Transcription
the probability that you have a real inflation bounce in the third and fourth quarter is is almost certain.
Now, a lot of the sophisticated investors are pointing this out to me that we have a there's some there's some tremors before the quakes, right? There's a quake coming. But in a multipolar world with global conflicts, uh higher interest rates, higher bond prices, it forces a dramatic alter like it changes the capital formation. In other words, you need a whole you need a whole new portfolio construction for your 401k, for your for your stocks and bonds because you're in this new world. It's a multipolar world. It's higher interest rates, higher inflation. And now we have the Iran rebuild. Think how inflationary wars are.
>> Welcome to World Affairs and Context everyone. I'm your host Lyanna Petrova and today I'm thrilled to welcome back Larry McDonald. Larry is the founder of the Bear Traps Report and a widely followed financial expert on global macroeconomics, financial markets, and systemic risk. Larry is a former Wall Street trader and the author of really, really great books, A Colossal Failure on Common Sense. And he also wrote a new book recently, How to Listen When Markets Speak. I will link both in the description below. Today, we will discuss the biggest risks facing the global economy, the outlook for stocks and bonds, inflation, geopolitics, and everything in between. Larry, welcome back. It is so great to see you again.
>> Thank you, Lena. Really appreciate it. No, I'm thrilled for this conversation. I know you have a lot of interesting insights and um I'm really looking forward to uh to to to hearing the details. Let's begin with the overall picture. Larry, many market analysts focus on equities, but you have consistently argued that the bond market is the real signal. As the war against Iran that was launched by the Trump administration escalates and continues to threaten global energy supplies, how do you see the oil market transmitting stress into bond yield, inflation, and of course ultimately financial markets in the United States and across the world.
>> Right. Right. And that's and it's good timing that we're talking this week. uh in recent days we hosted uh an ideas dinner with really the top chief financial officers some of the top chief financial officers in New York. So we don't produce a newsletter. What we do is we we want to give family offices and high net worth individuals and financial advisors a lens a valuable lens on a buyside conversation. In other words, it's not that I'm some smart guru. It's we've really built this incredible network together of in awesome mentors and when you do the ideas dinners and you host the meetings privately in New York and then you host what we call our Bloomberg chat you gather intelligence from all these incredible different angles and it really helps you put things together. So, one fascinating thing is that the portfolio managers managers in the chat in our in our dinners that have been really right on credit and really bullish on credit. Uh they've turned more bearish and this not just one. There's probably three of them. They're in like two different countries and three different cities. They don't know each other and but they're they're not permabulls. They're not perma bears. They're they were extremely bullish the last couple years. And I think what you were what you're talking about is is is if if distillates, which think about oil, oil, the Trump administration is like holding the beach ball underwater. They've done a good job by draining the SPR, the strategic petroleum reserve. But at our dinner last last in recent days um if you look at distillates which are you know jet fuel or diesel all these other sulfuric acid um chemicals these these prices are still very sticky and the strait's been closed 120 days right and so the probability that you have a real inflation bounce in the third and fourth quarter is is almost certain now and that's having an impact on bond yields. And then on the on the hyperscalers, um just this week, Apple CDS is at new wides. Uh Oracle credit default swaps. The cost of default protection on Oracle is ripping higher again, new highs. There's a lot of off balance sheet financing. And so it's the energy shock that's going to pressure yields. And then it's the amount of bonds being sold, right, to investors. Like in some ways, the amount of data center spending and all that debt, those debt sales. Think about those debt sales, $700 billion of capex this year was supposed to be 4 billion, 400 billion. Now it's 700. And a lot of that's debt financed. And so now you've got the hyperscalers, Google, Microsoft, Meta, Amazon, they're all competing with Uncle Sam for, you know, selling bonds, right? And so there's that angle of it. And so plus what's happening in the strait of Hormuz where you've got this, you know, really further further blockage. It's like an artery in your in your body that's just blocked and the second third order effects on distillates is really going to impact inflation and so and all that's coming into the midterms. So yeah, that's going to impact bond yields and it's starting to impact credit spreads. Um if this conflict expands as it appears to be on track to expand, we know that the Houthis or Ansarah just announced a blockade of the Red Sea um as sort of the continuation of the conflict with Saudi Arabia that bombed their um airfield about a week ago. So if this conflict expands, which it it's it it appears to be on track to do, and if energy prices continue climbing, which we know is sort of this is sort of a logical um logical uh continuation of of what we see unfold in the Middle East, do you expect the Federal Reserve to prioritize fighting inflation or supporting economic growth? In other words, are we heading toward another stackflationary environment?
>> Yes. And that's why we love the gold miners down here, the GDX, Agneo, Eagle, Apple, Edward, Mary, uh, free cash flow of six, seven six to seven billion dollars, a free cash flow yield about 8%. That means that they're they have so much free cash flow, they produce gold at $1,400, $1,500 an ounce, and gold's around 4,000. So you've got a lot of these gold miners that are really cheap. And in a stagflationary world, that's the trade that really works. At the end of the day, the only way out of a, you know, $40 trillion debt hole is they want to keep inflation um they want to really keep interest rates below the rate of inflation.
>> And so they're going to do whatever they can to be a little bit more doubbish um than than meets the eye. I mean, they should be hiking rates. They won't. Interest on the debt's 1.1 trillion, right? And if and if they if you look at the average weighted maturity and the average weighted coupon on the government debt, if they raise rates, uh they're going to really push that interest cost up, right? At a time when that interest cost is taking a lot away from the US government spending like a lot of that spending and the government, the government's obligations, a lot of it has to go to interest costs. And so, yeah, so they're going to do whatever they can to uh to they want to the way you think about it. If if you you have four $40 trillion debt, if you if you go into a elevated inflation regime, this what we talk about in our book, How to Listen Market Speak. If you go into that elevated inflation regime, you can pay the debt back with cheaper and cheaper and cheaper dollars down the road, right? And so that's how you inflate your way out. And that's the dirty secret is the Fed's new inflation target is really 3%. They they kind of been lying to us that it's 2% and we've been above the 2% target for the longest period I think since the 80s or 90s.
>> Larry, you're the expert on on the bond market. And I know very frequently we hear people say, "Well, the stock market is doing great." And of course there are reasons for that, too. But in recent weeks and months and certainly days, Treasury yields have climbed sharply despite expectations of slowing economic growth. Um, what is the bond market effectively telling us that perhaps equity experts or equity investors are ignoring?
>> Right? There's a credit crisis coming at us in terms of the amount of off balance sheet debt the amount of off balance sheet debt coming out of the out of the data centers is is pretty crazy and so that's the first angle the second angle just look at the restaurants today you've got McDonald's breaking down Darden restaurants you've got lower lower highs and so the consumer the bottom 60% of consumers are in a lot of pain right and so that, you know, that may if you look at triple C's so high yield bonds companies that face consumers they're they're in bad shape really like triple C's like the junk bond market is is near the tights but it's widening and so the credit market's telling us there's a problem and a number of people in our in our conversations that were really bullish on the financials for example they really see a credit problem developing um on the consumer side on the bank lending side really the banks right now priced for for perfection. Record price to book at the banks. Uh Bank of America record price to book cost of the cost of the bank is the most uh all time. Same thing with with JP Morgan.
>> Mhm.
>> And so the credit market's underperforming the equity market and a lot of times through history credit leads equities. This is what happened before Lehman Brothers in the financial crisis. It's not as dramatic, but in some parts it is like the like I said today, Oracle credit default swaps blowing out. Uh it's a really all-time high all time. Nvidia credit default swaps are are moving much much wider. And so that to me that says a lot. The Nvidia credit default swaps and we can sh a chart will be out tonight in our note. um they're they've been making new highs every single day. And that tells you that circular financing between the hyperscalers, all this all these games that are being played, right? It's the Dr. Oppenheimer in in Silicon Valley. They're all like trying to outspend the next guy and and you know, OpenAI is paying this bill for Meta and Meta. The whole thing is like circular financing. So, I find it interesting that Nvidia credit default swaps are moving wider every day with Oracle. Now, before it was Oracle moving wider by itself, right? Now it's it's Nvidia is picking up steam. So that tells you that there's there's really a breakdown in the confidence level of this circular financing of the hyperscalers, the off balance sheet debt, this Kimmy 3 coming out of China, which is like that deep seek moment where there really isn't any return on investment. This is and that's all part of the next credit crisis. This is what I'm getting from our top institutional investors really in the world that we've been meeting with in in recent days.
It is this is fascinating. Um, and so you've mentioned all of these very important uh driving factors that influence the bond market and and sort of the the credit the situation in the credit markets. Then there's another sort of elephant in the room that I would love to get your thoughts on. Foreign central banks have become less dominant buyers of US treasuries recently and it's private investors and hedge funds um that are playing a larger role. So, does that really tell you something? Does that make the Treasury market even more structurally uh fragile considering the facts that we just discussed previously in this conversation?
>> Right. Well, keep in mind Kevin Worsh, Stan Ducken Miller, and Scott Bent are best buddies, right? And they're all close. and Worsh and Bent, our Fed chair and our treasury chair, they're really brilliant financeers. They're absolutely brilliant. They're the Yellen Treasury was more like the faculty lounge, you know, like you know, the people, you know, these people have never taken risk before. a lot of these Fed governors and people at Treasury like Jack Lou uh was a treasury secretary without a lot a lot of really real world experience but Wars and Bet they're talking to Stan Denmiller every day. Draen Miller is probably the most famous hedge fund of all time. So, so these guys they know this is a mess. They know China's buying less treasuries. So behind the scenes what they've been doing is what we call and I'm getting this once again from the best and bright brightest hedge funds in the world that we have a daily conversation with in more than 20 countries but I call it bentense bag of tricks right? So they're forcing the tre the banks to buy more treasuries and what they're doing is essentially, they're putting a gun at the head of the banks and they're saying listen we're going to pro we're going to offer you deregulation and Michelle Bowman's done a great job there. Like they really want to deregulate the banks. The banks love it, but in return, the banks have to buy more treasuries. And so there's there's that element. And then there's this stable coin bill, uh this legislation that's on the hill. 5 years ago, stable coins were like 75 billion. Now they're $250 billion. And in five years, they're probably going to be 500 billion. Why does that matter for people listening to us right now? Stable coins own T bills and gold and uh and a little bit of Bitcoin in some cases in case of Tether. So if if they're forcing the banks to buy more treasuries and you've got stable coin, if the stable coin industry continues to grow like this and if this legislation passes, it's going to be a lot more powerful. They figure that they're going to have a lot more buyers on the front end from stable coins. And so right now, if you got from 75 billion 5 years ago to 250 billion, all of a sudden you're at 500 billion in three, four, five years. And so they they're nervous. They're as nervous as a longtail cat in a room full of rocking chairs. There's no question about it. But they have a plan. And so far that plan has been offsetting the fairly ugly deterioration in global buyers of treasuries. You're absolutely right. There's been a big step back in China. Uh the good news is there's been a big step up from say countries like Japan and the United Kingdom. And so it sounds worse than it is. It's still a problem and we're still going to be in a higher interest rate regime. But there's a lot of dirty shirts. Dirty shirts. Look at the UK today. like yields breaking out. And so there's a lot of other balance sheets on the on the on the sovereign side, government side that are in worse even worse balance sheets than than the United States, believe it or not.
>> Oh my god. I don't know if that's good or bad news for us, but um if if we for example sort of take a step back and I would love to get your thoughts and kind of what you hear when when you speak to those um experts and investors. But if you take a step back, I'm sure there are many people who are listening to this conversation and they think, okay, well, I'm not investing. So, does this really apply to me? So, for example, if the 10-year Treasury yield moves, let's say, toward 5% or higher, walk us through what happens to housing, corporate borrowing, and even equity valuations. And and how how is an average American going to be affected by those rising treasury yields? Um, an average person who may not be, you know, actively investing in equities, for example,
>> Right? And so people don't people don't understand from like 2017 to 2020 21 uh there was trillions and trillions and trillions of issuance you know more than probably 60 trillion of treasury issuance of corporate bond issuance of commercial real estate issu like all this debt issuance right and that was all done at like very low interest rates were near zero. So what happens is as interest rates go up, bond prices come down. There's an Apple bond which is trading like at 53 cents on the dollar. It's like 2.55% coupon. So it's really low. It was issued at par. So it issued at 100. So think about this. It was issued at 100. It's now trading at say 53. And that's because interest rates went up, bond prices went down. So to your point, in the old days, 5% didn't mean as much. Like we hit five five five and a half% in 2007 and it did it actually did bring on helped bring on the financial crisis, but for a while it didn't mean much. Eventually those subprime loans that had reset and that was created the big one of the big drivers of the crisis. here it's it's even it's much worse because the losses on the bank balance sheets and on the balance sheets of all the people that own this commercial real estate debt all the all the debt out there that was issued at 1% just like this Apple bond it's 2.55% coupon due ins issued at par it's trading at 52 so think about that all across the system there's massive losses so when you go from four to 5% today. That's like 20 years ago going from 5 to 9%. Because there's so much more debt in the system,
>> Right? Um, and and
>> that was that was issued at almost zero. You know what I mean?
>> Right. Right. Yes. Exactly. And so despite all of this, the S&P 500, if you look at the chart, it continues trading near historically elevated valuations, despite rising yields, despite escalating geopolitical tensions, despite midterms coming up in this very uh questionable and uh fragile domestic political situation and certainly international political situation. So if you look at so let's just focus on the stock market is it fair to say that the stock market is becoming too complacent or what what is your view on the S&P 500 uh sort of rising and appearing really healthy despite all of these red flags that we see flashing in multiple areas at the same time.
>> Right? And so market's done okay. Um, what's weird is seasonally July should be the best month of the year and the first two weeks of July should be easy easy street. We've had some volatility in the last week and I think a lot of the sophisticated investors are pointing this out to me that we have a there's some there's some tremors before the quakes, right? There's a quake coming, but the the way the market's acting like the market's really gone nowhere. Nvidia's unchanged since October. Uh Microsoft's unchanged for 3 years. Meta, same thing. Meta. So there's a big rotation going on the market. Money's coming out of big tech. It's going into other parts of the market. Um, some of the some of the companies that own assets. So our big trade is you want to own the energy companies. You want to own the oil and gas companies. You want to own the companies that control assets in the ground. um because there's at one point there was 40 two 43 trillion in the NASDAQ 100 and about about two and a half trillion is left. So although although the S&P is doing well, there's definitely these these big big kind of cracks forming where the leadership the leadership of the market is really broken down and you want to make sure and like you said on valuation the risk reward here seasonally is horrible. like the the probability that you get a big draw down in September and October seasonally is is very high and and then everything that's going on with Mag 7 and memory and all of that with China like there's really a a crisis coming because we've in we've essentially invested the plan is to invest4 to5 trillion dollars in artificial intelligence capex China's stealing a lot of our information throwing into open source It's like a bunch of piranhas, you know, stealing the United States uh intellectual property and the return on investment. Now, there's a big debate like look at Alex Karp and this doesn't come from me. This comes from people in our Bloomberg chat in our dinners that were really really bullish on technology, really bullish on semiconductors. They've turned bearish because of this mysterious return on invested capital. there's like a a wakeup moment with Alex Karp saying some things uh in a negative way and a lot of other high profile investors starting even you know Chimath uh and that whole crew over there there's a number of very knowledgeable investors that that are looking at the hyperscalers looking at the capital expenditures there is no there there like there's no possible way they're going to get a decent return on investment and that's causing That's that's what's probably going to bring the market down the next couple of months. I think the market the probability the market crashes between now in in October and I'm talking about crash like down 20 30% is pretty high.
Um, I think many people are pointing to the fact that the Trump administration is very skilled at um sort of u I don't want to say managing and or influencing but uh sort of uh playing with the market right and with the sentiment and and you know uh Friday everything is good and we got a ceasefire and there's probably going to be a deal over the weekend then come Monday morning more strikes right on on Iran and and and more escalation. So, how are investors and experts how are you sort of um adjusting to this environment where there's so much volatility and and so much is driven from sort of the political circles, right? And and from political action in in Washington and uh you know, some of it is in Europe, but but mostly coming from from Washington,
>> Right? It's so it's this is not a real estate transaction in Manhattan, right? Where Trump is negotiating with a sound mind and body individual on the other side. He's dealing with five factions in Iran. So what happens is he does a deal with one or two and think of the IRGC. This is the Republican Guard, the military. There's five factions over there too. And so when he when we do a deal, a peace deal, a ceasefire with one or two factions, all it takes is one or two of the other factions to throw missiles at ships and next thing you know the strait Amore is closed for 120 days, 130 days. And that's why you're seeing a huge divergence between distill it's like that diesel. One of the one of the investors at our dinner thought diesel prices could go up 100% from here, right? Because of that of that congestion. Now, Iran knows that here's the good news for the United States and Saudi Arabia and the whole the whole Middle East. We're building at a very fast rate of change. We're building probably six different uh pipelines that are going to go all they're going to basically neutralize the strait of Hormuz. They should have done this decades ago. And but the Iranians know uh and the Houthis know that they have leverage right now. That leverage is a melting ice cube. It's not going to be around in two years. So, they're going to do whatever they can now to be disruptive and try to get a pound of flesh out of the White House. They want to get financial compensation. There's a whole bunch and the White House is is forced to try to play hard ball back at them. And so, that's what really could unleash the bond market. higher energy prices, a spike in inflation, just like 2022. We had that spike in inflation. NASDAQ went down 30%. Right? And and we had that Ukraine war and big big inflation spike. It's not going to be that bad, but that's one of the big wild cards that's going to disrupt the midterms and inflation because if you close the strait for 120, 130. So, that was a big debate at the dinner the other night at at the Harbor Club in New York. It was that if the straits closed for another 30 days, the way it is, you know, [snorts] now, uh, yeah, we get a eventually we get a big move up in oil and then the strategic petroleum reserve is down to that really dangerous level. And so, this gets complicated, but there are these caverns, right? So, that there's oil in storage, but of different quality. and uh some of it's you know better quality than others. And so the the level right now the level of that storage is on the very very dangerous breaking point and and Trump wanted to aggressively uh take it down. In other words, suppress the oil into the midterms, right? But now this the situation in the Middle East offsets everything they're doing on that side, right? with the strategic petroleum reserve and really unleashing all that oil. And then there's the memory thing. This whole thing with Micron and SanDisk, it's just it's created all this inflation. Just look at Apple's raising the price on the computers and iPads. So memory costs are up, you know, double triple over the last year and a half because of all of this artificial intelligence demand for chips. And so memory has now created another level of inflation that's going to come at it's higher computer prices, higher, you know, higher chip prices and then that's just hitting the consumer in like other ways. So yeah, the whole thing's lining up for, you know, kind of more disruption toward the end of the year.
>> With respect to global energy markets, you've you've mentioned a fascinating development. You said that uh there are active projects going on to build pipelines to transport I'm assuming not just crude oil but also I'm assuming LG and perhaps other petroleum products um sort of to uh to to decrease that risk of the strait of Hermuse and perhaps Babel Mandab the Red Sea being um close to navigation. What are the global players that are involved in the construction of these pipelines and are there any American companies that are actively participating in in that project or in those projects? I'm assuming there are multiple,
>> Right? Yeah. So, yeah, the Saudis, the UAE, um I'm not I haven't we haven't done any work on the companies per se. I'm sure there's I'm sure if you look at the GES of the world and
>> Mhm. [clears throat]
>> you know the infra the traditional infrastructure companies that are that you would typically find but yeah so there's definitely there's definitely an investment theme there that we probably should look into but yeah they're on a real fast pace and so two years from now we're probably we're probably going to have far less traffic disruption in the in in the straits. Absolutely.
>> It makes me think that uh you know given the considerable investment that is required to build those pipelines and regulatory sort of hurdles, it makes me think that it's bound to increase the price of oil regardless.
>> Well, in the near term because because the strait's been close to 120, 130 days and maybe even 140 or 50 well it's all said and done. that's going to be really bullish for oil distillates. Uh but over time when those pipelines are are open then there'll be a more free flow of oil and you won't have that political disruption risk unless they hit they hit the pipelines with drones, right? Which is another thing that's probably going to be another chap. [laughter]
>> Yeah. So, but so yeah, so we're going to have like drones hitting the pipelines and shutting down the pipelines and uh so yes, we're probably going to be have this geopolitical risk for some time. Absolutely. That's what we talk about in our book, how to listen when market speak is that when you go, this is the bottom line. When you go into a multipolar world, a uniolar world is where one country really controls the show. There's there's really free flowing supply chains. It's very very deflationary. But in a multipolar world with global conflicts, uh higher interest rates, higher bond prices, it forces a dramatic alter like it changes the capital formation. In other words, you need a whole you need a whole new portfolio construction for your 401k, for your for your stocks and bonds because you're in this new world. It's a multipolar world. It's higher interest rates, higher inflation. And now we have the Iran rebuild. Think how inflationary wars are. You got to rebuild Iran. You got to rebuild Gaza. You got to rebuild the Ukraine. Elon Musk is talking about a 100 million robots. Like a 100 million robots. Just do a Grock search or chat GBT. How much copper is in a 100 million robots? And then you have the rebuild to the US power grid which is 35 40 years old. You've got all these data centers. You got Caterpillar stock at all-time highs because of the demand for for tractors and equipment and all this data centers being built and the copper in the data centers and so yeah so we're just in this whole new regime where you want to own less technology and right now technology is 50% of the S&P and you're adding in SpaceX you're adding in supposedly open AI and all anthropic so we're already overdosing on technology but one Hey, from the dinners and from gathering the intelligence, the top financial adviserss that we've met and we know they're actually reconstructing the S&P to a more equal weighted basket that's less tech heavy cuz they know that we could have remember in the last 50 years it's been two periods where stocks were flat for for five to 10 years, right? And when you have a sector that get goes from 20% of the S&P to 30% of the S&P construction, it goes to 50%. It's extremely da d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d d dangerous for future portfolio performance. You could have like a 10-year period. So the most sophisticated advisors that we see that are the biggest, best, and brightest, they're like recon constructing the S&P that's more equal weighted so it's not so exposed to tech and it has more exposure to companies that control hard assets.
Um, I believe yesterday or perhaps the day before yesterday um I saw an article published by Reuters that discussed the fact that Washington now doesn't want to um harden or to strengthen sanctions on Russia and other adversaries um because it views sanctions as the primary reason for uh global players virtually the rest of the world turning away from the from the dollar. So they even Washington now acknowledges that sanctions have become a weapon and so to uh mitigate the risk of that weapon the world is is is going to look for alternatives. So and there are many different camps. So sometimes you hear experts say the dollar is still still king. Other experts say well it's you know gold has uh surpassed um the dollar in terms of global reserve curren uh global reserves um in in central banks and so the US dollar is sort of slowly declining. Larry, how do you view the US dollar at the moment? And how do you see current geopolitical events um and domestic events as well shape the the role of the dollar and and also the strength of the dollar as the global reserve currency,
>> Right? So the dollar is going to be the global reserve currency for the next 30 years. There's no question. We talk about this in the book, but we are in a secular bearish dollar regime. And all that means in English is like a a long-term bearish trend that is going to go on for for I can with the highest conviction I believe that we're in that period. And there's a bunch of reasons behind it. First and foremost, when you get the inflation spike because of the price of oil and commodities and you get this inflation spike that comes out is the all of a sudden the Fed the perception of rate hikes goes up and the the front end of the yield curve is really bullish for the dollar. In other words, in the short term, so if the front end of the yield curve, if you look at the one-year T bill, it's gone from like a ballpark 370 to maybe $450 or something like that. So a one so on a million, you got from $37,000 of interest to maybe $445,000 of interest, right? And so as interest rates go up on the front end because of inflation expectations or because of problems in the Middle East then or the perception of rate hikes that's that's what strengthens the dollar and that's why the dollar's bounced. But and this is more like a muscle memory thing because last 30 40 years whenever we had an inflation spike um especially in 2022 the Fed started hiking and that strengthened the dollar because once again that front end of the yield curve those T bills are guaranteed by Uncle Sam for one year you can get 4.5% instead of 3.5% it's going to bring more international investors into own dollars right? But the problem is now or the difference is interest on the debt is 1.1 trillion whereas the last time we started hiking rates interest on the debt was 290 billion. So interest on the debt's gone from 290 billion to 1.1 trillion. So there isn't a lot of bandwidth to hike now because if you hike they're going to push push interest on the debt up to to 1.5 trillion. And if you hike, you increase in recession risk and all of a sudden your tax receipts come down, right? And so there's a secular bare trend in the dollar because the only way out of that $40 trillion debt hole is to massage interest rates below the rate of inflation. Keep it down. Keep keep interest rates down. Buy back bonds. Force things like stable coins to buy more T bills. Force the banks to buy more treasuries. And all of that is designed to support the system. But yeah, are we and this is this is why precious metals and hard assets and companies like copper miners and companies that control assets, oil and gas, Chevron, Slumber, uh companies that control assets are big outperformers in that kind of stagflationary world where you're suppressing interest rates below the rate of inflation. you're in a higher interest rate regime globally, higher uh interest rates, higher inflation and eventually the Fed has to pivot uh because the economy softens with high higher rates and higher and you can just see look at just look at the restaurants McDonald's breaking down, McDonald's d every like there's parts of the the bottom 60% of consumers are in absolute pain and it's very difficult for the Fed to hike rates with the bottom 65% of consumer consumers in this much pain and and you can just you can see it across many different look at Home Depot stock is like unchanged for 3 years now. uh the restaurants you go through there's many different stocks that are exposed to the consumer that are really look at Nike you know just on really beaten up and so the the ability of the Fed to hike is what is what would keep the dollar strong but because the consumer weakness and because of all the factors we're talking about interest on the debt uh the markets started to figure out that the Fed can't really hike that much and then you go into a real bearish dollar cycle and that's that's that's like what's going to play out over the next year and that's very bullish for companies that control assets.
Um, talking about investment strategy you mentioned commodities of course but but in general which asset classes offer the best risk adjusted returns in today's very volatile and uncertain environment?
Well, the copper miners are [clears throat] really the copper miners and the metals are destroying the the cues the last five years, four years, three years. So that would be number one. Uh, oil and gas has not so much, right? But that's I think the next couple of years that's where you're going to get really good outperformance. And we love the FCG, Frank, Charlie George ETF. We love a lot of these natural gas companies that are going to support uh the energy system. And then you know uranium you know we like we like companies that control uranium we like we like the uranium commodity itself. So that's going to support your your all your data centers and all your your power is going to come out of the nuclear side. So in terms of risk adjusted returns that 6040 portfolio has really been broken since 2021 22. It's dramatically underperforming. 60% stocks, 40% bonds. And so you're you're 30 [clears throat] you're 35 35 um 30 something like that where you're 35% stocks, 35% bonds, and 30% commodities. That's the new portfolio construction for that higher interest rate regime, higher elevated bond yields, higher inflation relative to where we were in the old regime was more certain deflation, lower more global supply chains that were smooth as silk, uniolar world. Right now, we're in a totally different ballgame and we're in that higher interest rate regime, multipolar world. And that's why you need that that 35% stocks, 35% bonds, 30% commodities. You need that type of different portfolio construction in the new world.
Laria, maybe we can close with the following question. Very very sort of broad question. If you had to leave our viewers, investors, just the the public with just one message about navigating today's bond market and today's stock market, what would that message be?
Well, above all, watch the bond market. Watch the credit markets because they're going to tell you they're really going to lead the stock market. and the credit markets. If there's really a credit crisis brewing in in data center construction and on the consumer side with the bottom 60% of consumers really hurting um commercial real estate, if if interest rates stay up here, that's going to be there's lots of systemic risk in commercial real estate with higher rates. If rates come back down, it's not a problem. But that that's where I think above all credit leads equities and you want to follow people, you know, like the bear trap report. There's a lot of other services out there. You want to really track the bond market because that's going to tell you the direction of the stock market.
>> And I will link uh I will share all the links to your work in the description below. I would love for our viewers to check it out and support your work and to uh to really get a better understanding of what to do in this environment because I know that many of our viewers, you know, comment and they say, you know, it it's it's impossible to know what's going on because everything changes daily. And so I think your uh the bear traps report and and and your work and commentaries is absolutely uh invaluable uh in today's world. Larry, thank you so much for sharing your insights and also helping us better understand the risks and opportunities in shaping today's global market. So, we appreciate your time and look forward to having you back on
>> and I'm really excited. Um,
>> over 1 million copies sold.
>> Congratulations.
>> Common sense, one market speaks. Thank you for all the support. 1 million copies. We just crossed the 12 languages been translated in 12 lang 12 languages. Thank you so much.
>> Wonderful. I will be sure to link uh both of those books in the description below the video. And uh yes, I think those are essential reads.