00:01 Hello everyone. I'm Ted Oakley, managing partner at Oxbow. And I'm glad to have back my friend Larry McDonald who wrote a great book a couple of years ago, When Markets Speak. Larry, great to have you back. Ted, thank you, and it was great to see you out in Colorado last year. I really enjoyed the ideas that you bring together with that team.
00:38 Well, I'm going to ask you — your book basically said we were going to shift away from what had worked the last 15 or 20 years to a different situation with hard assets, and the theme of the book was geopolitical problems. Basically everything you said seems to be coming true. Is that right? Well, we were very fortunate in the sense that the book came out at the right time. There's just so much capital that's in financial assets. There's still 31 trillion in the NASDAQ 100.
01:02 So only like 3 trillion has left the NASDAQ 100, but it doesn't take much to move the gold miners, to move uranium, to move oil and gas. Like literally just a small amount of capital that comes out of financial assets — bonds and tech stocks — and moves into hard assets, you can really get a colossal move. And you can see that now with energy.
01:25 Well, I know you have a great service called the Bear Traps Report which I take, but I wanted to ask a couple of things. I suppose you think that this war and the payroll and all that — I think you call it a double whammy. Yeah, it's really classic 1970 stagflation foundation. Because we have the slowdown that's coming from the credit markets, in private credit.
01:58 And if you look at the rate of change of information, whenever Wall Street starts to change the narrative, you're going to pay so much attention to that. So, they told us that private credit risk was idiosyncratic. I heard that word literally 75 times in October, November, and December. If you search for the word idiosyncratic and credit risk — David Solomon at Goldman Sachs, everyone was saying idiosyncratic.
02:47 And what they were trying to say is it's isolated credit risk. And now, it's pretty obvious that they're not lying, but they don't want to tell the truth as you move toward the iceberg. They want to keep everyone invested. And so, you have that credit risk there. At the same time, you've got everything in the Middle East that's creating this bounce in inflation.
03:09 And then, the job losses. That's the other thing. Wall Street investment banks have been lecturing us about artificial intelligence, Ted. They've been "looking over the valley." What they're doing is they're looking at the productive nature of AI, but not the disruptive nature of job losses.
03:29 So, they're looking over the valley, which is Pollyannish — which is okay to do cuz eventually AI is going to create incredible productivity. But, in the meantime, there's a potentially horrific disruption coming at us. So, that's the double whammy. >> Do you think that is the reason that rates haven't really spiked that hard with oil being up?
03:54 Right. You've always had the sniff with rates, Ted. We went back the last 30 years — with this kind of move in energy, the 10-year should have been up a lot more in yield. And you see the move in staples this year, the move in transports. A lot of economically sensitive parts of the market have been hammered. And bonds have not really sold off that much.
04:16 Bond yields have been trending down. So the bond market's telling us that there's a big disruption coming from private credit and from artificial intelligence disruption in the labor market. >> Would you see those lower rates as a short-term phenomenon? 12 to 18 months and then back to the old ways?
04:39 Exactly. Because what will happen is the Fed will get forced to ease. Dollar weakens some more. Then we're on the real big commodity bull market. We talked about this in the book. We're in the early stages of a multi-generational shift from financial assets — which are just paper certificates, like stocks and bonds — over toward hard assets.
05:00 And so, we've been through the first stage last year with precious metals, but we're in probably the second or third inning of this move back toward commodities away from equities. >> Do you feel like that has a number of years to go? >> Long way to go. Because the only way out of a $38 trillion debt hole is to massage interest rates below the rate of inflation — what we call financial repression.
05:29 And that's what they want to do. They want to come up with all these tricks to hold down rates. Meanwhile, inflation balances, and that's how you get out of that $38 trillion debt hole. You monetize the debt through inflating your way out. >> Well, in your service you've been really good at catching things early. You were early on energy. Where are you on energy now?
05:54 Well, when you have this kind of a move — we've taken the position down last week. We sold like 1/3 of our Chevron. We sold some Patterson. We sold some XOP. So, we're selling some of the energy names, but you want to be long energy. This is more for a counter trend. I think they're just extended, but you can buy the dips in energy for the next three or four years.
06:23 Because right now the XLE ETF, all the stocks combined are only worth about two trillion bucks. And then if you look at the FCG ETF, the OIH, and the XOP — those are the four big energy ETFs. It's maybe three trillion dollars in all of the energy stocks combined, whereas the NASDAQ 100 is about 31 trillion. So we're in the early stages of this multi-generational bull market for energy equities.
07:20 And on that count, if you just look at the percentage of the S&P, energy is about 3%. It's not very much. And these things rotate through history. You could easily get a move toward 10% of the S&P, 10 to 12, maybe 15 in energy. That's what we saw from 1968 to 1981. In that multipolar world, a lot of global conflicts. By the end of it, 50% of the S&P was in industrials, materials, and energy.
07:46 And so, 50%. Now, in recent years it got down to 13%. So 5-0, we're heading back toward that world. >> So let me ask you, you wrote another great book a number of years ago about the fall of Lehman, a colossal failure of common sense. Do you think we're in sort of a situation like that now?
08:22 I do in the sense of private credit. There's so many bad actors, and so many people have kind of — whenever you have lots of different counterparties that are all vested in a bad outcome, nobody wants to tell the truth. And the story keeps changing. They talked about idiosyncratic risk, and now we have all kinds of funds gating.
08:51 They made a huge mistake. They promised financial advisors and high net worth individuals quarterly liquidity on an asset class that is the most illiquid in the world. So, what's happening is there's what's called gates, and what they're offering is 5% liquidity every quarter. And when you look at the amount of demand coming in for the liquidity, it's 7, 8, 9%.
09:27 And so we're at these gating stages. And once trust is broken — if you look at the history of the word credit, back to the Greek days, credit is all about trust. And when trust is broken, then it's a run for the exits. It creates a panic very fast. And that's what's starting with the credit markets today. And that's why you look at the underperformance of the financials this year. It's literally the most significant underperformance for the financials to start off a year since almost 2008.
10:14 >> Would you still be a seller of the financials, Larry? I would. You look at Bank of America. It's trading way above its lows from last April. Everyone bought into the financials because of deregulation, and the Trump team is very favorable toward the financials around deregulation.
10:38 But the price to book of JP Morgan in recent months reached 2.6 times book. The historical average is like 1.6. So the banks just got crazy overbought. And yeah, they're still really expensive. >> I was going to go back to those gates that people put up on private equity and private credit. I think you remember this back in the hedge fund days, they learned that the hard way and started putting up gates so you couldn't get your money out. Do you see private equity in the same boat?
11:00 That we have to do some more work on. It's not as bad — private equity nowhere near as bad. I think the private equity players, the excesses were nowhere near as bad over there. I really don't have a strong view on private equity right now, but it's more about the private credit. Like every day, Ted, there's a new story coming out. There was a bond last week that was marked at par, and all of a sudden it's zero.
11:49 And we've seen over and over again — every week the story keeps changing. When I sat down with Charlie Munger in Omaha, he said, "Larry, never forget the three L's and the three M's." And I said, "Well, Charlie, what are the three M's?" He goes, "Always beware of liquor, ladies, and leverage." Right? And I said, "How would you relate that to the credit markets?" He goes, "Mark-to-market, mark-to-model, mark-to-myth."
12:44 And so there's just so many bonds that are marked at par, and because it's private credit and they don't have to mark their portfolios to market, these bonds are actually zeros. And because they promised the advisors quarterly liquidity, all of a sudden the marks become unhidden. You can't hide that anymore because you need to raise the capital to sell the bonds to provide liquidity for the investors. So all of a sudden you have an opaque area that forces a mark-to-market, and that's what creates more panic.
13:16 >> Well, the reason private equity doesn't have any problem is they've overpaid for a lot of companies, but they can't sell them. So you don't have a gate there cuz they can't come out of the companies. But it seems like so many large pools of money — pensions, plans, family offices — everybody's bought into private credit. And they sort of follow each other around. Those problems are going to keep coming.
14:01 Right. With private equity, they just did a lot of bad-price deals. The problem with private equity, too, is they can't sell the deal. You got to have an exit strategy. In so many things we look at, they can't tell us what they made other than that they get told they're doing well because they haven't had an exit strategy on anything.
14:20 But remember, Ted, always remember in situations where it lines up, the credit markets are ahead of the equity. Now, in some cases private equity doesn't have a debt side, but across all that private credit you now have this huge amount of debt that's on top of the private equity. And so that's going to be bad for some part of private equity.
14:45 >> So one other area you were really early on — all the gold, silver, the metals, the miners. How do you feel about those now? Well, we lightened up a lot of the basket last year, but we're still in the early stages of a multi-generational bull market. If you look at the percentage of household wealth that's in metals, you're still like 1 and a quarter, 1.4%. That should get up to potentially 3% in a real commodity bull market.
15:10 And so, we're in the early stages, so you want to take down some risk into really crazy bull-market runs like we had last month on silver — the call-put skew on silver reached 8 to 1. I think it was in late January. 8 to 1, so that means eight times more calls versus puts. Whenever you see that, it's a sign of really crazy froth, but typically that can be at the beginning of a bull market where people are getting way too crazy cuz they want to get into the trade.
16:03 But if you look at the debt, the United States, stagflation, slower growth, sticky inflation — that's a beautiful recipe for hard assets. >> So on weakness now for all the metals, not just gold and silver, you would add to them. On weakness. Absolutely. As a matter of fact, we sold the silver in the trade alerts at like 106 SLV or so, and then we bought some back at 80.
16:27 So we're looking to add. But you have to be careful with high beta assets like silver and platinum and palladium. They move much more than the market. So we're careful on the entry. >> Do you feel the same way about critical minerals? Yes, we've been buying some of the graphene names. We bought this HydroGraph. We did a call with Grant and the Tivan team in Australia.
17:16 And so, we're looking for companies that have strategic relationships with governments. And we look at what's happening with rare earths. The United States — we talked about this in the book — the United States is way behind China, way behind Russia when it comes to critical minerals and national defense. There's a lot of plays there. A lot of ways to invest around it. And a lot of money to be made.
17:46 >> Would you be in the same boat with copper and iron? Yes, but it's a lot like silver where you've had this — look at the COPX versus say the Qs. The COPX is the copper miners versus say the Nasdaq. It's reached the most crazy overbought levels that we've probably seen in 30 years, so probably all time.
18:05 And so it's one of these moves where we've had a rush in, but you still got the power grid that has to be reconstructed. You still have a lot of bullish parts of this copper trade, but it just gotten way ahead of itself. And you have to be very careful when you have those kind of parabolic moves.
18:28 >> In your book you talk about the fact that the old Wall Street mantra the last 15 years was 60% stock, 40% bonds, and that you feel like that's not going to work the next decade. Am I right on that? Yeah, it's really 30/30/40. 30% stocks, 30% bonds, 40% commodities or commodity equities. That's the smart play because the bond market's still pretty crazy — there's a lot of low coupon bonds still out there.
18:55 Nobody's made any money buying 30-year bonds since 2022. Everybody in France, everybody in Japan, everybody in the US duration has lost money since 2022. And every day, every week, every month that people are losing money on long-term bonds, that's driving more money into commodities and hard assets. Of course, you can also own bonds short-term.
19:46 >> You can keep it short-term. Do you ever foresee a time again where the Fed would be crazy enough to get into rate lowering back to the zero bound? Right. So we're at this period where you've got the slowdown from private credit, the AI job-loss disruption — two big factors hitting the economy. And we naturally have a Trump team that's more dovish, that's brought in Warsh, and there's a lot of pressure on Warsh from Trump to cut.
20:38 But on the other side of the coin, you've got that sticky inflation coming from the move in energy. And that multipolar world of global conflicts — wars are very inflationary. You look at the UK right now. The spread between the UK two-year and the US two-year is one of the craziest levels ever. The two-year yield in the UK is going up a lot, starting to price in rate hikes because of this move in energy.
20:57 And we've never seen rate hikes in the UK with unemployment this high. So you're talking about really 1970s type action. >> In your book you talk about really focusing on free cash flow, dividends, unloved areas. I'm assuming you still feel that way. Absolutely. The natural gas names have beautiful free cash flow yields. Companies are buying back stocks aggressively. Look at the FCG — really starting to outperform the S&P right now.
22:00 Also, the MLPs, which move gas around the United States. Gas and coal are going to be your foundational artificial intelligence trades for the next 5 to 10 years. Everyone's in the chips. It's the dumbest trade on the map, really, the semiconductors. You want to be in the energy infrastructure for artificial intelligence. And those MLPs within the FCG, that's where you transport the gas around the United States.
22:21 >> So you feel like coal fits in there as well. You hear a lot about natural gas, but not many people talk about coal. Oh, big time. Because coal is the fastest to ramp up. So if something happens in terms of demand from artificial intelligence, coal's really the fastest to ramp up. If you look at CNR, Core Natural Resources, it's got a beautiful free cash flow yield. They're buying back a lot of the stock. It's very cheap.
23:02 It's a smaller market cap, not a large cap stock. But there's a lot of companies like that in the coal space where you've got beautiful free cash flow, companies buying back stock. And your risk-reward with that kind of healthy balance sheet is very good. That's where you get that artificial intelligence demand coming for coal, and it's also coming from around the world where this move in global gas —
23:36 think of this move when you've shut down the Straits of Hormuz, 20% of LNG is now shut down. That gives you tremendous pricing power for your coal global coal plays, right? Because now you need that coal to fill that gap in the next 6 months. >> Let me ask you, where do you feel like real estate fits into hard assets?
24:08 Oh, it's one of the best potential plays you can make because you get cash flow on the properties. You just need to know how to buy the properties. There's a lot of cities where commercial real estate's great value. You got a lot of free cash flow. You've got bank loans and CMBS that's being restructured. But that's where you need a special talent that knows the cities. There's a lot of attractive ways to play commercial real estate.
24:34 >> And they must have a great lobby because they keep all the best tax benefits — depreciation, 1031, they've got it all in real estate. For sure. >> So if you look at the average investor — they just own the S&P. Every portfolio we bring in here, they're in the S&P or the index fund. What would you say to those people looking out over the next 10 years?
25:30 Well, you're really setting yourself up for failure because the S&P is nothing like it used to be. 10-15 years ago, the top two or three stocks in the S&P were maybe 7% of the index. In recent years, the top two stocks got up to 14-15% of the index, and they're both AI stocks — Microsoft and Nvidia.
26:02 So, Microsoft and Nvidia are trading at I guess 13 to 24 times sales. So you're putting a million dollars in the S&P, you're putting $150,000 in two crazy expensive artificial intelligence stocks. That's really speculative. 15 years ago it was a much more broad diversified index that offered people a lot more protection.
26:34 Now, the composition in technology is really not 35%. It's close to 50% of the index in artificial intelligence technology if you count the communication sector, right? Cuz that communication sector includes Meta and Google. And remember, these hyperscalers — Meta, Google, Microsoft — these are companies that have been cash cows for the last 30 years. And now all of a sudden they're very capital intensive businesses.
26:56 So it's a bad time to be buying the S&P 500. You're much better off buying a more broad diversification of stocks around the planet. >> And a lot of those big 10 names have started to roll over in price. Yet people that have owned them for years have tremendous profits and refuse to sell even part of them. What would you say to that group?
27:48 Well, I'm seeing some financial advisors do structured collars for people. If you Google Mark Cuban — Mark Cuban is a friend of ours, he helps us out in our Bloomberg chat. When he sold broadcast.com to Yahoo, he was able to structure a collar where you sell the upside. So say you have a million dollars in Meta, you could sell the upside and then buy some downside protection.
28:12 And I'm seeing a lot more financial advisors set up those structured collar trades for people in the Mag 7. >> When they have a lot, you can do that. When the average investor has big profits but not enough to put a collar on, it doesn't work as well. I think they'd all be better off to just sell some and pay some of the tax, as opposed to riding them, cuz you remember what happened to all those big names before.
29:07 Yeah, Mark Cuban when he sold broadcast.com to Yahoo, he had all this Yahoo stock and was able to sell the upside, buy the downside, and that's what saved his whole career. If he hadn't done that he would never have been the billionaire he is today. >> Well, in my office I have a graph of Yahoo from the high to the low. It's like a waterfall straight down.
29:41 Oh yeah. It wouldn't surprise me that some of these don't take the same route before it's all over, because they're so expensive. >> So to wind it up, if you had some advice to the average investor that's never seen you before — if you're an average investor, I would recommend you to think about a few things. What would those be?
30:14 You want to think about global equities versus the US — diversifying, looking around the world at other equity markets that are cheaper than the United States, that offer lots of these companies that own assets in the ground. And then looking at muni bonds, municipal bonds again. That's an area that's going to offer tremendous value in the years to come depending on what state you live in. But there's a move toward property confiscation in states like California, wealth taxes and things like that.
30:38 So you need a really good financial advisor today. But net net, a portfolio that's exposed to copper, platinum, palladium, gold, silver, oil and gas — and you want to be taking down the copper and gold names over the last year. That's what we've been doing, moving that over toward agriculture, coal, and oil and gas.
31:04 >> Larry, I've been around long enough to have been through those times when you had stagflation. But if you look at our industry today, not many people have only been around 15, 18 years. That's probably close to 50%. They've never been through anything like that. Right. Within the last couple years, the attitude toward stagflation — if you even mentioned it on CNBC, you were called a boomer, you were called clueless.
31:55 There's a whole group of investors that were laughing at stagflation. And never forget, 40% of all dollars ever created were done so in 2020 and 2021. 40% of all dollars ever created coming out of COVID, and then the Trump deficits plus the Biden deficits — we ramped up spending to such a crazy level, and now we're addicted to that level. We're still up at deficits near 6% of GDP. So that's a very bullish argument for a stagflationary world with hard assets.
32:29 >> Well, listen, I'm really glad to visit with you, Larry. This month is the 2-year anniversary of your book, am I right? Right. Yeah, thank you, Ted. That was 2 years ago this month. >> I reread the whole thing and then reread parts again. It's almost like you wrote it yesterday. I'd highly recommend it. Larry, thank you. We appreciate you visiting with us.
33:16 Thank you, Ted. >> We hope to see you next year. All the best. >> You bet. Thanks. >> If you like this video and want to see more of this type of information — because we really try to get the information that you don't see from anybody else — be sure and click subscribe, and you'll see more of what we do here at Oxbow.