Title: Larry McDonald | AI Is Hiding a $600B Credit Crisis Show: Risk Takers (host Alessandro) Guest: Larry McDonald, The Bear Traps Report (ex-Lehman; author "A Colossal Failure of Common Sense", "How to Listen When Markets Speak") Date: 2026-06-16 URL: https://youtu.be/c_xjRP4c1DM Length: 55:51 Note: fillers (um/uh/you know) and stutters/false starts removed; wording otherwise verbatim and every (mm:ss) cue kept exactly in place. Recorded around the Hormuz reopening ("supposedly just opened this morning… signed properly on Friday") — mid-June context. MetaMask sponsor read ~25:25-26:09 is an ad, not a pick. Auto-transcript garbles left as spoken: "Kevin Walsh" / "war sh-" / "war's" = Kevin Warsh; "beer traps" = Bear Traps (Report); "mice supply" = money supply; "Croc" = Grok; "for all and K" = 401(k); "Mag 70 TF MAGS" = the Mag 7 ETF (MAGS); "5 600 billion" = $500–600B; "reserves at the Fed… down like $300" = JPMorgan's Fed reserves down ~$300B (unit garbled — context implies ~$300B); "idea centers" = ideas dinners; "trueflation" = Truflation; "trim mean" = trimmed-mean; "46 4700" = 4,600–4,700 on gold. =====
00:00 Everyone's 401K has essentially been hijacked. Remember, SpaceX in 2019 was only worth 30 billion. And now it's two trillion, right? Everyone's 401K is financing billionaires and the little guy is holding the bag. And this to me sets up a Lehman-like credit crisis where there's a lot of off-balance sheet debt.
00:27 I think it's over 5 600 billion dollars of off-balance sheet debt that the hyperscalers, the Facebooks of the world, the Microsofts, they have this debt that's off the balance sheet. And you already seen some of that in private credit. There's a big private credit meltdown in the software space already. I think this whole data center buildout is really starting to trigger a credit problem, a credit crisis.
01:03 >> Hey guys, welcome back. Today we have the privilege to be joined by New York best-selling author Larry McDonald. He wrote the incredible book How to Listen When Markets Speak, and today, Larry, I would love for you to tell us exactly what markets are speaking to you today. >> Thank you.
01:23 Yeah, both books have now been published in 12 languages. Thank you so much for having us on. We're doing speeches this week in Toronto and Montreal. And just about over a million copies sold with two books. The first book was a New York Times bestseller about Lehman Brothers and all the stresses that built up into the system at that time.
01:48 The new book, How to Listen When Markets Speak, is more about the fiscal and monetary response to COVID and then obviously the banking crisis of 2023 and Trump and Biden fiscaling up have created 17 trillion bucks of fiscal and monetary support since 2020. And that's causing a colossal migration out of what we call financial assets which are just paper certificates, bonds and over towards hard assets and Bitcoin should be a beneficiary as well.
02:27 And so that's what the book is really about. All the artificial intelligence spending, that 5 trillion over the next couple years, all the fiscal, all the monetary, it creates a whole new inflationary regime in a multipolar world with more global conflicts as we've seen. It's really like a 1968-81 portfolio construction that we make the case in the book where you have that multipolar world.
02:55 You've got big fiscal spending coming out of the Vietnam War, now massive amount of capital expenditures coming into the power grid to support artificial intelligence. That's the big theme of the book — all of that triggering this colossal migration of capital. >> Absolutely awesome.
03:17 Yeah, the thesis looks like it's essentially playing out in front of our eyes right now. So, what I'd love to do, Larry, is just get you to set the stage right now. Where do you think we are right now? The book was written in 2024. The Strait of Hormuz supposedly just opened this morning. There's a meeting where it's going to be signed and signed properly on Friday.
03:39 Apparently the first ship has just gone through in the last half an hour or so. There's reports of that. So the backdrop is ever changing. Could you just set the table for us right now where we are and take all the time you need. >> Sure. Well, the strait — when you close the strait for 100 days, there's a price to pay for that.
04:05 So, the ships will open. I'm sorry, the strait will open and the ships will start going through, but we're going to have inflationary impacts for the rest of the year that come through not just fertilizer and different food products, but look at semiconductors. Your tungsten, your very critical minerals that are needed for semiconductor production are essentially being hoarded now and we're going to run out of supply.
04:35 There was an announcement out of Japan last week. We're going to have a supply problem by the end of June. So, 25% of the supply. So you're going to have all these unattended consequences from the strait being closed. And so, that to me sets up a real problem, probably the next three, four weeks, five weeks, six weeks in the market where you're going to have to digest that inflation bounce.
05:01 And in 2022, remember, right now there's 41 trillion in the Nasdaq 100. And in 2022, at the end of that inflation shock, we get down to about 12 trillion in the Nasdaq 100. So, 2021, we're up near 20 trillion. And after that inflation shock, we moved down to about 12 trillion dollars in the Nasdaq 100.
05:28 Now, we're up near 41. So, the inflation shock should trigger a big rotation out of technology into oil and gas, into metals, into companies that control hard assets. >> Yeah, we have seen enormous stimulus that poured into the tech sector over the last, especially in the last 4 years, I guess.
05:55 And this has come at the behest of basically most other sectors. And it's interesting right now because you've got even the mag 7 right now relatively underperforming against the capex receivers, right? So you've got the semiconductors are now 18% of the index. Even the SPX right now is like 45% AI or AI adjacent.
06:26 And in the last 6 months, the mag 7 haven't even been dragging that thing up, right? Which is almost mind-boggling. But you've now got the situation in the US where the most amount of jobs that are being created are coming out of healthcare, for example. And healthcare is one of the most beaten down sectors in the index.
06:48 How do you see continued passive investing playing out over the next few years given all of the sort of turmoil that's happening underneath the surface? >> Right, and it's so important that you bring this up, Alessandro, because everyone's for all and K has essentially been hijacked. In other words, you can't have 45% of the index that's already in technology and then bring in SpaceX, Anthropic, OpenAI.
07:23 And so I strongly recommend if anybody's in the S&P 500, whenever you have a sector that gets this big, like the financials in 2007-8, got up to almost 30% of the index. And that was a big warning sign. Same thing with the energy names in 2000, say 2010 to 2014. So, for passive investors, if you have say a million dollars in the stock market, $450,000 of that is in technology and it's at the highest valuations ever.
08:02 And so, it's really what we call in the book the dark side of passive investing. And all that means is what's happening is passive has become such a big part of the market that passive investing, that's just the S&P 500 or the NASDAQ — the index has become more and more gameable as the money's just automatically flowing in. There's no thought process.
08:30 And so now you're taking SpaceX and you're putting it into the index over the next year and you're putting it into the NASDAQ and the Russell. And so, all of these feeder funds, these index trackers have to buy these stocks at twice — SpaceX is twice the valuation of Berkshire Hathaway. Just insane, twice the valuation.
08:51 And it's 14 times the size of Facebook when Facebook came into the market as a public offering. So, everyone's 401k is essentially overdosing on technology and I think you want to make sure that if you're in the market the next 10 years that you're diversified away from that. And you want to own companies that control assets.
09:18 The oil and gas sector, the metals, and industrials — they're only like 15% of the index, right? We make the case in our book that the industrials, the metals, materials, oil and gas, uranium, these sectors are going to be in the 30, 40% of the index 5 years from now. >> [snorts] >> Yeah, well that would be an incredible change.
09:45 You make a good point on SpaceX, right? Right now, I think SpaceX IPO'd a few days ago, right? They raised $75 billion or so. And 4% of the entire float basically is available. That means 96% of the real value of SpaceX is to come on the market. And these are some of the most predatory unlock schedules you could possibly imagine.
10:05 >> You should really get into that. You should explain — this is a very aggressive unlock schedule. It's much more aggressive than other IPOs. >> Yeah, certainly. I mean, you're welcome to go into more detail if you want, but just real briefly, normally these things take much longer.
10:28 Normally these things are not included in indices for months, maybe even a year, because the passive retail investor is supposedly meant to be sheltered from the volatility of including these enormous things with very low float essentially and very large market caps initially because, well, once the people who have those shares to sell — in a lot of ways, they're forced sellers.
11:01 This is what I think people sometimes forget. If you invested in SpaceX when it was $10 billion, $50 billion, $100 billion, and it's now 25 or 40% of your book, in a lot of cases, if you're a fund manager, it's not even legal for you to not rebalance at this point.
11:17 If you've got a mandate — so it's not even that they don't want to hold it. They can't just hold on for another 10x. They're essentially forced sellers once their shares unlock. And we've also obviously got Anthropic coming up and OpenAI coming up.
11:32 How does all this play out, do you think? >> Well, the good news is there's a lot of millionaires that have been created and I love the stories of the welder that's now a millionaire at SpaceX. I mean, there's wonderful stories. But it's similar to Facebook when it came public.
11:55 Facebook came public with a big loud roar and then there was like a 50 60% drawdown, to your point around the float. There's only a small percentage of the shares. So, there's going to be just so much dumping of stock. Remember, SpaceX in 2019 was only worth 30 billion. And now it's two trillion, right? So, what's happening is companies are coming public later in their life cycle.
12:25 Much later at much higher valuations. It's getting dumped into the indexes. Everyone's 401k's financing billionaires, a lot of them. I mean, it's nice stories of the welder, but there's a lot of venture capital billionaires that are dumping stock into passive indexes over the next year and you're talking about valuations that are going from 30 billion in 2019 to two trillion and all of a sudden that stock's getting dumped onto the market.
12:59 So, it creates a situation where the S&P is probably going to be unchanged for the next five or 10 years. Which has happened several times in history. Remember, from 2000 to 2010 the S&P was unchanged. I'm pretty certain the same dynamic is going to happen again. >> So, you mean expected returns from the SPX between now and mid-2030s are going to be zero.
13:28 It's predicted — the share of PE ratio suggests when you get to these valuations, the expected forward returns for 10 years are in fact that. You think that's going to play out? >> Right. No, 100% and guess what? You look at the CapEx of the Mag 7 plus Oracle, those big stocks, those stocks to your point are actually down 2% since October.
13:50 So the Mag 70 TF MAGS is down 2 3% since October. It tells you there's a digestion problem where they are financing. So, if you believe the bankers on the SpaceX deal, 1.4 trillion dollars of revenue is going to come from Mag 7 plus Oracle. In other words, the SpaceX revenue is going to have to come from somewhere.
14:16 It's going to have to come from a lot of these Mag 7 type companies. Plus, the Mag 7's already doing 4 and 1/2 5 trillion of capital expenditures in artificial intelligence, right? So, you have these companies that were really cash cows and now they're really becoming capital intensive businesses.
14:38 Look at Nvidia today, a 20 billion-dollar bond offering. The Mag 7 has done almost 300 billion of bond offerings. So, they're selling stock. Google just sold 80 billion of stock. They're selling bonds. They're doing everything to fund artificial intelligence. And so, that creates a dynamic where these companies are the most expensive ever.
15:03 They're being dumped in the passive indexes and the probability that the market is unchanged for the next 5 to 10 years is I think very high. >> Yeah, I think this dynamic change from these companies being free cash flow monsters to suddenly issuing equity at the same time that you've got these enormous IPOs hitting the market.
15:28 It basically is the CFOs, the smartest money in the world are essentially exiting their positions and everyone else is supposedly meant to go and buy it up on the premise that AI is going to be incredibly transformative. Now, I don't deny that AI is obviously incredibly transformative.
15:47 I mean, I use it — it's made my work incredibly more productive, but I'm fully aware that when I max out my Anthropic subscription, for example, they're subsidizing that at about 20 to 1 currently. So, if everyone used their subscription like me, it's a big problem for them. What I really wanted to ask you actually, Larry, is where do you think the value flows to? Because you can argue that the value is going to flow to the frontier labs.
16:20 So, it's going to flow to Anthropic and OpenAI, these guys that keep pushing forward more models. That's where the value's going to go. And if they IPO at enormous valuations, and then the market believes that — whether that happens or not is up for debate. You've got obviously a lot of competition from Chinese open-source models and they're two to three months behind, let's say.
16:39 So, once you've produced a product that is exceptional, let's say you're a surgeon, right, and you have a robot that operates. Now, this robot runs on a model, maybe it's not a Chinese open-source model, but once the robot has a model that's good enough to produce a 99.
16:57 99% effective surgery, going from 99.99% to 99.999%, it doesn't need to happen between today and tomorrow, right? So you don't need to be running the absolute max latest model for that. So, where does the eventual value for AI flow down to, do you think? Is it the companies that just harness it and deploy it or does it remain in that top frontier lab sector? >> So we've been doing a lot — the beer traps report, we worked with hedge funds, mutual funds and pension funds in more
17:30 than 20 countries and we host a live chat, an ideas dinner tonight in Montreal and Thursday in Montreal, tonight in Toronto. So what we do is we sit down with the best and brightest investors. And we also host a conversation with them on Bloomberg everyday and on discord. So we're constantly triangulating this from talking to the best and brightest and that's where we get a lot of our ideas from.
17:59 And what I can tell you is that people are selling down their exposure to technology and increasing exposure to natural gas, to coal companies that are going to directly benefit from artificial intelligence infrastructure. These Canadian natural gas names are screaming buys, companies like Tourmaline. They have that trapped gas.
18:22 You can take these data centers, move them into regions in the world where gas typically would never even be sold because it's too far away from things, right? So there's that play >> off at source, right, a lot of the time? >> Yeah, it's like if you have oil or gas at a weird part of the world and there's no pipeline and it's far away from the ocean.
18:43 Yeah, you can't truck it, there's not a real system. So there's all this gas. There's the copper names — the copper names are destroying mag seven, right? Because of that artificial intelligence power grid you need to build the data centers. And then on the healthcare side, companies like Intuitive Surgical — we hosted a private ideas dinner last week with some real big families, billionaire family offices in the medical technology space. The Baxters of
19:21 the world, the Intuitive Surgical. These companies are going to benefit from AI in a huge way. Massive increase in profit margins. Intuitive Surgical's data that they have — artificial intelligence makes that data so much more valuable. They've got a real big moat. And so, yes. So, I agree with you.
19:44 The medical field was 16% of the S&P within the last 5 years. And now it's down to eight — healthcare, 8% of the S&P because all this money is moving into technology. So, you can buy healthcare companies and if you're smart, listen to people like the Bear Traps Report. There's a lot of good research out there.
20:04 The Daily Dirt Nap or the Hedgeye. There's a lot of good research on companies. The bottom line is the smart money is buying companies that will benefit the most from AI, from artificial intelligence. >> Yeah, that is the play. Which companies are the beneficiaries of the actual implementation of the technology? Because that's what we see in the past.
20:25 The technology is transformative, but whoever can actually harness that technology and create extra value from the tech obviously are the main winners. So, I just want to touch on the natural gas outsourcing thing, right? Because right now you've got a lot of pushback from certain communities in certain areas because they don't want data centers.
20:56 I think it's like not in my backyard. >> Not in my backyard. Some people are referring to it. >> Yeah, yeah. NIMBY, right? Yeah. And so the people don't want it where they live basically because it's going to raise electricity costs and it's going to take all their water and a lot of these things are questionable in of themselves, but still the narrative is there.
21:16 We've already seen some Bitcoin mining companies actually make use of this and go to these areas where the natural gas is getting burned off at its source. So these companies are finding areas where this natural gas is, going to the land owners and being like, "Hey, rather than you burning off your natural gas, can I — I'll pay you for it.
21:36 " And they're like, "Oh, yeah, great. Seems like a reasonable source of revenue." So, I want to know two things really. There's already been a mass migration of people moving away from Bitcoin mining to providing their compute to AI anyway. How many data centers do you think the data center build out is on track for what it's meant to be? I think we heard news maybe three or four months ago that 50% of them are already not really going anywhere.
22:10 And if that's not the case and they actually are delayed, it's going to be a very very long time before they can actually be set up in these areas, right, for being completely made in areas where this natural gas is getting burned off. How far out is this actual build out? >> Right, and this to me sets up a Lehman-like credit crisis where there's a lot of off-balance sheet debt.
22:37 It's over 5 600 billion dollars of off-balance sheet debt that the hyperscalers, the Facebooks of the world, the Microsofts, they have this debt that's off the balance sheet. And to your point, you've got this risk to the data center construction. If you're going to build a thousand data centers in five years, Elon Musk is promising a rail system to space, right? Where he would be the railroad and SpaceX would take and create data centers in space.
23:12 That is going to take some market share away from on Earth data centers, which already have financing plans. So, if the on Earth data centers run into not-my-backyard pushback, which we know is happening, if SpaceX pulls market share away from that, there's all these financing deals that have been done on different data centers around the United States.
23:37 If that's not fast enough to build out, then you're going to have a big credit problem. And a lot of that — you're already seeing some of that in private credit. There's a big private credit meltdown in the software space already. And even though the US high-yield market, the triple C's, which are the junk, a joke, they're making higher yields, lower bond prices, so there's some stress building there.
24:00 I think this whole data center build out is really starting to trigger a credit problem, a credit crisis. >> What are the implications for when that credit crisis ends up blowing up? >> Well, that would be a big impact on the banks. Right now, if you look at KKR, for example — so, here's JP Morgan stock and here's KKR.
24:32 KKR's down 42% off the highs. And since say a year and a half, KKR, which is exposed to the credit markets and private credit, down 42% and JP Morgan's up 23%. So, you're already seeing cracks in the foundation, but that's going to crack all the way up to the big banks. So, we're seeing a lot of clients short the financials, either short puts on the XLF.
24:59 There's a lot of ways to short the financials, but that's where you get the credit problem later in the year because you're already seeing the credit problem in what's called private credit or the KKR private equity which is exposed as well. >> Crypto is a pain. Holding Bitcoin, Solana, Ethereum means you need three separate wallets, three separate apps, three separate seed phrases.
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26:09 Your home in Web3, MetaMask. Get more out of crypto. >> Do you think the ramifications of those smaller firms, right? The smaller firms — just so viewers have a bit of an understanding — back in 2008, after the great financial crisis, the conditions to take on loans tightened a little bit and then what this created was a separate market, right? And this private credit market has grown to — it's hard to say it's relatively obfuscated, but supposedly like 3 trillion is a figure that's
26:38 often thrown around. Do you think this market is large enough and exposed enough to AI debt that it is big enough to actually cause a systemic risk to the larger banks? >> Well, yes. Remember, it's not just private credit, all the financing that's done on artificial intelligence and the data — some of that's private credit, some of it's public, some of it's off balance sheet.
27:04 So, yeah, there's so much financing that's been done to support the data centers, artificial intelligence, and then there's a lot of financing that was done in the software space that's blowing up now because artificial intelligence is kind of destroying some software companies, right? And so, AI has two forms of credit risk.
27:28 One form of credit risk is the fact that the exposure from some companies to software to artificial intelligence — in theory, Adobe is at risk, right, from artificial intelligence. So, you have that angle, then you have the build-out problem and NIMBY, right? And so, yeah, this is a credit crisis that's forming.
27:52 It probably really starts kicking off in this third quarter of this year, September, October. And don't forget, that's when you get the inflation bounce because we've shut the strait down for 100 days, and that inflation bounce is going to accelerate the credit crisis. >> Let's go into that inflation bounce then, please, because obviously we've got a new Fed chair coming through on Wednesday, I believe, so very soon, obviously Kevin Walsh.
28:20 He arguably was put forward with a mandate to lower rates. There's questions as to whether or not that's possible now. He's coming in and said, "Look, in his testimony, he was saying we want to change the data that the Fed runs on.
28:41 " So, again, are they just changing the data so that they can reduce rates? But then having said that, the long end of the curve has not really been very forgiving anyway. So, where do you sit with how Kevin Walsh can impact rates generally, and those second and third order effects coming with the strait being reopened now, all the things that happen there in inflation generally? >> Right.
29:07 Well, the point that we make in the book When Markets Speak is there's only one way out of a $40 trillion debt hole. There's only one way. There's two. One is a debt jubilee, which is talked about in the Bible, a big default reset, or you inflate your way out. That's what's called financial repression.
29:32 You massage interest rates below the rate of inflation. And there's no question that's what Warsh and that's what the Fed's going to try to do. And they're already doing this by forcing the banks — if you look at JP Morgan's reserves at the Fed, they're down like $300 and what that means is, for people listening to us, they've taken the money out of their reserves and they've put it into treasuries.
30:01 So, the Fed and the US Treasury have a gun. They're pointing it at the banks and they're saying, "Listen, guys, you have to buy more treasuries." So, that's one of the ways they've been holding rates down — through forcing the banks to buy more treasuries.
30:18 We think it's about a trillion dollars of forced buying last year, this year, next year, and the year after. And so, that is really good for hard assets because when you go into a dynamic where they're artificially suppressing rates, right, that makes companies that control assets much more valuable. >> Yeah.
30:49 So with the financial repression that it looks like they are implementing, do you think they end up buying longer duration rather than just treasury bills? To force the long end of the curve down? >> Yeah, there's about a 10 trillion rolling over the next 12 months.
31:11 So 10 trillion's rolling. And that's why the Fed can't hike, because when you have the inflation bounce, the Fed should have to start hiking again. But if you look at the average weight of maturity on the portfolio, if they start hiking, the interest on the debt's already going to be 1.1 trillion. If they start hiking, it'll be even more.
31:32 And so that's where the setup for hard asset companies that control metals, companies that control oil and gas, companies that control commodities are going to be in a much better situation, because the last time they had the inflation bounce, the interest on the debt was only 300 billion.
31:53 2021-22, now we're 1.1 trillion. And so the Fed can't admit it, but they really don't have much room to hike at all. And therefore your inflation bounces, and that's going to really create — like I said before, that 40 to 41 trillion in the Nasdaq 100, up from 12 trillion in 2022. Go back to that.
32:20 So in 2021, we had 20 trillion in the Nasdaq 100, right? 20 trillion. And after that inflation bounce, we got down to 12 trillion in the Nasdaq 100. Now we're at 40, 41. And so if you have that inflation shock, which is coming, and don't forget I'm in Toronto. You've got these World Cup games in all these different cities, the summer driving season.
32:45 Refiners have to buy oil and refine it and get it turned into gasoline. You've got the World Cup. All of this creates that big inflation bounce. You've got all the data center spending. So that inflation bounce triggers that rotation out of financial assets, which are bonds and tech stocks, into hard assets. >> How persistent is that inflation shock in your opinion? Because generally, when you see inflation shocks that are persistent, they require continued growth of the money supply, right? This is what happened in
33:20 the '70s. You saw the money supply was inflating alongside the inflation shock from the oil embargo. And as a result, wages were able to keep up. At the moment, we have a very clear K-shaped economy. And the upper portion of that K are driving consumption of the economy.
33:41 I had Vincent Deluard on the podcast a few days ago, actually. Really insightful in a lot of ways. Because he thinks that the upper half of that K is beginning to show cracks. Things like home equity lines of credit are being taken out. And of course, who can take out a home equity line of credit? Well, someone with enough paid off in their mortgage to actually take out equity again to take out a loan against their home.
34:05 And the rate of growth of tax receipts has come down from sort of 10% to 5%. So he's really trying to look into the savings rate in the US as well. Who can save money? Well, half of the US haven't got 500 bucks in savings, so they're not saving.
34:23 So the only people who are able to save are that upper portion anyway. And the savings rate is in decline over the last three or four months as well. So, he's starting to see cracks in the upper K. So, if the upper K cracks, can this inflation persist because it feels in a lot of ways like it's just going to cause demand destruction.
34:46 >> Right. Yeah, well, you're right. Every economic slowdown slows down inflation. There's no question. But the line that we have in the book is that when inflation gets under the seat cushions, in the carpets, when it's above the Fed target for this long — like we've been above the Fed target, I mean, super core inflation right now is annualized at almost — the last 3 months of super core, it's almost 11%.
35:18 And that's the last 3 months if you move that forward. And so, yeah, inflation will come down if the economy goes into recession. But it's going to be like in 1970s, 1980s, where you have unemployment going up, inflation coming down, but still sticky high. And that's stagflation.
35:40 Remember the fiscal and monetary response to Lehman Brothers was 3 and 1/2 or 4 trillion. That was the great financial crisis. So, think about that. 3 and 1/2, 4 trillion was the greatest financial crisis of all time. The fiscal and monetary response in Washington was about 3 and 1/2, 4 trillion. The fiscal and monetary response to COVID, the regional bank crisis of 2023, plus Biden and Trump juicing the fiscal for a whole bunch of different reasons — you're like 17 trillion of fiscal and monetary response since
36:15 2020. Plus the data center CapEx of 5 trillion between last year and 2030, 5 to 6 trillion. So, it's almost going to be impossible to avoid sustained elevated inflation with that much fiscal and monetary response. To your point, the mice supply has just exploded higher. >> Yeah.
36:43 Yeah. It is wild when you think about these things over such a long period of time, like the response to the GFC was three to four trillion and then COVID was just an absolute bazooka and then whatever it was seven months ago they just turned on the tap again for 40 billion a month just because they needed some liquidity for April.
37:05 I mean, just sounds crazy. >> Yeah. >> [laughter] >> So, what do you think the true level of inflation actually is? >> Well, whatever that trueflation number is, that's complete BS, right? And this whole trim mean thing you mentioned about Warsh — this is the classic thing governments do when they need to move the goal posts.
37:37 If they go to trim mean inflation, it's just a way of saying that we're walking away from the 2% inflation target, which is what they have to do. Remember, the Fed's mandate is 2% inflation and to control unemployment. That's the dual mandate. And they're essentially changing the inflation target which makes sense and that's why hard assets are starting to really destroy tech stocks.
38:06 I mean, if you look at the industrials versus the Qs, just destroying the Nasdaq in recent months, especially since October. And same thing with the copper names, same thing with natural gas. Look at the oil services, the OIH is up 50% this year, destroying technology. So, you're already seeing a rotation out of tech, out of bonds into stocks that control hard assets, oil and gas.
38:43 And that's because one of the big macro reasons behind that is if the Fed's changing that inflation target and admitting to a higher level of inflation, which they clearly are — and in reality, just do a Google search, right? Or do a chat GPT. Ask, "Okay, what was the price of a Big Mac and fries 5 years ago?" And it's up like 140%.
39:11 This is not — inflation is not running at 4%. It's running much higher than that. >> Smaller. >> Yeah, oh yeah, the shrinkflation is a big one, too. >> Yeah, I mean they got smaller, they got more expensive. The real cost of inflation in people's pockets is so much higher than the numbers suggest.
39:30 And this is why people I think just feel so fed up at the moment, because you've got the cost of goods, yes, and all that sort of stuff is going up, but really it's the cost of insurance and the cost of just being general — those sorts of things that don't really end up trickling into the real figures.
39:48 This is why people are getting to the end of the month and getting poorer in real terms every single month because they're just a little bit further away from me and I can't afford things, a little bit further, a little bit further, and all that compounds to that kind of turmoil that they're beginning to feel.
40:04 So, you think hard assets are the escape hatch. Where does Bitcoin fit into the global macro picture? >> Well, we track the Bitcoin gold ratio and when it gets down into the low teens, that's where you want to be selling some gold, buying some Bitcoin.
40:27 That's where we've been. So, in our trade alerts, we recently bought some Bitcoin, for the first time. And that Bitcoin gold ratio went from like almost 40 to something like that. And so >> Yeah. >> If you look at Bitcoin, I mean, obviously, it's had a really horrible couple years, in a big risk-on market.
41:00 And you could blame that on SpaceX, people having to sell Bitcoin to buy the SpaceX IPO. I know that's what Michael Saylor's blaming it on. >> They've been selling since October to fund the SpaceX IPO. >> Yeah. But it is a really good measure of liquidity, right? So, if you're in a bull market and there's a lot of — look at today.
41:31 Look at these quantum stocks, right? IonQ's up 6%. Rigetti's up at 10. QBTS, these stocks are up 10. So, in this kind of a bull market with a lot of crazy stocks doing crazy things, it should be fairly bullish for Bitcoin. But the bottom line point that we make in the book is that because of that inflation and the fiscal and monetary response, because of the overdosing on fiscal, you're overdosing on capex, that should be good for hard assets.
42:07 It should be good for Bitcoin over time. >> Why hasn't it been good for Bitcoin over the last seven or eight months? >> Well, there's a lot of people — I always say watch out for the strippers. >> Mhm. >> When you see the strippers actively pitching Bitcoin at the highs, it sucks a lot of these young guys in, right? And I swear to god, when Bitcoin's on the lows, nobody's pumping it up, right? So, you have a lot of people that came into Bitcoin at
42:43 very high prices. They tell themselves they're going to hold it for 20 years and then you get this drought out and it just feeds on itself. Crypto as a whole has lost two trillion bucks from the highs across Bitcoin plus all the other, some of the garbage coins.
43:01 And so, it's a real mystery as to what's caused it. We host these idea centers with the smartest institutional investors in the world. And you could blame it on the IPO cycle this year which is much bigger. And it's not just SpaceX. It's literally going to be the largest IPO cycle we've ever had.
43:26 But is it liquidity? Or is it having to sell things to make room for other speculative assets? It's one of the two. >> Mhm. >> So, where do you see the world in two years? Stanley Druckenmiller is very famous for saying you don't get paid for thinking about things today.
43:48 You get paid for thinking about the world in two years. Where's the world in two years to you, Larry? >> Well, think of these drones, right? You're going to have drone attacks on cities and you're going to have this whole war in the Middle East in Iran. It's very easy for a faction to disrupt this deal, right? And so, you're in a world that's kind of a more multipolar global conflicts, higher interest rates, higher inflation.
44:19 And that's kind of the new world that we're in for a long time now. And so commodities in that world do really well. You're going to have populist >> just hold on. You mean higher rates outside the US because they haven't got dual mandates? >> Right. No, yeah, higher rates — if you look at the whole world the bond issuance around the world is exploding, too. Like France, Japan.
44:45 So, there's just a tremendous amount of global pressure on higher global bond yields. And so, if you get those higher global bond yields, elevated inflation, the cost of living creates more populist candidates like the whole Trump thing — it has a lot to do with populism. Look at Nigel Farage.
45:08 He's going to probably be the next Prime Minister in the UK. So this elevated inflation crushes the middle class, like you said with the K-shaped economy. It creates a big social backlash against politicians. And like I said before, robotics, Intuitive Surgical. You need 100 million robots to be built in the next 10-15 years.
45:39 It's going to require a lot of copper, right? So, you've got robotics, you've got the power grid rebuild in the United States and around the world. That's 2 trillion bucks. Needs a lot of copper, needs a lot of metals, right? You've got all these data centers that we're going to throw on the power grid.
45:58 You have countries like India that are exploding with growth. Big population. There's a billion people in India that don't have air conditioning. Think about that. A billion people. So, what we're doing is we're raising the standard of living around the world. Countries like India need more air conditioners.
46:20 People are going to make more money. That requires nuclear power, right? Requires natural gas. Even the coal, right? More coal plants. So, that's where we are. We're in a world where next 10 years, you've got 100 million robots. Somebody has to build them. Where are the materials for that? Wars are really inflationary.
46:41 We have to rebuild the Ukraine. We've got to rebuild Gaza. We've got to rebuild Iran, right? We've got to rebuild LA after the fires, right? This is all going to require hard assets in an inflationary regime where the Fed has to engineer some type of what we call financial repression. They need to keep interest rates below the rate of inflation.
47:05 >> Well, you summarize that absolutely beautifully. One of the things I think that's been damaging to Bitcoin actually, specifically, is that exact thesis, right? It's been atoms over bits across the board. And this is one of the beneficial things about this CAPEX generally. It's interesting, right? Because tech has always been so confined to a very few select winners because software is very easy to scale.
47:28 Once it's created, the IP's there and it's very easy to scale and you don't really need to give anyone else any money. But if you want to build real stuff, transportation gets a kick. Construction has a big kick, physical industries, commodities, rare elements, all that sort of stuff.
47:50 The money flows a long way, which is very different from tech in the past where it was just maintained in and amongst the free cash flow giants. So, honestly, you laid that thesis out absolutely brilliantly. What I'd love to know actually Larry is, where do you see by year end the S&P 500 and where do you see gold by year end? >> Well, gold's an easy one for me because I think we got a shot at going back to the 46 4700 but next year 6500
48:24 on gold. And then the S&P, it's a little bit like the summer of '87 where interest rates are sticky high, you get an inflation bounce, and you're going to have that big drawdown in the market between say August, September, October. Can you hear me? >> Yeah, yeah, absolutely, yeah.
48:49 >> Yeah, so big drawdown in the market between August, September, October. I don't know if we get back to the highs — we probably don't get back to the highs, but I think we're below 7,000 on the S&P by year end. >> Cool. And Larry, before you go, could you — you do a lot of interviews, right? What is one thing people don't ask you but they absolutely should? >> I think talking about the S&P 500's construction and how it might change over the next 10 years.
49:36 And how this passive investing — people know passive but what's going to be the reaction to putting expensive companies into the S&P at very high — after they've tripled, up 10x in the private sector, what is the long-term impact on the S&P 500 and how does that construction change? Like what sectors are going to be at the top of the S&P 500 in 5 or 10 years from now? We're probably going to go for a period where energy and materials and industrials are upwards of — right now 14, 15% of the index to maybe
50:23 30 to 40% of the index. >> And you think that plays out over a 10-year period? >> Yeah, 5 to 10 years, yeah. And that's typically what happens after you have a big move in a sector like technology. And so passive investing has gotten bigger and bigger. It's that 60% — when I was here, active managers far far outnumbered passive.
50:51 In other words, you had human beings just determining what they were buying and selling, right? Whereas today passive is 60, 65% of the index. At some point passive becomes evil because it gets too big and too easy to game. And I don't know — if you're a billionaire in the valley, do you blame them? I mean, you keep SpaceX public.
51:16 Remember, if they brought SpaceX public in 2019, it would have been a $30 billion deal, right? And now it's a two trillion-dollar deal, right? And so over time, look at the companies that they're adding to the S&P. They just added CoreWeave to the Nasdaq. They're adding CoreWeave into the Nasdaq. Companies that are really financially a mess. They put Lululemon in the S&P at all-time highs. The stock's down 60%.
51:46 What's happening is people are figuring out what's going to go into the index. They're buying it ahead of time and then things get dumped into the index and the little guy gets to holding the bag. >> Yeah, it's so interesting as well with regards to the makeup of the S&P over time because all of the gains in the S&P are attributable to a very small select group of companies.
52:14 I think 90 companies are really responsible for all of the gains in the S&P 500 as over and above T-bills, right? Because 50% or 55% of companies that are in the S&P 500 — and don't forget these are the biggest best companies in the entire world. Just because they're not Nvidia doesn't mean they're bad companies. 55% of companies that go into that index do not beat Treasury bills over their lifetime.
52:38 And almost all of the gains in that entire index are attributable to the winners. So, if you don't put the winners in at the bottom, then it's hard for that index to win over time, which is a really interesting thought experiment to actually play out because Nvidia obviously a big winner in the S&P 500, but it gave all of its gains to the public markets.
52:55 Whereas, of course, SpaceX gave all of its gains to the private markets and now it literally needs to go to 10 trillion dollars, 20 trillion dollars to be a net benefitor to the public markets over the next 10, 20 years. It is a crazy thought experiment for sure. >> Right. So, let's think about Tesla.
53:15 Tesla came public at $2 billion, something like that valuation. So, for Tesla to go from $2 billion to a trillion, that's a big home run for somebody that's in the index, right? But for SpaceX to come public at $2 trillion, to double it has to go to $4 trillion. But no one's talking about — okay, let's just say it does double or triple.
53:41 Let's say the revenues go from right now 30, 40 billion to a trillion, right? Guess who has to pay for that? Meta, all — if you just do a Google search or a chat GPT or ask Croc and you just say this, for SpaceX's revenues to go from 60 billion to 1.3 trillion, and that's what the bankers tell us over the next 5 years, where does that revenue come from? Okay? It's not popcorn that you just pop.
54:13 I mean, this revenue's going to come from Microsoft and Meta and all — in other words, the hyperscalers are already spending trillions of dollars, their cash flow is already getting raided by data centers. Now, you're going to take another trillion bucks of free cash flow and it's handed over to Elon Musk and SpaceX.
54:38 I mean, it doesn't sound very good for the market as a whole. >> Well, we are up on time now. I could talk to you all day, but thank you so much for your time. Could you tell people a little bit about where they can find you or about the book, whatever you want. The floor's yours.
54:56 >> Well, it's at convertbond on X, and then it's info@thebeartrapsreport.com. If you want to get our note where we recap what the institutions are up to, what are the best and brightest doing? So, that's info@thebeartrapsreport.com. And those are the two easiest ways to reach us.
55:20 >> Awesome. Guys, thank you so much for watching. All of Larry's links will be in the description, so you can go check them out. We shall see you in the next one. Ciao. Ciao. >> I don't listen to market speak. I face a lot. >> Mhm.