Title:   Double-Digit Inflation Risk Surges… 30% Market Drop by September | Larry McDonald & Michelle Makori
Show:    The Real Story with Michelle Makori (Miles Franklin Media)
Host:    Michelle Makori
Guest:   Larry McDonald (Bear Traps Report; ex-Lehman VP; ex-head of US macro strategy, SocGen)
Date:    2026-APR-24
URL:     https://www.youtube.com/watch?v=Xv7-YIUcB88
Length:  ~61 min
Note:    Auto-transcript, timestamps mm:ss. Saved for personal study.

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(00:00) You've got this big inflation shock that's coming at us. The probability of runaway inflation in September-October is pretty high. Inflation above 10% in the United States would be pretty crazy. And the probability that's gone from like 1 or 2 or 0% to maybe 20-25% and then in terms of inflation being in that 4 to 7 bucket, the probability I think is about 80%.
(00:22) >> So you believe what we're seeing right now is a short-lived relief rally. >> I think you get about 20%, 25-30% drawdown between now and say September. >> That's a pretty big statement, Larry. I love it when someone gives a forecast and has the gumption to give a forecast and a timeline. >> The players in Washington, they cannot be honest with us.
(00:42) They're almost like the pilot on the plane with an engine that's on fire. They're going to say, "Ladies and gentlemen, stay in your seats. Everything's fine." They want the fannies in seats. The only way you get out of a $39 trillion debt hole with interest that's now going to be above a trillion dollars with now spiking inflation.
(01:01) The only way you get out of that is to massage interest rates below the rate of inflation and that's called financial repression. It's great for hard assets. China and all of these agents ripping the value off and it's basically in a dilute the return on invested capital. I think what would shock the market is another deep seat moment where you see, actually see China with an advantage in terms of AI where they've stolen our intellectual property and they've actually passed us in certain areas in terms of the race for
(01:39) general intelligence. That would really create a shock. The Mag 7 could potentially drop 50%, 5-0%. Hard assets are destroying the Mag 7. The Mag 7 is a joke. Unchanged since October. >> So what does that break the glass moment then mean for gold? And then silver and then equities, but let's start with gold.
(02:02) >> This is the real story with Michelle Makori. >> Hello, I'm Michelle Makori. Thank you for joining us here on The Real Story, where we go beyond the headlines, beneath the surface, and behind the curtain to show you what is really happening with money, markets, and power. And right now, stocks are soaring. Markets continue to hit new record highs.
(02:29) The S&P 500 and the Nasdaq both finishing at record levels. President Trump has extended the US ceasefire with Iran, saying that it will remain in place until Tehran delivers a unified proposal. And he added that the delay was needed because Iran's government is, quote, seriously fractured. So, markets are now seemingly looking past the Iran conflict and focusing on earnings reports.
(02:51) Well, my next guest says that this rally is being driven by positioning, not real confidence, that markets are pricing a quick return to normal, and that there is, in fact, a 90% probability that inflation could push back up to 4 to 6% and at least a 25% chance of double-digit inflation. He's warning that the downside risk for equities is significant, and that there is another major risk that markets have not factored in yet.
(03:21) Larry McDonald is a New York Times best-selling author, CNBC contributor, and founder of The Bear Traps Report, one of the most widely followed independent macro research platforms. He previously served as head of US macro strategy at SocGen, and was a vice president at Lehman Brothers, where his team famously bet against subprime ahead of the 2008 collapse.
(03:45) He's also the author of a colossal failure of common sense and how to listen when markets speak. Larry, welcome back. Good to see you again. >> Hi Michelle, it's a pleasure. >> All right, we have a lot to break down, but let's start off with what we're seeing from the markets right now. They have more than made up their losses since the Iran war started, now making new record highs.
(04:07) And it seems that the ceasefire between the US and Iran has been extended, potentially indefinitely, not really clear until when. The Strait of Hormuz has not broadly opened to ship traffic, but some ships are going through, including a few oil tankers. Iran is still trying to control ship traffic in the sea lane.
(04:28) The US is maintaining its blockade of some of Iran's ports and vessels. The security situation in the Strait of Hormuz remains dangerous. There have been a couple of attacks on ships in recent days, but we did have about six ships going through on Wednesday, according to tracking data. Another six ships going through on Tuesday, so there is some traffic, but it is a way lighter than usual.
(04:48) I mean, before the war, more than 100 ships crossed the strait daily. So, Larry, you're looking at this. And again, the markets are hitting new record highs. Are they too optimistic regarding an Iranian resolution here? How are the markets responding? Because they're not really being moved by Iran war headlines anymore. >> Well, you know, what I like to do is to marketize information.
(05:12) So, we work behind me with a on the Bloomberg terminal and on Discord with all the lot I say most of the large hedge funds, mutual funds, and pension funds in the world. And we gather intelligence. We just had an ideas dinner in London at the Dorchester. Um ideas lunch in Milan. And so, we're talking to investors about, you know, kind of looking around the corner.
(05:34) And what I'm hearing from, you know, the best and the brightest is that the Nasdaq short interest going into this I guess what you call peace deal, uh ceasefire, uh at the highest level in two years. Positioning was very bearish, which means that the CTAs, commodity trading advisors, these portfolios were not very long, so you have a situation where you have a lot of short covering, a lot of CTAs and what we call momentum players having to catch up.
(06:08) And that creates like a lot of you know, forced buying. It's kind of like you know, at the poker table where somebody has to go all in. It's It's really a lot of machines. It's not real investors up here. It's more um it's more of the mechanics of the market of the new 21st century market just chasing things at this point.
(06:31) >> Okay, so let's talk about the consequences of the war here before we get into other market risks because again, it seems as though the markets are viewing this as well, largely a resolve not really moving on Iran war headlines at at the moment. How do you see this playing out because you have mentioned in your latest newsletter that the consequences of these oil flow disruptions are yet to rear their ugly head and that that is not being priced into the big macroeconomic picture as yet. So break that down for us.
(07:06) >> Right. Um so first of all, you know, Trump is a is a tough negotiator. He's great to sit across from where he's really strong at a deal table in New York. The problem is he's dealing with lunatic factions in Iran on one side and maybe a a faction in the middle that he's engaging. And so any deal he does, the the probability that a faction, say he does a deal.
(07:37) I heard this from two institutional investors this week. If he does a deal, the The whoever does a deal with Trump, the that person, the probability they could be executed is not zero. Like, you're talking about um the Iran government is just so bifurcated right now. And imagine you're a 30-year-old uh engineer or member of the um the Republican Guard in in Iran.
(08:02) You've been told since you were 3 years old the United States is the Great Satan. Over and over and over again. So, to get a deal done like this after the attack is is going to be hard, and that's why the White House was embarrassed this week, right? They told us they were going to Pakistan because they were dealing one faction, and then that faction got overruled by another faction. And the bottom line is this.
(08:25) It's a lot like a government shutdown. With a government shutdown, always remember, the first week, the second week don't really matter, but every day every day you go past that second week, the impact on GDP in that third week, it goes exponentially higher. And then fourth week, it's three standard deviations higher than that impact on the economy, right? This is very similar, and I'm getting this from the best and brightest minds that we sat down with in London last week.
(08:56) If you look at the Straits of Hormuz, if they're closed for 1 week, 2 weeks, say 20 days, it doesn't matter that much. But once you go above 30 days, and right now we're at 54, uh each day exponentially more damaging, and it causes second, third, fourth order impacts. Um think of just rubber uh that's used in all kinds of products.
(09:20) It has to be refined in the oil side, and then refined in the chemical side. And there are bottlenecks all over the world because of this. It's like the tentacles of this are going on and on and on. And has massive imp- I want to get into the semiconductors next, but the bottom line is that the every day this goes on above 55, you know, 40 days and we're not right now at 54, uh the probability of runaway inflation in this is in September, October is pretty high.
(09:49) >> Well, what about the fact that some ships are going through? Again, six compared to 100 more or less is is not really uh the same level of volume. But if this sort of uh status of quasi ceasefire continues and there is some traffic, does that still uh create that same long-term dynamic that you're warning about? >> Yeah, the problem is you've taken hundreds of millions of barrels off the market.
(10:15) Uh the Vitol CEO said this week they net net, it could be a billion barrels that are going to have to be replaced over over if this goes on another three, four weeks. So, that has to be replaced and that's going to take some >> talk that the US market is is able to fill in that gap? >> Oh, yeah, over the time over over the next couple years, for sure.
(10:36) That's why we love Look at Schlumberger. Look at the uh look at the offshore companies, oil services, uh Weatherford. They're ripping this week because, yeah, Trump's going to put a lot of pressure on US offshore drilling. It's going to take years to to to fill that gap. So, we have no we have a big big problem uh for a lot of different sectors that's coming up in the in the second the more like the third quarter of this year that that it's really is not much they can do because even if they even if they had a peace deal today, um the the the trust
(11:10) level of all it takes is one faction to hit one ship and then the insurance companies back away or the ship just don't want to go through. The captains are just refuse to go through. >> All right, so basically markets are too optimistic in terms of the way they're factoring in the down the road implications of what's going on with Iran.
(11:31) >> Yes, so think think think of semiconductors. Um we had uh the CEO of Taiwan, uh Kurt Wilson, at one of our dinners in in recently. He made the point he's a brilliant man around strategic uh strategic metals. And the phosphorus is an an very important uh chemicals that go into semiconductors. And I've heard this point like three or four times in the last week.
(11:58) The entire ecosystem of the chemicals and those important strategic minerals that go into the creation and the foundation of the construction of semiconductors, uh that's all broken down and they're all pan- there was a big panic right now in Asia. Um it's all throughout Taiwan, uh South Korea, uh Japan.
(12:19) There's a big panic because there's just so much of a bottleneck in the straits. And once again, so many ships aren't moving. It has It's just like just like airplanes. When you go to airport airport during a snowstorm, you know, one plane gets stuck. The next thing it takes like a long time to get those planes back up into the cycle.
(12:36) And um yes, so I think the semiconductors um the semiconductor ETF or socks can drop 30% like in the next month. It's It reminds me of COVID where you're up on a relief rally. Never forget this. What I call the crack smokers. Never forget the crack smokers. From late January of 2020 to February 19th, the Nasdaq was up every single day almost 10% total.
(13:04) It right ahead of one of the biggest ahead of one of the biggest drawdowns that we've seen in the last 20 years. Uh just completely smoking in the dynamite shed. And that's what markets will do. That's what these momentum idiots will do. And they make a lot of money, but they can be very very idiot savant.
(13:22) And when they get on the on these runs, um Um, they're really like I said, just smoking in the dynamite ship. >> So, you believe what we're seeing right now is a short-lived relief rally in the markets, and it's not really relief because there isn't resolution, but you do see a turnaround happening soon. >> Yeah, I mean, today I think the turn will probably be the next within the next week. Um, it's just Europe.
(13:47) The the numbers are incredible. I mean, like, the semiconductor ETF is up 36% in 14 trading days. 36% 14 trading days. You're not going to see that in your lifetime. Uh, Nasdaq up 18% in 14 or 15 trading days. Very I mean, these these are in the 90 90 percentile data. And oh, the oh, by the way, the semiconductor ETF SOXS is trading at 106% above its 200-week moving average.
(14:18) It's only been there in the last 20 years, uh, maybe four or five days. And so, yeah, your your your extension is pretty incredible. >> All right, let's talk about inflation because you made a couple of comments there, and in your latest turning point turning point note, uh, you wrote that you see a 4 to 6% CPI inflation on the cards, and large downside for equities is approaching.
(14:45) Break down your inflation outlook, the likely case, the tail case, break that down. >> Well, we're running 1.9 trillion dollar deficits in Washington, right? Um, we're Trump wants a 1.1 1.2 trillion dollar defense budget. The CAPEX going into AI, um, is 2 trillion bucks. Look at Caterpillar stock.
(15:12) It's traded you know, it's literally it's it's its best 52 weeks it's that it's ever had. So, the best one year over a year by by almost 30% in the history of Caterpillar. It's best one year year-over-year number and by 30% higher than the previous record. And that's because of the data center expectations. So, everything's baked to the cake.
(15:33) Stan Druckenmiller, uh one of my favorite investors of all time, his fav- my fav- favorite line of his is never ever ever invest in the present. It doesn't matter what a company's earning today. You got to look 10, 12, 18 months out. And that's what that's the the price of the stock and where it should be. >> All right, Larry, let's focus a little bit more on the inflation target that you have because in your latest turning point note, you write, "We see a 4 to 6 CPI inflation on the cards and large downside for equities is approaching."
(16:11) So, give me your inflation outlook given what you're saying is happening with energy flows. >> Okay, so the most important thing for our viewers right now is the probability of I don't want to say hyperinflation, but hyperinflation in developed markets, which is like above 10%. I know the definition's 50, but, you know, hyperinfla- inflation above 10% in the United States would be pretty crazy.
(16:37) And the probability that's gone from like 1 or 2 or 0% uh to maybe 20, 25%. And and then in terms of inflation being in that 4 to 7 bucket, the probability I think is about 80%. I'll tell you why. Um Once again, every day this trade is closed above 30 days, uh there's an exponential second, third, fourth-order effects.
(17:03) Um you just think of how many products that oil and chemicals are used in. Diesel fuel, jet fuel, their planes Lufthansa today is canceling 20,000 flights. I can go on and on and on and on. Any kind of chemical, any kind of product, sneakers, rubber, anything all these products, thousands of products have second, third order effects.
(17:27) And when you when you close the straight for more than 30 days and you know you're up up about 50, we're going to be at 60 next week. And like you said, like four or five ships doesn't cut it. We need to get back to 100. We're not going to be back there for at least 6 months. So, that's the first inflation driver.
(17:46) The second one is everything that was going on into this. We're running 1.9 trillion dollar deficits according to CBO, Congressional Budget Office in Washington. We're doing 2 trillion dollars of capital investment from from artificial intelligence companies. And so, you have just this big fiscal uh and monetary overdose.
(18:09) And you've got a capex overdose coming from Silicon Valley. At the same time you get this Suez the canal, the Straits of Hormuz completely blocked. And all of the not just fertilizers, you going to get so many products the second, third, fourth, seventh order effects. I don't know if any of you heard the story this week, the largest condom maker in the world.
(18:29) Now, think about rubber. You you've got you've got to you've got to you've got to refine the refineries have to refine the chemicals and refine the oil ahead of time. All of that gets all that whole process gets what gets um gets interrupted. So, you're talking about 30% increases for things that that contain rubber that in the processing.
(18:54) And so, it's just a wild 120 to to to to 250 days ahead of us. >> Right. So, you're saying condom prices are going to go up as well contributing to that inflation which is pretty dramatic. A 25% chance of double-digit inflation. That's pretty significant. To your point, it's not just the oil, it's fertilizer, it's natural gas, it's all of the products that down the line rely on these raw materials.
(19:22) Now, if we have double-digit inflation, I mean, what does that mean? What does that look like? >> Well, it what it does is it it at first puts the Fed on hold. Then then it it kills cons- If you remember the '80s and the and the I lived through the '70s and the '80s, recessions were caused by runaway inflation.
(19:42) The economy overheats, and then inflation kills the consumer, and, you know, the the bottom 60-70% of cons- of consumers get hit, and you you slows down the economy, go in recession. So, you know, the the probability of that kind of 1980s, 1970s type recession is very high, and that's why that 1968 to 1980 portfolio that we that we you and I have been talking about for the last year and a half is working really well.
(20:14) >> Right. Well, let's talk about that portfolio because last time we spoke, you anticipated a big rotation into hard assets. Are Are you still saying that? Do you think that that has begun? >> Well, if you remember our last presentation or last conversation was you know, the coal names have done really well, natural gas.
(20:34) When I When I say hard assets, I just mean commodities, but the natural gas equities, the FCG, have done really well. But, the oil and gas companies, especially the the Schlumbergers, I still we still I think Schlumberger is like the best artificial intelligence play in the world because of their artificial intelligence capabilities around offshore drilling and oil services.
(20:56) And so, if you look at companies in the United States, your Weatherfords, your Schlumbergers, your OIH, they're dramatically dramatically outperforming the Nasdaq and the rest of the oil space. And that's for a reason because they're going to have to do a lot more offshore and it's oil services to get production up if they want to offset, you know, this this big big problem in the Middle East.
(21:21) >> Well, let's talk about what inflation means for the Fed. You started to touch on that. Clearly, this will be an issue whether it's 4 to 7% which you say is what an 80 to 90% probability or double-digit inflation which you put at a very dramatic 25% plus probability. Um clearly, that's going to be an issue for the Fed and uh we had Kevin Warsh having his confirmation hearing this week.
(21:47) Uh he said that the Fed would be independent from the White House. He was fielding questions on issues ranging from his views on monetary policy to his personal finances with sprawling and complex personal finances to of course his ties uh to President Trump. Uh the main focus seems to be Fed independence here.
(22:08) Um but a lot of focus has come on his comments regarding what he termed regime change, right? He told uh lawmakers that he's looking at regime change for the Fed, more specifically a fundamental overhaul of how monetary policy is conducted including potentially the way the Fed calculates inflation.
(22:30) Uh let's take a listen to what he said there. >> We know at the Federal Reserve that price stability was an objective that the that you and your colleagues gave to the Fed. So, when over the course of the last several years, especially after the after COVID when prices went up to the tune of 25 to 35% for virtually all deciles of American people, that's an indication that the Fed missed its mark.
(22:56) And we are still dealing with the legacy of the policy errors in 2021 and 2022. Um once you let inflation take hold in the economy, it's more expensive and harder to bring it down. And so the fatal policy error going back four or five years is still a legacy that we're dealing with. We need, in my judgment, fundamental policy reforms to fix it.
(23:23) And while it's true that inflation is less problematic, meaning the rate of change in prices is less severe than it was some years ago, hard-working Americans are no doubt feeling it. I think that means a regime change in the conduct of policy. I think it means a different new inflation framework.
(23:41) I look forward to working with my colleagues at the Fed, if confirmed, to achieve that. I think it means, as you suggested, using tools differently. The Fed has an interest rate tool and a balance sheet tool. My view is the interest rate tool gets in the cracks. It's fairer. Uh the balance sheet tool disproportionately helps those with financial assets.
(24:01) The interest rate tool hits the entire economy. So we need a new framework, new tools, and I'd also say, Mr. Chairman, new communications. >> So Larry, what does this regime change and new framework mean to you? How do you interpret that? >> Well, let's get base back to basic numbers. The fiscal deficit in the United States in 2006 was about 250 billion.
(24:28) 2016, it may be like 570 billion. And now you're at 1.9 trillion in 2026. So think about that. 250 billion in 2006 all the way up to 1.9 trillion. So it's very hard for the Fed to fight inflation with fiscal policy this out of whack. And I think what they won't tell you in Washington when I when I when when we wrote my when we wrote our book, how the listener market speak, what we talk about is financial repression.
(25:02) And that is that the players in Washington, they cannot be honest with us. They're almost like the pilot on the plane with an engine that's on fire. They're going to say, "Ladies and gentlemen, stay in your seats, everything's fine." They want the fannies in the seats. They don't want panic.
(25:18) But at the end of the day, the only way you get out of a $39 trillion debt hole with interest that's now going to be above a trillion dollars with now spiking inflation, the only way you get out of that is to massage interest rates below the rate of inflation. And that's called financial repression. It's great for hard assets. Your portfolio construction of the next decade should be focused on companies that control assets.
(25:47) That's going to protect you from this new generation. So, at the end of the day, whatever the Fed says they can do, um they're really up against the a a wall a fiscal wall of responsibility from Republicans and Democrats. And uh and that's that that's going to just force them eventually into yield term control.
(26:06) But the bottom line is they're going to change the inflation target. The old 2% is is now 3 and 3%. >> Well, there is in effect talk about calculating inflation differently. The Fed, as we know, has long favored the core price index for personal consumption expenditures, uh the PCE core PCE because because that excludes food and energy prices, which are typically very volatile.
(26:30) But Williams now wants to go a step further by rooting out extreme price shocks when calculating overall inflation. I'm quoting him here. He said, "What I'm most interested in is what's the underlying inflation rate, not what's the one-time change in prices because of a change in geopolitics or change in beef.
(26:50) " Uh during the hearing, he said that the measures I prefer are looking at things that are called trimmed averages. We take out all of the tail risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy. Um and I guess under that calculation uh Bank of America says that inflation looks uh softer.
(27:14) So, is this basically a way to reframe it to allow for reducing rates into high inflation? Well, what's your read on this comment? >> That's That's exactly it. And that's what Once again, that's reducing rates is basically pushing rates below the rate of inflation, and that's how you monetize a $39 trillion debt hole.
(27:40) $39 trillion. And so, when you're when you have the debts that high, um you can monetize the debt by by keeping interest rates below the rate of inflation. So, you're paying the bond holders back with uh with with cheaper and cheaper and cheaper dollars. >> Well, look, we've known for a very long time that what the government, regardless of the administration, tells us inflation is is not really what it is.
(28:09) It's not what people feel when they're paying for their groceries. It's not what people uh feel when they're paying for their uh vacations, their cars, their rent. So, we long know that the official inflation numbers are not really indicative of what's going on on the fundamental level. So, you know, we're predicting double-digit inflation and potentially a Fed that's now going to well, for whatever reason, I mean, you could argue it has to do this, right? But for whatever reason, is going to uh effectively create a scenario where inflation is calculated differently,
(28:42) potentially, and cut rates into that inflation. Again, what does that mean for for the average person? How does that translate into real life? >> Well, so think of your portfolio. In a disinflationary regime, you want to be in bonds, tech stocks. Everyone in long-term bonds since 2022 is losing money because interest rates have gone up, bond prices have gone down, and you have inflation.
(29:13) And so what it means for people watching us is that in a in a multipolar world with global conflicts, um and higher interest rates and higher sustained inflation, you need to be in a portfolio of companies that control assets like commodities. And And that's essentially what it means. Whereas in the previous decade, you wanted to own software companies, you wanted to own technology stocks.
(29:40) Um if you look at to that 1968 to '81 portfolio, it's an entirely new basket. It's your BHPs, it's your it's your Chevrons, you know, it's your Schlumbergers. These are going to be the companies that are going to be very large percentages of the S&P 5, you know, fund 5 years from now. >> Again, I'll I'll I'll break down how exactly you should structure your portfolio, but before we get into that, uh again focusing on what Warsh said, uh he said that the interest rates tool, and I'm quoting him now, is fair.
(30:13) He said balance sheet disproportionately benefits asset holders, and he many interpret this as a direct critique of quantitative easing, of QE. And he said that before. He has critiqued QE before. So, less reliance on QE. What does that mean? I mean, how should markets react to that shift because for years that's sort of been the driver of asset prices.
(30:37) That's how liquidity has been injected into the markets. Are we potentially looking at a a new Fed regime? >> Well, I think you know, Warsh, if you look at all his work over the last 20 years, especially the last 10 years, he's been very critical of the balance sheet of the Fed and the explosion of inequality.
(30:59) Inequality, uh you know, just the the the top 10% in the United States are essentially 60% of consumption. And you know, 10 20 years ago, uh that number was a lot lower. The top 10% might have been 40% of consumption. And so, the inequality is exploding and he's trying to come up with kind of you know, he wants the political appeal.
(31:25) But it he ultimate ultimately, the problem is China's buying less Treasuries. Um we're forcing our banks to buy more, so that's one solution. They're the the the the SLR. Bottom line is they're forcing the US banks to buy more Treasuries to to replace what's happening in China. But the bottom line is at some point they're going to need to have that like that that yield curve control where the Fed is actually supporting the bond market because there's just not enough buyers for all the bond issuance. I mean, these
(31:57) issuance levels are five, six, seven times what they were, you know, 10 years ago in terms of the auction sizes. And that's a lot of bonds they have to sell. >> And you know, uh Larry, that was exactly the concern that former Treasury Secretary Hank Paulson raised recently. I remember he was the guy that led the US response during the 2008 financial crisis.
(32:22) And he is warning that policy makers need what he calls a break-the-glass emergency plan because there will come a point where the government will struggle to issue debt where the Federal Reserve becomes the only buyer. And he says the consequences of a declining Treasury market would be vicious, according to him. Let's listen to that clip.
(32:42) >> This crisis is different, right? If when you hit the wall and you're trying to issue Treasuries and the Fed is only buyer and the prices of the Treasuries are going down, interest rates are up, that's a dangerous thing. And so, I what the thing I am talking about now is we know people say, "When are you going to hit the wall?" I obviously don't know. It's impossible to know.
(33:08) But the law of economic gravity, you're you're not going to know that. So, and when we hit it, it will be vicious. So, we have to prepare for that eventuality. And I think we needed emergency break the glass plan which is targeted and short-term on the shelf. So, it it's ready to go when when we hit the wall. >> So, Paulson basically saying there will come a moment where there will be a tremendous loss of confidence uh confidence, rather, in the US Treasury market, which as we know is one of the foundational pillars of the entire
(33:42) global financial system here, Larry. What could this emergency break the glass plan look like? >> Well, one is the gold holdings. This has been talked about. Um margin borrowing against the gold holdings in the global economy. Um the US has a very large amount of gold. We've got assets around We've got a ton of wealth in the United States.
(34:10) A ton of wealth in the government assets that they own. Um so, forcing the Japanese who are our best trading partners to buy more Treasuries through trade deals. Um there's there's all these different ways you can you can kind of coerce it. England did this with their pension system. They England had England had a lot of these problems six or seven years ago.
(34:35) They have still have them today. But they they forced their pension system to hold more gilts, to hold more their their their treasuries. And so there's there's all these coercions that you can where you break the glass with. >> So, what does that break the glass moment then mean for gold? And and then silver and then equities, but let's start with gold.
(35:02) >> So, in that world um you get a much weaker dollar. And that's where if you look at a long-term chart of commodities versus the S&P 500 uh commodities have make it are making this like move out of the long body. But in that world um assets you know, if you own a portfolio of real estate maybe some Bitcoin uh a lot of commodities or a lot of companies that own commodities, gold miners uh companies that control assets, you're going to be in a lot better position than being in bonds and tech stocks, which work really well. Work really well
(35:45) in a low inflation regime. >> Right. Um and again, this is something that you've been advising for a while, this rotation into what you call hard assets uh including uh commodities and companies that make real real things. Uh and BlackRock is now making what many are calling a hard pivot, only the third time in 50 years that it's moving away from long duration US government bonds and towards real assets.
(36:12) BlackRock has now abandoned its 60/40 portfolio stocks and bonds, which has long been considered the foundation of modern investing as we know, and shifting towards what it calls a plan B diversification strategy tied not to financial engineering, but to real economic strength. Capital is rotating into four key commodity plays, gold miners and streamers, copper, uranium, and energy producers.
(36:39) So, the building blocks of the real economy. It's not just BlackRock, we also had Bank of America, one of their chief investment strategist, the chief investment strategist, Michael Hartnett, uh making a similar call saying investors should be moving into commodities for the next several years, arguing that the second half of this decade will be defined by geopolitical tension, inflation risk, and a structurally weak dollar.
(37:02) He sees commodities replacing stocks and bonds as the biggest winners for the rest of the 2020s. Larry, this is something you outlined in your book. So, I imagine you concur with these thoughts. Give me your analysis on these pivots. >> Well, this is a good point around like you always want to see where the street is because um if you look back to the beginning of the commodity boom in 2001, 2002, 2003, they came up with the BRIC uh analysis, you know, the Brazil, Russia, India, China thing.
(37:38) And there was this big movement toward emerging markets and everything like that. Um when the street comes up with a new narrative, you know you're kind of in the middle of you know, kind of the early innings. Um they're shifting. A year ago, two years ago, they they wanted no part of gold miners, they wanted no part of oil, they wanted no part of copper.
(37:58) And now they're shifting. So, it's a good sign. Um it means we're probably in the second, third inning of this. And um but in terms of household ownership of assets, in the '80s, in the early '80s, uh precious metals were 3, 3.5% of household wealth. And now you're still down at 1 and a quarter, 1 and a half, and maybe 1, 1.4.
(38:18) And so, you just still don't have any buy-in. If you just look at the ownership of of of say copper names, oil and gas, gold names, uranium names as a percentage of the S&P 500, you're talking about, you know, less than less than less than I guess total maybe 7%. And so these these sectors should be 15, 20, 25% of the S&P in in the years to come.
(38:46) So, you know, that that's what you want to get That's what that's what you want to be ready for. That's what's coming at us. >> Okay, so what does that mean for gold specifically? >> Well, gold, you know, gold's going to have a little test here with if So, here's what's going to happen this year. So, you've got this big inflation shock that's coming at us from the from the from the streets.
(39:09) And like you said, every day the streets been closed about 40 days. And so, you're going to have this big inflation shock later in the year. The perception's going to be that the Fed's going to have to hike. Uh the problem is that inflation shock it's going to also going to slow down the economy. Plus, you have job losses from artificial intelligence that are really starting to pile in.
(39:26) And so, gold is really going through You want to buy that dip in gold because gold will suffer when the perception of rate hikes increases. And that's because if if you're getting 5 or 5 and 1/2% in a 1-year Treasury, that's that's a really you know, that that that's something that investors would prefer over gold.
(39:48) And we saw that in 2022 and gold got smacked. But, as that shock of inflation and the shock from AI hit the labor market and bring us closer to recession, um and and as job losses start to go up, that's where gold's going to really potentially explode back to maybe 6,000. And so, you want to be buying between 4,200, maybe 4,100 all the way to all the way to 4,800.
(40:15) And um and and holding it up towards 6,000 as as we have this the kind of crisis coming at us with this big inflation spike brought on that's going to bring on a recession, job losses from AI, and and just economic stress and real stagflation, economic stress with with um with with higher inflation. >> Well, there is another risk that the market is not fully taking in yet.
(40:38) I will say you were very very early to flag private credit as a risk. So, that's now been on the radar, but you say that there is another market risk that markets haven't processed yet, and that could be a big problem, and that has to do with China stealing intellectual property. So, break that down for us. >> Yes, so what what we So, we run like I said, we run that Bloomberg chat, we talked to all the different hedge funds.
(41:06) And so, we see the birth of narratives. Um so, if you if you do the idea centers around the world, which we do, do like 14 idea centers last year in anywhere from London to New York and Los Angeles. And when you run the chat every day, you you're talking to the best investors in the world.
(41:27) And one of the things that's been creeping in the last couple of days is the tension the this rage raging tension between the United States and China. And there's a whole bunch of there's a military tension in terms of China's support for Iran, but there's also tremendous tension around intellectual property. And there's there's a device called Kimmy, you know, a platform called Kimmy, um which is in China, where they're rating Claude and throw up they're actually rating the technology.
(41:57) They're taking the code, they're putting it into the this what's called distillation. And it's basically taking it into this Kimmy device, the platform, and then they're putting it out to open source. So, imagine a $2 trillion cap backs with Larry Ellison flexing his muscles Zuckerberg flexing his muscles $2 trillion of cap ex everyone's trying to outspend each other, right? And this is classic malinvestment.
(42:24) Now typically malinvestment is like what we saw in the shale crisis from 2010 to 2014 where the Aubrey McClendon's of the world everyone was trying to outspend each other. And that ended up and we saw what that ended up very very and very very badly in 2014 15 16. Now this malinvestment cycle uh if what I use is going to be is going to be sped up by this property theft and this intellectual property theft that's coming from China.
(42:57) We saw with Deep Seek uh last February there was a big kind of moment where everybody said jeez these guys are making some they're stealing the code and now this the theft um and we're talking like 20,000 to 25,000 fake accounts. Um and where these these these these three platforms in China are stealing data from Claude stealing code uh putting into this Kimmy regime and then also um and and then and throwing it out into open source and where really the piranhas of open source can just rip it apart and so that's just like stealing
(43:32) billions of dollars of capital investment and um we were paying the best and brightest in Silicon Valley all that brain power is uh potentially being diluted and so at the end of the day a lot always these boom and bust cycles have a malinvestment period and that's where the testosterone's flying the companies have to really everybody wants to be number one it's like the Oppenheimer project uh race for the bomb in World War II.
(44:02) It that's what just happened and now we We China and all of these agents ripping the valley off and it's basically going to dilute the return on invested capital and it's and that's why if you look at the Mag 7 we're unchanged. Hard assets are destroying the Mag 7. The Mag 7 is a joke, unchanged since October in a bull market, record highs.
(44:29) Mag 7 is not at record highs. You know, that's because Microsoft's unchanged I think for almost 2 years. Meta is unchanged for a year and a half. These companies have over Look at Look at Look at the Look at the drawdown at Oracle. These companies have overinvested and now China's picking them apart. >> Well, China's Foreign Ministry is denying this.
(44:52) In fact, there was a need to come out and vocalize this denial by the Foreign Ministry saying that these allegations of intellectual property theft are nothing but baseless narratives according to the Chinese Foreign Ministry. They were report responding to media inquiries from several individual countries that accuse China of infringing on IP rights and stealing cutting-edge technologies in critical sectors.
(45:19) Now, China stealing IP is nothing new. Larry, why is it worse now and and what are the implications of this? And and I will say allegations of China stealing IP are nothing new. But why is this worse now and and and what are the implications here? >> Well, China's been ripping off technology in Japan for 20 years.
(45:42) Yeah, China's been This goes back to the auto industry and I mean this this just China's ripped off a lot of technology over the years, but Enphase has accused three different entities. This is very public information and that's just three that that identified with 25,000 fake accounts that are raiding cloud every single day.
(46:03) Um what are the implications? The implications are that we've over invested and I think what would shock the market is another deep seek moment where you see actually see China with an advantage in terms of AI where they've stolen our our intellectual property and they've actually passed us in certain in whatever it is in certain areas in terms of of the race for general intelligence.
(46:36) That would really create a shock and uh the mag seven you know in that world the mag seven could potentially drop 50 uh 50% 50%. >> 50% drop but only if China comes out with something more advanced. Just the fact that they're stealing this IP, I mean surely that already impacts uh the companies that are investing in developing this IP.
(46:59) >> Yeah, well there's a lot of there's a lot of like just the whole data center build out is much slower than people think. There's a lot of stresses on artificial intelligence in terms of the companies moving too fast or too far ahead of the build out. You look at we we talking about Caterpillar stock the largest one year in the history of the company so which is fifth like 20 30% more than any year that in the history of Caterpillar.
(47:29) So there's a lot of front running on this right? But the data center build out in the United States is going a lot slower than people think. And so the mag seven has that headwind and they have this headwind of intellectual property theft. So it's going to be it's very your return on invested capital is going to be very hard to identify in in the mag seven.
(47:48) These companies have been cash cows for 10 15 20 years. Now they're becoming capital intensive businesses. >> Focusing on China Larry, I mean earlier this year the China narrative was what was dominating market headlines and the tensions between the US and China and trade war. Now we have this issue. Uh we have President Trump going to China to meet with President Xi in the middle of May.
(48:17) There's also the concerns that China has been aiding Iran rather dramatically in this conflict. Many have even called this a proxy war. Uh the president uh just this week claimed that an Iranian flagged cargo ship that was seized by US forces after refusing to comply uh with a blockade in the Strait of Hormuz was carrying what he described as a gift from China.
(48:44) US Central Command confirmed that the vessel remains in US custody following the interception. They didn't elaborate what that gift was, but uh implications are that it was some kind of weaponry. And again, there have been confirmed reports that China has been assisting Iran in this war. As we know, China has been hit hard given that it gets its discounted oil from Iran as well as from Venezuela.
(49:08) And many have said that part of the reason of this behind this conflict was to curtail China's access to this discounted oil. We're going to have this meeting in May with China. A- Again, it feels like the markets have sort of overlooked the China narrative for for the time being. What do you think happens and how do you see the the China dynamic playing out? >> In in the ideas, dinners, and the phone calls and panel last week, this has been the major topic of discussion.
(49:37) And there's a lot of positioning on the part behalf of China and the White House ahead of this meeting. Um both sides need deal. Trump is really, you know, the probability of Trump getting removed from office hit 39% uh which was 30% uh in the recently in the betting sites. And which is pretty incredible because the only way to be removed from office is you need 2/3 majority in the Senate.
(50:09) Um no president's ever been fully impeached. Nixon resigned, of course. So, the fact that you're up at 30% Trump needs what our what our top investors are watching are those Senate seats. Those 30 or 232 Senate seats that are up in 2026. And a lot of them a lot of them are in um commodity type agricultural farm belt states.
(50:36) And so Trump needs a soybean deal desperately with China. Uh but he's going to posture. He needs also he needs also defend Silicon Valley. We'll be talking about intellectual property theft. Uh she President she's in a mess to disinflation uh deflationary problem um they're just coming out a nasty property crisis.
(50:58) There's a lot There's a lot of good things that could happen here. But the posturing ahead is going to be probably pretty tense. Both countries are putting up um as as you as you mentioned China's aid on the side of Iran. Um the US has threatened already to put a 50% tariff or 150% tariff on any company any country that's helping Iran.
(51:24) And China's been surreptitiously helping Iran. So Trump is like kind of they're like kind of dancing by the flame here. And so they're going to play play a lot of games between now and May 15th. But in the end both countries need a deal. And and Trump desperately needs a deal with his approval rating and with the midterms coming in November.
(51:47) >> Okay, so do you think the market's a factoring this China dynamic in yet or you say that it's likely to be resolved so they don't really need to factor this in? >> No, there's a lot of things in the next like three, four, five weeks that the market's not pricing in. This is probably going to be you know, Trump Trump always thinks he's he's sitting in Manhattan and doing real estate deal, even though he's sitting across the table from, you know, four Iranian factions this time.
(52:18) It's not And now he's sitting He's going to be with President Xi. So, he he likes to create a big ask and that that sounds, you know, intimidating and then he wants something in the middle. And and that's what that's what he's going to try to do. So, it's going to get you want to be long volatility um from now until May 15th for a bunch of reasons.
(52:42) The extension of the market, um the percentage of stocks that that are that are really at highly extended levels and um and and then this whole and this whole dynamic around AI job disruption um and and and and this whole dynamic about inflation re-acceleration. >> Right. I mean, so you've got these market risks, double-digits inflation, Iran conflict not resolved, dynamic with China that needs to re-enter the equation.
(53:12) China intellectual property theft that's going to impact some of the tech AI stocks and and the sector there. So, if you put this all together, Larry, um what is And you said you see equities having significant downside, what is the sort of timeline that you can see this rolling out in? >> Well, a lot of people say sell in May and go away, you know.
(53:38) Um we haven't had a great start to the year, but the market's broadening out a little bit. Hard assets have been a much better start. Commodities have had a much better Like I said, the mag sevens unchanged since since October. But, you know, right here, uh we're going to have I think the best buying opportunity of the year is probably going to be uh sometime in June, July, August, maybe even September.
(54:05) Um you've got a lot a lot of things that are coming at this is like I said this inflation shock, um this AI job disruption, Trump, you know, posturing, flexing muscles with China. You know, the only way to make money in the market the last 5 years is being there with some cash for that you know, think of think of the muscle memory Think this is one of the things that's going on.
(54:30) The muscle memory from say Q1 into Q2 2025. A lot of people missed that rally. That's another reason why stocks should be strong. There A lot of people missed it and they don't want to miss this one. That's the you know, we call recency bias that muscle memory. And so that's why you have this un you know, they get to all the short covering.
(54:53) You have all this unnatural kind of chasing. It's not really investing. And so the only people that made money the last 5 years is buying when when things are really on sale. Not Not really chasing and I think that's where we are. We're really a chaser's market. >> So, where do you think the biggest opportunity that you're seeing right now is given everything you're seeing? >> Well, still the natural gas names in the United States.
(55:19) That's we we recommended the FCG ETF last year before we still love the natural gas names. We love I love the oil names that pull back. We can see the oil services. So, you want to be in and then uranium. We're doing a call on uranium with clients around the world. Next week the SRUUS. I mean, the setup for your rating is incredible.
(55:42) New plants coming along online in in China. Um, demands opening up in Asia across board. Demands opening up in Europe. We're under supplied. Um, we have a really we think uranium prices could double over the double, maybe even a triple over the next 10 years. But, I think it double most likely in in the next, you know, I think two to five years.
(56:08) >> And what would need to happen with your big macro outlook, Larry, for you to change your view? Is there anything that derails your general macro thesis here? >> Well, in terms of the bear case, in terms of inflation, if Iran had if they came out tomorrow and had like a unified government where all the factions held hands and agreed and signed on the dotted line with Trump and did a multi-year deal, that would be that would be really good for um for for really containing inflation cuz you could open up the streets pretty
(56:45) fast and the tail risk wouldn't be as bad. But, if one or two factions doesn't go along, then that's clearly what just happened this week. Trump was supposed to meet in Pakistan. J.D. Vance was supposed to be on the plane. We heard this like five times Monday morning and they canceled the flight.
(57:03) The whole thing the whole thing smells high heaven because at the end of the day, they're negotiating with all these different factions. >> So, basically you're saying uh a different approach from the current Iranian regime and even at the best of times the Iranian regime is not exactly been known to honor the deals that it does make regardless of the administration.
(57:31) So, there's that factor to to consider as well. Larry >> Well, here's the bottom line. This is probably the most important part of this conversation. In 2025 Trump had an off-ramp. They took Howard Lutnick, they put him in a closet for a month. With you know, with with the commerce secretary. Then they put percent on the Sunday talk shows.
(57:53) And they lowered tariffs. Trump has control over tariffs through the executive branch. It was an easy off-ramp. So, a lot of investors missed that rally. Today investors are looking at the market. They're chasing. They They They have that muscle memory from 2025. But here Trump kicked a hornet's nest. He doesn't have control of the factions.
(58:18) It's not like moving tariffs around. And all it takes is one or two factions in Iran to really wreck this deal. Screw up the strait. Clog the strait for another month or two. Then the probability of really crazy inflation goes up up and up. The probability of food shortages in the in the emerging markets watch the credit default swaps on emerging market countries.
(58:45) Creates massive economic and financial instability. A food crisis. So, yeah, there's a lot There's a lot There's going to be a great buying opportunity in the middle of the year. >> A great buying opportunity for equities across the board? >> Well, this this special I mean, there's all You always have to be careful.
(59:06) Um but but you I think I think you get a 20% 25 30% drawdown between now and say September. >> A 20 to 30% pullback across the broader markets between now and September. Or after September. All right, that's that's a pretty big statement, Larry. Uh I love it when someone gives a forecast and has the gumption to give a forecast and a timeline.
(59:28) So, I congratulate to you on uh your boldness and and bravery and and you have been right in some of your calls in the past. So, we'll see how how that one shakes out. Uh your voice is taking strain. So, I'm going to let you go at this point. I know I know you've exerted yourself as you said you've had tons of um investor dinners throughout uh the last couple of weeks, but thank you for sharing those insights with us what you've gleaned from those very important closed-door meetings.
(59:55) Uh and thank you for your thoughts and for your analysis, Larry McDonald. So, where can people uh learn more about you and your work? >> Michelle, thank you so much. We appreciate appreciate your passion, your dedication, uh your thought leadership and research when you put these segments together. It's really second to none. And uh yeah, the Bear Traps Report you can find us at convertbond on X, info@thebeartrapsreport.
(1:00:21) com, and our book has been in the top top five or 10 or 20 on Amazon all year. How to listen when markets speak on Amazon. >> All right, it's a great read. I've read that book twice, and some of the things that you've said there are really coming into fruition uh right now as we discussed in this interview.
(1:00:40) Larry, we'll have you on again soon. Thank you so much. Uh hope that voice recovers quickly, Larry McDonald. Thank you. >> Thank you, Michelle. >> And as always, thank you for watching. Thank you for spending your time with us. If you enjoyed our content, found it informative, interesting, educational, which we certainly hope you do, please make sure to share it with friends and family.
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(1:01:22) There's a link in the description and again, also on our website milesfranklin.com. As always, we love to hear from you. So, feel free to praise, whine, or just opine. For me, Michelle Makori, and the rest of the team, we'll see you next time. Until then, stay sober. >> This is the real story with Michelle Makori.