# Larry McDonald: S&P 500 Could Crash 30% Over the Next Year

[Source video](https://www.youtube.com/watch?v=8F3x-mRHFUo)

## Opening excerpt

**Larry McDonald (Speaker 1):** [00:00](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=0s) The S&P is going to drop 30%. NVIDIA is going to get cut in the next two, three years. This is the greatest cash-out from billionaires in Silicon Valley we've ever seen. Run, don't walk the other way.

## Introduction and passive investing

**Maggie (Speaker 2):** [00:16.12](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=16s) Joining us today, Larry McDonald, founder of Bear Traps Report. Hi, Larry. Great to—

**Larry McDonald (Speaker 1):** [00:21.26](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=21s) Have you—

**Maggie (Speaker 2):** [00:21.44](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=21s) With us.

**Larry McDonald (Speaker 1):** [00:21.80](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=21s) Thanks for having me. What a pleasure.

**Maggie (Speaker 2):** [00:23.76](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=23s) Same here. It's going to be a great convo. The work you do is all about avoiding drawdowns, and it feels like we really need to be thinking about that right now. Where are the greatest risks investors need to be positioned for right now? What's top of your radar?

**Larry McDonald (Speaker 1):** [00:37.94](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=37s) The year-end setup is fascinating because the relationship between the index, the S&P, and what I call the dark side of passive investing is getting pretty crazy. Probably 60 Hall of Fame brands that are down 35% to 80%, and the index is at all season. In years where the S&P's up 10%, 15%, 20% and great brands are down, you want to get long the wonderful brands and maybe think about even shorting the index or buying puts on the index.

That's what we're seeing the most sophisticated institutional investors behind me in our Bloomberg chat—that's a trade that I'm seeing people put on.

**Maggie (Speaker 2):** [01:23.80](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=83s) We ask the experts closest to the real economy to make sense of it: the people who build, mine, and power real assets and put their own capital behind them. Then we connect the dots and tell you what it means for your money. Wealthion.

It's interesting. It sounds like rotation within equities: look for the beaten-down—kind of sounds like a value trade. But I hear a lot of people really concerned: listen, yeah, the S&P 500 is broken. What we look at doesn't represent what's really going on in the economy. But equities are not the answer because everything's delivered to AI, including the economy, and it's risky. It sounds like you're not bearish equities; you're just worried about the concentration. How do you see this?

## AI concentration and IPOs

**Larry McDonald (Speaker 1):** [02:15](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=135s) Yeah, it's because of AI. Think about this: essentially, the S&P is 50% tech. Come on. Whenever you see that—remember, I'm a former Lehman trader, and our book is right now a million copies sold, *Colossal Failure of Common Sense* and *When Markets Speak*. I tell my wife once a month, “Maggie, if we sell a million books, we'll break even on our Lehman stock,” right?

The point I try to make is that in 2000, 2007, whenever you have one sector that is that big a part of the market, run. Don't walk the other way.

Then you're going to take three IPOs. Think of the idiocy of this. This is how passive investing gets gamed. These three IPOs—SpaceX, Anthropic, and OpenAI—three years ago were worth $360 billion. Now they're at $5.1 trillion from $360 billion. And we're going to put them in the index. We're going to put them into the NASDAQ 100. We're going to eventually get them in the S&P.

This is the greatest cash-out from billionaires in Silicon Valley we've ever seen. They're dumping the shares into the laps of Mr. and Mrs. Joe Lundqvill, average investor, in their 401(k)s. It's disgusting, and it should be stopped.

**Maggie (Speaker 2):** [03:39.48](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=219s) So retail's the exit liquidity for private—correct?

**Larry McDonald (Speaker 1):** [03:42.86](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=222s) 100. Private—

**Maggie (Speaker 2):** [03:43.74](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=223s) Money.

**Larry McDonald (Speaker 1):** [03:44.02](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=224s) And it's not just exit liquidity; it's valuation. Just look at the relationship between Anthropic and Google. Google came public at like $35 billion, $40 billion. Anthropic's going to come public at whatever it is, $2 trillion. It's just crazy, the relationships out there. It's really quite pathetic. Everyone's just along for the ride. The index is at an all-time high, and no one really cares.

**Maggie (Speaker 2):** [04:12.94](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=252s) Is this a stock picker's market, where these other names in the S&P look attractive? Or is the AI trade, the bubble bursting, going to be so damaging that it takes everything down with it, including the economy, and so even those names get taken down?

## Consumer pressure and bond opportunities

**Larry McDonald (Speaker 1):** [04:33.80](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=273s) Right. That's the tough thing. Nobody knows the answer to that question. I will say we've already had a 1987 crash in the stock market. It's already happened. Anytime you have equities that are down 35—and we're talking like Harley-Davidson, Lenar. Buffett was buying Lenar like 20% above where it is now. Netflix—Bill Ackman was buying Netflix 10%, 15% above where it is now. These things are down 45%. So we've already crashed. They can go down more, but think about this, Maggie.

Oil and rates, the last 60, 90, 100 days. The move in the last six months or so: the 12-month Treasury is up 100 basis points. Oil, gas, diesel—what we call distillates—they're all up 60%, 70%, 120%. We've already had a $300 billion punch to the face of the U.S. consumer. That's why McDonald's and Home Depot are down 30%, 35%. We've already done a lot of hiking.

The ability of the Fed to hike further—I think the economy—I'm starting to see the most sophisticated investors. We work with hedge funds, mutual funds, and pension funds at the Bear Traps Report. Institutions are starting to look at duration again, in other words, long-term bonds. Because when you have that type, it's the economy—it's going to essentially accelerate economic risk.

It's like in the '80s and '90s, Maggie. We have these supernova economies where the economy's piping hot, rates are up, oil's up, the consumer gets slammed, and all of a sudden we go into a supernova, like a star burning out. That's what's about to happen.

**Maggie (Speaker 2):** [06:18.02](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=378s) Square that with me: the crash has already happened, but if the sophisticated investors think that a rescue—it sounds like you're coming—lower rates are coming because something's going to break. Talk to me about that middle part. How much worse does it get? What does that break look like in order to be the catalyst for that fall in long yields? That's what you're saying, right? They're buying long duration because they think that the policymakers, the Fed, are going to flip because they're going to need to.

**Larry McDonald (Speaker 1):** [06:53.14](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=413s) That's part of it. But it's more about the relationship between—in our lifetimes, only maybe in the late '70s have we seen a bond market that is at this level of crashing.

**Maggie (Speaker 2):** [07:06.28](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=426s) And—

**Larry McDonald (Speaker 1):** [07:06.52](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=426s) The reason—rates were higher in the '80s, right? But what people don't understand is interest rates between 2017 and 2021: $30 trillion of bonds were issued near 1% to zero to maybe 2%.

**Maggie (Speaker 2):** [07:22.46](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=442s) There's—

**Larry McDonald (Speaker 1):** [07:23.28](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=443s) An Apple bond behind me, Maggie, that's trading at 47 cents on the dollar. It's AA-rated, Maggie. It was issued at par, 100. It's trading at 47 cents because it's a 2.55% coupon and rates have gone up. That bond's worth a lot less.

If you buy something like that, what would you rather own? Apple equity at 10 times sales, $5 trillion market cap? It's brain-dead to buy that thing here. Whereas you can buy the bond that's trading at 47 cents. It's paying 2.55%, but your actual yield's much better than that.

Guess what? If the 30-year Treasury, for some reason in a recession, goes back to 4%, that Apple bond's going to be worth about 72, 73. The bottom line for people watching us right now: that's 18% a year if that happens in the next three years. It's like the '80s here, Maggie. Bonds are starting to offer equity-like returns because they've crashed like it's 1929.

**Maggie (Speaker 2):** [08:29.28](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=509s) So this is the smart trade, the smart money for you, is everyone opportunistically looking for trades that will work if interest rates go down.

## Nike and the index forecast

**Larry McDonald (Speaker 1):** [08:39.18](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=519s) Right. Another one—think about Nike, Maggie. You have the Olympics in 2028. This is Nike now, almost 75%, 80% off. You've got free cash flow at Nike near $3 billion over the next year, $51 billion market cap.

Guess what? In the last week, 360 million shares traded, and the float is 1.1 billion shares. So 360—in other words, the capitulation score that we're getting in Nike is Category 5. It's like ExxonMobil in November of '21. Think about that capitulation. It's like Intel a year and a half ago. We're talking Category 5 storm, as in a hurricane.

**Maggie (Speaker 2):** [09:29.16](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=569s) This—

**Larry McDonald (Speaker 1):** [09:29.72](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=569s) Is what just happened to Nike. When you can buy a world-class brand that's trading 30% below its 200-month moving average, you do that every day of the week and twice on Sunday.

**Maggie (Speaker 2):** [09:43.60](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=583s) It's funny, Larry, because you're the author of the Bear Traps Report, but this is a really bullish conversation about parts of the market that you think are grossly mispriced.

**Larry McDonald (Speaker 1):** [09:56.30](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=596s) Yeah. Make no mistake: I think the S&P, once we get through this dumping of the IPOs, is going to drop 30% over the next year. It's probably going to be flat for eight years. Let's see what happened in 2000 to 2010. The S&P didn't go down—I mean, it didn't move. It was flat. There's been two periods in the last 50 years where the S&P was flat for seven years. This is what we're coming into. But within the market, there are gems on the floor that have to be picked up.

## Sovereign bonds and bank deposits

**Maggie (Speaker 2):** [10:26.04](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=626s) I love that visual. We'll dig in again about portfolio construction and framework in a minute. But let's talk a little bit about bond yields, because it seems all of this is centered on yields going lower, right? That's the premise, that yields have to flip at some point.

Government bond yields around the world are rising. Demand for U.S. Treasuries at the long end has been dismal. We've seen terrible auctions, some okay, but some really bad, especially when you're talking about 30-year. Are we watching a sovereign bond crisis gather steam?

**Larry McDonald (Speaker 1):** [11:02.90](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=662s) There's no question. Watch the European banks, socked chin down, I think, 20% in the last three, four weeks. They're exposed to French paper. You've got a really nasty situation with the global bond market. That's probably going to trigger that kind of crisis in the index, the S&P, in the next couple of months.

I think yields could go a little higher. What I mean is in terms of—I'm sorry—the U.S. 30-year, U.S. 10-year. You can go higher, but this is where you want to start adding in. If they do go higher, it'll be a blow-off, nasty, and then a reversal. Because from here, any more that rates go up, bond prices come down, and you start to create massive stress within the banking system.

Think of Bank of America. We're seeing a lot of players behind me shorting Bank of America because they're sitting on all that commercial real estate. They sold these commercial real estate loans at 2% to 3%. They're going to refinance at like 7%, 8%, 10%. They're sitting on hundreds of billions.

Not to mention, they have like $300 billion of deposits that are at zero, Maggie—zero interest rates. There are some retired couples out there that still have their money in these savings accounts at zero. Guess what's going to happen? These Muse systems that you're seeing from Meta—they're going to go around. People are going to say, “What can I do about my banking deposit?” Muse is going to go out there and say, “Hey, hello, is anybody home? Why are you in this zero-interest-rate bank account when you can get 4% over here?”

You know what's going to happen? $150 billion is going to leave Bank of America over the next year, maybe five years. That's a huge, juicy part of their profits. They're ripping off investors right now because they're sitting on that money. They're taking in the $200 billion, $300 billion—I think it's $600 billion total—and they're giving the clients maybe 1%, and they're putting it in Treasuries and getting 4% to 5%.

**Maggie (Speaker 2):** [13:15.80](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=795s) Who—I've been hearing more and more, and of course Muse just rolled out, so this is just the beginning of us understanding what AI-assisted search will look like and what that means. Who benefits from that, or what companies benefit from that?

## AI spending and data moats

**Larry McDonald (Speaker 1):** [13:34.80](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=814s) First of all, let's talk just for a second about Mr. Zuckerberg. The guy incinerated $300 billion on the metaverse. He changed the name of the company to Meta from Facebook. It's hilarious. He incinerated $300 billion.

Now he's created a product. Think about it: they had a world-class business that's essentially a monopoly. Instagram, Facebook—nobody can compete with them. Anybody that's come along, you've got monopoly power. They had like $30 billion, $40 billion free cash flow two years ago. $40 billion, maybe two to three. Now they're going to go negative free cash flow, minus $20 billion. They're incinerating cash.

They're creating a product called Muse. Guess what? Google announced one today. Apple's going to have one. There's going to be 40 of these things, and it's a free product, Maggie. Imagine burning the cash. You have an oligopoly, monopoly business of cash flow. You take that cash, you're burning it, spending it on AI for this product that you're giving away, which has no barriers to entry. So that's—

**Maggie (Speaker 2):** [14:45.46](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=885s) So clearly Meta, not the beneficiary of this.

**Larry McDonald (Speaker 1):** [14:48.30](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=888s) Yeah. Let's get to the question. Intuitive Surgical, Baxter—there are these companies that have the data. Slumber J, SLB—they have the data, Maggie. Slumber J, I think the stock could potentially double, triple in the next five, ten years. Same thing with Intuitive Surgical.

When you have the data, think about robotics and surgeries. All of these doctors around the world—the percentage of robotic-type surgeries globally is going to probably go up like 500%, 600%. But if you have the data, that's where you can really absolutely capitalize on artificial intelligence. Baxter, Intuitive Surgical, and Schlumberger are three big picks for companies that will harness the power of AI.

**Maggie (Speaker 2):** [15:34.40](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=934s) So the data is the moat now for—

**Larry McDonald (Speaker 1):** [15:38.90](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=938s) These—

**Maggie (Speaker 2):** [15:39.92](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=939s) Companies. What about in financials, though? This is very disruptive, what you were talking about. I understand: if you're commoditizing, giving away AI tools and products, and people are reluctant to pay for them, not the winner of the AI revolution. You own the data, own the moat, you're the winner of the AI revolution.

But what about the disruption that's coming? If you have that kind of reallocation of savings, you're talking about a bank run. You're saying five years. I think you're probably being generous, and you suspect it could be a lot quicker than that. Maybe generationally older people are slower to do it; let's give them a little bit more time on that. That's hugely disruptive to the way the financial system works.

**Larry McDonald (Speaker 1):** [16:22.02](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=982s) Yes. The rate of change on the CapEx—the big warning sign is the capital expenditures. This is a testosterone contest in Silicon Valley. They don't have any idea when the payoff is. What's going to happen is the payoff is more out in the future. There's more disruption in the near term.

Then all of a sudden, politicians—look at the left wing in Europe and the United States. They're coming at this hardcore. They want to slow it down. Once these guys start to slow down the CapEx, which probably happens in the next two to three months, then you're going to have a big reset in the Mag 7. That's where you really don't want to touch the Mag 7 or the indexes.

Once again, the index—if you're a fiduciary, imagine a 75-year-old person gives you a million dollars you're going to put in the stock market. A 75-year-old's going to put $500,000 of that essentially in AI. This is absolute madness, Maggie. It's madness, and it has to be outed.

## Wealthion membership and the macro question

**Maggie (Speaker 2):** [17:28.20](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1048s) Everything we do on this channel has one goal: to make you a sharper, better-informed investor, someone who understands the macro forces shaping your money before the mainstream catches on. But information is only half of it. The other half is acting on it, and that's what Wealthion membership is for. It's how you go from watching these conversations to putting them to work in your own portfolio.

Membership opens three doors: access to advisors, helping build real assets into your portfolio, and, for accredited investors, access to specialized funds. To learn more, the link to become a member is in the description box below.

Again, I think where you put things in terms of asset allocation depends on how you see this playing out. Let's talk about this macro regime a little bit, because I think it's really important. What tells you that we are in a situation that's like maybe the 1980s, where you have this supernova economy and then you're going to see some sort of recession, or you're going to see a correction, and then you're going to have policymakers step in? Why? Is that how you see it? Correct me if I'm wrong.

## Bonds, hard assets, and market rotation

**Larry McDonald (Speaker 1):** [18:37.64](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1117s) Yeah. Never forget the rule of 72. If you can get 9% on a bond, your money doubles in eight years. If you get 6% on a bond, your money doubles in 12 years. That's in a tax-deferred account, of course.

Once bonds start offering equity-like returns like they did in the '80s—and that's because interest rates go up, bond prices come down—it starts to steal market share from the equity market. That's the big threat. The second threat is gold and silver and hard assets. Right now, there's $43 trillion, Maggie, in the NASDAQ 100.

**Maggie (Speaker 2):** [19:18.98](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1158s) In—

**Larry McDonald (Speaker 1):** [19:19.64](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1159s) March, there was $30 trillion in the NASDAQ 100. This is America's wealth. In the fourth quarter of 2022, there was $12 trillion in the NASDAQ 100. We've gone from $12 to $30 to $43 trillion. Think about that.

When you have a shock with interest rates, oil, multipolar world—we talk about this in our book, *How to Listen to Market Speak*—when you have a sustained inflation regime, the models start looking at discounted cash flow. All that means is companies that control hard assets—oil and gas, coal companies, any kind of metals—those companies tend to gain a larger portion of the market share of the market.

**Maggie (Speaker 2):** [20:08.78](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1208s) So—

**Larry McDonald (Speaker 1):** [20:08.98](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1208s) Think about from 1968 to '81: Vietnam War, high interest rates, the Great Society, big government spending. By the end of this inflation, high-interest-rate regime, by 1981, 50% of the S&P 500 was industrials, materials, and energy. Fifty percent. Today we're like 14% for those groups.

We're not saying we're going back to 50%. But over the next five years—we have to look forward, not back—trillions are going to come out of financial assets, which are essentially growth stocks. They're going to go into companies that control hard assets. The percentage of the S&P that's long industrials, materials, and energy, that's going to go from 12% to 14% to 20% to 30%.

You want to call your financial advisor and have them reconstruct the S&P for you, putting more of your assets into those groups than into tech, which is essentially 50% of the S&P. As a 70-year-old or a 60-year-old, you can't put a million dollars in the market and have $500,000 of that essentially be this small amount of stocks that are all exposed to AI. It's absolute madness. It has to be outed.

**Maggie (Speaker 2):** [21:31.74](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1291s) And yet, if you had done that—and people have been calling for that for a while—you missed a lot of gains, right? The trade has been to buy the dip in the NASDAQ, and it's worked.

**Larry McDonald (Speaker 1):** [21:42.14](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1302s) People say that to me. That's a lot of BS. Gold is crushing the—look at the XME, which is a metals ETF. Last two years, three years, four—it's basically destroying the NASDAQ. But nobody knows because it's not on CNBC every day.

**Maggie (Speaker 2):** [21:57.34](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1317s) You—

**Larry McDonald (Speaker 1):** [21:57.86](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1317s) Know, gold over the last two, three years. It's amazing how much airtime this gets because it's a bubble. But there's parts of the market that are destroying the NASDAQ. Look at the Mag 7, up 15% since last October, 15%, 16%. The oil service names are up 50%. Schlumberger—nobody talks about it. It's crazy. The Mag 7, it's a joke.

**Maggie (Speaker 2):** [22:25.46](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1345s) We talk about it a lot here on Wealthion, but this is the narrative we hear, and this is why people come to us with questions. They hear this, and then they sit with their neighbor whose portfolio is going sky-high, and they have that regret: “I got out of NVIDIA. I thought it was rolling over.” Everyone's waiting for that crash that doesn't seem to come.

## Mega-cap valuations and concentration

**Larry McDonald (Speaker 1):** [22:48.54](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1368s) Listen, you can't make money over the long term. You can't buy stocks that are trading at 10—Apple at 10 times sales. For 30 years, they traded between two to six times sales. What's the new product?

Then NVIDIA—they're ripping off all these other guys with chips, and they're overcharging now. Eventually, the new generations of chips—the older chips are getting cheaper and cheaper and cheaper. NVIDIA is going to get cut in the next two, three years.

**Maggie (Speaker 2):** [23:19.16](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1399s) And that is in everyone's portfolio, probably in multiple places—

**Larry McDonald (Speaker 1):** [23:22.94](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1402s) Which is—

**Maggie (Speaker 2):** [23:23.36](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1403s) What we worry about.

**Larry McDonald (Speaker 1):** [23:24.68](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1404s) Maggie, in the '90s and 2000s, the top two stocks in the S&P 500 were maybe 5% or 6% of the S&P. Now the top two stocks—NVIDIA is 8%, and call it Apple, it's like 6%. Thirteen percent of the S&P is in two stocks. Once again, I give you a million dollars, you get $130,000 in two stocks. Bob Marley, crack-smoking investing. Crack-smoking.

## Central-bank gold buying

**Maggie (Speaker 2):** [23:55.60](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1435s) I think everybody can relate to that. It kind of feels like getting through the day anymore, Larry, with all the headlines. Let's talk about two things that are on the radar I want to get your take on.

One is the fact that we have had China's central bank making record purchases of gold in September. We have the Bundesbank president talking up the case for central banks diversifying into gold, out loud in popular media. How much does that impact the price of gold? Because, as you say, we've had the short term pulling it down. Is it a marginal support? Is this a bigger trend that is going to look very different than what we've seen in past gold cycles? How are you thinking about that relative to gold?

**Larry McDonald (Speaker 1):** [24:39.58](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1479s) My favorite word in our first book was “hubris,” and that was the Lehman management team. That's just an out-of-touch group of people.

Washington, from both Democrats and Republicans—the hubris in Washington the last ten years. They've been hitting emerging-market countries over the head with sanctions. They confiscated property from the Russians with the war, which Russia did some horrible things. But at the end of the day, when you do that, other countries are like, “You know what? They could do that to me.”

**Maggie (Speaker 2):** [25:12.28](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1512s) And—

**Larry McDonald (Speaker 1):** [25:12.72](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1512s) That's why China's holdings of Treasuries are down like $600 billion, $700 billion in recent years. They're taking those Treasury assets, and they're buying gold and buying other things. Washington basically triggered this massive incentive for all kinds of central banks to take money out of Treasuries and put it into gold. They're literally smoking in the dynamite shed in Washington.

## Stablecoins and financing U.S. debt

**Maggie (Speaker 2):** [25:38.94](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1538s) Given what we've seen going on, we see that happening, we have all the pressure on yields, we're approaching the midterms—are you anticipating or expecting any kind of policy action from the Trump administration to try to address what they're seeing when it comes to yields, energy, the economy? They've got their back up against the wall.

**Larry McDonald (Speaker 1):** [26:02.08](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1562s) This is a really exciting, sexy story. I'm getting this—remember, we do the ideas dinners in ten countries a year. New York next week; Miami, Palm Beach the week after that. We sit down with the best hedge funds, mutual funds, and pension funds in a private room, and we really triangulate information. We're trying to figure out: you listen to the news cycle, what's priced in?

**Maggie (Speaker 2):** [26:28.78](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1588s) You—

**Larry McDonald (Speaker 1):** [26:29.76](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1589s) Know, what's overpriced and what's not priced in? That's what we specialize in at the Bear Traps Report. What's not priced in is the awareness of stablecoins. I sat down with John Carlo, the CEO of Chether, earlier this year in a private room. It's absolutely jaw-dropping.

You've gone from $100 billion of stablecoins—think of stablecoins: own T-bills, Bitcoin, and gold, mostly T-bills, so there's Treasuries. You've gone from $100 billion to $300 billion today, maybe $350 billion. Look at Circle equity. We did a trade alert at 62 this year. It's up into the 90s.

If the Clarity Act passes in Washington, they're going to basically start to force money into stablecoins. I think stablecoins probably go in the next five years to a trillion, trillion and a half. What that means is they're going to force international investors.

Say you have a trucking company in Brazil. Put your money in the bank, right? The bank in Brazil or Argentina—the currency is all over the place. It's torture for some of these people, absolute torture. You take some of that money, you put it into a stablecoin, and now all of a sudden you're in T-bills, so you have much more stability.

They're going to steal trillions of dollars from the global banking system. They're going to actually create a mechanism where they get the eurodollar clearing in London—they hate that. They want to bring it back. They're going to force international investors: if you want to own U.S. assets, you want to own NVIDIA, you want to own real estate, you have to own a stablecoin first and have your money in the stablecoin.

That'll force money into Treasuries, the front end of the yield curve, and that's how they can finance this $40 trillion debt hole. The only way out of a $40 trillion debt hole—there's two ways: default or inflate your way out. That's what we call financial repression. When you suppress rates through mechanisms and tricks, you create financial repression, and that's what drives money into hard assets.

## Financial repression and the policy response

**Maggie (Speaker 2):** [28:32.10](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1712s) So when they inflate their way out—I think the stablecoin story is super important. First of all, who are they? When you say “they,” they are going to force everyone into stablecoin, who are they?

**Larry McDonald (Speaker 1):** [28:47.52](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1727s) Let's be clear: this is not Republican or Democrat. This is a financial crisis if they don't do it. We already saw it: China's got $600 billion less Treasuries. Japan, other countries like France—France is trying to finance themselves. Their rates are going through the roof. Everyone's offering higher interest rates.

The U.S. is going to have to—they is like, whether it be the Fed. The bottom line is, think of World War II. After World War II, the Fed and Treasury—there are white papers out there, you can explore them—the Fed and Treasury worked much closer together because we were trying to finance this colossal war. Imagine trying to finance AI. Imagine trying to finance World War II. This is what we're up against.

When I say “they,” the Fed and Treasury, Republicans and Democrats, are going to create these mechanisms that are very financial-repression-like. That's going to drive a lot of money from financial assets to hard assets.

**Maggie (Speaker 2):** [29:50.18](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1790s) It sounds like they, the U.S. government at large, from all sides, are getting ready to pull out the mother of all bazookas.

**Larry McDonald (Speaker 1):** [29:59.46](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1799s) Yes. Think about it: the fiscal and monetary response to Lehman Brothers was $4 trillion. The fiscal and monetary response to COVID and the regional bank crisis of 2023, plus the elections and all the games they're playing when you run 6% deficits—the fiscal and monetary response this time since COVID is $17 trillion, Maggie, versus four after Lehman. Their back's against the wall here. They're going to have to pull out every trick in the book to get out of this debt hole.

**Maggie (Speaker 2):** [30:33.86](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1833s) When you're talking to all of these people that are living in the future, all of these super-smart folks—I think the average thought was that it's going to be financial repression, and it's going to be yield curve control, devalue the dollar, yield curve control, maybe some other operation, latest name. How do stablecoins look different, or do they? Do stablecoins change what that bazooka looks like?

**Larry McDonald (Speaker 1):** [31:01.16](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1861s) In some ways, it's a part of yield curve control. They're not going to come out and say “yield curve control.” That's like saying the pilot wants all the fannies in the seats in the plane. We're—

**Maggie (Speaker 2):** [31:15](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1875s) Crashing.

**Larry McDonald (Speaker 1):** [31:15.44](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1875s) Yeah. They're going to just do white paper and slowly—look what they did with the trend. You know this: they're changing the goalposts on inflation. The definition of inflation, like in the '80s and '90s and 2000s, the formula—we probably have like 15% inflation now using the old formula. They changed the formula, the formula again this week.

**Maggie (Speaker 2):** [31:38.48](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1898s) Yeah.

**Larry McDonald (Speaker 1):** [31:38.90](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1898s) In the PCE. Stablecoins are part of it. If you force an extra $2 trillion in stablecoins, they have to own T-bills, which is Treasury bills. Then you sell the debt on the front end of the yield curve, you've got all these new buyers. In some ways, it's not yield curve control, but it's like another—

**Maggie (Speaker 2):** [31:59.78](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1919s) It's increasing demand for Treasuries, which should help. It's a little bit different, I think, than people were thinking because you're also increasing demand for dollars. Some people have pushed back on the devaluation, debasement of the dollar, because if you institute some kind of global stablecoin, you're basically reining back in the eurodollar market from the wilderness, and you are maintaining the dollar as a reserve currency. Yeah—

**Larry McDonald (Speaker 1):** [32:28.86](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1948s) Exactly. It's a speed bump toward the U.S. We talked about this in our book, *When Markets Speak*. We have a bearish dollar chapter. We wrote the book in 2023, so we made a great call. We wrote it in '22, '23, so we made a great call in the dollar. The dollar is much lower now.

But in my lifetime or my kids' life, we're probably not going to lose our reserve currency status. They're going to come up with all these types of speed bumps along the way.

## Hard-asset equities and discounted cash flows

**Maggie (Speaker 2):** [32:55.56](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=1975s) Why does that mean that hard assets are the trade as opposed to equities? If you're pulling rates down, you're basically creating all this liquidity to keep the whole thing going. Does that just not magnet toward equities? That's what happens usually when we see rates lower. It's certainly what equity people think now. I see people in chats all the time saying the Fed's eventually going to have to ease; that's just going to be rocket fuel for the NASDAQ.

**Larry McDonald (Speaker 1):** [33:26.36](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2006s) Right. But I'm talking about equities. I'm talking about companies that control hard assets versus companies that control, say, software. So—

**Maggie (Speaker 2):** [33:34.14](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2014s) You're being discerning about where that money is going to go. There are going to be better winners. There are going to be winners out of this.

**Larry McDonald (Speaker 1):** [33:40](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2020s) There's a scene in our book where we talk about discounted cash flows. It's really simple. Say you have company A, and it produces a billion dollars of cash flow over ten years, like a software company—a billion dollars of cash flow in ten years. Think about that. If you're in a 3% to 6% inflation regime with higher interest rates, that billion dollars is worth a lot less ten years from now.

Company B controls oil and gas, gold, silver in the ground, natural gas, all kinds of assets. If you're in that higher-inflation regime, those assets increase, so the value of the company increases. That's why, in that 1968–'81 regime where you had the higher global yields and the higher inflation, those types of companies flourished. Whereas the companies that own intellectual property, tech, those go out of favor in that kind of regime, if that regime lasts for a long period of time.

## Treasury assets, the debt ceiling, and a bond rally

**Maggie (Speaker 2):** [34:44.82](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2084s) I want to stay on the bazooka issue, or policy response issue, for a moment. A lot of people have been watching with interest some of the people who've been coming onto Treasury as counselors. We emailed briefly about this: Judy Shelton, longtime sound-money advocate, David Zervos, and wondering, are they cooking something up here?

Do you think there is some chance that they revalue the gold? Especially with Judy Shelton coming on, that's one of the hypotheses that's running around. Do you see any potential for that as a way to try to, as Scott Bestin said in the very beginning, recognize the assets on the balance sheet and not the debt? They've been laying the groundwork for some of this stuff. Does it seem like that is in any way imminent, based on the conversations you're having with folks?

**Larry McDonald (Speaker 1):** [35:38.14](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2138s) Right. An empire in decline is what the United States is, kind of like the U.K. 80 years ago. What happens along the way with the U.K. is they start moving out of Hong Kong. They start reining things in or monetizing assets.

The United States has all kinds of assets: Tennessee Valley Authority, parts of Yellowstone, gold. But we have a lot more debt than our government assets. We have a lot of wealth on that balance sheet too, which they can tax. But the government assets relative to the debt is actually pretty crazy small.

One of the things they could do, and this is what an empire in decline would do, is they wouldn't reprice the gold—maybe put it up as collateral and use it as a mechanism to support the Treasury market with that collateral somewhere. There's a lot of tricks they can pull. We call it the sense bag of tricks.

We sat down with an ex-Treasury official at one of our dinners in recent weeks, and he was pretty confident that dissent has a number of weapons. Just think of this whole debt ceiling thing. We're going to hit the debt ceiling in January. We're going to have a split Congress. Most likely the House and Senate might be controlled by the Democrats.

Whenever you have that split government, maybe you go into—we'd hit the debt ceiling. Next thing you know, Treasury has a trillion dollars in the TGA. That's their checking account. Then they have extraordinary measures of another $300 billion. We might not have any Treasury issuance between March, April, May, June, July next year. No net issuance—I'm talking about net. It's complex, but we might have no net issuance.

There's a lot of things they can do to really get bond prices up over the next six to nine months. Bonds are in a bear market. We're just talking about a bear market rally. Bonds are in a vicious bear. The probability of a bear market rally—look at the TLT. That's something we're starting to look at and buy again, the ZROZ. If you get a countertrend rally in the TLT and in bond prices between now and, say, this time next year, you could potentially make, with the coupons, 10%, 20%, 30%.

## Time horizons and tax-loss selling

**Maggie (Speaker 2):** [37:55.54](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2275s) It's probably good to ask timeframe. What is the timeframe you're using for a lot of the things you're talking about? We'll go through and go over some of what you've mentioned, but what's your general timeframe?

**Larry McDonald (Speaker 1):** [38:07.90](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2287s) With Nike and the bear market rally in Nike and, say, bonds—in years where the S&P is up a lot, if you buy a basket of stocks that have that tax-loss-selling intensity. The mutual fund quarter, year-end is typically September 30th, October 30th. They want these stocks off the pad. They don't want to show people they own these things, so they puke them out.

Then the retired couples around the country are looking at their statement at year-end. The accountant comes in and says, “Hey, we need some losses.” They sell the dogs the next 30 days, and then they buy it back in 31 days. That's why you get this amazing January effect with the losers.

So yes, I think between now and June, July, these bonds and this beaten-down basket of stocks could offer 30%, 40%, 50% returns in some cases.

**Maggie (Speaker 2):** [39:04.58](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2344s) Wow. Dogs on sale. I think we want to pay attention to that.

**Larry McDonald (Speaker 1):** [39:08.58](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2348s) Dogs on sale.

## Apple bonds versus stock

**Maggie (Speaker 2):** [39:10.12](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2350s) Just to circle back, you were talking about Apple before, and you sounded negative, and yet you sounded interested in Apple's bonds with the idea that bond yields were going to go down. Did I understand that correctly? What is the distinction when you're looking for some of those opportunities, equity versus bond?

It sounds like Apple's a commodity. Their memory costs are going up. They haven't had new products. Yet the bonds look attractive if those Treasury yields do go down, right?

**Larry McDonald (Speaker 1):** [39:42.56](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2382s) Maggie, they're selling phones for $3,400. The first iPhone I ever bought was like $700. Granted, there's a lot more memory in there, a lot more sophistication, the whole thing.

**Maggie (Speaker 2):** [39:56.50](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2396s) We're doing more with them. They're the center of your life.

**Larry McDonald (Speaker 1):** [39:59.08](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2399s) Oh, yeah. But it's hard to sell. When you have McDonald's and Home Depot down 35%, and Harley-Davidson, all these consumer-facing companies, why is Apple at $5 trillion?

I'm seeing people—this is a sophisticated trade—but if you buy the bonds at 47, you take the coupons. Say you put a million bucks in, you get the coupons, maybe that's $30,000 on a million, and you buy two-year puts on the Apple equity.

Think about this: if the bonds are at 47, the only way that bond goes to 40 is if interest rates go up another 1% or 2%. That would decimate the economy. That would kill Apple stock, because they sell to consumers.

That's the type of trade where bond volatility is through the roof; you're crashing over here. Stock volatility is low, and high prices. It's like a seesaw, and it's going to flatten out. That's why people are starting to look at bonds.

## AI commodity demand and valuation

**Maggie (Speaker 2):** [40:59.50](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2459s) That's super interesting. This is why it's not your passive game anymore, because that is a much more active view of what's going on.

Let's talk about when we're looking at the portfolio wheel. Let's face it, this is still what an awful lot of people do. I hear you bullish on hard assets. A lot of people are interested in commodities. We've been talking a lot with our audience about what diversification looks like into real assets.

But if the AI trade rolls over, what does that mean for commodity demand? How much of that commodity, hard-asset story, energy story is linked to the future demand that's expected to come from AI?

**Larry McDonald (Speaker 1):** [41:36.64](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2496s) Right. That is a piece of mystery meat. The first stage of AI is very inflationary, because look at Caterpillar. The stock is up 300% in a year and a half. It's nuts, because all of those data centers need construction equipment and things like that.

Think of all the building out of the data centers. Think of all the copper. Hundreds of thousands of tons of copper are going to be needed for the data centers, to rebuild the power grid. Maggie, there's a billion people in India that don't have air conditioning. You have to build out energy infrastructure over there. Hard assets are the place to be.

But if the AI trade slows down, and you go from, say, you're supposed to do a thousand data centers built in the next seven years, and that number comes down to seven, it does slow down the hard-asset trade.

But remember, there's $43 trillion of wealth in the NASDAQ 100, and in the metals ETF, the XME, it's not even a trillion dollars. Because there's so much wealth over here and no wealth over here, relative—household wealth in 1981, like 4% of assets of American wealth was in commodities or commodity equities. Now we're less than maybe 1%.

**Maggie (Speaker 2):** [43:07.20](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2587s) And—

**Larry McDonald (Speaker 1):** [43:07.86](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2587s) So even if there's an AI slowdown, it's that rebalancing of the wealth globally that will support these stocks. By the way, these stocks are cheap. You can get natural gas companies, get 8%, 9%, 10% free cash flow yields. Look at Antero, Range Resources. The companies are buying back 10% to 15% of the equity underneath you with that free cash flow.

**Maggie (Speaker 2):** [43:30.06](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2610s) And—

**Larry McDonald (Speaker 1):** [43:30.90](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2610s) So on valuation alone—I'm not saying things can't go down—but your risk-reward to be long something that is producing free cash, with the company buying back stock underneath you, that risk-reward is a lot better than the AI insanity.

## Stablecoins, Bitcoin, and quantum computing

**Maggie (Speaker 2):** [43:48.20](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2628s) We talked about stablecoin, and this is something we'll continue to look into, because this is a really big change that's coming. I'm not surprised it's all the talk at your idea dinners. What's the trade on stablecoin? That's what gets people stumped. Is it Circle? It seems limited. Is there a trade there?

**Larry McDonald (Speaker 1):** [44:05.84](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2645s) That's the problem. I'm sure others are going to be—Circle's one of the main ones. Think of the market share globally now: Tether and Circle are probably 60%, 70%, 80% of the market. There'll be new players that come on, maybe IPOs that—

**Maggie (Speaker 2):** [44:21.86](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2661s) That—

**Larry McDonald (Speaker 1):** [44:22.36](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2662s) Allow you to take care of that. But then on the other side of the coin, there's Bitcoin and gold. Just look at Tether. When I sat down with Sean Carlo, he's like—the vault he has in Switzerland, this gold is mind-blowing.

**Maggie (Speaker 2):** [44:37.68](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2677s) I was obsessed when I saw the stories of them buying gold. I don't think it got nearly the amount of attention it should.

**Larry McDonald (Speaker 1):** [44:43.06](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2683s) Oh, yeah. He's backing up the truck. He has his own stablecoin. This is his own coin that's backed by gold. Then he's got the Tether, which is gold and T-bills and Bitcoin.

Bitcoin, we've been buying. We bought some this summer on the lows. Kramer put the sell on it, God bless him. We bought some on the lows, and we recently lightened it.

I'm worried about quantum computing, because at the dinners two years ago, if we said quantum computing is a threat to Bitcoin, it was like a joke.

**Maggie (Speaker 2):** [45:12.70](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2712s) But—

**Larry McDonald (Speaker 1):** [45:13.26](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2713s) Now I would say 50% of institutional investors think it's a threat five to seven years from now. But the other side of that coin is: if it's a threat to Bitcoin and unlocking the code to the creation of Bitcoin, then what's it going to do to your bank account, Maggie?

Are—

**Maggie (Speaker 2):** [45:34.36](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2734s) You looking at cybersecurity? Are you looking at anybody who's solving—is anybody looking and playing in that area?

**Larry McDonald (Speaker 1):** [45:41.02](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2741s) That's an area. Now the cybersecurity stocks are all crazy right now. But yeah, all the dips, absolutely. We've got to create a basket of those.

## Investing principles and closing

**Maggie (Speaker 2):** [45:48.90](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2748s) We'll finish up here, Larry, but this has been a fascinating conversation. I think it shows that you can't just have a sort of—I don't even want to call it passive, but it sounds like we're in an environment where you have to be really nimble. You have to be paying attention. You have to be looking at your portfolio all of the time because there are so many crosscurrents.

How do you stick to your investing principles when you have this bull market in this really narrow NASDAQ that never ends? You have these signs of things changing, and then it seems like it rolls back. You have massive government intervention in a way that we haven't seen in a long time. How do you stick to your investing principles?

**Larry McDonald (Speaker 1):** [46:29.68](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2789s) Right. That's the thing: whenever something's too good to be true, you always want to start to go the other way. Passive investing looks like the dumb—it's really dumb money to me. But it works because more and more money comes into passive, and the indexes have to buy the top six stocks. It just becomes dumber and dumber and dumber.

We're at a point where it's so extreme, with the 50% of the S&P that's in one sector, that people are starting—literally the best. About 10% of our clients are financial advisors, and they're literally reconstructing the S&P. I'm talking the big guys that have like billion-dollar financial advisors. They don't trust their in-house research. They love Bear Trap because they listen to their in-house research, but they also want to have another view.

Buy the RRSP or the S&P 500 equal weight, which is another way to own the S&P, or have a financial advisor reconstruct the S&P for you that puts more weight on companies that control hard assets.

**Maggie (Speaker 2):** [47:38.52](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2858s) Fantastic stuff. Larry, so fun. This went by so quick. I could keep you much longer, but we see those screens blinking behind you, so we know you've got a lot of work to do. Thank you for your time, and come back and see us again soon.

**Larry McDonald (Speaker 1):** [47:49.22](https://www.youtube.com/watch?v=8F3x-mRHFUo&t=2869s) Thanks, Maggie. All the best.