The Man Who Listens When Markets Speak with Lawrence McDonald

0:04Hello, I'm Anthony Scaramucci and this is Open Book, where I talk with some of the brightest minds out there about everything surrounding the written word, from authors and historians to figures in entertainment, neuroscientists, political activists, and of course, Wall Street. Sorry, I can't resist. Before we get into today's episode, if you haven't already, please hit follow or subscribe wherever you get your podcasts and leave us a review. We all love a review, even the bad ones. I want to hear the parts you're enjoying or how we can do better. You know, I can roll with the punches, so let me know.

0:38Anyways, let's get to it.

0:47Our economy is evolving and our investment opportunities and decisions need to evolve with it. But when the markets speak, it can often be hard to listen. My guest today, Larry McDonald, can connect the dots between past, present, and future better than most. And he joins me today to discuss his unique analysis that can ensure we're always one step ahead of the game. Let's get into it.

1:19Joining us now on Open Book, Lawrence McDonald. He's one of the most respected financial experts on Wall Street. He's the founder of the Bear Trap Report, and he's a New York Times bestselling author. And he's out with another book, which I predict will be a New York Times bestseller if it isn't already. How to Listen When Markets Speak, Risks, Myths, and the Investment Opportunities in a Radically Reshaped Economy. And what a great book. And I'll tell you what I loved about the book. It was very easy to read. Your first book was also very easy to read. That's how we actually met each other. I complimented you on your first book, The Colossal Failure of Common Sense, which was about our exploits at Lehman Brothers.

1:58We both shared some time there. but this book is better in some ways. You're smarter, you're more experienced, you've got more battle scars, which you describe, and the book makes all of us wiser. So what is it, Mr. McDonald? We've been around the block a long time, you and me. Do you get better as you get older? Do you get better as you get older? You know what? A lot of it goes back to you at SALT. And what you told me, like 2010, I was just starting out and you invited me to SALT to SALT conference. It was like 2010, 10, 11, 12, somewhere in there. And I was trying to build the institutional business.

2:32And you said, you know, come to Salt and then get around the world, do the speaking tour, meet the institutional investors. And I met a lot of really professional investors through you. And it's those, it's, and that's what I said in the acknowledgements. The book's not about me. It's more about the great people that I met over the last decade. You know, there's an old saying, you make more money on the speaking tour than you do writing the book, right? So the first book was the New York Times bestseller. And I basically met this great nucleus of friends around the world on the professional asset management side.

2:59And what I'm trying to do in the book is democratize information out to a wider audience and really share some of the things I've learned over the last decade. So what is it though? What is the, like if I said to you, take the crystal essence of what you learn about investing, I can tell you what mine is, ready? Whatever you think cannot go wrong. Whatever you think with absolute certainty cannot go wrong, will go wrong. That's my sentence. Okay. And what's yours? Well, one is your greatest moment of fear. And I talked about this in the Tepper Chapper. I sat down with Tepper. And at your greatest moment of fear, you got to do the exact opposite of what you want to do.

3:39And that's what he did in all his greatest trades. And you kind of look for those trades that are most mispriced. And fear is oftentimes a great opportunity. Let's talk about Dave Tepper for a second. So he's literally one of the best investors that ever lived. He's fairly low key compared to Warren Buffett. although us in our industry know him. He runs Appaloosa. He's now the owner of the Carolina Panthers. If you were smart enough to put a million dollars in Mr. Tepper's business, unless you paid your taxes elsewhere,$1 million in his business worth$270 million today, 34 years later, what do you think about Mr.

4:15Tepper's ability, his instincts, his analytical skills? The average person listening to this doesn't have those. I don't have those, but how do they apply to the average person? Well, he has an ability that not many people have to play the bullish and the bearish side, which is hard to do. What I think is amazing about him is he, you know, he's flipped from hard asset plays, say, eight or nine years ago, 10 years ago, into more financial asset plays, which would be, think about like metals, materials, oil and gas companies 10 years ago. Then over the last decade, he flipped more into what we call financial assets.

4:48That's like the fangs and the big, and he got that right. But now I think he's shifting, and I think a lot of professional investors are shifting toward a hard, like a hard asset portfolio, more value. In other words, what worked the previous decade of more of a deflationary decade, and this is the main thesis of the book, is probably not going to work the next 10 years. You want to be long at a portfolio that maybe has some mag seven, but has a lot more hard assets relative to financial assets. You know, I'm blown away by your career because, I mean, you were selling like frozen meat at some point in your life.

5:19Weren't you? I remember that from the first book, right? Weren't you? I got out of school during this S &L crisis. I literally tried to get a job at Merrill Lynch. I stuck my way into the office. I dressed up as a pizza delivery guy. And I got into the manager's office and said, listen, I want a job. I want to work with you. And he said, listen, go out and sell something for six months. And one of the guys with the biggest producer in the office yelled out, yeah, go sell pork chops. And they all kind of ganged up and said, if you go sell pork chops for six months and come back and prove to us that you had the tenacity to do that, we'll give you a job.

5:51And that's what I did. It was great. And they did give me their job. So there's something that happens to people. It hasn't happened to you, but let me describe what happens. They go to Wall Street, they get rich and successful. They start buying into their own BS. They buy fancy pants houses, fancy pants cars. They flex on each other. They'll buy some art. And then they run into a buzzsaw. Dick Folt, Joe Gregory, others. What is it about human nature that makes us bad at becoming rich, getting rich, making money on Wall Street? Tell me what it is. Well, you know, the Lehman story is great, but I've seen it and you've seen it through different parts of Wall Street and different parts of Hollywood.

6:34It's hubris, it's arrogance, it's complacency. And I think I relate it to like Tom Brady to quarterbacks. There's a guy that was never complacent. And after a good season, after a Super Bowl, that wasn't enough. And I think it's the same thing with Wall Street, where as you make a couple million bucks, you get the bigger house, the car, and the complacency puts you in a framework where you lose that drive for learning, you lose that drive for looking for edge and alpha. And then you surround yourself, and this is what happened to Liam. Dick had actually, in a lot of ways, a good heart, but he surrounded himself with a bunch of bad people.

7:07And that's a lot of hubris and a lot of arrogance and a lot of complacency. But a guy like Depper doesn't do that. Steve Cohen doesn't do that. Izzy Englider doesn't do that. So what is the added piece of wisdom of those guys versus some of the garden variety Wall Streeters, Lair? I think it's just staying grounded. I mean, keeping it simple, having that burning desire for greatness and repeating greatness over and over. Izzy's amazing. Millennium's been a big client of ours over the years. Most of our business at the bear trap support is institutional. And whenever I meet these guys, I'm just like, and over the years, I meet them year in, year out.

7:43And they just, the great ones just have the ability to block everything out and want to just keep creating a better business each year. You brought up some things in the book, and you're an expert on this, by the way, and I follow you for many reasons, but you always seem to be ahead of everybody on the inflation versus the deflation. And so if you don't mind, and I'm taking from your book, let's go over errors of disinflation or deflation following the Cold War, which you said the collapse of the Soviet Union created this sort of peace dividend. Then we've had errors of inflation. We had a period of benign inflation after the financial crisis.

8:22And then of course, after COVID, we got a fairly high dose of secular inflation. So give us the Lawrence G. McDonald truflation, if you will. Where are we now? How do we get to where we were? And what happened after the Cold War? What happened after COVID? Give us a sense for things. Well, so what I say in the book, the Lehman crisis brought on a fiscal and monetary response, and it was about$4 trillion. And a lot of it, as you explained at SALT one year, a lot of that fiscal and monetary response didn't really get out of the banking system because they were trying to bail out the banks. So it didn't really get out.

9:01In other words, when you're trying to fix the banks, a lot of times it's complicated, but you need a lot of that money had to stay in the banking system and didn't get out. Whereas the COVID was, it wasn't a 4 trillion response. It was a 16 trillion response to this date now. So it's a 16 trillion of fiscal and monetary. So right there, and a lot of that money got into people's bank accounts, right? Like when people went through the hardships of COVID, they were, Uncle Sam deposited cash into people's bank accounts. So that created this new sustainable inflation. And the other thing is we're in this multipolar world now.

9:32And that's what I talked about in the book around, I sat down with James Baker in the National Bank of Abu Dhabi years back. And he's like, Larry, when you get into this multipolar world thing, you got to be careful. And I said, you know, Mr. Ben, this guy was a former treasury secretary. I said, treasury secretary Baker, what is a multipolar world? And he said, it's a world where you have more adversaries, where your sea lanes are not as safe and where you can't really global, the true globalists in Davos that you know well, the great thing about your brand is you move, you can hang with them, but you can also hang with everybody else.

10:02But that crowd, you know, they've made a colossal miscalculation because that globalist agenda needs a unipolar world, sea lanes, really global stability, no wars. And what Neil Ferguson pointed out to me is wars are very inflationary and anything that screws around with transportation is inflationary. And this new drone technology, I mean, this is like the Terminator. We have drones now that are taking out refineries in Russia. I mean, think about that. So if one of those drones gets sent into the Saudi oil fields, then we're going to have another problem. But it's that kind of multipolar world thing that creates a lot more sustainable inflation.

10:38And then here's the big part. This goes back to Trump, but it goes back to Biden. If you think of the 2016 election and you think of, you know, what what elected Trump, right? We took five million jobs out of the United States, five million. We shotgun them around the world, India, Pakistan, Bangladesh. and we raised the standard of living dramatically. That's what we talked in the book. So if you're working in a call center in India, right? Say you're making 10 to 50 times more than your great grandparents. And you know what? There's a billion people in India, Anthony, that don't have air conditioning.

11:12One billion people, like 350 million families with no air conditioning. The moment you get a standard of living raised in India, you buy a moped, some type of transportation and you get some air conditioning. So we've raised the standard of living in the developing world. And so we're increasing, we're basically creating a whole swath of new carbon consumers. And, you know, they need a lot of gas, they need a lot of oil, they need a lot of diesel. But at the same time, because of regulation and ESG, we're suppressing the capital investment of all the necessary metals, mining, oil and gas, right?

11:47So we're suppressing the investment necessary. So here's a line from the book. If you take the 2010 to 2014 path of capital investment, right, capital investment, we're essentially$3 trillion below that growth path. And since 2014, so you go 14 to 24, the year 2024, we're essentially 900 million people more. So we've got 900 more people on the planet. We're underinvested. We're suppressing investment. And we've, you know, I'm sorry, we're suppressing supply. And we've got, we're augmenting demand. And that gets you a sustained inflation regime. And that's what creates the great migration of capital.

12:22What's coming at us is like probably the most impressive trade of our lives, I think, most opportunity. Okay. And so tell me the trade. How do we make the bet? Well, if you look at the U.S. power grid, for example, it's 50 years old in some places, 30 years old in others. It needs a lot of copper. I sat down with a billionaire investor this week that you know probably better than I know. And that's probably his biggest position is in the last like years, it keeps building the copper position. and copper has a lot of volatility, but you've got a suppression of copper supply globally. And then you've got this demand that's going to come on from, think about artificial intelligence, right?

13:00The terawatt hours that if they were used in say 2022 for data centers, think of those data centers, artificial intelligence, you're talking 460 terawatt hours in 2022 to potentially 2000 terawatt hours in 2026, 27, 28. That's going to require a lot more electricity. there's your natural gas trade your natural gas is so like if you believe in videos um you know management team there's no road to that growth path without a triple of natural gas here and you can look at companies you can look at etfs like the fcg etf which is a natural gas companies you can look at companies like chesapeake but there's a lot of mistriced assets and and i think I've heard you say this over the years.

13:44When you look at the dot-com revolution, a lot of the obvious trades, Global Crossing, JBS Uniface, Cisco, you know, these trades worked at the beginning, but that didn't work for 20 years. And a lot of the tertiary, the third level trades were the 10, 20, 30 baggards that nobody was looking at at the time. So you're a bull. I'm a bull on commodities. Yeah. What about the overall economy? Well, right here, the economy is bounced, but the bottom 60 % are a lot of pain. The Fed told us, the Fed lectured us that the bottom 30, 40 % only have$400 in their checking account. How many times have we heard that?

14:19So inflation kills the bottom and the bottom 40%. But if you're in Palm Beach and you get 10 million bucks in a money market fund, Powell just gave you a 350 % pay raise since 2021. So that's why it's so hard to figure out the economy. Because if you go around Palm Beach, you go to Toronto, any big city, the restaurants are pretty full, but the bottom 60%. So I think the economy has probably a rough patch over the next year as we inflation, if inflation creeps back up, it's almost like, you know, if they think of like the 80s, right? The recessions in the 80s, 70s, 80s were inflation driven. So it's like you get this blow off top in economic activity that re-accelerates inflation that hurts to the bottom 50, 60 percent.

14:59And then you go on to some type of recession. Whereas I think a lot of people, the Lacey Hunts of the world, you know, the Roses, you know, Rosenberg, they're brilliant guys. I think that they're looking at recessions the way 2008 and 2020 were, where you get this like disinflationary trend that really helps bonds. And so it's kind of like, I think that's one of the most confusing things out there. Well, you're a bond guy. So let's talk about our bonds. We've got 34 trillion of them. It seems to be growing. Deficit spending wise, we're spending 6 % of our economy annually on deficit spending. The politicians don't want to do anything to curb it.

15:33They've been very clear. Republicans and Democrats want to keep spending. Is this a problem? Is it not a problem? Is Dick Cheney right? Deficits don't matter. You know that we're printing money in order to finance these deficits. It does have an impact on lower and middle income people. The Palm Beach people, no problem. They'll stay eating in their fancy restaurants, but the average person's feeling it. What do you think happens? Well, there's a scene in the book. I sit down with our old friend, Mark Chaval, who he was on Louis Bacon's original team. This is one of the greatest investors. He's one of these under the radar guys, but he's a really brilliant investor.

16:07And to be on that more capital team, that original great team. And now he's running his own money. And he talked to me about this. We were at Dunnabin's bar in London this past summer. And I said, how does this play? I said the same question you just said. It's the only way you get out of that 34, 36 trillion debt hole with 80 billion a month of interest now, 80 billion a month of interest, which is potentially going to dwarf parts of Medicare or Medicaid. The only way you get out of that is what he called financial repression. And all that means is at some point they have to keep interest rates below the rate of inflation.

16:41So when you get a debt hole that big, what we talked about in the book, there's two ways out. You can do a debt jubilee. So if you look back the last 3000 years, many civilizations have done a reset, what's called the debt jubilee moment, where they basically forgive all the debts and start over. And it can be very painful. And it actually goes back to the Bible. I mean, the debt jubilee historic references. But the other way out is what he calls financial repression. And in that kind of world where they're suppressing rates below the rate of inflation, hard assets, crypto, and hard assets do very, very well.

17:13And I think the crypto market's picking up on that. Is there a bubble in crypto now? Well, I think the bubble was in 21, where, you know, the percentage of the tertiary coins that were doing well was pretty crazy. I think it's, I think it's a little, I think the ratio of Bitcoin to gold's a little rich here and it goes back and forth. I think you're better off buying Bitcoin in size when that ratio gets, I track it, you know, we track it once a month. And so I think you want to lighten up on, I think crypto relative to gold's a little rich here. So maybe you lighten up on crypto and buy a little bit of gold.

17:44But then again, you're going to, sure as God made little green apples, you're going to get a chance to buy, when that, when that ratio gets in that attractive range, you want to have more Bitcoin than gold. But not a bubble. A bubble in crypto. I guess parts of the crypto market are bubbles, like micro strategy, the ratio of micro strategy to Bitcoin. That's a bubble that that's that's completely unsustainable. Yeah, because it should be tracking Bitcoin and not being at a premium to Bitcoin. Yeah. And it's the most extreme premium, I think, on record. But maybe there's a slightly slightly bigger one in 21.

18:18That's a sign of a bubble. And I'm going to quote from the book, you quote George Soros in the book. He says, when I see a bubble, I rush in to buy it. Tell us the psychology of that. What does he mean by that? Well, I look at that. I get to do a lot of soul searching here because I saw this AI thing and I literally was writing the book and I was writing those words and I saw this AI thing like last year. Like first time I really noticed it was like, remember the entire street, Anthony, the entire street last first quarter was downgrading all the AI stocks, or at least they had them in neutrals.

18:50They had cut the price target. I mean, these Wall Street analysts are just, it's terrifying really, because if they didn't know anything then, like they were talking last March and last January, these stocks were all downgraded within the last like 15 months from now back. So the first whiff people really caught of the potential was like in the beginning of the second quarter. And you know what? That's where I'm in. I could have like, okay, the first thing you want to do when you see the bubble. And we saw, I guess, Larry Summers started talking about it. You saw Druckenmiller. You had a lot of public statements about the AI potential in like April of 23, April, May.

19:28And then June, they had the blowout quarter. So yeah, the first thing you should do when you start to see a new potential spectacular technology is buy it. And I've had dears in the headlines. I firstly froze on it. I just, I was trying to process, I couldn't process the potential a year ago today. The feeling for me about where we are after reading your book is that we're entering a period of normalization. I feel like your first book, we went into a 15-year period of financial healing. The Fed basically got raised to zero. They let the banks borrow the money at zero, lend it back to the federal government at two.

20:07And every year for 10 years, they improved their balance sheet by 20%. They did it for 15 years. So they had this massive improvement, profit-making to try to restore the strength of the balance sheets. Unexpected black swan event of COVID, inducts more than we would like to have. The Fed's trying to stop the inflation, but it's more or less normalized us back to what you and I grew up in, which is a 3%, 4%, 5%, 6 % yielding bond market. What did I miss? Yeah. And the other side of that is when you suppress the cost to cancel the line of the book, when you suppress the cost of capital for longer and longer and longer periods of time, you're incentivizing bad behavior.

20:46You're enabling the Bernie Madoffs of the world and you're not allowing the cleansing process of the business cycle to function. And that's been the case for a long time. And so we need that cleansing process. And, you know, the Fed's trying to prevent the business cycle from function. But when rates are suppressed that long, just look at commercial real estate. I think the black swan now is the regional banks, and I'm talking about the super regionals, their max loans. I've been in meetings this week with different hedge funds, and they're looking at oil, and they're looking at these drone strikes, and looking at these drone strikes in the Middle East.

21:20And if you get like a$20,$30 move in oil, that's going to put a lot more pressure on the curve to steepen or at least higher yields. That's going to put all that commercial real estate, all those mortgage-backed securities there in the super regional banks. We're talking like U.S. Bank Corp. We're talking like Zions or America, there's probably three of them that if rates go up 100 bips from here because of geopolitical or any kind of like higher interest rates from here, then that commercial real estate pain is going to explode and you're going to have another banking. It won't be Lehman, no way, but it'll be just like last year where the Fed has to step in, expand the balance sheet, and then they'll have to go into some type of rate cuts and that gets you a much weaker dollar and that also gets you another move into hard assets.

22:02All right. So I'm at the point in our podcast where I ask our authors five words, and I need you to respond to those words. And the title of the book, of course, is How to Listen When Markets Speak. It is a signal book. It's not a noise book. I recommend this to people because you explain what is going on, and you're relying on experts and your own judgment, and you just have a tremendous amount of common sense. And this is the reason why you're going to continue to do super well. But let's start with these five words. And this is more of two words, but let's stretch my own rules while I'm talking to you.

22:37Ready? Lehman Brothers. Failure. Federal Reserve. Too big. Inflation. Sustainable. Okay. Meaning it's normalizing or sustainable at a high number? Sustainable at like normalizing three, four instead of one, two. Okay. Markets. Volatile. Bitcoin. Rich. Is it a hard asset? It is. And that's unfair to Bitcoin. I believe in the entire thesis of Bitcoin. What I don't like about it is what annoys me is how it's pumped up at the highs. And there's a lot of guys like Saylor are pretty quiet at the lows. But it has sucked in a lot of kids. And there's some weird people that are associated with it. But there's no question that the fundamental foundation of crypto is here to stay.