How to Navigate the New Investment Paradigm | Lawrence McDonald

25:04Demetri Kofinas:So I do want to circle back to that, but let's talk a little bit about the government shutdown, since we're talking about the government and the fiscal side. And we just got news last week that the government shutdown is technically over, though I know that that's not, it doesn't work sort of one-to-one. There are some lagging effects as a result of what has occurred over the last several weeks, especially. What are some of the lasting effects of the shutdown in your view? And to what degree have investors and policymakers been handicapped, especially by the delay in the release of government data?

25:35Okay. So there's one important thing. We did some really good research on this with clients behind me. But the first week of a shutdown means almost nothing because the paychecks haven't really been stopped yet. But once you go past that second, third week, there's like an exponential destruction that, you know, we're, and we calculated the amount of paychecks across the military or across different parts of the government that were, you know, on hold for those, because we went in five weeks, right? So the fourth and fifth week, the economic destruction was probably 20 times what the first week was.

26:12And if that's why the White House and I think Congress panicked, because they knew if they went on a couple more weeks, we would go into a real hard landing over the recession. And so that's kind of your first thing. So the data is now still isn't out. I think we're going to get the jobs numbers this week, the inflation data. So a lot of the data is now in this mystery meat category because the government's been shut down. So these are the short-term effects. So the data is going to get really bad. That's why if you look at the bond market, you look at oil, you get a big move down in yields. That's telling you that the market is pricing in some type of hard or some bad economic data.

26:51Same thing with oil. It's telling you that. But other than that, the government shutdown impact will dissipate over the next six months. It doesn't have long lasting implications, but it has definitely short, nasty ones. Yeah.

27:05Demetri Kofinas:And while I don't mean to understate the impact of the shutdown, it doesn't come close to the impact of this administration in the way that it has conducted policy, the uncertainty it's generated, the corruption, the rapid loss of support for the president among some members of his base. I mean, how do you think about that, Larry? When you look at what's going on, like Marjorie Taylor Greene, for example, has come out openly against Donald Trump. He's beginning to lose support also in some of his important influencers on social media. There's a bit of a mutiny. We're seeing the early stages of a mutiny in the MAGA coalition.

27:43Demetri Kofinas:How does someone like you try to get his arms around, those kinds of political indicators, they're not easily quantifiable, but which can have an enormous, disproportionately enormous impact on markets. I've been hearing about this social unrest revolution for a long time, the whole ICE thing. We haven't seen any evidence of it in terms of impact on the markets yet, but it's something that's in the conversation with institutional investors all the time. Trump's approval rating, really low. A lot of times presidents run into this, and especially in the second, third year. Yeah, but he's going for broke, Larry.

28:25Demetri Kofinas:He's going for broke. He's not listening to his own base. Yeah. Well, you could say, I mean, Biden was intellectually intoxicated, right? For like, there's a bench. So they're both in there's like, the one thing you don't buy into, like Trump's bad, Biden's good. But listen, they both have huge flaws, right? And the way the country was run under the Democrats was screwed up in a lot of ways. And the way it's run under the Trump Republicans, it's screwed up in a lot of ways to have, to your point, to have that revolution within the party. Yeah. I mean, fair enough, though. There is a difference.

29:01Certainly the flavor is different, but also I think the difference between Trump,

29:06Demetri Kofinas:one of the key differences is that we've moved from a phase of covert corruption, where if you're caught, quote, red-handed, it's a problem for you. Whereas today, it's all happening out in the open. And I think that's especially challenging because there's been a lag. After Trump came into office - You're not talking about Nancy Pelosi's trading. Yeah, but everyone already knows that. Hold on. That's not out in the open? No, because she denies it, Larry. She denies it. Trump doesn't deny it. Her returns relative to her pay is out in the open. She should not have that kind of net worth with that kind of pay.

29:48Demetri Kofinas:Sure, but she denies it though. It's a fear map. I hear you. I hear you. The difference is she didn't... My point is she denies it. Well, you're telling me Don Jr. and then - Donald Trump openly embraced it with their coins and their shit pumps and all that crap. They've basically said, we're going to take what is already going on, the corrupt Nancy Pelosi's, the Obamas with their estates in Nantucket or whatever they are, and we're going to take it to the next level. We're going to go full banana republic. We're going to out Argentina, Argentina. And so I think besides all the other ways in which that's bad, I think it's also beginning to filter through to the MAGA base, where you're beginning to see some of the big MAGA supporters start to break with the president.

30:28Demetri Kofinas:And I think that is a problem. I mean, the center of the story is for whatever reason is the Epstein quote, Epstein list. There's no actual Epstein list, but it's a heuristic for the people that have benefited from whatever it was that Jeffrey Epstein was running, whatever you want to call it. But my point is that I feel like we might've been able to get through this administration without as many hiccups if he didn't lose support from his base. What seems to be happening is that he's losing that support, and that could mean a big change coming up at the midterms. And that is my point about trying to wrap your arms around this unquantifiable risk to markets that's coming from the political side.

31:13Demetri Kofinas:And again, so much more is coming from the political side, Larry, whether it's fiscal expansion or whether it is political volatility, because we have not addressed the deeper fundamental economic challenges post-2008. Yeah, this crypto thing by the White House, it was a real bad thing to do because if you look at it, like I said, the tertiary coins, just eight of them have lost$210 billion off the local high. So that's from 2021 to now. So you can never really quite know where the high was, but some of the highs on the coins were recent. Some of the highs on the coins were 2021. But that's$210 billion of wealth destruction that's affected a lot of voters.

31:54And you can say that whole Genius Act and the whole, there's some good parts of the Genius Act, which I think are going to be phenomenal for global payments. But the way the White House embraced some of these tertiary coins, that really bad part of the cycle is, yeah, it's going to leave a big stain. I do not. I'm not defending that at all.

32:16Demetri Kofinas:No, I think for many of us, it was obvious that Trump's North Star was not right-sizing the financial system or addressing corruption in Washington. It seems that it's really about what benefits him and his group. And again, in a much more open way, it's just a significant change in degree. And I think that is unnerving for investors who understand it. And I think it undermines investor confidence. And so much to your point, I mean, you talked about this earlier about the capital account surplus that the United States runs and its need for foreign capital in order to sustain the value of the dollar, sustain moderately high yields on treasuries.

32:53Demetri Kofinas:And so much of that is, it's not petrodollars, it's confidence in the American legal system, in property rights, in the strength of American empire. And I think the risk that I think you're sort of touching on here when your investors reach out to you or your clients reach out to you looking for a one-stop shop to understand the role that Washington is playing in all of this. I think there's a lot of anxiety around a potential discontinuous change in the role of the United States internationally, what that means for the dollar, what that means for interest rates, for the deficit, for these asset markets that are at all-time highs.

33:31Demetri Kofinas:I mean, it's a scary environment, which is why I led with some questions about what people are asking you, because it feels like folks like you and I are who people come to for continuing financial education or when their models for understanding the world and financial markets no longer work. And they're trying to interpret that information about the world that's coming at them in real time. There are some other things that we haven't touched on, like the decision for a new Fed chair. I mean, you'll have to remind me when that date is, when Trump has to make that decision about who's going to replace Chairman Powell.

34:02Demetri Kofinas:There's also the Supreme Court ruling that we're waiting on regarding the president's tariff authority. And of course, there is the Fed rate decision coming up in December. Where do you rank these in terms of importance and what should investors be paying attention to here? Well, I would say the Fed share thing has been out there and they're narrowing it, narrowing it, narrowing it. So that's pretty much a known known. It's HACET and down to, you know i think the waller is out in the picture now and i would say if it's has it one of the clients made a point this weekend and so what we do is we have a conversation in the bloomberg terminal and on discord and a number of clients have said that has it is kind of like uh you know you think about the central bank of turkey and aragon and the control that he has over the central bank, right?

34:55Or if you think of like, the view is that the Hassett Fed share seat from a global institutional investor in, say, Canada, is much less trusting of that Fed share-White House relationship. It's a step toward the Banana Republic direction in terms of just too cozy relationship. So I think that the market could be underestimating that. In other words, that could create some the long end the 30 year if has it is put in the seat the 30 year could really sell off i think in terms of the this whole tariff tax revenue thing if the supreme court dances around it it's not a big deal but if they create a really stern decision on because trump's you could say and i completely agree with this there's a there is a white house abuse of power Or like in the Brazil situation, you don't like you say you like Bolsonaro, you don't like Lula, and therefore you're going to defend Bolsonaro through, you know, the White House should not be going down those types of roads.

36:04And I can see the Supreme Court's definitely going to push back on executive branch abuses and power abuses. And both Republicans and Democrat administrations have gone through this where the War Powers Act push. And there's all different times throughout history. The executive branch gets aggressive. And I think there's no question they're very aggressive here. But there's some wiggle room in there for them to kind of like be narrow and go after some tax revenues. But if it was more broad, then all of a sudden we're going to have a huge, I think it's like $300 billion of assumed tax revenues that we're getting from tariffs.

36:41And if that was to cut down to like 75, once again, that would create a nasty shock in the bond market.

36:47Demetri Kofinas:I have a question about that because yes, I understand that causal mechanism, but also, couldn't it also be seen as dollar positive for the same reason that Hassett's appointment would be seen as negative for the dollar and for the treasury market? Because it's the United States legal system asserting itself, drawing a line in the sand saying, thus far, no further executive. Yeah. So yeah, if it was, I see what you're saying. Yeah. So if it was narrow and it wiped out a lot of tax revenue, yeah, it could be a dollar positive. Maybe not in the short term, but maybe in the long term. Well, no, but you're right.

37:19But higher yields would be dollar positive too.

37:22Demetri Kofinas:Well, depending on why they're going up, I suppose. Yeah, especially if they go up in the five year to 10 year, all of a sudden our paper yields more than the rest of the world relatively. Yeah, that brings in money. People buy bonds, so that brings in demand for dollars. So what do you think determines which of those paths we end up on? Are you able to determine it just based off the Supreme Court's decision? Is that what we're waiting for? Or what's the sequence here that we should be paying attention to as investors? Well, when you saw the minutes, there are these oral arguments. The oral arguments came out last Monday, Tuesday.

37:56The probability of Trump losing went up a lot. So the oral arguments point towards some type of... If you look in the betting sites, if you look at the markets, what's weird is the markets, even though the betting sites are telling us that the probability of Trump losing went up, the markets haven't really reacted to it the way they should. Why? I think it's because people are just, there's so much noise around it and there's not a lot of clarity as to how narrow they get. And we are like a risk on bull market. You know, you've got a lot of people buying dips. And the most incredible thing to me in my whole career is right before COVID or right before Lehman Brothers, like the February of 2020, with all the evidence in the world that COVID was accelerating all through Asia and Europe, the market was going straight up every single day from February 10th to February 25th.

38:51It was just ignoring, encroaching, really hardcore evidence of a potential problem. So, bull markets can get really stupid like that.

39:03Demetri Kofinas:Do you feel like complacency is a word that describes the zeitgeist today, not just in markets, but generally in a way that we haven't seen before in our lives. Well, complacency to me, it's always the same, but today with options and zero day options and what we call single day, zero day, it's created a much more wacky level of complacency. But at the end of the day, all it means is that you got a bunch of monkey speculators that are just buying dips. And what they're doing is they're buying breakouts. And every time the market pulls back, they are buying because it's worked over and over again.

39:40And the longer it works, the more and more junkies it brings into the trade. Yeah.

39:46Demetri Kofinas:And you know what it is, Larry? I mean, just thinking about this, this concept of complacency, it feels like in our society in general, I mean, to your point about as long as it keeps working, we've forgotten why it works. We've forgotten how things work, why they work to begin with, how they got there. Whether we're talking about bridges and tunnels and infrastructure, whether we're talking about the rules-based liberal order and what got us here, we're just almost like the inheritors of a great fortune. And we have now just gotten to the place where we take it for granted. And I worry about the nature of change in those dynamics when the dynamic flips and how discontinuous it is.

40:27Demetri Kofinas:And again, I feel like this is what so many of us, at least those of us who are interested in these topics and explore them intellectually, this is what so many of us are worried about. It's deep down. I think even for mainstream audiences, I think it explains some of the appeal of zombie movies. I mean, there's always a perpetual appeal for these types of end of the world films and artwork. But I do feel like people understand on some level that things are unsustainable and that there's a sort of inertia that's keeping the ball moving, but that at some point, things are going to start to fall apart.

41:00Demetri Kofinas:And I don't think it's clear either. I mean, even for me on exactly how to navigate that situation, I feel like it's going to require a day-to-day, week-to-week, month-to-month assessment as we go through it, because in part, government is going to play such a huge role in that situation. I mean, do you think about that at all? Again, this is not a question I had, I have so many questions that are in this outline, but how do you think about how government and governments in the West especially are going to have to respond over time to the underlying structural problems that we've been talking about here?

41:37Demetri Kofinas:The deficit debt, the need to reshore, re-industrialize, all the level of capital expenditures that need to occur. How do you think about that as an investor? Well, Dimitri, one of the things that you can use your platform, to me, there's this structural horrific thing going on. We call it the dark side of passive investing. In other words, if you think of the top two stocks in the S &P 500, in the 90s, the top two stocks were maybe 6%, 7 % of the S &P. Even 2000s, the top two stocks were maybe 7%, 8 % of the S &P 500. Today, the top two stocks are close to 16 % of the index. And so what's happened is complacency and passive money.

42:27In other words, once passive investing, all passive means is, if you think of active management means somebody's running the money, buying stocks and bonds, and they're picking the stocks that's active. Passive means you just own the index. And what's happened is there's this complacency around, oh, the index always beats everyone. OK, hedge funds can't outperform the index. All this moronic, idiotic, I mean, just like it's like Jonestown cult of people saying the same thing over and over again. And for a lot of years, that thinking was right. The problem is, it's now at a point where if you have a million, say you're 80 years old, the oldest boomers now are turning 80.

43:10They control almost 80 trillion of wealth. And say you're 75, 80 years old, you get a million dollars in the stock market and the S &P 500. That's$160 ,000. It's in two AI stocks, Microsoft at 14 times sales, which is two to three standard deviations greater than the 30-year mean. And NVIDIA at 31 times sales, which is, again, two to three standard deviations greater than the 20-year mean or average. And so this is something where the regulators will cry. There'll be house hearings. This is going to be like, you watch. Because at some point, passive investing is evil. Because what if the top two stocks were 25 % of the S &P, right?

43:58There's going to be hearings. There's going to be all this controversy because we got way too overweighted. There's no regulatory reaction now. and there won't be until a lot of people get really, really hurt. And nobody's talking about this and it's just a travesty, I think.

44:14Demetri Kofinas:That's super scary. I mean, Mike Green has been on the show talking about it for many years. I know David Einhorn also has been. So it's definitely something that people have been ringing alarm bells about, but it's got a force of its own. It's like a giant death star. But remember, Dimitri, five years ago, the top two stocks in the S &P were maybe 9%, 10%. So in recent years, it's gone to now 16. And yeah, it's much worse now than it was 5, 6, 10 years ago. And it's just getting worse and worse. The other crazy thing is when all this money's in passive, State Street, Vanguard, BlackRock, those shares are not for sale unless there's a crash or a sell-off.

44:58And so what happens is people just know that all the shares are locked up. And if a company's doing buybacks - It's like crypto. Yeah. So Walmart's trading at 40 times earnings because they're high weighting in the S &P. Target's trading at 12 times earnings. So you could say Walmart's a better company, all baloney, right? Sure, that's true. But it's never been that. The spread between those two companies was normally maybe, okay, maybe Walmart had a PE of say 18 and Target had a PE of 12. Okay, that's fine. But 40 times earning versus 12, these types of distortions have ruined the market.

45:40Demetri Kofinas:So I have a bunch of questions for you about the Fed, Fed policy, the dual mandate, what's the concerns about inflation versus job market data. But honestly, how much does any of this really matter? How much does the Fed and short-term interest rates really matter today when compared to all the other things we've talked about? You know what? The Fed thing is worth less and less and less because 10 years ago, it was the only game in town. Like I said, we had that vicious austerity between 2010, 2020, where they took the deficit from 1.2 trillion a year down to 400 billion. and it was a Tea Party.

46:20And whatever the Fed did, it was secular stagnation. And the Fed policy meant a lot more. Now with the fiscal stuff and reshoring and all these inflationary impulses that are just oozing through the economy with all this fiscal. I mean, think about the Fed raising interest rates or keeping them here with the amount of fiscal that both Biden and Trump have done. is like literally shooting a squirt gun at a fire. I mean, there's just way too much fiscal relative to what the Fed's trying to do to slow down inflation.

46:56Demetri Kofinas:So you said that the dollar, because of a sharp drop in foreign exchange volatility, is regaining its appeal as one of the world's most attractive assets for the carry trade, where investors borrow in lower yielding currencies, such as the Japanese yen or Swiss and then reinvest that money into higher yielding dollar assets. What explains the drop in dollar foreign exchange volatility? And what is the causal relationship between the government shutdown and that volatility? Okay. So government shutdown creates demand for bonds. It lowers bond volatility. And so the bond volatility has become way down.

47:34In terms of foreign exchange volatility, it has a lot more to do with tariffs and this crash that we had in the dollar. So in the book, we make a really hardcore determination around a bearish view on the dollar. But the move from the dollar from 2020 to now, if you look at the rate of change, it's been one of the most severe we've ever seen. And so that is creating this dynamic where the dollar was extremely oversold when we You have the tariff debates or tariff fight. A lot of foreign investors moved away from the dollar. This created a lot of dollar volatility. The thing is, we're coming out of that.

48:12And so that's the biggest driver of really stabilizing the dollar.

48:16Demetri Kofinas:So you think we're on the verge of a period of prolonged dollar strengthening? How do you think about that? No, no, no. What we're trying to say there in the note is that the rate of change in the dollar move in sort of 2022 to now has been one of the most severe sell-offs that we've had. And the fact that things have stabilized around, we're getting much more clarity around trade. The trade uncertainty in April for the dollar was spectacular. I mean, there were some weeks in April where the dollar was down, stocks were down, and bonds were down. That's something you only see in emerging market countries, right?

48:54And so that freaked out a lot of people. The certainty around or the knowledge of what tariffs are going to look like is creating a bounce in the dollar. But it's just the bounce within a bear market. It's just coming out of an extreme oversold level.

49:09Demetri Kofinas:So what does the return of this dynamic or return of carry into the dollar tell us about the broader risk appetite? Well, the carry trade's been out there for a long time. And there are periods where it gets popular again, periods where it breaks down. It started to break down in April with all the volatility in the market. But in terms of the carry trade per se, I don't have any strong views there. It's a trade that comes back and forth with countries like Japan, where people can borrow money there for almost nothing and put money in our bonds or put money in US corporate bonds and make a spread and then try to hedge out the currency risk.

49:49The one thing I would say is that the long-duration bonds in Japan, in France, in the UK have been in a much higher regime. This is one of the things that's driving money toward hard assets, is that anybody in long-duration assets in the US, Japan, UK, France is losing money since 2022. And every day, every week, every month, the people are losing that kind of money. it's pushing money into hard assets and other types of assets besides the duration.

50:22Demetri Kofinas:So last question for you, Larry. We've talked a lot today about the risks. We've talked about all sorts of ways in which our economy, our political economy is screwed up. What are the opportunities in your view for investors, especially those that maybe people aren't really paying attention to? Well, the one thing is this whole year-end tax law selling thing where in years where the S &P is up a decent amount, and there's a big divergence between winners and losers, there's a lot of stocks right now that have been dramatically underperforming the market. A lot of big, famous household names, the Lulus, the Chipoles, the Targets.

51:02To me, that's one of the big opportunities that we talk about. But the biggest of all is the AI power play. Everyone is in the chips. This is the dumbest trade in the world. It's the most overbought. It's the most concentrated. Everyone's in Micron, NVIDIA. And the amount of wealth that's in the chip side is idiotic relative to the power and the social bottlenecks. I call it social and power bottlenecks. These billionaires are putting these data centers in some of the wrong places in the United States, counties in the United States. There's all kinds of protests because you're going to write billionaires in Silicon Valley or flexing their muscles with the spending around data centers and investment.

51:52Trillions of dollars. It's distorting the cost of electricity around the country. And it's creating power bottlenecks, social inequality bottlenecks, protests. And so the execution of this, everyone should really sell and take down exposure to the chips and build exposure to natural gas, coal, nuclear power, uranium, things that are going to actually power this data center power renaissance.

52:24Demetri Kofinas:Larry, it was great having an opportunity to speak with you, man. Thank you so much for coming on the show. So do me a favor, give out your website for people who may want to follow your research and let us know also, do you use Twitter regularly? What are some of the ways in which people can follow you and keep up with your work? Thank you, Dimitri. It's how to listen on MarketSpeak. It's been in the top five or 10 on Amazon all month, all year. And then at ConvertBond on Twitter. And if anybody wants a copy of our latest reports, it's info at thebeartrapsreport.com. Awesome, Larry. And anyone who is interested in accessing our subscriber-only content, including the transcript and intelligence report for this conversation and other episodes, or if you're interested in joining our genius community and having the opportunity to ask these questions directly to Larry and other podcast guests on our live Q &As or in person at our various dinners, weekend retreats, and other in-person events that we host all over the world, you can do that at hiddenforces.io slash subscribe.

53:27Demetri Kofinas:Larry, thank you again for coming on the show. It was great speaking with you. Thanks, Dimitri.

53:56Demetri Kofinas:website at hiddenforces.io. You can follow me on Twitter at Kofinas, and you can email me at info at hiddenforces.io. As always, thanks for listening. We'll see you next time.