Title:   A Former Lehman Trader Sees the Same Warning Signs Again | Larry McDonald
Show:    The Julia La Roche Show
Host:    Julia La Roche
Guest:   Larry McDonald (Bear Traps Report)
Date:    2026-MAR-31
URL:     https://www.youtube.com/watch?v=QDgZyZRqVHs
Length:  ~49 min
Note:    Auto-transcript, timestamps mm:ss. Saved for personal study.

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(00:00) The market might bounce on what we call the taco trade, but this time you really have a much bigger credit crisis with private credit. You have that move in energy that is going to be substantial hit to GDP, and you have the ability for oil globally to come down is going to be very sticky because of all of the damage that Iran has caused across the entire ecosystem and the supply chains of energy.
(00:31) So, in other words — Hey everyone. Welcome to another special in-person episode of the Julia La Roche show, where we are joined today by friend of the show Larry McDonald, founder of the Bear Traps Report. Also, I should note a best-selling author of multiple books. Your latest, How to Listen When Markets Speak, which is now celebrating its second birthday.
(00:53) Congratulations. >> Thank you. >> And great to see you, as always, Larry. Julia, thank you. I tell my wife, Annabella, over Sunday brunch, once a month, as a former Lehman trader, if we sell a million books, we'll break even on our Lehman stock. So, we'll see. But your Lehman one — have you broken even on that one? >> Both books combined are up near a million copies.
(01:17) >> Let's go. That's awesome. >> The Lehman book is now picking up because people are looking at subprime versus private credit and — Are we repeating this? Oh gosh, yes. >> And you and I spoke about that on the last episode around private credit could be like this next crisis brewing, maybe already in a crisis.
(01:38) Since it's been about 4 months since we last had you, can you kind of set the stage of where we are today as it relates to like markets, the economy. Where are we today? Well, you know, there's no I in team. And so, what I try to do in the book and in our Bloomberg chats, in our Ideas Dinner. So, last night we had a beautiful dinner at the Harvard Club.
(02:01) We bring in, you know, hedge fund CIOs, pension fund CIOs, chief investment officers. And my goal is to build a network of great mentors. And make deposits over the years, and then get the withdrawals in terms of the contributions, right? And so when I look at markets, we're really kind of looking at the comments from all of the different buy-side investors, and we're trying to figure out a narrative.
(02:30) So when you're an investor and you're reading the newspaper, on the internet, you've seen these narratives that come up. And what I've noticed over the years is that if you have a really good network, you can identify the life cycle of a narrative and how well-known the story is.
(02:51) So with private credit, I really started to hear at the ideas dinners from talented credit people. People like Boaz Weinstein, and Kieran Goodwin, they've been very vocal. And people that I remember from other different credit cycles were all of a sudden really bearish on private credit and really bearish on business development companies.
(03:12) So in the Bear Traps report, we recommended a short position on the financials. We talked about this on the show. Where you get short the financials because of all that exposure from private credit, and then the disruption from software companies and artificial intelligence. So it's like the financials are getting hit by two punches at the same time.
(03:34) And so we've gone through this period of the financials underperforming the S&P by almost the most since the financial crisis. That's something you got to keep your eye on. Little oversold now. The percentage of the XLF, of those stocks that are below the 50-day moving average, that number is pretty crazy.
(03:56) In other words, there's a lot of oversold stocks in the financials right now. Mhm. On the private credit front, because you did mention Lehman, so you're getting a lot of questions. Do you think it's this cycle's subprime? It is this cycle's subprime. One of the best credit investors that I know, I had dinner with them.
(04:18) He was at the dinner last night. And I've heard this from a number of people. It's a mess. There's going to be some people that go to jail. When I sat down with Charlie Munger, he talked about the three M's, mark-to-market, mark-to-model, mark-to-myth, right? Yes. >> And so there's that, but is this a contagion into high yield, into investment grade bonds on the public side? I'm actually hearing that this is going to make public paper —
(04:49) so private credit is private companies that are not public. And there's a lot of bad marks there, a lot of bad people. Whereas on the public side there's better credits. And so we actually could see a lot of money leaving private credit, going back to public credit. >> For the safety. Visibility, safety.
(05:11) >> Okay. Fascinating. On the private credit side though, you mentioned the three M's, the mark-to-myth. I like that from Munger, that's clever. And he didn't like leverage, too. >> Yeah, the three L's, liquor, ladies, and leverage. >> Oh, look. He had some of the best sayings. >> He's in the book. >> I know you guys had an interview.
(05:27) >> with him in Omaha. Oh, so amazing. Okay, so what else are you hearing at these dinners? Has anybody brought up the redemptions issue, the liquidity? Like what is the story? Are you hearing folks who are getting their money out? Well, we were early in on the bullish side, the natural gas story.
(05:54) If you look at the FCG ETF — and the outperformance of natural gas equities versus the S&P, they're really breaking out. Great valuations. You've got a lot of trapped gas in Canada, for example. Companies like Tourmaline. Imagine you've got really cold weather in Canada. You've got gas in Texas and in Canada because it's trapped.
(06:17) What I mean by that is if there aren't pipelines and if the gas is in very difficult locations, you can have very cheap gas in certain spots. And so what they're going to do is they're going to take these data centers, 820 data centers the next 5 years. Some of them are in the wrong spots, right? And this is what's killing the Mag 7 right now.
(06:41) The Mag 7's down 15%. Meta is down I think more than 20%, right? Nvidia's down close to 20, 19. And because the street made all these investments, they're expecting these 820 data centers to be built in 5 years because of all these different problems with energy costs, with memory. Think of the memory costs.
(07:09) Like Micron, how much money Micron's making because they're robbing Mag 7. So, that is creating this downdraft in the Mag 7 equities, but the power side with the natural gas equities where they're going to actually take some of those data centers that are in the wrong locations, what we call NIMBY, not in my backyard, and they're going to move them toward other parts of say Canada and Texas where the gas is trapped and cheap.
(07:34) And so that's why natural gas in the next 5 years, you're going to have a real great bull market. >> Okay, so that's a bullish idea. But then the question is, do you have a lot of folks out there that are misallocated when it comes to their positioning today?
(07:55) This is — so think of the Trump off-ramp of 2026 versus 2025. In 2025, the Trump team misjudged the beast that is the bond market. And so the bond market created stressful financial conditions and they took Howard Lutnick. They put him in a closet in the White House for a month and they didn't let him out.
(08:25) And so they put Scott Bessent on the Sunday talk shows and that team put out the fire with a beautifully executed off-ramp. And the S&P rallied from the 8th of April through the rest of the year, and it was one of the best trades of our lives. We were really buying a lot of the hard asset companies in that April-May period.
(08:48) Now, you think about the off-ramp in 2026. Once again, the Trump team has misjudged something else. They've misjudged Iran's ability to hit all the neighbors in the energy ecosystem. So if you think of fertilizer and all the jet fuel and all the different ingredients that go into the energy supply chain.
(09:18) And the ability of the Trump team to try to declare victory and then end the war, which they're going to do aggressively cuz they have to do it by — >> You think so? >> Oh, the midterms, they want out of this war so bad. This is one of the reasons we got long volatility. And remember, they need to do all the most controversial things as far away from the midterms as possible.
(09:42) But once you get into April and May, voters won't hold you accountable for something in the first quarter. As you get closer to the election day — the Trump team's going to really off-ramp this hard the next 3 weeks, 4 weeks. And then the clear victory, the market might bounce on what we call the taco trade.
(10:08) But this time you really have a much bigger credit crisis with private credit. You have that move in energy that is going to be substantial hit to GDP. So energy costs are up. And so you have this big slowdown and you have the ability for oil globally to come down is going to be very sticky because of all of the damage that Iran has caused across the entire ecosystem and the supply chains of energy.
(10:36) So in other words, really sticky inflation this year, a real bounce, and a slowdown. So that's real stagflation. Great for hard assets. >> Okay, which stagflation is not great for the other assets. Elaborate a bit more. You think the energy prices are going to be sticky even if the war gets wrapped up. Why and how sticky?
(10:57) Like there's so much logistics to energy. And the way Iran hit Bahrain and Dubai and the UAE, they hit all these different assets. And when people get disrupted in that important energy sector — not just the Straits of Hormuz, but the entire area of the world is disrupted.
(11:26) And companies move assets out and insurance costs go up. And it takes a while for insurance companies to lower those insurance costs. It takes a while for companies to bring back assets and it just creates a situation where energy is going to be really sticky high for at least the next 5-6 months, which is going to give you a big hit to GDP, which really hurts the Fed's ability to cut rates and the market was expecting three rate cuts this year.
(11:52) >> So it's going to hit GDP? The part about GDP is the movement of energy, gas and oil and jet fuel and everything, takes about 1% off GDP, >> Okay. right? So you're going to slow down the economy. That's why if you look at the yield curve, look at twos-tens — we really had a big washout last week.
(12:19) And this is one of the things clients were talking about at dinner last night. So all this means — they got the two-year Treasury and the 10-year Treasury. Everyone was betting on this steepener trade. All that means is two-year, let's just say whatever the two-year yields 3% and the 10-year yields 5%. That's a steepener.
(12:37) You're betting on a steeper curve. So last week that crowded steepening trade got blown up. There were some real wounded — like a couple of funds blew up last week, last Wednesday Thursday. >> I think I saw some of those headlines. Yeah, because essentially what happens is if we go into this stagflationary period with higher energy cost, the front end gets kind of pinned a little higher.
(13:06) Right? So that means the yield curve flattens, right? Because in order for twos versus tens — and this is what all the pros look at — if the Fed's going to cut rates, that's going to steepen, right? But if twos get pinned here because of sticky inflation then all of a sudden the curve almost inverts or at least goes flat.
(13:25) >> Then what do you think the Fed does? Do they cut? Do they hike? >> So I'm going to make a call here. The consensus I just laid out is pretty well known now, and the twos look pinned because of this hit, but if you were a child of the '70s and the '80s, which I know you're not, what would happen — and we talk about this in the book — energy shocks, at first, they create a situation where rates go up on the front end because the Fed has to potentially fight inflation with rate hikes, but then what happens is there's this
(14:04) hit to GDP, hit to the economic activity, you've got AI job losses coming in. Like in other words, Jack Dorsey at Square, he laid off 45% of his workforce. >> AI. >> And then his stock went up 30%. So, you've got all these copycat companies. So, you get AI job losses, and you've got this big tax hike that came out of higher energy prices, right? That's hitting the consumer.
(14:34) So, what's going to happen is it looks like this inflation bounce with slowing growth, but then all of a sudden recession risk rises sharply this year, and the Fed's going to have to cut. So the bottom line is if you're watching this right now, if you can buy two-year Treasuries or three-year Treasuries anywhere near 4%, think about what could happen.
(14:57) You get your 3 to 4% risk-free for 3 years, but if all of a sudden there's a real credit crisis, a real slowdown in the economy, the Fed would have to cut, and the value of that three-year Treasury will go up a lot. You could actually make 8% in Treasuries. Huh, the bond math is interesting, yeah.
(15:20) Okay, well, there you go. There's a trade. I think the last time you and I spoke we talked about how 2026 would be like an inflection year for this kind of regime change. I'm talking about the investment regime. Right. >> Are you starting to see that play out? >> So far, there was 34 trillion in the Nasdaq 100.
(15:47) Now it's about 30 trillion. So 4 trillion left. Wow. And went into your Chevrons, your Exxons, your all kinds of oil and gas plays, all kinds of copper, hard asset companies. So the bottom line is the point we make in the book is what we call the great migration. And I think we're in only the third inning of this where industrials, materials, and energy — those three groups in the 1968 to '81 period, they were like 50% of the S&P's composition, 50.
(16:24) In recent years, they got to like 10. Maybe even a little bit lower, 9%. Only 9% of the S&P was in industrials, energy, and materials. And now that's maybe up toward 13. Are we going back to 50? No, but we're going back to like 20, 25. And that's where that portfolio construction — people are moving into international equities that own hard assets.
(16:48) Companies — your Glencores, your BHP's, your Freeport-McMoRan, your companies that own lots of assets. Cuz in that stagflationary world, those types of stocks outperform. >> Yeah, those types of stocks outperform like the Mag 7 or just growth stocks. >> Okay, back to the Mag 7.
(17:12) Are we seeing that money come out of the Mag 7? Cuz I love this. As you're pointing out, these double-digit drawdowns, too many monkeys in the tree. And I think we also talked about the passive investing going into these names.
(17:29) So, are we starting to see that bubble start to crack? >> Think of the S&P 500. The top two holdings were 14-15% of the index — Microsoft and Nvidia. We talked about this. Microsoft's now down 28%.
(17:51) Nvidia's down 19 since our last conversation. So, the thesis is playing out where I'm shocked the S&P's only down 6%. >> Why do you think that is? >> Because you're seeing a massive rotation and broadening out. So, 14-15% of the index was Microsoft and Nvidia. Microsoft's down 28-30% off the highs. Nvidia's down 19.
(18:18) And the S&P is only down six. So that's why we're talking about a whole new portfolio construction, a rotation out of the crowded monkeys-in-the-tree trades, and into a lot of companies that control hard assets. >> Is that a good thing then for the market? >> We come back to the off-ramp.
(18:43) So Trump team's going to try to pull the off-ramp. It's going to look like sticky inflation. That's going to continue to move money out of the Mag 7 into everything else. But there's this economic slowdown and the credit crisis creeping in from that big move in energy.
(19:12) And that's why the S&P is acting really poorly because every rally is failing, right? And people are losing more and more confidence. We're unchanged in the S&P, unchanged in the Nasdaq since almost October. So there's a lot of people getting frustrated. What happens is you rally back and they sell. So net net, the market overall is going lower, but there are places that are outperforming dramatically.
(19:36) — Hey everyone. I hope you are enjoying this interview. If you can, take a quick moment and hit that subscribe button. — Help me understand this. Is there a relationship between the move in energy and the private credit crisis that's brewing?
(20:23) >> One big part of it is that if energy costs go up a lot, the cost of building the data center — it's like diesel, right? Diesel prices went up like 100%. I paid like 519 a gallon. So that means gold miners got hammered. Any company that builds something with big construction, and then the cost of running a data center —
(20:43) so everything, your memory costs with Micron, the cost of memory because of this memory shortage we call DRAM, everything's gone up. And so that dramatically slows down the AI build-out trade. It hits it financially cuz the CapEx budgets were already crazy. So they were already spending tons of money and now you've got the DRAM explosion higher. You've got energy costs higher.
(21:13) Caterpillar tractors are short supply. So you have this — the data center build out is going to cost a lot more and that's going to hit the profit margins of Mag 7. That's what the market is telling you. That's why the Mag 7 is underperforming by so much. >> Because of the data centers.
(21:30) Yeah, because of the build out. >> And did you also reference that maybe they've put them in the wrong locations? >> Yeah, what happens is when you go into what they call malinvestment, when everybody in the valley is trying to outspend each other, in a very short period of time they chose locations for data centers and a lot of them were in bad spots.
(21:57) A lot of them are in climates that are too hot, right? So you got a cooling problem, you have a water problem, you have an environmental problem. NIMBY, not in my backyard. So yeah, probably 20% of the data centers are going to be reconstructed or just change locations because of protests.
(22:14) And then that makes this trapped gas — and it helps coal the coal names. >> You talked about coal last time. Yeah, how did coal — I'm sure coal probably did quite well? >> coal natural resources, one of our largest holdings. David Einhorn, Greenlight Capital. He's done great. He's got great positions in coal. I think it's one of his top five.
(22:32) And I just look at the coal names and they're up 20, 30% this year because of that demand. Well, plus you had in the Middle East that hit to natural gas with the LNG. So that makes coal naturally greater demand globally.
(22:54) And I also think LNG is really hard to transport. Um, speaking of hard assets, got to talk about the precious metals. Can we talk about your views today on gold, silver? Gold had quite the run last year.
(23:16) Gosh, it went up to 5,500 earlier this year. I don't even know where we are today, probably like 45 — I stopped looking at it. But what do you make of the move in gold and the pullback? >> Well, the move was just so violent. The move in the hard assets last year was incredible.
(23:37) In our trade alerts, we sold nice chunks of our gold and silver in January cuz the call-put ratio, the skew, was eight to one on silver names. Now you've had this big drawdown, so you can start to buy the silver miners down here. Once again, they've been hit by silver and gold miners have been hit by diesel costs cuz that crushes their profit margins, but they still have huge profits from gold being where it is.
(24:09) So you've had a nice drawdown toward the 100-day moving average on gold, the gold miners. And in a new bull market, you want to buy near that 100-day moving average. And so there's still — if you just look at household ownership of gold and silver or hard assets, in the '80s we're up near 3%.
(24:37) Now we're still down near 1 and a quarter. We're still under invested. So you've got a new bull market that's had a lot of tourists come in. You know, the heavy set guy with the Hawaiian shirt and the camera. Like a lot of weak hands. It's just like poker. In a poker game, if someone comes in with a big raise, anybody that wasn't serious folds and gets knocked out.
(25:06) That's what we call weak hands. Same thing just happened with energy with oil and gas. The oil and gas names in the third quarter, fourth quarter were the most under owned. If you look at CFTC data, everyone was bearish oil and gas, right? Gold miners are not anywhere near that level of bearishness, but they have pulled back a lot.
(25:35) >> Because of weak hands. >> A lot of tourists came in, a lot of tourists have been flushed. We did this with uranium over the last couple of years. Too many tourists came in. If you buy the 100-day moving average in that new bull market, and you're looking at an asset class that's still way under owned relative to history,
(25:56) it's most likely a very good idea. >> I like that mental model — these were tourists, these are weak hands. You don't freak out when you see this happen. >> whereas the real investors, they're buying. >> Yeah. Okay, so you see an opportunity to add more to gold right now then. Yes, the gold miners, we started to buy them back. We sold in January, we sold all of our GDX and our SLV and our SIL.
(26:34) We started buying it back in this pullback. And we actually bought some for the first time — we bought some Bitcoin. >> Whoa, okay, wait. Time out. The first time ever buying Bitcoin. >> First time ever. Talk to me about that. >> Couple things. The thinking around that is the Bitcoin-to-gold ratio was 38, in the high 30s, and it recently hit 13.
(27:00) Now there's only 5 years of data, but historically when that ratio gets into the mid to low teens, you want to sell some gold and buy some Bitcoin. The second thing is, think of BlackRock, think of the ETFs. They've democratized the investor base somewhat.
(27:26) Like 5 to 10 years ago there were like 18 families that controlled 60% of all the Bitcoin. So if there's a credit event and one of those big players needs liquidity, they crush the market and the little guy and the tourists get hammered with a 70% drawdown. And now with Bitcoin, you still have the hard asset element of the story. We talked about this in the book — scarcity, currency debasement globally.
(27:48) In the UK, US, really disgusting irresponsible spending on defense in the United States without raising taxes. The Trump team and the Biden team, they just think that they can spend money without raising taxes and just keep debasing the currency.
(28:11) So you want to start thinking about that portfolio, and when you see those ratios go from the high 30s gold-and-Bitcoin-versus-gold to the teens, it just makes sense. You want to take advantage of that Bitcoin drawdown. >> Do you express that through ETFs? Yeah, the IBIT ETF. >> IBIT, mhm. There's better ways to play it, but it's easier for the little guy.
(28:37) Wait, why the — let me ask you this, why the ETFs? What's the benefit with IBIT versus going out and just buying some Bitcoin? Well, at the Bear Traps Report, we have trade alerts that go out to over 2,000 clients. A lot of financial advisors, hundreds of them do the trades.
(28:55) And they go up live via WhatsApp. So we have to recommend something that is broadly easy to buy. That's why like look at the UNG ETF, or the USO. Everyone knows that these ETFs, some of them where there's a curve play in the futures market — this is really important for people watching.
(29:17) Like the UNG or the USO, they have to roll those contracts all the time. So there's this natural financial decay. Like the only way they can actually own natural gas or own oil in those ETFs, the USO and the UNG, is to constantly roll in the futures market. That's very costly, right? So over time that eats away at your returns.
(29:40) And there's no way for the average person to participate in natural gas and oil in the futures market. The average person doesn't have a futures account. So the USO and the UNG and the IBIT in this case, it's really the only way for a broad audience to get long some of these trades. >> that price exposure.
(30:04) >> You have to keep in mind, if there's a short-term move, you don't underperform at all. But if it's a longer-term move where those ETFs are rolling those futures all the time, your returns won't be as good as being in the commodity itself.
(30:23) Okay, it was a curious question. A viewer once asked about the IBIT ETF versus owning just Bitcoin outright. So that makes a lot more sense. The Bear Traps Report, you guys are famous for spotting these traps before they spring up.
(30:46) What would you see as the under-the-radar risk right now? The biggest one is I look at the UK and there's a real crisis forming where I think Nigel Farage probably could be the next Prime Minister, but you're in this period where you've got a very weak government. They're spending lots of money.
(31:08) Deficits are pretty crazy. Slowing economy. Energy costs are up a lot more in Europe. The energy hit to European economies is much greater than the United States for a whole bunch of reasons. But there's a big financial hit from this Middle East event to these economies.
(31:33) So could we have a situation where the UK has a problem financing itself? Global governments — there's a kind of bond vigilante move. That's to me the wild card for this year. >> Would that be like the canary in the coal mine? If you saw it first, would it be first in the UK? >> Yeah, I mean France — Italy's in a much better situation.
(32:11) The government's been much more conservative in terms of budget. France and the UK — if you look at the 30-year, they're really breaking out, and energy costs hit just like the United States. Energy costs go up 20, 30, 40%. That's a hit to the consumer, slows down the economy, and all of a sudden your tax receipts come down.
(32:36) And you're still going to sell lots of bonds. You have to, right? >> to finance the dream. Yeah. Well, speaking of, let's look at the fiscal picture. The US, we're now north of 39 trillion for our debt. And I was looking at Medicare, defense, social security — what do you make of our picture here?
(33:12) The dollar's just in this — you're going to have counter trend rallies, but you're just in a massive secular decline. A democracy can only last until the voters discover that they can raid the public treasury. That's Tocqueville and Tytler, we quote them in the book. You just have reckless 6% deficits. The last 50, 60 years, we only ran 2 to 3% deficits. Now we're running at 6% almost every year.
(33:36) The Trump team thinks that they can spend an extra 200 billion on this war that takes you from 1 trillion on defense to 1.2. And then we have to sell the bonds in the market. And remember this time around, when Lehman failed during the last financial crisis, debt-to-GDP in the United States was 70 to 80%.
(34:00) Now we're 120, 125%. So the next time we go into any kind of slowdown where tax receipts actually come down, but spending levels are sticky higher — that's what's causing this great migration of portfolio construction out of financial assets like stocks and bonds, which are just paper certificates, and into hard assets.
(34:27) >> Into hard assets. >> a massive rotation out of paper assets into companies or assets that — oil and gas, copper, silver, gold, companies that control those assets. >> Would you say we're still early innings in this migration? I think we're in the second-third inning. Okay.
(34:52) The dollar — your outlook seems a little bleak on the US dollar. You mentioned there might be counter trend rallies. >> Well, the situation in the Middle East — the US dollar is not going to lose its reserve currency status anytime in the next 10, 15 years.
(35:17) So we've got a nice runway there because there's a lot of other dirty shirts. And when you have a situation like we just had in the Middle East, there's a flight to quality into dollars, and then you have the situation in the UK. If the UK blows up, it'll be a flight to quality into the dollar again.
(35:33) So that's the one thing that keeps saving the irresponsible lunatics in Washington — other dirty shirts. >> cleanest dirty shirt in the laundry pile. But in your book you talk about this multi-polar world we are moving into. How does this impact our standing globally? Well, that gets back to the 1968 to '81 regime where you had the Vietnam War, the Great Society, the Johnson administration.
(36:07) And really crazy spending on the fiscal side. And you had these global conflicts in the 60s and 70s — not just Vietnam but the Middle East. So you went through this period where global conflict, supply chain disruption, creates this environment of higher rates, higher inflation that forces money out of financial assets and into hard assets.
(36:35) So the same thing's playing out. We've had two wars since 2022. And look at the global bond market. Everyone's losing money in the TLT ETF, or if you just look at the 30-year Treasury — every single human being in French 30-year Treasury, UK 30-year Treasury, US — anybody in long-term bonds is losing money since 2022.
(37:01) Then why would anyone own long-term bonds? Who owns them? Well, what we talked about in the book is we're in this deflationary regime for like 20-30 years. So when you're in a certain deflation world, it makes long-term bonds wonderful investments. People were brainwashed to own long duration bonds. You made money every single year.
(37:22) You got your 4-5% coupon and you got price appreciation every single year. >> how it was in the past. >> Yeah. And the relationship — think about when Lehman went down, we lost $5 trillion in the stock market, but the bond market made $7 trillion back.
(37:50) So there was this beautiful relationship. The 60/40. Yeah. But that's what created all the crowding in the 60/40. The 60/40 worked because every time you had a global shock, stocks would go down, bonds would go up. And since 2022, that relationship's breaking down again.
(38:10) So we're moving back — the way the world worked from the '60s and '70s, there were a lot of periods where stocks sold off and bonds sold off, right? Then we went into this deflationary regime from the 1990s to 2020 where deflation was certain, and that seesaw between stocks and bonds was extremely healthy. Stocks down, bonds up.
(38:29) Now since '22, and since we blew out the deficit with these 6% deficits and global conflicts making energy prices higher — two wars in Ukraine and the Middle East — it creates this whole other world where stocks and bonds don't have that offset. Mhm.
(39:04) And that's where investors get really frustrated, because imagine you're a baby boomer. The last 20 years, every time the market got hit, you made money on your bonds. Every single time. Now all of a sudden since 2022, you look at your statement — what's going on? That's why money moves out of financial assets into hard assets.
(39:24) >> I guess too, the environment you come up in really shapes you. So 2008, Lehman Brothers — how did that experience shape you as an investor? >> The biggest thing today is when I see the sell-side research, they're a cabal, right? They're analysts. They can't be trusted. They all hang out in the same group.
(40:01) Imagine you're an analyst in Westchester, you got to pay the country club membership dues, you have two homes now, you got the X1. These guys have to stay with the cabal. And so when things come up like — subprime is contained — they lied to us in 2007, right? They literally lied to us or they had their heads in the sand.
(40:27) Now I look at private credit. And do you know in the third quarter and fourth quarter last year, the word idiosyncratic was used hundreds of times. All the sell-side research, every single one of them, was downplaying the credit risk from private credit, saying everything's fine. It's tricolor. It's First Brands. It's idiosyncratic. Either they lied or they're completely out to lunch.
(40:56) And they completely misjudged this credit problem. And so now you have a gating. So private credit is like 5% gates, which means they only allow 5% of the money out per quarter. And 5, 10, 15% of the people want the money back. And so there's a lot of — my point to what's similar — it's the truth bleed. The truth comes out one drop at a time.
(41:21) But then if you see the truth change in a four or five-month period — and then when you see that first analyst, like the guy from UBS, is the first guy that actually left the cabal. He's predicting a much bigger default problem from private credit into loans, loan market freezes up, CLOs.
(42:10) And then all of a sudden once that securitization machine starts breaking down — that's what we talked about in my first book — it's just like a conveyor belt that moves risk, securitization. They package up all these products, all this credit, and they move it and sell it. But if that securitization machine slows down, all of a sudden banks own more risk. And that creates the credit crisis.
(42:38) And so, when the truth changes, and when you see one analyst on the street start going the other way — we've gone from idiosyncratic to oh, we have a problem. That's where there's a credibility problem on Wall Street. >> And then also you have the rise of so many who are independent now.
(42:58) >> So many good — Jared Dillian, Daily Dirt Nap, Hedgeye, there's so many wonderful pieces of research. And so what I recommend clients do is you buy independent research, but you don't just go to the Bear Traps report. You get a group of them. If you have a good group like Jared and myself and Keith at the Hedgeye people, that's going to outperform the street research every day of the week because it's independent thinking, unbiased, and not part of that cabal.
(43:22) >> What does your gut tell you? Is private credit already a crisis? >> It's a crisis for sure if you look at the insurers potentially. One of the things I'm hearing from clients is this is very much like 2008 where the rating agencies created all this garbage ratings for subprime and for securitizations.
(43:50) And all of a sudden, if you look at the last four or five years, there's been this explosion of whacky rating agencies for private credit. And these insurance companies like MetLife — I'm seeing clients shorting the MetLife type situations, or shorting insurers that are long lots of private credit. The ultimate bag —
(44:07) >> looking for yield. >> Oh yeah, they're looking for yield. The bag holders. >> who are the bag holders? >> Insurance companies. And they were hoodwinked into this by sell-side research saying this product was really safe, and then these rating agencies — you've got this crazy situation where somebody's in a house in Westchester with a team of eight people rating thousands of securities that insurance companies buy.
(44:41) So it's just like the scene from The Big Short where the lady with the glasses, the guys are asking her how she came up with these ratings and she got very offended. It's the same thing today. History is just repeating itself. >> How about the retail investors that were sold the product? Someone asked me, how do I know if I'm exposed?
(45:22) >> Oh yeah, well — Kieran Goodwin talks about this. He's Weinstein's business partner. And he opened my eyes to this last August. He talked about, in order to get the financial advisors on board, and all of your broker-dealers and your retail community — they promised these people quarterly liquidity.
(46:02) On an asset class that is the most disgusting illiquid asset class there is. Think about private credit. It's like a pile of bonds from these companies all around America. They have financials, but they're private. They're not public. It's dark. It's murky. And imagine trying to sell 400 of those bonds at the same time. People got to do the work.
(46:22) So they needed to bring this retail money — I don't want to call it the dumb money — but it was the late money to the party. >> the round of suckers at the table. >> That's the famous line — when you're looking around the poker table and you can't find the sucker, it's you. Larry McCarthy, my old boss, used to say it all the time.
(46:43) So they promised all these financial advisors quarterly liquidity. So there's people watching us that own this stuff. And in the ideas dinners we hosted last year, I had story after story of large brokers. We bring in the CIO-level people, the hedge fund guys, pension fund people, but also a big financial advisor that has like a billion or two billion under management.
(47:31) And they told me, "Larry, the branch managers were bringing in these guys for the lunches almost every day." So there's a wholesaler for private credit, and the incentives on this asset class are so horribly aligned where the commissions were huge. Everybody's incentivized to keep this thing going.
(47:56) It's very similar to the financial crisis, but I do think it's not as bad as subprime and all of those loans on all these different homes across the United States. That was a much bigger problem. >> Follow the fees, show me the incentive, I'll show you the outcome.
(48:18) >> Larry McDonald, it is always a pleasure. Before I let you go, parting thoughts for this audience. Let them know how they can find and support your work. >> Thank you. Anybody that wants to reach out to us, it's info@thebeartrapsreport.com. And then there's Twitter @bear_trap_report.
(48:53) And the bottom line is it's not about me. It's about building a great team of mentors and building enough tentacles in the financial community where you can see the life of narratives and try to figure out, okay, what's priced in, what's not, where is this trade, is it early stage or late stage? And that's what we're trying to do.
(49:20) >> Larry McDonald, thank you so much for taking the time. Really enjoyed this. >> Thanks, Julia. Thank you.