Larry McDonald: SP500 Is A Screaming Sell; But Buy The Dip In Energy

0:00We've bounced off the back of potential ceasefire with the Iran war. Is the S &P 500 a buyer or sell here? The index itself is a screaming sell on the rallies. All it takes is one faction in Iran to continually harass the ecosystem of energy. One faction to fully disrupt, continue to disrupt the Straits-Board moves. So the 2026 off ramp is far more complex than what we talked about in the book, How to Listen When Markets Speak, is the second, third, fourth and fifth order effects of a movement energy. It creates a massive, massive inflation problem for later in the year. If you look at a 30-year chart of tech versus energy stocks, you'll see a long bear market for energy, but then a beautiful counter trend rally in 22, a pullback, and now another counter trend rally, energy versus tech.

0:53This, to me, the chart, and from every intelligence gathering I can find, I think that this is just the beginning of a big market share shift out of financial assets of tech stocks into companies that can actually control assets. So, yeah, buy the dip in energy the next month, all day long.

1:36in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is Larry McDonald, the founder of the Bear Traps Report and author of two best-selling investment books, A Colossal Failure of Common Sense, which came out in July 2009 about the collapse of Lehman Brothers, and How to Listen When Markets Speak, which came out in March 2024. Larry joined us, of course, on the podcast previously in August 2025. Welcome back to the podcast, Larry, and particularly welcome.

2:17Great to see you here in person in London. I mean, this city, it's clean, gorgeous, beautiful. And for some reason, every time I come, the weather is perfect. Well, thank you for bringing this weather. It is glorious today. And also, thank you for pointing out what a great city this is, because sometimes certain people on X, those with a particularly loud control over X can frame it as an unwelcoming place to come. But it is fantastic, isn't it? It's just, well, for finance, I put it at number one in the world. Above New York City? I would, yeah. It's just the financial, I would put it, yeah, New York's right up there.

2:54But the financial communities, like the amount of meetings that we can do in a week here is impressive relative to any other city on Earth. Well, I'm not going to push back against that. and we were just discussing before starting how to listen when market speak in your other book you've sold over a million books now so congrats on that we spoke extensively about this book which i loved as i've described in the first episode it's so much great technical insights in that yet it flows so freely as if you're reading a novel and we spoke pretty extensively about that in our first episode and i do refer people back to that for a deep dive on the book but But just the headline point on it, it's fair to say that this is a book that argues you should be buying hard assets.

3:36Right. Exactly. Not financial assets. It's the currency debasement argument globally. So that's pretty obvious. But it's also the Ukraine rebuild, the Israel rebuild, the Iran rebuild, maybe 100 million robots. Think about the copper that goes into all of those things. And then there's the US power grid, which we talked about last time. And we're going to get into some of these in more detail this time. But I just want to give credit where it's due. Because a lot of people come on and make calls. Some do it publicly. Some do it privately. But you literally wrote a book on it. It was published in March, as I said, 2024.

4:13Since then, silver is up 180%. Platinum, uranium, gold all up over 100%. Copper's up nearly 100%. Oil's up 80%. The Mag-7. is up 50 % in that period of time. The QQQ, the NASDAQ is up 32%. So kudos. You put your neck out there, wrote the book on it, and the call was absolutely correct. And you know, there's no I in team. It's like, I just built over the years a really wonderful reservoir of great mentors. And it's the ideas dinners like we're going to host tonight at the Dorchester. It's really getting to know Hall of Fame asset managers at a really high level, and then talking to them on a regular basis, which really helps you triangulate and develop really good ideas.

5:04It's also really interesting that even the assets that you said would underperform, which they have, are up quite a lot as well, which just sort of, I guess, speaks to the environment, which we'll get into. Now, one quote that I didn't throw at you in the last episode, I've only come across it or focus on it more recently, is that you said one of the keys to investing is, quote, measuring the life of the narrative. Right. Now, I guess that's the key question I have now for this particular theme that a lot of people are talking about now. You know, you were early to it and clearly the performance has already played out, at least in part.

5:43But pause for us pre-war if you can, January, February, this year. Was there still much life in the narrative before that, or is the best part of it already arrived? As far as I can tell, and that's triangulating, talking to the best asset managers in the world, and then figuring out the life of that narrative. When I was a, like, bottom line, to answer directly, I would say second, third, third inning. Of nine. Third, yeah, U.S. baseball. For the non-baseball experts. But when I was a retail broker in the 90s, I'll never forget, Wilf, like you heard these narratives that came out on the Wall Street Journal, Barron's Wall Street Research.

6:27And as a young broker, I couldn't tell how old those narratives were. And a lot of times I would think it was a relatively new narrative. And it was like literally a year old because I just was inexperienced in my network. was small. But when you build a really wonderful, intelligent network of really powerful risk takers, you can see the birth of narratives in a life cycle much more easily than you can as kind of an inexperienced investor. And so I can definitely tell you that this hard asset trend is still... Let's look at just precious metals, which is a big part of the book, but not an in No, it'll be all 3 % of household wealth in the 70s and 80s.

7:14Three, three and a half. Now we're one and a quarter, one and a half. So we're still nowhere near saturation of kind of this narrative. And does the war, which obviously, you know, hopefully this ceasefire for lots of reason holds, but does the war reignite the narrative? Does it take us from the third innings back to the second? So this is really important for our sit down today. So Wall Street's famous for what we call muscle memory. Everyone has recency bias. So the average investor that didn't buy the dip last year on that Trump off-ramp, they took Howard Lutnick. Off to Liberation Day, April 2025.

7:57The big risk off. It's probably the biggest risk off since 2022. And it's definitely up in the top five in the last, say, five years. So they took Howard Lutnick in the White House. They put them in a closet and they threw away the key for a month. You know what I mean? And they took your friend Scott Bessent, the Treasury Secretary. Scott had more of the president's ear for those weeks. Absolutely. And he was on the Sunday talk shows. Bessent and the whole team negotiated a really incredible off-ramp. And you think about it, that narrative was easier to control because they can just lower the tariffs today.

8:33Today, so the 2026 off-ramp is far more complex than what we talked about in the book, How to Listen When Markets Speak, is the second, third, fourth, and fifth order effects of a move in energy. So each day, oil is at these levels, but each day also that the, I guess what we call the supply chains of the energy ecosystem have been clogged. it creates a massive, massive inflation problem for later in the year. So at the Ideas Dinners in New York and last night and tonight in London, the one narrative that I'm hearing is the risk of an Arab Spring situation. We're seeing institutional investors actually short emerging market countries' credit risk.

9:24So a lot of these emerging market countries have their huge energy importers, and then you have the risk of just think of white sugar, getting sugar from, say, Brazil refined in the Middle East and then getting that out to Bangladesh and Pakistan. This is big. This is a really big problem for later in the year in terms of inflation, but also in terms of credit risk for EM.

9:50This episode of the Master Investor Podcast with Wilfrid Frost is sponsored by BMY Investments, a trusted partner for many, delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice.

10:12There's obviously an immediate relief rally on ceasefire talks. Maybe we can hit short term, long term. Short term, even if it holds, are these relief rallies wrong? I mean, I guess Where do you see in the short term oil settling to? If we started the year 60, 65, we got up above 110, we've fallen back to the 90s. Where do we settle over the next month and where do we settle longer term? Yeah, we can touch the 70s, you know, in the next month or two. But it's those tentacles of the second, third order effects across just everyone talks. There's a lot of people talking about phosphates and the different types of fertilizers.

10:54but there's just so many second, third order effects that to me are much more problematic for investors. So the bottom line is the off-ramp is much more complicated. There's a lot of muscle memory. So you get that big counter trend rally. And so it may be up another five or 10%. But I think you want to sell the rally with both hands. Of mainstream stocks, what about oil and gas stocks which which clearly have had a great run we mentioned that a little bit in the intro over the last year and a half they had a good run coming into the war they had a good one during the war by the way credit again when you came on last year you you told listeners to have a look at oih and fcg some of these etfs thank you that have exposure to that they've had a great run since august what do you do in that space is this a buying opportunity because they've obviously fallen back in the course of the last day or two since the ceasefire was announced.

11:51It's a really incredible buying opportunity, especially in the OAH services names. Like this, this Schlumberger is an incredible company. Beautiful free cash flow yields, great valuation. But they're like, they're their AI powerhouse for the energy space, like a real artificial intelligence play in the energy space for the next 10 years. So you can buy it. And if it pulls back, you might be able to buy it near the 200-week moving average, which is, you know, not 200 a day. When you get near the 200-week moving average down there, it's at a really good level. But most important, most important of all, if you look at a 30-year chart of tech versus energy stocks, you'll see a long bear market for energy.

12:36but then a beautiful counter trend rally in 22, a pullback, and now another counter trend rally. And talking about the XLEs versus the XLF, so energy versus tech. This to me, the chart, and from every intelligence gathering I can find, I think that this is just the beginning of a big market share shift out of financial assets of tech stocks into companies that can actually control assets. So yeah, buy the dip in energy the next month, all day long. Let's dwell on war as well and the consequences of this. You quote Neil Ferguson, who's been on the podcast, war is very inflationary. Again, have we felt the effects of that, not just from the Iran war, which clearly we're not in the rebuilding stage yet, but are we even in the rebuilding stage yet for Ukraine, for example, which is a four or five year old war now?

13:31We are nowhere near the rebuilding stage. So it's like what we talk about in the book is a generational shift, a multipolar world with more global conflicts. Think of like the United States coming out of the Vietnam 1960s. It's very similar today. You have the Great Society, which is big fiscal spending. And then at the same time, you had this Vietnam War and then the rebuild of Asia and the supply chains. Here, you've got the$2 trillion of capital expenditures for coming out of what we call artificial intelligence,$2 trillion. You've got a fiscal deficit near$1.9 trillion. And you had PMIs that were like YSM data.

14:12We were actually reaccelerating manufacturing in the United States heading into this. So now you throw in the second, third, fourth order effects of inflation. And you're looking at 5 % inflation later in the year going into the midterm. It's a big problem for Trump. Talk to me about copper in particular. Because I mentioned some of those commodity price moves since you published the book. Copper's up nicely, but it's not as up as much as some things. And if you look at the super long-term charts, it's not up as much of a turning point, perhaps, as it could have been. Were we early stages on copper's rally?

14:51Well, this goes back to the life of a narrative. So the power grid narrative has been out there a couple of years in terms of the U.S. power grid is old. So a lot of people are buying copper and aluminum. Just look at like a classic stock to watch is Alcoa, right, on the aluminum side. So the street had all cells, like high, like almost mostly cells at the lows. And now the street's been upgrading. You know, they love to downgrade on the lows and upgrade on the highs. The cell-side research can be really dangerous to your health, right? So this narrative of the rebuild of the grid has been out there, the narrative of the war.

15:30So actually, copper, there is a little bit there. Like we're developing a little bit of a near-term supply risk problem for this year. And that's why we could have a drawdown. But then five, 10 years, there's a massive supply problem. So it creates a situation where the copper miners, like the COPX, which we recommended in the book, it outperformed the NASDAQ by maybe 50 % last year. Pull back. It's a lot like oil. Near-term risks that will create an incredible buying opportunity. And obviously, people who subscribe to the Bear Traps report get your more short term calls on things like this. The book obviously more long term in nature.

16:12And we'll include a link as ever in the show notes for the Bear Traps report. I was a little stunned doing my research for this, Larry, that you're now a buyer of Bitcoin. I didn't expect that, knowing you as I do and from reading the book. I don't think you're a super bull on all crypto, but you're now thinking Bitcoin should be in people's portfolios. Well, there's a lot of bipartisan support for the Bitcoin legislation. and you had this vicious sell-off, like almost 40 % in like two months. The gold, the ratio - From sort of October last year. Yeah, October, the Trump surprise on that Friday.

16:59I mean, literally$2 billion was a lot. All these poor kids, not actually take poor kids, but like young people that just got blindsided. And the disgusting manipulation, this is why we've stayed away from Bitcoin is it's so high beta because there's just so many people with much better information and the little guy typically gets hurt. So, but this capitulation was so severe in such a short period of time. It wasn't as severe as the previous drawdowns of 75%, but it was such a short period of time. The Bitcoin to gold ratio was 38. All of a sudden 13. And so I'm like, okay, Bitcoin goes, the ratio of Bitcoin goes from 38 to 13, which is, if you look back the last five years, that's been a place to sell some gold and buy some Bitcoin.

17:46So, but the threat of supercomputing, quantum computing is now creates not a cap, but your convexity to the upside that was always there is now it has this like gray matter in the future. Like how fast is quantum computing going to come? Is it a threat a year from now or is it a threat seven to 10 years from now? That threat has moved up. So that's another thing that's been weighing on Bitcoin. So all this together, it creates like a near term buying opportunity, but I think we're much more worried about the long haul. So that to me is very much a short term trading call, not the long term strategic calls that the book is all about.

18:31Is that fair? I mean - It's fair. It's fair. So even if the trading call on gold short term is not a buy, it should still have a place in people's portfolios for the long term investors. Should Bitcoin have a small place in people's portfolios? It should have some place in a currency debasement world. And that's the argument we make in the book is that the currency debasement is so disgusting. I mean, the GOP has gone from like a fiscally conservative party to, and I voted GOP before. So like, it's just unrecognizable in both Republicans and Democrats. And then you look at the wars, you look at, like I said, the amount of pressure on inflation from robotics, which long-term will be deflationary, and the short-term, 100 million robots.

19:18You're talking about a lot of copper, right? So there's just so many near-term threats to what we call financial assets that hard assets and Bitcoin have to be a big part of your portfolio. Let's talk about gold in a little bit more detail because clearly it's performed super well over the course of the life of your book. You also have been talking more recently about a different ratio, gold to Brent. What's that saying now? And where's your level of conviction with gold? The gold to Brent got up to the most extreme ever, like in January. And so we went overweight, the energy, and we actually sold down our gold miners and the trade alerts, which you You get about 2 ,000 financial advisors who get our trade alerts.

20:01And I tell you, Wolf. And a few journalists like that. Yes. But I tell you, Wolf, Wall Street research is fiction without skin in the game. So I want to have skin in the game. So when we do trade alerts, over 2 ,000 financial advisors, family offices get the alerts. So if we're wrong, we're going to get some real punishment. So we took down gold and silver and platinum and palladium in the first quarter and the last quarter of last year, fourth quarter, and we added the energy names. And we just rebalanced the portfolio more to the energy side. But just because of your point, like that gold ratio to oil was even more extreme than COVID.

20:43You think about that. Like almost two standard deviations more extreme. So think about how, think about gold. When oil went negative. Oil went negative. And so here, it's not that oil went negative, it's just gold went so crazy. And oil and gas, it's a dollar-based asset globally. It's an asset. Oil and gas companies and oil and gas are going to do great if inflation re-accelerates. What about silver? I mean, silver clearly joined the precious metal rally second half of last year. Did that also get overstretched? So what we track is that we have a model that tracks how extended things are. It's, you know, there's a call puts queue.

21:25So you can see like the ratio of calls to puts, how many people are buying upside versus protecting on the downside. That reached eight to one, Wilf, in January 26th for silver. And if you look back historically, every time that's happened, it happened with Apple in September 2020, 2021, 22. It happened a couple of times. The Tesla happened, I think, last year with NVIDIA. It's a very, it's a brilliant short-term sell signal. Doesn't tell you much about the long term at all. But when there's so many people buying calls, right, the dealers on the street have to buy upside. So think of like eight to one calls versus puts.

22:03When you see that, it's a great short term indicator because what happens is the dealers, the banks, there's so many people are buying the calls. They have to actually buy more silver to hedge their upside. And so what happens is they get so long that once silver reverses, then the street has to sell fast and you get these vicious high beta moves. So this is a good chance to buy silver on the dip. And similarly gold? I mean, gold's been bouncing around, but it's back up to$4 ,800 or so today. Yeah, if you can buy gold$4 ,400 to$4 ,800, yeah, that's the zone where you want to reload.

22:43This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset, provided market-leading research to help investors understand gold's role and modernize how gold is owned, traded and used, developing industry standards and market infrastructure. Learn more at goldhub.com.

23:11quick final things on on uh on precious metals because i've got another whole page we've got to get to um platinum palladium which platinum in particular has not taken part like silver and and gold has should it have done are you as convicted behind that as you are behind copper or not yes i mean all the gold ever mine would fit into an olympic swimming pool everyone's heard that. But all the platinum ever mine would go up to your ankles in that pool. So it's such a scarce asset. Eventually, they're going to be on the moon. If you listen to the all in, you know, guys, eventually we're going to have like platinum resources, PGM metals being taken from the moon back to earth.

23:53That's at least 20, 30 years away. So yeah, there's just not a lot of platinum. Artemis didn't quite bring that home yet. Oh, sorry? Artemis didn't quite bring that home yet. But, yeah, so what happens with commodities is you go through these vicious bear markets. Just think of uranium. It's the same thing. Like every CFO that overinvested in capital expenditures has been fired, right, for the last 10 years. Same thing with platinum and palladium. So the more vicious the bear market, the longer it is, the more capital discipline that the companies start taking on. So therefore, the supply gets really out of whack with demand.

24:31And that's exactly. And that takes years to unwind. So yeah, platinum is... And plus, you've got this whole hydrogen. Platinum's a metal that can withstand lots of heat. And so if you think of the move toward green hydrogen the next 10 years versus, say, the decline in what we call catalytic converters, I guess as EV sales explode, it's potentially less platinum and PGM metals that you need, right? But there's been a big pushback on that globally, right? The amount of EVs that were supposed to be sold by now is much lower. And then you have the incoming demand from green hydrogen, which is eventually going to be here.

25:06So yes, a net platinum, palladium are still in that screaming buy zone. Let's talk a bit more about equities and tech equities in particular. We spoke about this on the August 2025 episode. You felt a lot of the AI companies, the hyperscalers, were kind of getting ahead of their skis in terms of how much they're committing to CapEx going forward. I guess we don't know definitively if that's the case or not. We'll know in five years or 10 years if their revenues play enormous catch up or not. But there has already been a repricing by the market towards that fear that you identified nice and early.

25:43Has that repriced enough in your mind? If we've seen the likes of Meta and Microsoft and perhaps the Eye of the Storm, Larry Ellison, Oracle repricing, Are they repriced enough for the scale of fear you had about them getting over their skis or not? Well, no, they haven't. But this will be a nice bounce that we're going to experience the next week. The problem now, there's an emerging threat. Talk about the life of a narrative. I've heard this like the last three weeks, and it's a big reason why there's an overhang, is that if you look at the IPOs, SpaceX, OpenAI, and Anthropic, just those, but there's a lot more coming besides.

26:25Those are the big ones. What happens is when you have a large amount of stock that's going to come to the market, people start to, you got to make room for that at the table, right? So 75 billion times three, that's what you're looking at ballpark. And it's all pretty much going to, especially now that we're going, if we go risk on for a month, then that brings forward the IPO, right? For SpaceX. So that's like a lot of pressure on the Mag 7. So not only do you have this higher interest rate regime, higher inflation regime, you've got this like, there was$34 trillion in the NASDAQ 100. Now it's about$31 trillion.

27:09So$3 trillion is left. That really has to, another$5 or$6 or$7 trillion has to come out of the NASDAQ 100 and reallocate across over to energy, oil and gas, all kinds of companies that control assets. your Rio Tintos, your Valets. These are the companies we talk about in the book. Talk to me about the kind of slack that people have cut for the likes of Mark Zuckerberg. Because it's not the first time he's over. I mean, Meta doesn't, it's hilarious they changed their name to that. Do you know what I mean? It was a flash in the pan. And oddly enough, the low in their share price in October 2022 came at the peak of them over-promising and over-investing in Meta and the future there.