 21 Lehman systemic risk indicators for the Bear Trap Report, or I guess Lehman era systemic indicators. Can you just tell us what the methodology is and how many of these indicators are currently flashing red?
Well, we look for credit default swaps on the major financial institutions. We look at the high yield market versus say the loan market. And so there's a lot of credit indicators that that have been kind of deteriorating over the last couple of months where the loan market, like if you look at triple C's versus say high yield bonds in the loan market, the the the performance of these loans, these are bank loans, is pretty crazy relative to other cycles. So our 21 Lehman systemic risk indicators are not at 2008 levels, but they've gone from very low level to to a very like intermediate high level in a very short period of time. I guess the biggest point is to look at the BKLN or the bank loan index or any kind of portfolio of leveraged loans, which are a lot of them are tied to software. And what's happened at the end of the day, David, is that we've had trillions of dollars from from Silicon Valley come into capital expenditures on artificial intelligence, right? And what that's done is it's created all this disruptive capital which is wiping out a lot of software companies. And if you look at like Jack Dorsey with with Block, he wiped out 40% of his labor force two Fridays ago. And so there's all of this disruptive energy that's coming from artificial intelligence and it's creating the credit crisis. It's almost like all the capex, all that trillions of dollars of capex, the rate of change of the capex is actually accelerating the credit crisis.
Well, is there anything the Fed can do to ease credit conditions this year?
Well, if they cut rates, um, they're going to get a much weaker dollar, right? And that's going to give a bounce to inflation. So if they cut rates with with energy prices up at these levels and super core CPI still way above, if you just look at core CPI, we're like we're like one or two standard deviations greater than the long-term mean. So they're at a point where they really, if they cut, they're just going to going to going to bounce inflation. That's going to create more. And remember, David, you know, you and I are too young for this, but like I'm a I'm a little bit old enough to remember in the 80s, recessions were actually caused by inflation stress on the economy. So, so in other words, people haven't seen this. Like you get a big move in energy prices, bounce in inflation, hurt wounds, the consumer, caused the recession. And so that that's we're heading for that kind of world.
The um right now we have a situation where like you said, credit conditions may be worsening. So what is a credit market telling us right now in terms of risk that maybe the stock market isn't telling us or hasn't even priced it yet?
Well, let's look at the bank equities like Bank of America down 13% off the highs, maybe down 10, 11, 12% on the year. So the financial equities, the business development companies, the KKR's, we're talking like 30, 40% drawdowns, like the worst start for the financials since maybe 2008, like to start off a year. So that's one that's your radar is going to go up, right? But then on the loan side, um, the performance of the leveraged loans and the loan indexes, especially the triple C's that are exposed to all these software loans. So there's a bifurcation going on whereas the high yield index, the junk bond index, the HYG exposed to software. Whereas the loan market has a lot more software exposure. So, we're starting to see a a big credit u crisis that's in the loan market. It's starting to spill over to to um to to the high yield market, but it hasn't yet. That's where our 21 systemic risk indicators, when we if we see that contagion moving really aggressively up to high yield, then we're going to go to a much higher defcon level.
Well, take a look at this screen. This is from Koshi. It's a prediction market. Defcon level currently recession risk this year 31.8% according to traders. What will push this defcon level up even more? Notice how the odds of a recession according to traders have been declining ever since mid-July last year. And just recently, I'm guessing on the back of a new conflict in the Middle East and rising oil prices, we have now recession odds shooting up from 21% to 32% in a matter of a week. So, what will push the Defcon level up for you?
Well, there's three things going on, right? Whenever Wall Street's narratives start to change, David, um, Wall Street wants to keep everyone fully invested. They've been lecturing us and lecturing us and lecturing us again and again about idiosyncratic risk that is isolated some spots of private credit. So, they're starting to admit that that's not the case. They're starting to admit that there's a lot more credit spots that are vulnerable. But then there's Wall Street analysts on the other side of the coin around jobs. We were lectured last year that AI over the valley would create productivity boom. So there's two ways to look at AI. There's the over the valley which is the polyianish view and that's what Wall Street has had this view. They had a view that AI would be over the valley, create an incredible productivity boom, which would be great for the stock market. But the under the valley is the disruption period first. And that's the job losses that you're going to see from the Adobe's, the CRM. I mean, Adobe and CRM employ maybe 100,000 people, right? So, we're going to have hundreds we're going to have hundreds of thousands of job losses that come from artificial intelligence. And so, whenever Wall Street starts to change the narrative in a short period of time, they've gone from oh, private credit risk is idiosyncratic to all of a sudden there's all these we've gone from two spots and first brands to 17 spots. So, they're changing their narrative there. And that they're also changing their narrative on the over the valley versus under the valley. And it would AI was supposed to be over the valley productivity boom, good for the market. Now all of a sudden more and more and more analysts, more analysts are talking about this under the valley disruption that's coming from the labor market. I'm hearing some estimates. We run a Bloomberg chat with hedge funds, mutual funds, and pension funds. And the institutional investors we talked to talk about 200 to 300,000 job losses between now and June, July, August.
Yeah. Let's talk about the job market. So last Friday's job numbers weren't great. 94,000 jobs lost. What should be done going ahead if we were to assume that AI will cut jobs? Like you mentioned, hundreds of thousands of jobs potentially lost because of AI. We're already seeing that in the tech sector. Jack Dorsey's Block for example just laid off half his workforce. Now, should the public sector, the government do something to alleviate stress on American workers if we were to assume that job losses will occur? Should we preempt job losses from AI either in the form of more fiscal stimulus or perhaps UBI some people are calling for that or monetary policy should be looser? Anything that should be done now or should we just wait until it happens definitively to make an action then?
Well, that's a tough one. When you talk to people on the Hill, you know, we were we were in Treasury maybe a month and a half ago, two months ago. The midterms are important to the White House. They're trying to do a lot on home affordability. They've got a big crisis there. I don't think they want to hit the panic button yet. When you talk to people in the White House, you talk to people in Treasury, they're very cautious because they don't want to come out and admit even though what you said, David, is a very, I think, potentially proactive, wise move, I don't think they want to hit the panic button. And so, they want to kind of feel this thing out. And um, but by April, May is the key point to the midterms because they really have to if you if you talk to people that are close to the White House, they want to get all the hard um, the difficult things out of the way in the first quarter. That way they can kind of stabilize things into the into the midterms. And also there's a lot of tax on tips. There's a lot of potential um, there's a lot of potential stimulus that can come from from uh, from the White House in this this I guess second third quarter of this year as well.
Do you think that the unemployment that will rise as a result of AI will just be structural unemployment that happens per business cycles when things get rough when you know new shifts happen people lose jobs and they just find another job in maybe the same sector or a different sector or do you think it will be a lot more of a generational shift what we saw in the industrial revolution in the early 1900s where the entire labor force of the agriculture sector was basically wiped out and people had to find jobs in completely different locations?
Yeah, that that's the case. In other words, the question is how fast does it happen? And that's why you want to keep an eye on stocks like Expedia, um, stocks like in the transportation, CH Robinson. You've had these, you look at you look at IBM, right? You've had these big elevator shaft moves in certain equities over the last, you know, three months. And if you look at new highs versus new lows within the stock market, we're seeing extreme divergences. Whereas the the beast of the market is already starting to to to really call out the victims. And so, yeah, there's going to be this disruptive period of winners and losers. Eventually, we're going to go over the valley and people are going to find other places to work and there'll be more productivity. There's certain companies in the medical space um that are going to be using AI to their advantage and they're going to become a lot more profitable companies. So, there's a lot of good things happening, but there's that disruptive period that's coming at us.
What is your view on how high the oil price will get this year? So prediction markets are saying $133 a barrel more than 55% chance of $130 plus. Right now it's 92, just came down from 119 overnight. If it were to get to much higher than $100, let's say, what will need to adjust first, margins, corporate margins for the S&P, inflation, spending patterns, all the above, none of the above? What's going to happen to the economy?
Well, I think if you look at the call put skew or if you look at the amount of speculative buying of calls versus puts or futures and the energy market, upside futures versus downside, it's pretty extreme right now. So, I think that the high for oil is going to be in for at least for a couple months. And I I I can say that with a lot of conviction because we we study capitulation moments um scientifically and the move today is is um very very unusual. So yeah, I think the highs for for the year are probably in. There's a lot of things the White House can do to put this fire out. They get a lot of help from Saudi Arabia. Um, there's there's a lot they can release the SPR, strategic petroleum reserve. Treasury can kind of even Treasury could potentially even sell oil futures. So I I I don't see the Trump White House, you know, allowing oil to uh run rampant and destroy their midterm chances. I think that they're they're going to start to throw everything they can at this in the next couple weeks.
Um, what are we looking at? More fiscal stimulus, price controls on oil, stimulus checks to Americans for higher higher gas prices, perhaps lower taxes? What what can they do, Lori?
Well, the Sen could could actually sell oil futures, right? Um, they could do on they could do on the fiscal side. That's true. The strategic petroleum reserve, they could release the air. They could put a lot of pressure on the Saudis to increase production. The Saudis have this, you know, kind of backdoor phantom um supply that they can release. There's a lot of things they can do. They can put more teams on the ground in Venezuela to try to get up get production up there. Um, the the Iraqi production and the Iranian production is down a lot, even in Iraq as well. So, yeah, there's millions of barrels a day that are that have come offline and they're going to be scrambling over the next couple weeks to fill that void. But I hear you on the fiscal and kind of the MMT side of it, but that's not going to come for a little while. It's where you actually are paying people or you're using social programs to alleviate the pain. We're not we're not there yet.
Lawrence, can we take a look at um precious metals right now as a potential inflation hedge at $5,000 for $5,100 for gold right now? Is it still appropriately valued for someone looking to hedge against inflation if they haven't bought into precious metals already?
Well, yes. If you look at precious metals as a percentage of US wealth, we're still at like 1 and a quarter, 1.3%. So, there's not a lot of capital that's in precious metals. In the 80s, we were up near 3%. So, we're at the early stages of this, you know, big move into hard assets. And when I say hard assets, I'm talking oil, gas, platinum, palladium, gold, silver, every kind of commodity that that you can find. Um, but the move so far in in in in gold has been so vicious that it's it's really extended. The call puts skew on silver reached 8 to one at the end of January. That was like extremely rare. That's highly speculative price action. And so whenever the speculators come in, there's a lot of tourists. There's a lot of tourists that have come into gold and silver. And typically that means you're going to have a pullback period where you want to try to take advantage of that pullback and buy the dip.
What is the appropriate time horizon for somebody who should be thinking about when it comes to inflation hedging? When someone when someone says to you, Lawrence, I want something to protect my wealth. I want something to help me fight inflation over the next, I don't know, x number of years. What should that x be when you think about it?
Well, it it depends on the person's age. So, you take your age and that's the percentage of your assets that should be in short-term bonds. So, say you're 70 years old, 70% of your assets should be in short-term bonds and cash, 30% stocks. So out of that that money that's in short-term bonds and cash, you got to have at least in this day and age with inflation, you know, rear rearing its ugly head, you have to have at least 10 to 15% in inflation hedges. And that's hard asset type portfolios, whether it be copper, copper miners, gold miners, silver miners, oil and gas. You need to have, you know, some some portion of your wealth that's in companies that own assets in the ground. That's what gives you the protection against inflation.
Is there anything else that we can use? Some argue that the S&P 500 itself is an inflation hedge. Because businesses need to adjust for prices to keep their margins high. So over time, you're you're investing in an inflation hedge itself. Does that make sense to you?
That that there's an argument to be said for that. I just think I'm worried about the amount of the S&P that's in technology now and so it's up near 50%. I think you're much better off and say real estate. You're much better off in say a basket of hard asset place global equities. I think you're much better off and say a lot of global equities are value plays that own assets. Look at your BHPs, your Rio Tintos, your Valleys.
Okay. Let's turn now to investment opportunities. Your newsletter is called the Bear Traps Report. So how does one identify a bear trap? What what does that mean? What's the process there?
Well, bear traps. So say you're in a bull market and you get a move down and all of a sudden bears, some of the bears will lean into that move down and then all of a sudden you get a a big move back up and the bear is trapped. Right? So you're in a bull market, you get a move down in the market. Some people will sell into that or short that and then you get a move back up into the bull market and then the bear is trapped. And so the bear traps report is just a name for the report. But what we're really doing is we we work with hedge funds, mutual funds, and pension funds in more than in more than 25 countries. And we're democratizing information. We're sharing that intelligence from the Bloomberg chat out to a broad audience. And that's what we're trying to do is really, you know, you can get everything in life that you want if you just help enough other people get what they want. And to me, it's about democratizing information.
Okay. Can you just give us one or two examples of bear traps that you're following right now that maybe we haven't discussed already?
Well, one would be the semiconductors. I mean, there's a lot of people that are bearish on the semis. Um, we made a big move down to the 100-day moving average. I think the semis are going to break sometime in the next 6 months because of this whole artificial intelligence capex over overpromising. The memory, the memory side of the semis is extremely extremely expensive and some crazy crazy valuations. But um, yeah, the biggest bear trend in the market for at least for the short term could be um could be the semis where you get this nasty move down and then a retest to the highs and then you know then then you make the new lows.
Uh, the um, what happens now to the stock market throughout 2026? Maybe just get your outlook on the S&P 500. The 10-year yield has been climbing even as the economy weakens. Anything that the Treasury market is signaling that equities investors can take away from?
Well, before this move in oil, we had a very mysterious weakness in yields, bond yields, strength in staples. So there's no question, David, before this move in oil and the Middle East, the bond market was telling us that disruption from AI, job losses, and credit risk coming from private credit was starting to overpower the bond market and starting to lower yields. People really people buying bonds in anticipation of of a recession. This was all going on in the last month. And then at the same time, it was mind-blowing how the performance of the consumer staples relative to the discretionary stocks. The consumer staples are your recession-proof stocks. They've been destroying the market and the consumer discretionary for this year. That's another ominous side. You know, how to listen when markets speak. That's something you want to pay attention to. when you see bonds, you know, bond yields that have been typically pretty low and and kind of all year long kind of coming down before this week. So, there's no question that there's something under the surface in private credit and in job market disruption that has kept rates much lower than they would be. Like this type of oil price, you should see you should see bond yields much higher, but there's something going on under the surface.
There have been periods of time when bond yields have moved positively with the stock market. Their correlation has been positive and there have been times when their correlation are are has been negative. And so tell us about whether or not it means anything when the correlation shifts from positive to negative and where you think things will progress from here.
Well, we talked about this in our first book, A Colossal Failure of Common Sense. When Lehman went down, um, you had about $4 trillion of loss in the stock market, but the bond market made back about $3 trillion. And so even though we had a financial crash in the stock market from say 2008 to 2010, a lot of money was made in bonds. And that's where you're talking about is stock prices went down and bond prices went up. And that's the way the the relationship has been for much of the last 20, 15, 20 years. Something's happened since 2022. And since 2022 duration, which is long bonds, like more than 10 years in maturity, no one's made any money in in longer-term bonds. And so even when like say last year when we had that big move down the stock market in April, stocks were down and bond prices were down and yields were up. So yeah, I think we're in this new world where for much of the last 20 years, lower stock prices got you higher bond prices. And for a whole bunch of different reasons that we talk about in our book, we're in this new regime where lower stock prices actually come with higher bond yields. And that's that's something every investor has to pay attention to.
You wrote in your latest book, How to Listen When Markets Speak, that passive index funds now command over 50% market share. This concentration may slow the market's ability to react to regime changes. You wrote, "Now you've argued that passive index funds are like an aircraft carrier that cannot turn fast enough when the world changes." How does that apply to current situations?
Right. It's like everyone is stuck in the S&P and everyone the there's a point where so think about 20 years ago the amount of money was an active versus passive. Most of the money was an active management and active management that means that people there's a portfolio manager that's choosing stocks. Passive management is just an index of stocks. And so when you go from when when passive when passive versus active goes from 51, 52, 53, 54 to maybe like 58%. That's where we are now. The market becomes more and more and more dysfunctional because there's so many people that are in the passive side and those shares are being held by BlackRock, State Street, right? Vanguard. There's no real active manager that's picking winners and losers. It's just a a large group of people that have their shares held at BlackRock, Vanguard, and State Street. And nobody's on the conference calls. Nobody's actually doing the homework. And so the market gets dumber and dumber and dumber. And so we we argue in the book that when active management versus passive, passive starts to get up near 60%, that's when you want to really take down your exposure to to passive investing.
Finally, let's talk about what lessons at Lehman Brothers you've learned that we can apply today. So, you've like we like I talked about in the beginning, I mentioned that you were at the Lehman trader traders Lehman Brothers Trading Desk when 0708 happened and then you later served as a special advisor to the Financial Crisis Inquiry Commission. First of all, how did you identify the crisis, the credit crisis that ensued in 2008? Let's start from there.
Well, there's no I in team like I was part of a great group of traders. And there was a group of revolutionaries within Lehman that were trying to stop the madness and one by one by one they were kind of silenced. But what we saw in 2007 into 2008 is a lot like what's happening now. Whereas you have credit risk that's coming in and people originally downplay it with kind of hubris type knockoffs like they're just not taking it seriously, but then the credit risk becomes more serious. So that's to me that's the most compelling similarity between today and 2008 where you've got this big credit problem. If if like I said, 4 months ago was idiosyncratic to two, all of a sudden now we've got 12 different credit events that are tied to private credit and also tied to artificial intelligence and software weakness. And so, yeah, so I think you need to to monitor the sales pitch coming from Wall Street because Wall Street is like a buffet. This when the chef comes out of the kitchen, he isn't going to tell you not to eat this or that. He's going to tell you to eat everything, right? The chef, Wall Street strategists are never going to tell you to take down risk. They're they want every investor fully invested, right? And this is a point in history, I think, where you you want to listen less to Wall Street strategists and more to independent thinking.
From what I've gathered, just reading up on your story, and correct me if I've got the facts wrong here, but your division made about $75 million shorting Subprime while the CEO and executives at Lehman were obviously long these assets and ultimately they failed. Just tell us about that process. Were they trying to hedge with your desk? Did you did you warn the higher-ups about the bigger problem than they should be unloading? When did they listen to you? Just just give us a just sense of what happened.
So the fixed income division at a bank. Um, has all these different silos and the bank has all types of silos. You've got people in emerging markets and all these different business units. So within the high high yield and distress desks, yeah, we made about $2 billion in say 2007, '08 betting against subprime mortgages. You we were short New Century. We were short Countrywide. But on the on the on the senior floors on the on the mortgage desk and on the commercial real estate departments, they were so over the top invested and they made so much money in the previous decade that the Lehman senior management didn't want to listen to anybody else. They wanted to to listen to that that group and that group kept the bank really fully invested in illiquid assets and it got worse and worse and worse and worse.
Did uh did um I mean did the executives actually consider offloading when they saw you know mounting profits take place but then it was too late I guess.
Yeah. So there's a scene in our book where Mike Galban, Mike Galban went on to found um Exodus Point, the one of the most the most successful launches of all time. Mike Galban, Alex Kirk. There was there was a group of revolutionaries that were trying to stop the madness that wanted us out of subprime that were meeting with senior management and demanding that we take down the risk and they were basically pushed out of the firm.
Yeah. Why do you think Lehman was sacrificed when a bunch of other banks were failed bailed out with the TARP plan?
You needed a big bazooka from Washington and there was a moral hazard moment where they had just bailed out Fanny and Freddy. They had just bailed out a number of other they essentially bailed out Countrywide. They forced Bank America to buy Countrywide. So there was like this bailout bailout bailout regime and I think they needed a moral hazard moment where they needed a victim. And that if you look back at what happened is the first TARP plan, which is the troubled asset relief portfolio program, that that bill did not pass um in Congress, but once Lehman failed, that bill passed pretty fast. So they needed they needed a victim to get some of the big bazooka in into the you know out of from Washington into the markets.
Did your experiences at Lehman give you any insight between the differences between managing risk and managing uncertainty? Are they two of the same words? They're basically used interchangeably in finance. But did you have a different conceptual approach to risk and managing uncertainty?
Yeah, it's after living through that you become jaded and you you're less trustworthy of bull markets. You're less trustworthy of all kinds of price action. So, you know, sometimes you miss out on opportunities like in 2021 it got really crazy on the upside and people were buying NFTs and cryptos. You know, we're more value investors and we just we'd rather own companies that have beautiful free cash flow yields, great valuations, companies buying back stock. And that's kind of like that Lehman experience has forced me into that kind of mindset of buying some of the natural gas names today are are incredible businesses, 10, 14% free cash flow yields, which means they producing so much free cash flow. They're buying back a lot of stock underneath the market and you've got the whole artificial intelligence energy trade behind you with natural gas and coal. To me, that's that's where you want to be investing. That that's more of a value mindset.
Okay. And finally, looking now at the current situation, any similarities you can draw between right now 2026 and maybe 2007?
Yes, just like I said before where the narrative is starting to change. Look at David Solomon. Like if you look at his quotes or if you look at Lloyd Blackbine's quotes in the last couple weeks, look at the quotes from the UBS analyst. It's in our most recent report. There's definitely been a violent shift in admission of the credit risk that's coming from private credit and it's also coming from artificial intelligence impact on the software loan default cycle as well. And so those things are very similar to it's about the rate of change of a narrative on Wall Street. And if the narratives are changing slowly, you can have a nice bull market. When the narrative change fast, that's when you know something's about to happen.
Uh, thank you very much. I appreciate your insights. Lawrence, tell us where we can find your work and what we can expect to learn from the Bear Trap Report.
Uh, thank you, David. Yeah, so it's at convertbond onx.info at the beartrapsreport.com. and get our latest reports. And uh, yeah, what we're doing is really sitting down with institutional investors every day. We do ide last year we did ideas dinners in Zurich, Geneva, London, LA, New York, and we take that intelligence gathering and we share it with a more broad audience to high net worth individuals, family offices, financial advisors, try to democratize information.
Yeah, absolutely. Well, appreciate that and we'll make sure to follow your work there. So, we'll put the links down below. Follow Larry and and his team's work in the link in the description down below. Appreciate it, Larry. Good to meet you. Thanks for coming on the show and I look forward to hosting you again. Take care for now.
Thank you, David. A great job on the research coming in here. You did you did an excellent job. Thank you.
Well, I can't take credit for that. Like you said, there's no I in team. So, I thank my team for that. And uh so, thank you team and thank you Larry. Thank you to the audience. Don't forget to like and subscribe. Don't forget also to use my code lin link down below or scan the QR code here. When you sign up to Koshi, new users will get $10 deposited to your account when you trade $10 using my code.