00:00 The equity markets are pricing in a soft landing, but the credit markets are telling a very different story. Now we're seeing blue chip companies like Oracle have their debt repriced while parts of private credit are selling off even as major banks rally. And at the same time the Federal Reserve is quietly restarting liquidity operations injecting roughly $200 billion into the system over the next five months.
00:23 Now that combination does matter because when credit tightens and liquidity returns at the same time it usually marks a turning point. Now we got a lot to get on to in today's show. Let's get started. Kitco News Outlook 2026 is brought to you by Discovery, a growing North American precious metals company.
00:43 All right, welcome back. As we close out 2025 investors are facing two conflicting realities. Stocks are holding near record highs while the bond market is repricing risk. Now to help us navigate what 2026 may look like, I'm joined by Larry McDonald. He's the founder of the Bear Traps Report, a New York Times bestselling author and former trader who sat inside Lehman Brothers during the last financial crisis.
01:06 Larry, welcome back to Kitco. Great to see you. Jeremy, thank you. Merry Christmas. Happy New Year. Yeah, and to you too. I can't believe we're going into 2026, but of course we wanted to bring you back and talk about the thesis we talked about all year. It's kind of played out to be quite accurate.
01:24 And now we're watching a new time, with the liquidity signal that we just saw. Let's start with the central bank. They've initiated what they're calling reserve management operations, injecting roughly $200 billion into the system over the months. And you called this "bazooka deployed at full employment." Overnight funding stress isn't abstract. So if the economy is as robust as the White House claims, why does the Fed need to inject that much capital into the plumbing right now?
02:10 Well, we always have a year-end liquidity problem, it's common for many years. But at the end of the day they're restarting quantitative easing with core CPI inflation up near 2.8%. The last time they were restarting QE was like 2019, and core CPI was down to 1.6%. So inflation's a lot — this is pure madness. They're trying to address the liquidity issues, but they're cutting rates and doing QE with Atlanta Fed GDP at like three and a half percent, which is still a lot of growth.
02:51 And the deficit, 1.8 trillion this year, 1.8 trillion, which is almost 6% of GDP. The last time Trump was in office, 2017-18, deficits were much lower, 600 to 800 billion and about 3% of GDP. So this is real modern monetary theory. It's crazy fiscal and monetary overdosing, and it's phenomenal for value stocks and hard assets.
03:21 Restarting liquidity with this inflation still elevated — what gives the Fed confidence this doesn't backfire in rates or the dollar? Well, I think we have to have an inflation bounce in 2026. We've come way down, and we've got all that fiscal plus 1.3 trillion of massive capital expenditure overdosing from the Mag 7 and from this circular financing on artificial intelligence.
03:46 So this is an interesting cocktail for '26 because you've got the fiscal and monetary overdose, plus the overdose from Silicon Valley on the AI side. It sets up a phenomenal opportunity for next year. I want to ask you — this liquidity move is happening alongside political change at the Fed too. You noted that Warsh is not nearly as dovish as Hassett, and that he has advocated for significantly reducing the Fed's balance sheet. If Warsh takes the chair in 2026, does he force a real withdrawal of liquidity?
05:00 Yeah, that's what doesn't add up. Warsh has a great resume, but he's far too hawkish for Trump. And after what Trump went through with Powell — Trump appointed Powell and misjudged his ability to work with him — I just have to believe Trump goes the Hassett direction because he has a much higher level of personal trust with Hassett.
05:24 There's another side of the liquidity story too. Fannie Mae and Freddie Mac have increased their mortgage bond portfolios by 25% in recent months. Is this a shadow Fed in practice? Right. When I was in the White House maybe 5-6 weeks ago, they're as nervous as a long-tailed cat in a room full of rocking chairs around housing inequality, housing prices.
05:48 The average homeowner now is in his 40s. This is not great for the midterms. And yeah, I think they're going to use the Fannie and Freddie balance sheet — they'll use whatever means they can into the midterms to expand homeownership and put out this inequality fire.
06:31 Anything on the Main Street versus Wall Street bifurcation? Well, think about this. There's 8 trillion in money funds. 4-5 years ago we were down at 4.1 trillion in money funds, paying less than 1%. Now we've got 8 trillion, paying 4%. So it's an extra 3 trillion and an extra 3%.
06:55 That's why I was just in Palm Beach last week. We had a great ideas dinner. Everyone's rolling in the dough in Palm Beach because that extra $3 trillion earning an extra 3% gives that crowd a lot of capital to spend. Whereas the bottom 60% have pretty much no savings, and that's why you see the Chipotles of the world and the Targets — some of these stocks are great values toward year-end because the negativity on the consumer side has really hammered some of these consumer-facing equities.
08:08 I want to turn to the credit markets. We've discussed Oracle's bonds sliding after the CapEx hike, but you've also flagged a major divergence in the financial sector — while Goldman Sachs is up sharply, private credit players like Blue Owl are down significantly. Is private credit the subprime of the cycle? Well, I was at Lehman Brothers. I sat down in Palm Beach with a legendary credit investor who made over half a billion dollars during the subprime crisis. And he sees a massive crisis next year.
09:22 Right now the S&P is almost 30% AI stocks, which is insane. And the street's expecting 820 data centers over the next 5 years. But there are three big hurdles — NIMBY (not in my backyard), power, and infrastructure equipment. A lot of data centers are probably going to get delayed, and the credit markets are already sniffing this out. Just look at Blue Owl. Look at Jefferies equity versus Goldman Sachs. But the CoreWeave bonds are trading with almost 12% yield.
10:07 This is one of these data center developers. Negative free cash flow next year of 15 billion. So yeah, we see a big credit crisis coming. But above all, private credit has offered quarterly liquidity to all these wealth managers on almost 300 billion of the 1.8 trillion. That's the big problem for next year. They offered quarterly liquidity on an asset that is very dysfunctional in terms of giving liquidity. It's a liquidity mismatch like we saw at Lehman.
10:59 Who's caught holding the bag? What breaks first? Well, it's already breaking. The CoreWeave bonds were 104 in September, now they're in the low 90s — that total yield is near 12%, single/double-C type yield on a single-B credit. And then we saw the First Brands dip last week. This is debtor-in-possession financing — a loan on your highest quality assets. I've never seen a DIP with that close to the bankruptcy. The bankruptcy was in September. Typically a DIP trades at par. That loan last week traded in the 30s.
12:16 So we have the CoreWeave bonds in flames, the First Brands situation, and a bunch of others. The credit crisis has already started. On that DIP trading in the 30s — is this isolated bad underwriting or a signal collateral values are overstated? It's the madness of a bull market in credit where 2021-24 everyone was rushing into private credit and looking the other way on underwriting. There's some fraud in First Brands, but the smart money tells me the underwriting was so bad there are at least 10 to 20 others like First Brands.
13:45 When I sat down with Charlie Munger in Omaha, he said, "Always beware of the three M's — mark to market, mark to model, and mark to myth." That can go on a long time. But what triggers the problem is that quarterly liquidity in private credit. Those big high net worth individuals are calling their stockbroker: "Hey Frank, remember on that tennis court you told me I could have quarterly liquidity." It's a run on the shadow banks. That forces these loans to actually trade — probably in the 30s — and that creates the panic that kicks this off next year.
14:39 What's the trigger for 2026? Investor redemptions, margin calls, lenders pulling warehouse lines? The smart money and high net worth individuals are looking at First Brands and tricolor and CoreWeave and these data centers that were supposed to be built on schedule and now slow down. Those people are already making phone calls. I think it's already kicked off.
15:52 How good is it for the retail investor at these valuations? The great thing about this year is the tax-loss basket. You can buy Diageo below its 200-month moving average, cheapest valuation in decades. You're talking about Johnnie Walker Blue, one of the great Guinness brands in the world, and Smirnoff. There's a tale of two cities. There's 32 trillion in the Nasdaq 100. 3 years ago today it was 12.3 trillion.
16:42 The gold miners a year ago today, all of them combined — gold and silver miners — were 290 billion. So the slightest amount of capital, 300 billion, came into precious metals equities and the sector's up like 140%. So that 32 trillion in the Nasdaq 100, I think that money's going to flow into natural gas names next year, a lot of the copper, a lot of the coal names especially, oil services. These sectors are so cheap and don't have much capital. When you go from 32 trillion to maybe 22 trillion, that 10 trillion has to go somewhere.
17:36 You noted you could fit 34 Rio Tintos into Nvidia's market cap, yet Nvidia can't build data centers without the copper Rio produces. Does capital rotate from the users of electricity to the owners of the infrastructure? It's started a little. Rio Tinto right now is probably the most overbought on the RSI in a while. But it's still extremely cheap. Nobody owns these stocks. In the new year there's going to be a colossal migration from financial assets into hard-asset companies.
18:43 We're seeing a big shift into industrials versus the QQQs. In a higher interest rate, higher inflation regime, say 1968 to 1981, by the end of it 50% of the S&P's market cap was in industrials, materials, and oil and gas. Today we're like 14%. So 2026 is going to be this colossal migration back into energy companies, the companies that support the power grid on the copper side, the aluminum. Look at Alcoa — the street hated Alcoa a year ago. Aluminum's going to be a major contributor toward the power grid. Everyone's in the chips, nobody's in the infrastructure to support the chips.
19:37 You're bullish on infrastructure like Eaton and GE Vernova. If the consumption spike hasn't shown up yet, are these early? Well, there are three risks — NIMBY, getting the infrastructure into the location, and power. So I think you get a really good opportunity to buy the GE Vernova situations. A lot of these are really rich right now. But once this happens, a lot of the hot-money plays like the Vistras, the Constellations are going to get really hammered, and you want to create that wish list for '26.
21:04 Tax-loss selling is in full swing. You identified GM as the ultimate value stock, about 3.4 times EBITDA. But GM carries more than 130 billion in debt. If rates stay higher for longer under a Warsh Fed, does that turn this value play into something else? Yeah, exactly. GM could be a value trap because of that debt. We only — in our core portfolio, the biggest thing we look for is high capitulation volume selling, low relative strength, seller exhaustion. That's what we see at Diageo, Lyondell. But that debt load — we're not comfortable with the GM debt load at all.
22:33 You look at Chipotle, Target, Diageo — consumer stocks absolutely in flames. On the Diageo side, the bear thesis has been out there 24 months — younger people aren't drinking the way their parents did. That's why it's below its 200-month moving average. But the capitulation volume on Lyondell in the chemical space and Diageo — you're getting a category-five hurricane type capitulation at year end. And the Fed just told us they expect growth to accelerate next year. Consumer stocks are trading like we're in a recession. Somebody's wrong.
23:51 You estimated a robo-taxi thesis could drive a $42 billion alcohol-sales boom. Walk us through it. It's a long-term thesis — autonomous driving removes the designated-driver constraint and should support alcohol consumption. But I'm just looking at the brands — Johnnie Walker Blue, Guinness, Smirnoff. Buffett looks for great brands when they go on sale. Hall of Fame brands that cheap on EV/EBITDA or free cash flow yield — that's where the opportunity is at year end.
24:45 How crazy has gold been this year? $4,300 spot and silver $63. Last time we told you the gold-to-silver ratio was in the high 80s, and that in a commodity bull market it should move to the low 60s, maybe high 50s. Right now we're down to about 68. So it's got a ways to go. We still love silver. We're still long the SIL, still long the GDX in our core portfolio — long for three, four years now. We've taken some down, but I'd rather rotate into some of the natural gas and energy stocks.
25:50 We've sold 1/3 to 2/3 of our gold and silver miners and we've started to add to the Weatherfords of the world, the OIH oil service names, your Occidental Petroleums. The energy stocks — the bearish sentiment is incredible. Remember, November is the second worst month of the year for crude oil. There's a ton of bears in the CFTC data. To me that's an opportunity to double up and take down some precious metals that a year ago nobody wanted and now are up 150%.
26:43 Why is natural gas the right trade for 2026 despite the short-term collapse? One of the things we look at is free cash flow yield. That's what we see with Antero, which is AR Equity, and Range Resources, RRC. Debt coming down the last three-four years, free cash flow so robust both companies have bought back 5 to 10% of the stock. That's a beast under the market buying the company.
27:41 Let's say the market cap is 10 billion and free cash flow is 1.5 billion — that's a 15% free cash flow yield. And then Energy Transfer, 8% dividend, doubled the dividend over the last four years. The bottom line is artificial intelligence needs a whole new energy infrastructure and transportation system. Natural gas — Trump's going to do a deal with the Europeans, LNG exports are exploding.
28:25 Those 820 data centers supposed to be built over the next five years, they're taking them out of NIMBY locations and moving them near the gas assets in northern Texas. We had an ideas dinner in Palm Beach last week with legendary investors and this is what went around the table — natural gas equities. That's the FCG ETF. Reach out to info@thebeartrapsreport.com.
29:08 Finally, the regulatory wild card — reports that Trump is preparing to reclassify cannabis to schedule three. We saw a major volume spike in names like Tilray and Trulieve. Is the language concrete enough to sustain the move? When you're coming out of a vicious bear market — that's what we went through with oil names in 2020 and with Alibaba and Kweb in 2021-22 — we look for category-five capitulation selling. That's what we just went through with the cannabis names. Bombed-out village, nobody wants them. Year-end tax-loss selling. But the news out of the White House gets you that big move up — a 30% move last week, still trading way below 18-month levels. You want to be there for the turn; you can buy the dips in cannabis for the next 6-9 months.
30:51 Why should people look at it? That gets back to the 32 trillion of the Nasdaq 100. When the Fed is offering liquidity through QE at the same time the 1.8 trillion deficit, all that fiscal and AI spending — that's a real higher interest rate/inflation regime game changer. That forces money from growth (your 32 trillion of the Nasdaq 100) over to value. We're seeing a big first-inning rotation out of growth into value. And the most important thing is international value.
31:44 International value small cap has doubled the S&P's return this year. At the ideas dinner last week, the takeaway from three legendary investors: when value and international value outperform the S&P by this much over the last 50 years, it's never been a one-year event — it's always been the beginning of a 6-7 year trend. Look at the EWU portfolio — global value UK equities. Underperformed the S&P every single year from 2010 to 2020 in that disinflation regime. Now we've gone into this fiscal overdose — 16, almost 17 trillion of fiscal and monetary response since COVID, versus only 4 trillion for Lehman. This forces a massive migration into global value.
32:34 What about Bitcoin? It's trading above its 100-week moving average and you linked it to Treasury General Account liquidity. Is it the cleanest way to play the liquidity? Right. These poor young kids that own Bitcoin don't understand — when you're long Bitcoin, it's a liquidity trade. You get these 50, 60, 70% drawdowns and these kids get hammered. But the Bitcoin-to-gold ratio — when that gets into the 20s or even the high teens, you definitely want to take down some gold and buy some Bitcoin. Earlier this year it was 38. Now we're getting into the 20s.
34:17 Some fun ones. Gold miners or copper miners for 2026? Copper miners are up 81% on the year, gold miners up 150. But the copper names are outperforming the last 3 months. So I'd rather own copper names — there's a beginning of a shift. But be careful of any asset class up 81% on the year. You want companies that benefit from all this AI CapEx.
35:02 Gold or Bitcoin for 2026? If you have a lot of gold exposure right now, you want to be diversifying into Bitcoin, into energy equities, into your aluminums of the world. Especially, I love the coal names down here. I love the coal — Core Natural Resources (Charlie Nancy Robert) — literally 15% free cash flow yield, company bought back 25% of the stock this year. There are a lot more attractive places than gold right now, especially in the coal space.
35:49 Oil majors or shale independents? Well, Trump wants an extra million barrels a day offshore. The Schlumbergers of the world — I would rather own Schlumberger than Exxon or Chevron. You can buy Schlumberger right now below that 250-week moving average. The oil service companies are what's going to service all those wells in the Gulf. That's why the Trump team renamed it the Gulf of America — they want offshore drilling in a big way. So Schlumberger and Weatherford are your big winners.
36:51 Have you pulled back any exposure to emerging markets? We bought some Argentina in the trade alerts — Argentina stocks were really hammered because Milei looked like he was going to be in trouble for the election. We bought some Baba today on the dip; we lightened Baba near the highs. But above all, the Brazil election is next October. Around Latin America — Chile, Peru, Panama, Argentina — a lot of governments have moved center-right. And Lula, I think, is going to be knocked out of office next October in Brazil.
37:59 Real rates in Brazil are 15% after inflation, and the inflation rate is actually very tame, so the central bank has a lot of room to cut next year. So you can buy the EWZ. I love the oil names — Petrobras, for example, get a huge dividend. Commodity-producing countries, hard assets, 2026 — it fits right in. They've got the election and the rate cuts.
38:41 To wrap up — you wrote about moving from a fiat-based system toward a hard-asset commodity-driven regime. For investors heavy in tech and light on real assets, what's the single most important portfolio adjustment for 2026? Whenever you come into year-end, quarter-end, month-end, it's a high-probability time for rotations. People want to show they own the AI stocks, but going into the new year they can sell. Here's an amazing stat: 11 years ago today the Nasdaq 100 was worth $4 trillion and all the energy stocks combined were worth 3.4 trillion. Today it's 32 trillion in the Nasdaq 100 and energy stocks are down to 2.8. Great rotation next year.
40:37 In 2021 we saw a big rotation into '22 — energy stocks were up 60% and the Nasdaq was down 30. What's the wild card that could invalidate this? A credit shock that's anywhere near a Lehman situation — private credit blows up and starts to impact the banks, then correlation drives to one and you get a really nasty move down across everything, including commodities. That's why you need some type of hedge on. But the good news is if that happens, the Fed will have to cut 100-200 basis points, do QE, get a much weaker dollar, and the commodity space comes out of it with great returns, just like COVID.
41:59 All right, Larry, appreciate it. Founder of the Bear Traps Report. Merry Christmas, happy New Year. Thank you. The message for 2026 seems clear: liquidity is a story again, credit is repricing risk, and the rotation into hard assets may be well underway. We'd also like to thank our Outlook 2026 sponsor, Discovery. I'm Jeremy Szafron. Thanks for watching.