An Interview with Larry McDonald of BearTraps

June 10, 2024No Comments

An Interview with Larry McDonald of Bear Traps (Video Transcription)

Hello and welcome once again to the Smart Money Dumb Money Show. I am your host, Keith Richards. And occasionally, as you guys know, on my videos, I do a guest interview and I got to say I’ve interviewed some amazing people and go through the archives, [00:00:30] and you’ll see some people that you’ll recognize. But this man today is, I think, one of the most significant people I’ve interviewed yet. And I’ll do a quick introduction, although those who read my blog and watch these videos with any regularity are familiar with his name, it’s Larry McDonald and Larry McDonald runs Bear Traps. I was an early subscriber to his research and I was just saying to Larry [00:01:00] a minute ago, I said, listen, you may think I’m gushing when I give you the intro, but there are three big influences in my career and I’ve been in this business since 1990.


Actually, I started in ’89, so it’s really like 35 years, but 34 years licensed. And so, I’ve been around a bit, and I’ve had lots of good people in my life who have helped me and taught me. But I’ve had three guys. The first guy who introduced me to technical [00:01:30] analysis was my first influence. The second guy was Ralph Acampora, who is probably the single best technical analyst in the world. And I was privileged to stay with him for several days. And one-on-one have lunches and whatnot. I feel very privileged with that. And the third is this man here, Larry McDonald. Larry McDonald has turned my way of thinking around in the past six or so years that I have subscribed to his research six or seven years. And [00:02:00] I just am so thrilled to introduce him. I came across this book called a Colossal Failure of Common Sense, and it describes his days at Lehman Brothers during the great collapse.


And Larry McDonald was a distressed debt trader, and he was one of the top guys in the world, all in an atmosphere and a firm that was literally collapsing around him. And it was just like, the story is amazing. If you want to read an entertaining reach, read that book. And his second book most recently, and I have talked about it on the blog [00:02:30] a couple of times, is this one here and it’s called How To Listen When Markets Speak. And I just finished audio reading it and now I’m going to read it because it’s so good. And by the way, Larry McDonald, also, if a lot of you guys have read my book, Smart Money Dumb Money, Larry McDonald was kind enough to contribute a little bit to that book through a conversation that we had over email. Larry, welcome to the show. I’m done gushing. 

Larry McDonald (02:58):

Thank you, Keith. Keith, we go way back buddy. And [00:03:00] I really appreciate you and I tell as a former Lehman Trader, I was a trader at Lehman and over Sunday brunch, I tell my wife once a month, if we sell a million books, we’ll break even on our Lehman stock.

Keith Richards (03:16):

That’s great. Well, I don’t know if I’ll help you sell the million. I bought a few for some of my clients and sent them out. I want to get started, Larry, because some [00:03:30] of the stuff that I’ve been talking about in my blog fits in and has been amplified by the research that I read through your Bear Traps report. By the way, some financial advisors watch this video and I hardly recommend that if you buy the Research Bear Traps report, look it up. It’s the best research, maybe I shouldn’t tell my competitors, but it’s the best research I have, and I have lots of research. I get Rosenberg and all kinds of stuff, [00:04:00] but it’s good stuff. And one of the things that I’ve been talking about is the cyclical nature of the commodities markets. And my belief has been from a pure cyclical point of view, we’re going to see a resurgence in commodities.


We’re starting to actually see that. And Larry McDonald tells me the reasons why that I’m a technical guy. I am only interested in price, but he talks about the background. So, I want to start off with the energy demand. And you guys have heard me talk about this in the videos and blogs and [00:04:30] coming from, believe it or not, the green energy and crypto and data storage and all that sort of stuff. Larry’s the one that gave me the data on this. 

I’d really like to, Larry, if you could give your overtake of why energy demand’s going to grow and how we’re going to fill it.

Larry McDonald (04:50):

Well, thank you, Keith. And there’s no ‘I’ in teams. 

I think my blessing is after Lehman failed, I did 140 speeches [00:05:00] in 16 countries and I met so many talented people around the world. And we created this Bloomberg chat behind me. And if you picture in your mind a theatre with, say 650 people in the theatre in 20 countries, so 650 people in the theatre, 20 countries, and they’re all institutional investors. So, they are at the big shops, the Fidelity, the Hendersons, the hedge funds, the mutual funds. And what we do is there’s about 30 to 40 people out [00:05:30] in that theatre that actually get on stage and have a conversation. And so, what we’re really doing is we’re crowdsourcing intelligence and that’s how we produce the research. So, what we do is if Goldman comes out with a report on energy demand or JP Morgan, we’ll talk about some of these trends in the chat and we’ll kind of develop, okay, where’s the strong piece of research?

Larry McDonald (05:55):

What do the buy side investors, what does a veteran hedge fund manager or a veteran mutual [00:06:00] fund manager, what are they saying about the research? And then, or the topic, whether it be like you said, artificial intelligence impact on natural gas or nuclear power and small modular plants or small modular production of nuclear power that’s going to be maybe next to a data center. These types of themes, we gather that intelligence from the chat. And I’m kind of an ambassador to that and I appreciate all the accolades, [00:06:30] but it’s really, I owe so much to the people behind me and thank you. Thank you for all the acknowledgements to them. So the point that we’re making, the big picture is we’ve taken 5 million jobs out of the United States, I think of the Davos crowd in Switzerland, and we have the Davos meeting, you’ve got the US Davos people, the European das, they mean well, and they’re globalists and they wanted to raise the standard of living [00:07:00] globally.

Larry McDonald (07:00):

And so, what we’ve done is we’ve decimated the rust belt, we’ve taken 5 million jobs out of the US, we’ve pushed them around the world, and we’ve raised that standard of living globally dramatically. But at the same time, we’re suppressing the supply of energy through a whole bunch of ESG forces and a whole bunch of different forces which we can get into. If they give a young person in India who works at a call center, he’s making 10 to [00:07:30] 20 to 50 times more than his great grandparents. And so, we’re seeing this incredible sustainable demand for energy from the developing world. It’s kind of like if you think of Frankenstein, you’re talking about global central planners who meant well, but they’re really on a course. They created a real energy crisis probably in 2025, 2026 because of ESG and because a lot of CFOs and energy companies [00:08:00] were burnt for a whole bunch of different regulatory reasons and a whole bunch of different overproduction reasons from the last commodity crisis.

Larry McDonald (08:06):

All this came together. And we’re suppressing the supply of energy at the same time. We’re dramatically juicing the demand. And I think the last big picture point is if you think of 2010 to 2014, and you think of the investment track that we were on the planet earth, the energy, oil and gas, uranium, [00:08:30] your metals, all those key strategic metals, uranium, mining, all of this that you need for energy, you need the metals, you need key metals for windmills. And those are very rare earth that the United States just literally, we have less and less and less control of these key strategic minerals and oil and gas. And so that investment path from say 2010 to 2014, if you move it forward to today, we’re essentially 3 trillion [00:09:00] in the hole, and the global population over the last 10 years is up 900 million people. So, we’ve got 900 million more people, but we’re about 3 trillion in the hole terms of investments. And so that’s what really sets up the big-picture theme for the book.

Keith Richards (09:17):

Yes, you mentioned in the book, Larry, it was through your conversations, and by the way, that’s one of the cool things about your book is that I think I sent Tatiana [00:09:30] your assistant a note. I said a lot of the financial books out there these days, you fall asleep a quarter of the way through them, but your book keeps you engaged because one minute you’re in an oyster bar talking to somebody, the next minute you’re going down an elevator and you’re talking to these famous hedge fund managers and whatnot or travelling out to Brazil and meeting great managers and politicians and whatnot, and it keeps you engaged. But [00:10:00] yeah, you talked about that the probability of these goals of becoming carbon neutral in the timeframe that the more woke politicians are talking about is going to be stretched beyond way beyond their timelines. And so maybe you could speak to that for a moment.

Larry McDonald (10:26):

Okay, so one of the people behind me, we have that, like I said, the set [00:10:30] chat with the institutions. And over the last three weeks, more and more people have been making this point BP kind of reversed course British petroleum in terms of their investment path, and they admitted that they need to kind ramp up investments. So that’s kind of a classic thing because over the last year and a half, well actually the last five years, they’ve been bragging about investing more toward green initiatives and less [00:11:00] toward oil and gas initiatives. And so, they’ve kind of, in the last three weeks, they’ve admitted that that path is incorrect and they’re going to have to adjust that. So that’s a big point and one of the main points people are making in the chat and people are starting to hear, I started to hear about this maybe two months ago in terms of it really becoming a problem. But if you look at hybrid sales hybrids versus EVs, so think of hybrids, they obviously consume both [00:11:30] electricity and fossil fuels, and they also have things like they’ve got.

Keith Richards (11:42):

Larry McDonald (11:44):

No, I’m trying to think. You’ve got the exhaust system. Yeah, catalytic converter, excuse me, catalytic, you can cut that out for me. But the catalytic converter is very, very important [00:12:00] for what we call platinum and platinum and palladium demand. And so, if your EV penetration, if your EV penetration was supposed to be here, but it’s going to be here. We wrote this in the book. My point is we have some of these predictions in the book, but we’re starting to see the big automakers admit that they’re shifting more. The demand for hybrids [00:12:30] is exploding because of all of the problems of actually, like you said before, getting this EV system up and running and that whole, whether it be cold winters in Toronto or whether it be small fender benders that blow up or ruin a very expensive battery, a very tiny fender bender, it can ruin an electric vehicle. And so, there’s all these unintended consequences that nobody’s really planning on that are pushing out the [00:13:00] EV penetration. So if the EV penetration formula is pushed out, say another 10 years in terms of that track of EVs where they thought the market would be, then that’s going to create, like you said, we need that bridge of oil and gas and uranium to get through to the other side. Carbon neutral 2050 is more like carbon neutral 2100.

Keith Richards (13:27):

And I remember that was in the book, and I [00:13:30] fully agree, I mean, one of the people I interviewed is Lauren Gunter, who you may not be familiar with, but he is a pretty well-known reporter with the National Post here in Canada. And he was talking about there is the lack of reality behind EVs and why they’re all ending up in the used car sales lots because they don’t go as far, they don’t go as far in the winter. The batteries get 30% less mileage by the time they’re five years old and all these things. [00:14:00] So everybody’s kind of been disillusioned and trashing them. So even the technology and the EVs themselves is not there for massive adaptation to the product, but whatever the case. So let’s move on because man, I tell you, I was asking,

Larry McDonald (14:18):

Well keep in mind that my point is there is the trade there is platinum. Platinum is really cheap relative to gold, the cheapest we’ve ever seen in terms [00:14:30] of platinum. And so if that penetration is on a much slower track, those metals were really annihilated in the last five years because of the expected EV penetration. And so, if the EV penetration is slower and hybrids expand, that’s potentially for our viewers. It’s a bullish trade there just on that little spot. And there’s so many different trades that come out of the book and can come out of this conversation.

Keith Richards (15:00):

[00:15:00] Yeah, no, absolutely. Actually, I think in our aggressive strategy, we have either platinum or palladium, I’m sorry, I can’t remember which one, but it was on that concept. They’re pretty oversold. Okay, so I want to get you mentioned, again, I’ve got a lot of talking points here and I maybe can just rip through them, but the one is, you were mentioning the international policies and the effect on, you talk about [00:15:30] Ukraine, hit Russia and all these different oil spikes, blah, blah, blah. So talk a little bit about maybe the international scene and how that affects us as investors.

Larry McDonald (15:44):

When you write a book or do a speech, you want to have a formula of good storytelling, good facts, and humour, and so it’s like a recipe. You need to have the right ingredients when you write a book or a speech, if it’s too much [00:16:00] information, it’ll put the audience to sleep. If there’s too much storytelling and not enough facts, then you lose credibility. So, we worked really hard on creating a balance in the book. One of the things I was fortunate enough to do was a speech at the National Bank of Abu Dhabi and I met with James Baker, Nicholas Sarkozy, Neil Ferguson. I mean Neil Ferguson has become a good friend over the years. I love him, probably the best financial or just historian out there. And so [00:16:30] these are really important mentors to me. Ferguson and Baker, James Baker was the Secretary of Treasury and the Secretary of State with Reagan.


And I think he also, he was part of the Bush administration as well. But when we were in Abu Dhabi, they opened my eyes to this whole multipolar world potential. And then over the years, Neil Ferguson opened my eyes to it like 2020, [00:17:00] but a unipolar world, you think of 1982 to say 2000 each year, the supply chains got smoother and smoother and smoother and smoother. The US became increasingly dominant. Obviously, we had the fall, with the Soviet Union and the US became a much bigger player on the global stage, a much bigger force. We had NATO expansion. It got to the point where [00:17:30] the neocons in Washington kept pushing and pushing, think of how far NATO’s expanded, but since the sixties or seventies, and so NATO got bigger and bigger, and so we kept pushing Putin into this little corner. And now we’re in a more multipolar world where in a unipolar world, you have one country that’s kind of the dominant force of trade of supply chains.


[00:18:00] That’s in a unipolar world. That’s the case where typically for very deflationary forces in a unipolar world, that’s one country that is controlling the whole global system and it’s very deflationary. But when you move toward a multipolar world where you’ve got global conflicts where the US, our defense budget’s now going to be stressed the next 10 years because the interest on the debt is approaching $1.4 trillion if we go higher for longer. [00:18:30] And so for a whole bunch of different reasons, whether it be sanctions, whether it be the way the global conflicts that have developed through the Middle East or in the Ukraine, it’s supply chains, there’s a whole bunch of forces that are much more inflationary. And with global conflicts, you obviously have a problem with energy, a problem with energy transportation. And all of this creates this undertone of [00:19:00] support for higher prices.


And so, in a unipolar world, you need a totally different portfolio. And I think what’s happened is the intoxication of, say the Mag seven and what we call financial assets from the last 20 years, you really needed a deflationary portfolio. And everybody was kind of brainwashed into this, but if you go into a multipolar world, you really want to have, it’s okay to have some components of that. [00:19:30] Say those more, I guess you say technology is okay, but percentage, the percentage of metals, oil and gas, uranium in industrials, these percentage in the market, we get down to 13%. 13% of the market within the last year was industrials, oil and gas metals in uranium. And in 1980, that number was [00:20:00] up there, 50% in that multipolar world. We are kind of underweight the potential portfolio that you need for that new decade that’s going to be a lot different than the previous. The 2010 to 20 portfolio is a lot different than the 2020 to 2040 portfolio.

Keith Richards (20:21):

This is like I was saying, Larry, as a technical guy, I see this cycle of the S&P versus the GSCI [00:20:30] commodity index. I say, okay, there’s roughly 10, 12 years here in the cycles, and then here you are telling us why the charts are telling me that we ought to see a return to commodities and yeah, sector rotation, right? It’s time. You’re already seeing it. In our talking notes, you mentioned Nvidia, and I don’t know if we’ve covered that enough [00:21:00] but it’s certainly they came out with a bang-out earnings report. Everybody’s falling in love all over again, but there’s really this, as I mentioned in a blog the other day, I said, if Nvidia, I said, is AI a bubble? It was the name of my blog. I said, if Nvidia is really everything they say “it is the best stock you can buy on the market”, then it better be the best stock on the market. It better have predictable [00:21:30] earnings and all those other things. And it’s being priced on revenue. I don’t even know if it’s being priced on earnings. That would be too extreme. Do you want to address it?  

Larry McDonald (21:41):

Well, I think that’s important because it’s the story of the week, the month, and over the last 18 months, it’s gone from 1% of the S&P composition to 5%, 1% of S&P composition to 5%. And if you think of [00:22:00] how the evils of passive investing, we get into this in the book, but this is a company that is, first of all, it’s a sector that is extremely volatile, it’s very cyclical, and there’s a lot of booms and busts in semiconductors for a whole bunch of different reasons, which we can get into. But you just have so many people that are intoxicated with AI and they’re not looking at, it’s just like 99, 2000. They’re not looking under the surface. Everybody’s looking at JDS Uniphase, Cisco. [00:22:30] They’re not looking at where are the real trains like natural gas. As you said, if you believe the Nvidia growth trajectory, we’re going to need a ton of cheaper electricity that comes from oil and gas uranium, and we’re going to need a whole bunch of new technologies, a whole bunch of new, what we call utility type companies that are going to go from very 2% growth to maybe 10% [00:23:00] growth.


That’s what Buffet said in the annual meeting, D Energy or Dominion, you might have companies that have been growing one to 3% a year to fulfill this artificial intelligence dream, very old fashioned type companies, if they’re in the right parts of the United States and closer to those data centers, you could see just tremendous growth, tremendous pricing power, and everybody’s focused on Nvidia NVIDIA’s 81% above, its [00:23:30] 200 day moving average, right? Think about that. It’s a $2.7 trillion company that’s 80% above. Its 200-day moving average. The most Apple ever got was about 63%. The most Microsoft ever got above, its 200-day was 34, 30 5%. So this is a very dangerous situation, Keith. There’s some $34 trillion that’s tied to passive [00:24:00] strategies. It’s quite evil. I mean, this whole, every time a company comes into the S&P and look at Lululemon, the people get the inside information or they get on some type of information group that figures out which companies are going to go into the S&P, whether it be super microcomputer, Uber or Lululemon. These are the last three examples. The stocks go up a hundred, 200, 300% into inclusion. Then all these copycat passive [00:24:30] tracking funds have to buy these stocks after the jump. It’s insane. It’s insanity. And so that’s the whole point – there’s so much passive money that now owns this extremely dangerous, volatile stock in Nvidia, and so buckle up. It’s just going to create more volatility for the market.

Keith Richards (24:54):

Yeah. You just rewrote my blog from three days ago, [00:25:00] the AI bubble, because I was talking about how, yeah, I mean, everybody buys ETFs that are index ETFs, and guess what? NVIDIA’s just gone here and therefore the ETF has to buy it, and it’s like this, which came first, chicken or egg, right? Yeah. And also on the power grid thing, sorry, just another quick thing.

Larry McDonald (25:21):

In my book, I sit down with David Einhorn, billionaire investor, Greenlight Capital, and I’ll just say to end this little part of the conversation, [00:25:30] it’s like he’s on these conference calls, Keith, nobody’s on the calls, fundamental investors that actually ask the tough questions of management teams. Nobody’s home because everything’s passive, and you’ve got State Street, Vanguard and BlackRock which are the large shareholders and there’s no real accountability for management teams. And so, I think this is all going to really unwind over the next four or five years where active managers are going to take a [00:26:00] much bigger seat at the table once this reverses.

Keith Richards (26:04):

Yeah, to your point about the 200-day moving average, I get worried when it’s like 25% over the 200 anyway. It’s amazing. And actually, let’s talk about this whole ETF thing because this is another thing that I think a lot of people aren’t aware of. Well, for example, by owning that, so-called safe, ‘just buy the market and wake up in 10 years and you’ll be fine’ [00:26:30] program. They don’t even know what they own and the volatility that could ensue because of what ETFs are doing. So, is there anything else you wanted to address on the ETF issue before we move on? 

Larry McDonald (26:43):

Well, the one thing we get into very quickly is like the vault suppression, where if you have so much passive money that’s coming in, and then you’ve got so many people that are selling volatility because for a whole bunch of different vol sellers are [00:27:00] like a pack of piranhas, and they will try to manipulate volatility down. And so you have this vol suppression that keeps building and building and building and building. And what happens is there’s one event that really unwinds it. And so what we’ve had the last, since 2018, we get a lot of vol suppression. Then like you saw Volmageddon and then we saw Covid. We’ve had three vol events [00:27:30] since 2018, Volmageddon, COVID, and then obviously the Ukraine War, and actually a small one with obviously the war in Israel where the market gets caught off sides. All these vol sellers and these quants, they’re buying short-term options and they’re suppressing volatility.


The bottom line is when you see the VIX get into that 12, 13 handle, it’s crazy. You’ve made money by getting long volatility. If you look back the last four or five [00:28:00] years, every time we’re down there, it may stay down there for a little bit, but we typically, we’ve got some very tradable moves. And so right now I think vol is still pretty cheap relative to what’s happening in the next six months with the presidential election. It is conflict in the world, global conflicts, and so vol looks very cheap relative to some of the risks.

Keith Richards (28:23):

Vol often spikes coming into an election. That’s been one of those historic patterns. Yeah, and I agree. It’s funny because [00:28:30] we run, not to your level of sophistication, Larry, but we run a monthly quant screen to give us a picture of where the risk might be on the market, and we give it a scale zero to eight. Zero is ‘run for the hills by canned beans and live in a bomb shelter’ and eight is ‘back up the truck and mortgage your house and buy more stocks’. So, one of the factors is the VIX, and it’s just one factor out of 11 factors that I use, but [00:29:00] it’s amazing if Vol can stay down there at 12 or below. It has historically, and it often does clusters, but when it’s down there where it has been lately and it stays there for too long, then you have a setup for like you’re talking about one of those covid to the moon events or maybe not so high, but at least back to 20. We’ll have to see if that happens. But I got to say it’s probable not [00:29:30] possible. It’s more probable.  

Larry McDonald (29:31):

Especially with the way what people are talking about behind me is that the way the transports act consumer discretionary transports in the banks, the super regional banks are showing a lot of stress like the underperformance of some these big, but look at US Bancorp versus the S&P’s, the fifth largest bank in the United States. Then you look at the consumer discretionary down two to 3% on the year. These are, it’s supposed to be consumer, assuming [00:30:00] what happened to the consumer, I thought this is a raging strong economy and the transports are under. So what we do is we measure the book, we talked about this and I know you did this, but we measure the breadth of the underperformance, and when those things get this when they underperform by this much, it makes the whole volatility bet that much that makes the risk-reward so much more attractive. I think it also helps you figure out whether or not you’re, I think we’re pretty close to a big ball move.

Keith Richards (30:29):

Yeah, [00:30:30] yeah, yeah. Well, to your point, we raised cash again a couple of days ago. We just keep, and I tell you, if we see 5,200 crack, that’s one of our rules we just get, we’ll be getting out again. 

Okay, so we talked about the rare earth and stuff, but one of the points that I wanted to ask you, as I said, we have some talking points we put together before this, but this is the one that I really need some input on this because we [00:31:00] can talk about vol all day long and I’m familiar with it, but this one I’m not. You talk about a potential banking crisis and really could you talk to that or could you speak to that? I am fascinated by your thoughts here.

Larry McDonald (31:14):

Well, what happens is when you get in an election year, you have a lot of positive messaging from the White House, whether it be Republican or Democrat. I’m not [00:31:30] picking on Democrats not picking on Republicans. It’s a historical fact that in election years, like 2008, for example, if you go back to 2008, and remember I wrote the book about Lehman Brothers, so I researched this intimately and meticulously. The Bush administration was trying to help McCain and they were talking up every single good part of the economy, the consumer, every piece of data was [00:32:00] viewed as like, wow, this is great. Oil prices in the spring of 2008 were $140 per barrel. The economy looked really strong, and so they spun it that way. And meanwhile, the banking system was showing a lot of weakness under the surface. Everybody ignored it. I’m not saying this is 2008, but it’s the same exact thing today.


Everybody’s looking at, okay, strong economy, labour market. But if you look at New York [00:32:30] Community Bank, or if you look at Bank of the Ozarks, or if you look at BMO overnight, I guess last night, yesterday, Bank of Montreal, all these signals are pointing toward what risk people do. And when people are in a bad trade, they go into the risk meetings. And I’ve been in this situation to say Lehman Brothers, and they say, okay, hopefully, we’re going to get some rate cuts. This is what they’ve been saying over the last year and a half when they go into these risk meetings and banks, they’re like, okay, [00:33:00] give us another quarter or two before we have to mark this stuff down because I think we’re going to get some rate cuts. And once we get those rate cuts, we’ll be in a much better spot. Remember, we kept interest rates at 1% or below or zero for over a decade, and there are at least three and a half trillion dollars of commercial real estate loans on the bank balance sheets.


Everybody wants to pretend that we didn’t distort the cost of capital for literally [00:33:30] 12 to 15 years, which is disgusting. We distorted the cost of capital. And if there are 3.5 trillion of these loans, they’re all priced for a fantasy world of say, 1% interest rates. There are hundreds and hundreds of billions of dollars of losses that are sitting on bank balance sheets. And the truth is coming out one drop at a time every day. There’s a new one every single day. We had two this week, and we have, I think it’s the Bank of the Ozarks is down, [00:34:00] and it sounds like a funny name, but they have lots of commercial real estate in some big cities across in the west coast and different parts of the Midwest. And so that’s the situation with New York Community Bank. It’s the same thing situation with Bank of Montreal, BMO.


And the truth is just bleeding out. And that’s why if you look at the performance of the KBW versus the S&P or the KRE versus the S&P, it’s financial crisis-type stuff. It’s [00:34:30] that kind of crazy. If you look at Zions US Bancorp and say, Comerica, these are three huge, huge, these aren’t little regional banks. These are large super regionals that are underperforming the S&P since the first quarter of 2023 by 25% to 50%. And whenever you see that, you just want to be like, okay, that’s telling you something. The beast inside the market sees this. And yeah, there’s no question we have [00:35:00] a financial crisis coming at us in corporates next year, the whole refinancing, but more so commercial real estate, but it’s not a Lehman. It’s just a big refinancing crisis where a lot of bad loans are going to have to get worked out. But right now, so far it’s been ‘extend and pretend’, but the longer you go higher for longer, one of the guys said this in the chat this morning, it’s extend the pretend for the last year, but the longer you go higher for longer, [00:35:30] the more you actually bring out the truth of these bad loans. And you’ll see it from companies’ earnings reports in the months ahead.

Keith Richards (35:38):

We share a belief that the future ain’t what it used to be when it comes to inflation, and you’ve used the word, and I’ve used the word, I even actually had one of the hosts that speak on BNN once a month, I go on their television show. Some of the people that [00:36:00] I communicate with, she’s quite bright, but she said to me, well, officially, we’re not in stagflation. It doesn’t fit the definition. But I said, well, I don’t care what you want to call it. It looks like inflation. 

Larry McDonald (36:14):

What’s funny about that is Hal said in the last meeting, he said, I don’t see the stag or ‘flation’, right? Because what he did was, he took the 1970s definition, which is like a 10% unemployment in like five, [00:36:30] 7% in, okay, that’s the extreme definition. But then Jamie Diamond this week is warning about, this is the CEO of JP Morgan, is basically calling, he’s not directly, but if you just listen to what Jamie Diamond said and you listen to what Powell said, Jamie Diamond is calling him out publicly, not in his face, not calling his name up, but he’s saying a very opposite thing than Powell saying,

Keith Richards (36:58):

So, we’re Canadian, eh. [00:37:00] I had to throw an ‘eh’ in there. So as Canadians, we’re looking at what’s happening here and our unemployment is terrible, all about Trudeau, and we can go on about that guy, but the unemployment situation is not good. In our business environment, our productivity is the lowest in the world. So, we’re more, in Canada, we’re more facing a legitimate, you want to call it a slowdown, you want to call it in recession or whatever you want to call it. [00:37:30] So our inflation is actually falling. It’s not because they’ve done good work with the monetary policies because basically they’ve crushed the economy through various policies. And now we’re seeing a slowing. Well, in the States it’s the opposite. You’ve got kind of high for longer like you’ve been saying. And that doesn’t allow the US to lower its rates, which by the way, if that happens in the US keeps their rates relatively kind of stable and we lower rates, we’re going to see our looney get crushed, [00:38:00] which is interesting. But there’s another factor that you mentioned, and I wanted to finish up with this one last question. 

You are calling for a higher year, not high, but higher inflation in the US for longer. And part of that is based on whether you elect Trump or reelect Biden. They’re both kind of protectionists. And that’s another factor that I know you’ve been looking at. So maybe you could sort of speak to that more on why your inflation [00:38:30] thesis is worth looking at.

Larry McDonald (38:35):

Okay, yes. Trump, I mean both Druckenmiller and different Stan Druckenmiller famous investor, Bill Gross in the last couple of weeks, they’ve both said the same thing, that Trump is kind of a closet. MMT, modern monetary theory, probably more. Trump would try to gas [00:39:00] the economy to get us out of this mess. Because the only way you get out of a $35 trillion debt hole is through financial repression and financial repression. We talked about this in the book. I sat down with Mark Schmehl. Mark Schmehl is one of the most brilliant investors I’ve ever met. He worked in more capital for years. He was on the original Louis Bacon team. But markets gets into, if you need to keep the interest rates [00:39:30] below the rate of inflation, so interest rates here, inflation here, and that’s how you can monetize the debt. And the only way out of a 35 trillion debt hole is by financial repression or what we call debt jubilee.


And there have been many civilizations going back the last two, 3000, at least three to 4,000 years, where we’ve had financial resets and big defaults. And we’ve seen this with Argentina. I’ve seen this with many civilizations where there’s just a debt jubilee. And so [00:40:00] the US isn’t going to have a debt jubilee, but the only way out of that kind hole is if you can keep interest rates below the rate of inflation. And so they won’t tell you this, but when you really dig into people, you talk to people on the hill, you talk to people in private dinners around New York, around the world, it’s pretty clear that they’re going to reset the inflation target from the Fed from two to 3%. And this big, very [00:40:30] progressive group in the Fed that they want to cut rates. Now, Elizabeth Warren wants to cut rates. Now all the progressives want to cut rates. They’d rather deal with inflation than unemployment. And so that whole psychology is coming out. Trump, if he spent money aggressively on the fiscal side, that would ramp up the deficit. But if that created an economic boom, somehow you can get [00:41:00] out of that. But MMTs is a theory. It’s never been proven. And we did try MMT during the Covid debacle. That was clearly MMT.


We had back-to-back deficits of three, almost back-to-back 3 trillion per year of deficit spending. And then GDP went up and now it’s come way back down. So, the point I’m the book is that Lehman Brothers, the fiscal and monetary response to Lehman, and this gets into inflation [00:41:30] sustainability. The fiscal and monetary response, the Lehman was 4 trillion. But from 2010 to 2014, the Republicans took Congress, and they took the Senate, and then we had a vicious austerity regime in the United States. So, we had a $4 trillion fiscal and monetary response to the Covid crisis. And we had a vicious austerity regime in the United States and in Europe with Greece and the whole Brexit. A lot of deflationary issues [00:42:00] here. With the fiscal and monetary response to Covid and the banking crisis of right now, we’ve got New York Community banks signature, everybody knows about Silicon Valley Bank.


And so that banking crisis plus Covid was $16 trillion, fiscal monetary 16 trillion. That’s fiscal spending and monetary spending, monetary balance sheet expansion. And so that, and guess what? On the heels of that, we see, no, I talked to Mick Mulvaney. We [00:42:30] did a call with Mick and some of our clients. Mick was head of the OMB. You talked to people on the hill. There’s no motivation for austerity now. And so that’s where you just have in a totally different environment, plus the multipolar world, the fiscal overdose plus the multipolar world and the supply chains that are just broken. All of that gets you into an inflation regime that normalizes at three to 4% [00:43:00] instead of one to two, three to four, instead of one to two. And everybody’s portfolio is set up for that previous regime of one 2% inflation,

Keith Richards (43:09):

Hence the commodity cycle.  

Larry McDonald (43:13):

Exactly, if we go into financial repression, we haven’t really done it yet. We had a little bit of financial repression in 2022, we had very high inflation. But now if they really change that inflation target [00:43:30] to 3% and it hangs out higher, and then they can get rates lower through QE, that’ll mean we will be off to a roaring commodity market.

Keith Richards (43:40):

And that long-term inflation’s been like 3%. If you look at really long periods, it’s kind of been an average. 

So well, listen, Larry, I’m probably taking too much of your time, and I know you’re a busy guy and I need you to keep researching to keep me with good ideas, so I make my clients money.  Thank [00:44:00] you so much for coming. I’m so thrilled to have you on today, and you are, like I said, a major influence in my business. We just feel blessed at ValueTrend that we know you and we are part of your circle.

Larry McDonald (44:20):

Well, great. And let’s do something in Canada. We’ll be up, we have speeches in Montreal, Toronto, and Calgary, this [00:44:30] I think between late July and early August. We’ll be up there. So hopefully we’ll get together.

Keith Richards (44:35):

Hey, I’d love that. That’d be great. We’re pretty close to Toronto in my office, so that’d be great. Well, Larry, thanks again and I’ll look forward to talking to you in the future.

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