← The Master Investor Podcast with Wilfred Frost
The Master Investor Podcast with Wilfred Frost
Larry McDonald: SP500 Is A Screaming Sell; But Buy The Dip In Energy
00:47:17
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A
We bounced off the back of potential ceasefire with the Iran Iran war. Is the S&P 500 a buy or a sell here?
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B
The index itself is a screaming sell on the rallies. All it takes is one faction in Iran to continually harass the ecosystem of energy, one faction to really fully disrupt, continue to disrupt the straits. More moves. So the 2026 off ramp is far more complex. When we talk about in the book how how to listen when markets speak is the second, third, fourth and fifth order effects of a move in energy. It creates a massive, massive inflation problem for later in the year. If you look at a 30 year chart of tech versus energy stocks, you'll see a long bear market for energy, but then a beautiful counter trend rally in 22 a pullback and now another countertrend rally, energy versus tech. This to me the chart and from every intelligence gathering I can find, I think that this is just the beginning of a big market share shift out of financial assets of tech stocks into companies that can actually control assets. So yeah, buy the dip in energy the next month all day long.
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C
Welcome to the Master Investor Podcast with me Wilfred Frost, where we celebrate and learn from the success of the greatest investors and business leaders and politicians in
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A
the world, giving you our listeners, the edge.
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C
The Master Investor Podcast is sponsored by Elseg Interactive Brokers, the World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today is Larry MacDonald, the
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A
founder of the Bear Traps Report and author of two best selling investment books, A Colossal Failure of Common Sense, which came out in July 2009 about the
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C
collapse of Lehman Brothers and How to
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A
Listen When Markets Speak, which came out in March 2024. Larry joined us of course on the podcast previously in August 2025. Welcome back to the podcast, Larry.
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C
And particularly welcome. Great to see you here in person in London.
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B
I mean this city, it's clean, gorgeous, beautiful and for some reason every time I come the weather is perfect.
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A
Well, thank you for bringing this weather. It is glorious today. And also thank you for pointing out what a great city this is because sometimes certain people on X, those with a particularly loud control over X, can frame it as an unwelcoming place to come. But it is fantastic.
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B
It's just, well, for finance, I put it at number one in the world
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A
above New York City.
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B
I would, yeah, it's just the financial. I would put, yeah, New York's right up there. But yeah, the financial community, like the amount of meetings that we can do in a week here is impressive relative to any other city on earth.
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A
Well, I'm not going to push back against that. And we were just discussing before starting how to listen when markets speed. And your other book, you've sold over a million books now, so congrats on that. We spoke extensively about this book, which I loved, as I've described in the first episode. So much great technical insights in that, yet it flows so freely, as if you're reading a novel. And we spoke pretty extensively about that in our first episode. And I do refer people back to that for a deep dive on the book, but just the headline point on it. It's fair to say that, that this is a book that argues you should be buying hard assets, right?
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B
Exactly.
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A
Not financial assets.
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B
It's the currency debasement argument globally. So that's pretty obvious. But it's also the Ukraine rebuild, the Israel rebuild, the Iran rebuild, maybe 100 million robots. Think about the copper that goes into all of those things. And then there's the US power grid, which we talked about last time.
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A
And we're going to get into some of these in more detail this time. But I just want to give credit where, where it's due because a lot of people come on and make calls. You know, some do it publicly, some do it privately, but you literally wrote a book on it. It was published in March, As I said, 2024. Since then, silver is up 180%. Platinum, uranium, gold, all up over 100%. Copper's up nearly 100%, oil's up 80%. The MAG7 is up 50% in that period of time. The QQQ, the NASDAQ is up 32%. So kudos. You put your neck out there, wrote the book on it, and the call was absolutely correct.
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B
You know, there's no I in team. It's like I just built over the years a really wonderful reservoir of great mentors. And it's the ideas dinners like we're going to host tonight at the Dorchester. It's really getting to know hall of Fame asset managers at a really high level and then talking to them on a regular basis, which really helps you triangulate and develop really good ideas.
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A
It's also really interesting that even the assets that you said would underperform, which they have, are up quite a lot as well, which just sort of, I guess, speaks to the environment which we'll get into. Now. One quote that I didn't throw at you in the last episode, I've only come across it or focus on it more recently is that you said one of the keys to investing is, quote, measuring the life of the narrative right now, I guess that's the key question I have now for this particular theme that a lot of people are talking about now. You know, you were early to it and clearly the performance has already played out, at least in part.
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C
Pause for us.
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A
Pre war, if you can. January, February this year. Was there still much life in the narrative before that or is the best part of it already arrived?
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B
As far as I can tell. And that's triangulating, talking to the best asset managers in the world and then figuring out the life of that narrative. When I was a bottom line, to answer directly, I would say second, third,
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A
third inning of nine. Yeah, US baseball for the non baseball experts.
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B
But when I was a retail broker in the 90s, I'll never forget Wilf, like you heard these narratives that came out on the Wall Street Journal, Barron's, Wall Street Research, and as a young broker, I couldn't tell how old those narratives were. And a lot of times I would think it was a relatively new narrative and it was like literally a year old because I just was inexperienced, my network was small. But when you build a really wonderful, intelligent network of really powerful risk takers, you can see the birth of narratives and the life cycle much more easily than you can as kind of an inexperienced investor. And so I can definitely tell you that this hard asset trend is still it. Just look at, let's look at just precious metals, which is a big part of the book, but not an end all be all 3% of household wealth in the 70s and 80s. Three, three and a half. Now we're one and a quarter, one and a half. So we're still nowhere near saturation of kind of this narrative.
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A
And does the war, which obviously, you know, hopefully this, this ceasefire for lots of reason holds, but. But does the war reignite the narrative to a mean. Does it take us from the third
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C
innings back to the second?
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B
So this is really important for our sit down today. So Wall Street's famous for what we call muscle memory. Everyone has recency bias. So the average investor that didn't buy the dip last year on that Trump off ramp, they took Howard Lutnick off
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deliberation day, April 2020.
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B
Exactly. The big risk off. It's probably the biggest risk off since 2022. And it's definitely up in the top five in the last, you know, say five years. So they took Howard Lutnick in the White House, they put him in a closet and they threw away the key for a month, you know what I mean? And they took your friend Scott Besant, the Treasury Secretary.
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A
Scott had more of the President's ear for those weeks.
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B
Absolutely. And he was on the Sunday talk shows. Besant and the whole team negotiated a really incredible off ramp. And you think about it, that narrative was easier to control because they can just lower the tariffs today. So the 2026 off ramp is far more complex than what we talked about in the book. How to listen when markets Speak is the second, third, fourth and fifth order effects of a move in energy. So each day oil is at these levels, but each day also the that the, I guess what we call the supply chains of the energy ecosystem have been clogged. It creates a massive, massive inflation problem for later in the year. So at the ideas dinners in New York and last night and tonight in London, the one narrative that I'm hearing is the risk of an Arab Spring situation. We're seeing institutional investors, actually short emerging market countries, credit risk. So a lot of these emerging market countries have their huge energy importers and then you have the risk of just, just think of white sugar, getting sugar from say Brazil refined in the Middle east and then getting that out to Bangladesh and Pakistan. This is big. This is a really big problem for later in the year in terms of inflation, but also in terms of credit risk for em.
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C
This episode of the Master Investor podcast with Wilfred Frost is sponsored by BMY Investments, a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice.
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A
There's obviously an immediate relief rally on ceasefire talks. Maybe we can hit short term, long term, short term, even if it holds. Are these relief rallies wrong? I mean, I guess. Where do you see in the short term oil settling to? If we started the year 60, 65, we got up above 110, we've fallen back to the 90s. Where do we settle over the next month and where do we settle longer term?
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B
Yeah, we can touch the 70s in the next month or two, but it's those tentacles of the second, third order effects across just everyone talks. There's a lot of people talking about phosphates and the different types of fertilizers, but there's just so many second, third order effects that to me are much more problematic for investors. So the bottom line is the off ramp is much more complicated. There's a lot of muscle memory. So you get that big counter trend rally. And so maybe up another 5 or 10%. But I think you want to sell
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A
the rally with both hands of mainstream stocks. What about oil and gas stocks which clearly have had a great run. We mentioned that a little bit in the intro over the last year and a half. They had a good run coming into the war. They had a good one during the war. By the way, credit again. When you came on last year, you told listeners to have a look at Oih and FCG, some of these ETFs.
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B
Thank you.
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A
That I have exposure to that. They've had a great run since August. What do you do in that space? Is this a buying opportunity? Because they've obviously fallen back in the course of the last day or two since the ceasefire was announced.
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B
It's really incredible buying opportunity, especially in the OIH services names. This Schlumberger is an incredible company. Beautiful free cash flow yield, great valuation. But they're their AI powerhouse for the energy space. A real artificial intelligence play in the energy space for the next 10 years. So you can buy it, you know, if it pulls back, you might be able to buy it near the 200 week moving average, which is, you know, not 200 day when you, when you get there, the 200 week moving average down there. It's a really good level. But most important, most important of all, if you look at a 30 year chart of, of tech versus energy stocks, you'll see a long bear market for energy, but then a beautiful counter Trend rally in 22, a pullback and now another counter trend rally and talking about the XLES versus the, say the xlf. So energy versus tech. This to me, the chart and from every intelligence gathering I can find, I think that this is just the beginning of a big market share shift out of financial assets, of tech stocks into companies that can actually control assets. So yeah, buy the dip in energy the next month. All day long.
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A
Let's dwell on war as well and the consequences of this. You quote Neil Ferguson who's been on the podcast, war is very inflationary again.
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C
Have we felt the effects of that?
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A
Not just from the Iran war, which clearly we're not in the rebuilding stage yet. But are we even in the rebuilding stage yet for Ukraine for example, which is a four, five year old war
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B
now, we are nowhere near the rebuilding stage. So it's like what we talk about in the book is a generational shift, a multipolar world with more global conflicts. Think of the United States coming out of the Vietnam 1960s. It's very similar today. You had the Great Society which is big fiscal spending. And then at the same time you had this Vietnam War and then the rebuild of Asia and the supply chains here you've got the $2 trillion of capital expenditures for coming out of what we call artificial intelligence. Two trillion bucks. You've got a fiscal deficit 1.9 trillion. And you had PMIs that were like YSM data. We were actually re accelerating manufacturing in the United States heading into this. So now you throw in the second, third, fourth order effects of inflation and you're looking at 5% inflation later in the year going into the midterms. Big problem for Trump.
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A
Talk to me about copper in particular because I mentioned some of those commodity price moves since you published the book. Copper's up nicely but it's not as up as much as some things. And if you look at the super long term charts, it's not as much of a turning point perhaps as it could have been. We early stages on copper's rally.
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B
Well, this goes back to the life of a narrative. So the power grid narrative has been out there a couple years in terms of the US power grid is old. So a lot of people are buying copper and aluminum. Just look at a classic stock to watch is Alcoa, right on the aluminum side. So the street had all cells like high, like almost mostly cells at the lows. And now the street's been upgrading, you know, they left a downgrade on the lows and upgrade on the highs. The sell side researches can be really dangerous to your health. Right. So this narrative of the rebuild of the grid has been out there, the narrative of the war. So the so actually copper there is a little bit like we're developing a little bit of a near term supply risk problem for this year and that that's why we could have a drawdown. But then five, 10 years there's a massive supply problem. Right. So this so, so it creates a situation where the copper miners like the CopX, which we recommended in the book, it outperformed the Nasdaq by maybe 50% last year. Pull back. Yeah, you want. It's a lot like oil near term risks that'll create an incredible buying opportunity.
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A
And obviously people who subscribe to the Bear Traps report get your more short term calls on things like this. The book obviously more long term in nature and we'll include a link as ever in the show notes for the Bear Traps Report.
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C
I was a little stunned doing my
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research for this Larry, that you're now a buyer of bitcoin. I didn't expect that knowing you as I do. And reading the book, I don't think you're a super bull on all crypto, but you're now thinking bitcoin should be in people's portfolios.
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B
Well, there's a lot of bipartisan support
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for
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the bitcoin legislation. And you had this vicious sell off, like almost 40% in like two months.
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A
The gold, the ratio from sort of October last year.
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B
Yeah, October, the Trump surprise on that Friday. And then, I mean literally $2 billion was all these poor kids. Not I shouldn't take poor kids, but like young people that just got blindsided and the disgusting manipulation. This is why we've stayed away from bitcoin, is it's so high beta because there's just so many people with much better information and the little guy typically gets hurt. So. But this capitulation was so severe in such a short period of time. It wasn't as severe as the previous drawdowns of 75%, but it was such a short period of time. The bitcoin to gold ratio was 38. All of a sudden with 13. And so I'm like, okay, bitcoin goes. The ratio of bitcoin goes from 38 to 13, which is, if you look back last five years, that's been a place to sell some gold and buy some bitcoin. But the threat of supercomputing quantum computing is now creates not a cap, but your convexity to the upside that was always there. Now has this gray matter in the future, like how fast is quantum computing going to come? Is it a threat a year from now or is it a threat seven to ten years from now? That threat has moved up. So that's another thing that's been weighing on bitcoin. So all this together, it creates like a near term buying opportunity, but I think much more worried about the long haul.
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A
So that to me is very much a short term trading call, not the long term strategic calls that the book is all about. Is that fair?
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B
It's fair.
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A
It's fair. So if you. Even if the trading call on gold short term is not a buy, it should still have a place in people's portfolios for the long term investors. Should bitcoin have a small place in people's portfolios?
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B
It should have some place in a currency debasement world. The argument that we make in the book is that the currency debasement is so disgusting. I mean, the GOP has gone from fiscally conservative party and I voted in GOP before, so it's just unrecognizable in both Republicans and Democrats. And then you look at the wars, you look at, like I said, the amount of pressure on inflation from robotics, which long term will be deflationary. In the short term, 100 million robots, you're talking about a lot of copper. So there's just so many near term threats to what we call financial assets that hard assets and bitcoin have to be a big part of your portfolio.
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A
Let's talk about gold a little bit more detail because clearly it's performed super well over the course of the life of your book. You also been talking more recently about a different ratio, gold to Brent.
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B
Right?
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A
What's that saying now? And where's your level of conviction with gold?
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B
The gold to Brent got up to the most extreme ever, like in January. And so we went overweight the energy and we actually sold down our gold miners. And the trade alerts, which you get, about 2,000 financial advisors get our trade alerts. And I tell you, Wilf and a
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few journalists like me, yes, but I
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B
tell you Wolf, Wall street research is fiction without skin in the game. So like I want to have skin in the game. So when we do trade alerts, over 2,000 financial advisors, family offices get the alert. So if we're wrong, we're going to get like some real punishment. So we took down gold and silver and platinum and palladium in the first quarter and the last quarter of last year, fourth quarter, and, and we added the energy names and we just rebalanced the portfolio more to the energy side. But just because your point, like that gold, that gold ratio to oil was even more extreme than Covid, you think about that like almost two standard deviations more extreme. So think about how, think about gold.
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A
When oil went negative, oil went negative.
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B
And so, so here it's not that oil went negative. Gold, gold went so crazy. And oil and gas is like, it's a dollar based asset. Globally, it's an asset. Oil and gas companies and oil and gas are going to do great if inflation re accelerates.
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A
What about silver? I mean silver clearly joined the precious metal rally second half of last year. Did that also get overstretched?
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B
So what we track is that we have a model that tracks how extended things are. It's, you know, there's a call put skew. So you can see like the ratio of calls to puts how many people are buying upside versus protecting on the downside. That reached 8 to 1 Wilf in January 26th for silver. And if you look back historically, every time that's happened, it happened with Apple in September 2020, 2021, 22. It happened a couple times in Tesla, happened I think last year with Nvidia. It's a very, it's a brilliant short term sell signal. It doesn't tell you much about the long term at all. But when there's so many people buying calls, right. The dealers on the street have to buy upside. So think of like 8 to 1 calls versus puts. When you see that, it's a great short term indicator because what happens is the dealers, the banks, so many people are buying the calls, they have to actually buy more silver to hedge their upside. And so what happens is you get, so they get so long that once silver reverses, then the street has to sell fast and you get these vicious high beta moves. Yeah, so, so this is a good chance to buy silver on, on the dip.
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A
And similarly gold, or is gold, I mean gold's been bouncing around, but it's, it's back up to 4800 or so.
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B
You can buy gold 44,400 to 4800. Yeah, that's, that's the zone where you want to reload.
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C
This episode is sponsored by the World Gold Council. The global experts on gold. They champion gold as a trusted strategic asset. Providing market leading research to help investors understand gold's role and modernize how gold is owned, traded and used. Developing industry standards and market infrastructure. Learn more@goldhub.com.
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A
Quick, final things on precious metals because I've got another whole page we've got to get to platinum, palladium, which platinum in particular has not taken part like silver and gold has, should it have done? Are you as convicted behind that as you are behind copper or not?
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B
Yes. I mean all the gold ever mined would fit into an Olympic swimming pool. Everyone's heard that. But all the platinum ever mined would go up tier ankles in that pool. So it's such a scarce asset, eventually they're gonna be on the moon. If you listen to the all in, you know, guys, eventually we're gonna have like platinum resources. PGM metals being taken from the moon back to earth, that's at least 20, 30 years away. So yeah, there's just not a lot of platinum.
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A
Artemis didn't quite bring that home yet. I'm sorry, Artemis didn't quite bring that home yet.
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B
But yeah, yeah. So what happens with commodities is you go through these vicious bear markets. Just think of uranium. It's the same thing. Like every CFO that overinvested in capital expenditures has been fired. Right. For the last 10 years same thing with platinum and palladium. So the more vicious the bear market, the longer it is, the more capital discipline that the companies start taking on. So therefore the supply gets really out of whack with demand. And that's exactly. And that takes years to unwind. So yeah, platinum is. And plus you've this whole, you know, hydrogen. Platinum's a metal that can withstand lots of heat. And so if you think of like the move toward green hydrogen the next 10 years versus say the decline in what we call catalytic converters like as, as EV sales explode, it's potentially less platinum and PGM metals that you need. Right. But there's been a big pushback on that globally. Right. The amount of EVs that were supposed to be sold by now is much lower. And then you have the incoming demand from green hydrogen which is eventually going to be here. So yes, a net net platinum, palladium are still in that screaming buy zone.
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A
Let's talk a bit more about equities and tech equities in particular. We spoke about this on the August 2025 episode. You felt a lot of the AI companies, the hyperscalers, were kind of getting ahead of their skis in terms of how much they're committing to capex going forward. I guess we don't know definitively if that's the case or not. We'll know in five years or 10 years if their revenues play enormous catch up or not. But there has already been a repricing by the market towards that fear that you identified nice and early. Has that repriced enough in your mind? If we've seen the likes of Meta and Microsoft and perhaps the Eye of the Storm, Larry Ellison Oracle repricing Are they repriced enough for the scale of fear you had about them getting over their skis or not?
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B
Well, no, they haven't. But this, this, this will be a nice bounce that we're going to experience the next week. The problem now there's an emerging threat that I'm talking about the life of a narrative. I've heard this like the last like three weeks and it's a big reason why there's an overhang is that if you look at the iPodS, SpaceX, OpenAI and Anthropic, just those. But there's a lot more coming besides those are the big ones. What happens is when you have a large amount of stock that's going to come to the market, people start to, you got to make, you got to make room for that at the table, right? So 75 billion times three, that's what you're looking at, ballpark. And it's all pretty much going to come especially now that we're going. If we go risk on for a month, then that brings forward the IPO, right. First SpaceX. So that's like a lot of pressure on the Mag 7. So not only do you have this like higher interest rate regime, higher inflation regime, you've got this like there was 34 trillion in the NASDAQ 100, now it's about 31. So 3 trillion is left. That really has to, you know, the 5 or 6 or 7 trillion has to come out of the NASDAQ 100 and reallocate across over to energy, oil and gas. All kinds of companies that control assets. Your Rio Tintos, your valets. These are the companies we talk about in the book.
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A
Talk to me about the kind of slack that people have cut for the likes of Mark Zuckerberg because it's not the first time he's over. I mean Meta doesn't. It's hilarious they changed their name to that. Do you know what I mean? It was a flash in the pan and oddly enough the low in their share price in October 2022 came at the peak of them over promising and over investing in Meta and the future there. I just try and kind of compare then to now. We probably have passed the peak, haven't we, of people announcing investments into AI?
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B
Yes, I think so.
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A
Does that not. If we're drawing the line of comparison, does that not mean we're therefore past the trough of those share prices? Do you see what I mean?
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B
Yes. The problem is that companies, even though we may be at the peak of what you call promises to spend, so you still have a big CapEx commitments they've already made and so eventually those CapEx commitments might actually come down. So that would really mark the bottom. But for right now you have companies that used to be cash cows, like incredible cash producing machines. Their free, free cash flow Meta is going to go from 75 billion to almost negative. Like so all of a sudden you get these cash cows and Oracle went from 30 billion 40 billion plus to 15, 20 billion negative in terms of free cash flow. So that like creates a dynamic where like everybody was chasing growth and now you're in a higher interest rate regime. Companies that are producing as much cash, they're not as valuable over the long haul because they're producing now. Eventually the AI is going to create all kinds of demand for them, but there's going to be this cloudy Period, like in the next 24 months where I think a lot of people are going to be like, show me. And there's not going to be a lot of earnings from AI right away.
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A
And how much for a sort of more traditional tech name like Microsoft that's hedged across different business lines, it's gone through a lot of cycles, comes out the other side, what's the worst, what's your base case scenario of how much further that has to fall?
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B
I just look at price to sales. Okay, so Microsoft in 1999, 2000 got above 14 times sales. In 2021 it hit 14 times sales again, late 21 into 22. And that drawdown in 22 you talk about it was within the last year was 14 times sales again. And now we're talking about maybe nine, 10 times sales. If you look at Microsoft, I mean when David Einhorn was buying it in like say 2011, 12, 13, it was trading at 3 times sales, 2 times sales, I guess, I guess 2 to 5, call it that. So in terms I look at everything price to sales with companies like that. So okay, is it going back to 2 to 5 times sales? Probably not. But does it belong at 10 to 14 times sales? That's pretty crazy. Like it's, it's very difficult to, to make, to buy a stock at that level and hold it for the long haul and make money. It's just trading it even now after it's gone from 14 times sales about 10, you need to buy Microsoft at 5 to 4 to 8 times sales before you want to step in.
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A
It's interesting for that kind of sensible sounding, bearish outlook for one of the great goliaths who's maybe invested a bit too much. But it's not as gung ho as some of the names. So it's a really interesting perspective. Let's talk about private credit quickly because I've heard you talk about this more recently on a couple of other podcasts and obviously you were inside the room at Lehman, as we said in the intro and we talked about in our first podcast and know the scale of damage that mortgage backed securities could create. What about where's private credit relative to that? Is it much smaller of a problem?
- [31:38]
B
It's much smaller. The problem is the banks got so expensive because of deregulation in Trump, so the banks were priced for perfection. In the Bear Traps report we recommended through the FAZ ETF a short on the financials, we hosted a call with Paul Hackett and these different hedge funds for the clients in September, October, we Went through Wall street research in the third, fourth quarter. Whenever you see them go crazy with, with a word, they went absolutely nuts with the word idiosyncratic. And they were calling the private credit risk in First Brands and Tricolor the first kind of ugly ducklings that came out up to the surface. The perception was that these were idiosyncratic risks. Now when you see on Wall street when the narrative changes and just think about, we've gone from idiosyncratic, pounding the table, Wall street research to like now all of a sudden, the Lloyd bank blank vines of the world you sat down with Lloyd, really prominent, very respected strategists or the Jamie Dimons of the world are starting to say, listen, this is a big credit problem for the banking system over the next, you know, couple of years. And so because there's a lot of lending from business development companies, they're financed by our banking system. So on the good side is all right, we hosted the ideas dinner in New York last week and we had someone at the table. It's probably the best investment grade bond trader and portfolio manager I've ever met. I've known for over 15 years. And he said something interesting. There's all these financial advisors that they were told they could have quarterly liquidity with private credit. So all this money is now rushing. It's about $350 billion out of the 1.8 trillion and that's in private credit. So in order to get all these family offices and wealth managers involved, they promised them quarterly liquidity on the most illiquid asset in the world, which was a dumb, really bad mistake. So now there's a run on the bank. And so you would think that wow, this is going to be contagion over high junk and high yield. And what I'm actually hearing is that the public market credits might, you know, as money comes out of private, private credit has to go somewhere. It's probably going to go back to the, you know, investment grade bonds or junk bonds. So that's a little bit of a positive potentially for the contagion argument. But the biggest risk to high yield and investment grade bonds now is just simply the energy move that hit to the bond market. In other words, when you have a big move in energy, it's a hit to consumption. The second, third, fourth order effects on inflation. So that you get like this stagflationary risk for the fourth quarter is high. So, but so is like the bottom line. Is this private credit a subprime? No. But does it have a contagion effect because in a higher interest rate regime, we have all these other incoming threats to credit markets. We have got the Jack Dorsey effect. The guy that's the CEO of Square comes out and lays off 40% of his workforce in one day. So you have a lot of companies that are going to try to copycat that. And so the probability of a big spike in unemployment later in the year that's driven by AI is high. So that's much more of a threat to the credit markets than say, private credit.
- [35:19]
C
This episode is sponsored by Interactive Brokers. Building wealth starts with the right broker and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com masterinvestor.
- [35:49]
A
You know, credit to Scott Besson and the treasury team, despite a lot of challenges, they have kept a lid on long term rates. Maybe we'll come to this in a second with the war, maybe that's making it harder now. But looking backwards, are you surprised where the 10 year has been? When we spoke in our last podcast, you said 5% is the real pain point for risk assets and for equities. Even with everything that's been thrown at it, the peaks that have been 4.5 are back down to 4.1 again. Have you been surprised by that?
- [36:29]
B
I am. We came up with a report called Bessense Bag of Tricks. And this is another classic, you know, measuring the life of a narrative. We started to hear this a year ago, January at some of the ideas dinners. And that is that they would use the supplemental leverage ratio, the SLR of the banks. So essentially what they've been doing is they're forcing the banks to eat more of the home cooking treasuries. And so even though the Chinas of the world have come down with the ownership, the banks have taken up their ownership a decent amount and that's still going to continue. And so the Besan team, these guys, he's talking to Druckenmiller like he must be talking to Stan Druckenmiller every week. So he's got like the financial acumen in that guy's head relative to the last 20 treasury secretaries is two standard deviations higher. Like he's that good. Forget about whether you like Trump or not.
- [37:23]
A
He is, he's incredibly small world class.
- [37:26]
B
And his connectivity on a daily weekly basis, like Janet Yellen, I mean, her connectivity to real asset managers in the world, from everything I know, I know this I know this for a fact. It was just like down here relative to where he is. Right.
- [37:40]
A
She's also very smart. She's, I take your point like her
- [37:43]
B
call is going to be through the academics. Right. But the academics have never taken professional risk. They're dangerous people because they've never sat in a risk taking seat. Like they make decisions based off of academic theories and what's, you know, on the wall versus, you know, the reality of markets. So the Besan thing is fascinating. But yeah, are yields, do we have a problem with yields later in the year? Yeah, because as great as they are, we still have this big inflation shock that's going to come, you know, third quarter this year. And so you're going to have a big problem. The one thing I want to talk about and let's is, is the, is the gridlock effect. And this would be the most so if Trump were. So this is a, this is like a new narrative. So in many elections, when you go into the midterms, if the House and Senate go blue, think about that, the deficit, all of a sudden, 1.9 trillion. The Democrats are going to basically completely arrest spending. They're going to go from spenders and the Republicans would do the same thing. Right. So they're going to go really hawkish on spending to try to hurt the Republicans. 28. So you want to track, you want to track the defense companies because the defense companies should be in this massive bull market. They rolled over hard in recent days and weeks. They're probably going to rally here. We're seeing guys short defense contractors because if there's this gridlock, if Trump loses the House and Senate, all of a sudden that defense spending, which is supposed to BE Trump wants $1.2 trillion. That's probably going to come back down to the 800 billion range.
- [39:22]
A
It's a really interesting point about the gridlock and I think people should also, I mean, look, bond yields are in the uk we're already slightly falling out of bed. Maybe we're the first. Let's see if it calms down. I think people should watch France as well on the gridlock point because they're going into a presidential election year, they have to approve an annual budget and there's no majority.
- [39:43]
B
And when is that?
- [39:44]
A
That'll be the end of the calendar year.
- [39:46]
B
Okay.
- [39:46]
A
So then you get into the final quarter of the year and it's going to become clear whilst everyone's campaigning, they just got it through for this year, that you're not going to have political will for at least five or six months until the elections in April, May. So I think there's just so many different G7 economies that could be the spark for a bond market unwind that I'm kind of with you that I think even though Bessens kept a lid on things in the short term. Well, it's not short term anymore. He's done it for 18 months. The pressure is going to build.
- [40:17]
B
There's a line in our book, Dr. Tytler and Alexis de Tocqueville. They're both attributed to this quote. But a democracy can only last. Remember, the United States is coming on 250 years this summer. A democracy can only last until the voters realize that they can raid the public treasury. And if you look at the cycles of democracy, they start off in bondage, right? Think of the US in 1775, right? In bondage. Essentially the Tea Party, spiritual faith, great courage, entrepreneurship, abundance. Think of the 50s, 60s, 70s. And then you go into this like, apathy, dependence and back to bondage. That's probably where Venezuela reached, right? So Venezuela's done the whole cycle. There's other countries that have done the whole cycle. The UK and the US are probably in that dependence, apathy.
- [41:12]
A
Well, I hope the policymakers can buy themselves more time to quickly grow out of it this time.
- [41:18]
B
That's your big heart. That's that pitch right there. If you have too many countries in that dependence, apathy, bondage range in the next 30 years, that's very bad for the global bond market.
- [41:27]
A
The other way of looking at it is our mutual friend Neil Ferguson's when does interest as a percentage of GDP grow above defense as a GDP which the US is just crossing. Sadly, we crossed it. God.
- [41:38]
B
Well, the funny thing, the big joke in Washington and the ideas dinners the last week or two is it would have crossed but Trump took defense up to 1.2 trillion from trillion. So in other words, they prevented the cross by spending, by promising to spend more.
- [41:57]
C
This episode is brought to you by lseg, the leading global financial markets infrastructure data and analytics provider. To learn more about how LSEG connects businesses, investors and markets worldwide, visit lseg.com.
- [42:19]
A
Okay, so I've got a couple more questions because we're nearly out of time. The first one is just where markets are today. Headline S&P 500. We bounced off the back of potential ceasefire with Iran Iran war. We just touched on how even if the war goes away, the central part to America's finances is more pressured than it was at the start of the year. Combasant Keep flooding short term issuance. Is the S&P 500 a buy or a sell here?
- [42:49]
B
The index itself is a screaming sell on the rallies because remember the evil thing of passive investing, it's so evil because the top two stocks in the S&P, which Microsoft at 14 times sales within the last six months. Nvidia was like 30 times sales within the last six months. Those numbers have come down. But they're like, you know, if you have a million dollars in the S and P, you almost have like $150,000 in two stocks the last 30 years. That was always like, you know, the top two stocks are maybe 5% of the S&P. So you've got two stocks that are 14, 15% of the S and P both trading at record price to sales. That's not an index you want to own. So yeah, are we at a capitulation moment like 2022? We're nowhere near the amount of. You want to see over a thousand new lows on the New York Stock Exchange for real, one of those great opportunities that you saw in 2022, in the fourth quarter 2008, we were way up around 1800 new lows on the New York New York Stock Exchange Covid so there's all, all the indicators point that we're nowhere near real buying opportunities.
- [44:00]
A
Larry, final question. You know we've asked in the last episode, your, your overriding advice for, for all time for investors. What about just for the rest of, of 2026, if people are trying to gauge what to do, what, what is your, your overriding piece of advice?
- [44:16]
B
This year is going to be a year where we have a little, probably a little bit more volume in the middle of the year. Trump's then going to try to really push it, push spending and push, you know, he's going to really try hard to get asset prices up into the midterms. But in the near term, we've got this inflation shock, we've got Iran. That is all it takes is one faction in Iran to continually harass the ecosystem of energy in the United States to create a real big headache for the Trump administration. One faction to really fully disrupt, continue disrupt the straight spore moves. So yeah, I think that I would take the Buffett playbook. You want to sit in the boat, wait for that better moment to really get long. Stocks in terms of oil and gas and copper and precious metals, they're at the beginning of a multi year bull market. Remember the famous stat in the book, 49% of the s and P in that multipolar world, that 1968-81 regime, which we're kind of like going through now. By the end of it, 49% of the S&P, 49% of the S and P was in materials, energy and industrials. And now we're like at 14. So are we going back to 49? No, but we're going back to 2530.
- [45:37]
A
Larry, it's been an absolute pleasure. So good to see you, particularly in person. And thank you for joining me on the Thro Investor Podcast.
- [45:43]
B
Thank you my friend.
- [45:44]
C
Make sure to hit subscribe or follow
- [45:46]
A
if you haven't done so already so you can receive the next episode. And I really do highly recommend Larry's latest book, how to Listen When Markets Speak. And again, refer back to our first episode with Larry if you want to hear more about that. But for now, Larry, thanks again.
- [46:02]
B
Thanks Wolf.
- [46:03]
C
The Master Investor Podcast is sponsored by Elseg Interactive Brokers, the World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes.
- [46:27]
A
Hi guys, Just wanted to remind you about the upcoming Master Investor show in London in person on Saturday 25th April. I'll be interviewing Jim Mellon, amongst others, on the main stage. There are lots of other speakers and panelists and discussions taking place and over 5,000 like minded investors in attendance. If you want to attend, please visit masterinvestorshow.com or look at the link in the show notes and use code MIPOD for a free ticket.
- [47:00]
C
This podcast is produced by Paradine Productions and Master Investor limited In association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.