All posts by NY Times Bestselling author Lawrence McDonald

Larry McDonald; founder of THE BEAR TRAPS REPORT investment letter, is a political policy risk consultant to hedge funds, family offices, asset managers and high net worth investors. As former Managing Director, Head US Macro Strategy at Societe Generale, he's a frequent guest contributor on Bloomberg TV, CNBC, Fox Business, and the BBC. Larry is a NY Times bestselling author, his book "Colossal Failure of Common Sense" is now translated into 12 languages. He ran a $500 million proprietary trading book at Lehman Brothers, made over $75 million betting against the subprime mortgage crisis and was consistently one of the most profitable traders in the firm. His "Bear Traps" letter is one of the most highly regarded on Wall St. He's participated in 3 major financial crisis documentaries: Sony Pictures, Academy Award winning documentary the "Inside Job," BBC‘s "The Love of Money" and CBC‘s "House of Cards." He's delivered over 72 keynote speeches in 17 different countries, at Banks, Investment Firms, Conferences, Law Firms, Insurance Companies and Universities.

Tarnished Stocks in Gold

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

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A client in our institutional Bloomberg chat said today:

“We have looked at the S&P in EUR (Euro currency). I would love to see it in gold. I bet it doesn’t look nearly as hot in gold equivalent. Gold is a powerful global currency, especially right now!”

We MUST NEVER forget how many investors globally are crowded into U.S. equities.  When a stock’s performance in gold starts to look unattractive, U.S. equities will lose some portion of their global investor-base. So many things can be said about the chart below but we think what it really does is cancel out the Fed effect. Meaning, the Fed has caused the inflation of both stocks and gold – higher asset prices for sure.  So, if you price stocks to gold – the Fed’s ($3T of balance sheet expansion) effect on the stock market more than disappears.

Shocking and Shocking

The most shocking moment of this shocking chart is that it quite recently made a big new low. It wasn’t a token new low. It was much much lower than the previous lows.

Just Wow
We agree it looks much more natural. We think the price of the S&P in dollars is the ultimate Fed head-fake.  The entire 2018 move has been canceled. It is really a revelatory chart. It’s super important! U.S. stocks in gold terms are trading at late 2017 level if my eye doth not misread, one ugly equity rally indeed. Poor foundation, in two words.

Colossal Inflows

In the first half of 2020, Gold-backed ETFs closed with a record $40B of net inflows. In June, gold ETFs added nearly 110 tonnes, this brought global holdings to all-time highs of nearly 3700 tonnes. With over $35T in paper-promises; U.S. Treasuries $15T, U.S. Corporate Bonds $11T, Big Tech Stocks $7T, and U.S. Municipal Bonds $4T – all that new wealth is crowded in financial assets – looking for a real, hard asset (hedge) alternative. At some point, when the promissory note pool becomes too large, more and more capital starts to look for a hard asset hedge, WE ARE THERE.

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Follow the Money

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*Our institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.

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Follow the Money

So far in 2020, investment-grade bond issuance is approaching $1.3 trillion, that’s more than double the $595 billion IG debt issuance pace at this time last year.  In the history of U.S. capital markets, four of the top six best IG new supply months are found in 2020, with April being the mother-load, up close to $300 billion.

Credit Risk, Who’s Funded?
As you can see above, credit risk is driving equity prices. Well funded sectors (blue Goldman strong balance sheet) have performed well since the market highs of June 10th, while under-funded balance sheets are falling behind. Likewise, the S&P Equal Weight equity index is down almost 10% over the last month. Everyone knows – a few, well-funded companies inside the S&P 500 are running the show with hundreds of other companies left behind.

The Eye-Opener

Here’s an eye-opener. Below we take a look at the BB and higher credit quality new issues – year to date by sector. That’s right, YTD debt sales in 2020 vs the FULL YEAR 2019, the data is telling:

1) Financial $427 billion vs $546 billion (increase in deposits, record money market fund inflows, equal lowered funding needs);

2) Consumer non-cyclical $175 billion vs $228 billion (cash flows steady, COVID19 favors staples)

3) Consumer cyclical $153 billion vs $108 billion (levering up, get it while you can);

4) Communication $117  billion vs $87 billion (deals, 5G expansion funded for now);

5) Energy $116 billion vs $133 billion (companies disappearing, capex (drilling) imploding vs. 2017 levels);

6) Industrials $113 billion vs $98 billion (again, get the money while you can);

7) Technology close to $110 billion vs $68 billion (explosive inequality, monopolistic advantages all funded by the Fed, continue the debt build);

8) Utilities $75 billion vs $100 billion;

9) Basic Materials $36 billion vs $48 billion (There are 10,000 fewer holes (metals and mining) on earth being dug today than a decade ago. From a CAPEX overdose to starvation, NO supply!

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The Bloomberg Financial Conditions Index is now at the mid-point of the February 2020 range, yet IG issuance clearly is set for issuance records unforeseen back then. A one-week all-time issuance high was set in April at $110 billion.

The cause is well known: a near-infinite Central Bank bid allows IG companies to raise as much money as they can dream of despite poor economic conditions. Meanwhile, after multiple fiscal stimulus rounds, the White House is pushing for another $1 trillion before the August recess.

Debt markets may have found an equilibrium point. Treasury just had a record 3-year issuance of $46 billion, up-sized by $2 billion, and a full $8 billion above the norm that has held since December 2018. At 0.19%, it is the richest on record. The cover was 2.44, lower than last month’s 2.55, and a touch below the average 2.45 of recent times. So we have now the first sign of some investors on the sidelines.

Second-quarter earnings are soon, with S&P earnings forecasted down 30%. Earnings may not be quite that bad, but cash flow to interest ratios are set to deteriorate markedly. It will be interesting to see if this quarter’s earnings season “puts a lid on it.”

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There was Once a Dream that was Rome

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*Our institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.

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“A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.”

Alexis de Tocqueville, 1841

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The Life Cycle of a Democracy*

1. Bondage to spiritual faith
2. Spiritual faith to great courage
3. Courage to liberty
4. Liberty to abundance
5. Abundance to complacency
6. Complacency to apathy
7. Apathy to dependence
8. Dependence back into bondage

Alexander Tytler, 1787

*See the latest developments in Venezuela, Argentina, Greece, and Puerto Rico – all in stages 7-8.

A Bullish Set up for Commodities and Emerging Markets

A disenfranchised population rises in revolt against the establishment ruling class, demanding equal rights after having been subjugated more than two hundred years before, after fighting side by side with the elites in a series of wars leaving the country the wealthiest and most powerful country in the history of the world. Four years of war built on massive debts leaves over five percent of the male population killed. A prophecy of the immediate future? No. A description of ancient Rome’s  Social War of 91 BC to 87 BC. Over the last 2200 years, democracies have a very consistent pattern of self-destruction. Can it happen here and now? Yes. Can it be averted? Yes. And by the most mundane of all things: employing millions of citizens to fix and modernize America’s crumbling infrastructure, both the old fashioned bridge, tunnels and roads, and the modern final push to lay down fiber optic cable for 100% of the country, a common vision, purpose, and effort to fill the hearts and minds of all Americans with the dignity and pride of a job well done for the benefit of all. But will it happen? Let’s explore.

America’s Broken Bridges

Total: 614,000
Over 50 Years Old: 42%
Structurally Deficient: 14%

American Society of Civil Engineers. Look for a large infrastructure renaissance in the 12-18 months to come. Levered-up social experiments bathing is colossal debt financing are coming down the pike.

The U.S. Unemployment Surge
Since January, we have experienced over $4 trillion of deficit spending and $3T of balance sheet expansion from the Federal Reserve. Will the U.S. continue to borrow more, to print more, to stimulate more? A disastrous 11% unemployment number was greeted as a positive surprise. One thing is very clear, a long term sustainable solution is needed to replace the jobs that are NOT coming back.

“You realize of course, that in order to be eligible for forgiveness of PPP loans, employers HAD to rehire employees by June 30, 2020. After that, if funds provided by CARES have been used for payroll and eligible expenses, the employers have no restriction on future layoffs.”

– John Hussman

Large Hole to Fill
The latest bill passed by the Democrat-controlled House of Representatives concocts a $3 trillion infrastructure bill spending that represents a jump towards a Green New Deal, and unabashedly so. The Republican-controlled Senate knows not what to do: on the one hand, it doesn’t want an infrastructure bill it deems not truly an infrastructure bill, but on the other hand, rejecting what is touted as jobs creating legislation makes for bad optics politically. One would hope that some sort of infrastructure bill slithers out of the Senate before August recess. Assuming a compromise bill is signed in September, then what? Why, more trillions of dollars to state and local governments whose coffers have been emptied by lockdowns. Of course.

When it comes to Washington policy, we highly recommend setting up a call with our associates at ACG Analytics. Email if interested. There has never been a more important time to discuss the political impact on sector rotation in the United States.

The Coming Fiscal Cliff

It’s a scary few words, but all it means is there’s a large amount of fiscal love about to expire, but it sure can be replaced. A robust infrastructure spending agenda is an important option, far more sustainable than sending Americans cash. Some form of an extension of federal unemployment insurance will surely pass in the next piece of legislation. However, the $600 per week “plus up” will not be renewed. Why? Because 70% of recipients now are paid more money NOT to work than the “back to work” option. Usually, there is no federal unemployment pay. Every state has its own parameters for unemployment disbursements. However, currently, we also have a COVID virus inspired federal unemployment payment scheme. This has had a profound effect on the US economy.

Consumer Credit

Over the last 3 months, US consumers have paid down a colossal $106 billion in credit card debt, bring the total outstanding credit card debt below $1 trillion. Indicatively, the first time total credit card debt hit $1 trillion was back in December 2007, which means that the deleveraging of the past 3 months has sent the US credit card balances to a 13 year low. – ZH

So Far, Delinquencies are in Check
Big credit expansion from the Federal Reserve and a colossal fiscal boost has significantly reduced credit card delinquencies and increased car purchases. Those two phenomena will reverse once the $600 a week safety net vanishes after July 31st. We expect Congress to extend the PPP program for small businesses, but in a more focused format that supports only the hardest-hit businesses. Extending the full $600 per week in Pandemic Unemployment Compensation (PUC) is highly controversial and will NOT last past July.

Unsustainable Cash Burn

Close to 70% of the U.S. annual budget is already entitlements and interest expense, so laying-out current $600 per week for the roughly 20 million Americans is NOT sustainable. The colossal outlay for those NOT working adds up to $48B a month or $576B a year for the U.S. Government. To put that in perspective, the Defense Budget is $721B this year, and the interest on all of the U.S. Government’s debt is nearly $400B this year (and that’s only the case if the Fed is able to arrest long term interest costs on the U.S. debt obligations). This is clearly an unsustainable unemployment benefit pay-out, but a cliff drop to no benefits could be disastrous. If you take it away, yes you force people back into the labor force, but you also drag down near-term consumption. This is the reason why the Administration is considering ‘bonuses’ to get people to go back to work. The question is what has a stronger effect – Less money in people’s pockets in Q3/Q4 or increased confidence of future income from increased employment? This is another major selling point for infrastructure. 


A Must Pass Fiscal Boost for Infrastructure

In brief, and ironically, household income increased in the second quarter as the economy collapsed, and household income will decline as the economy recovers in the third quarter.  There will be another bill of over $1 trillion, if only because Senate Republicans know it’s a MUST PASS bill heading into November’s election. They simply have to deliver.  As a result, some unemployment benefits will likely be extended to year-end and selected states will be backstopped financially.

As to infrastructure, this has been discussed for well nigh three years now. The House bill insists on broadband for all and Green New Deal lite, while the White House wants classic bridges, tunnels, and roads plus optic fiber everywhere. The whole recipe is a colossal tailwind for construction stocks and a couple of high tech heavyweights. Meanwhile, the Senate is conflicted about more fiscal love and doesn’t know what to do. Timing: perhaps a September signing, right in the middle of the presidential campaign. But any sign that the U.S. economy is potentially strong enough to withdraw fiscal and monetary support, you will see the mother of all taper tantrums. Stock will collapse.

Our High Conviction Call from Early April Here Below
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Green New Deal Posing as Infrastructure

The House measure surreptitiously has over $1 trillion of environmental justice programs which are seemingly unrelated to classic infrastructure. A green wolf in infrastructure clothing won’t be embraced by the Republican Senate. But there is another risk: many Republican Senators vowed NOT to raise taxes. The question for them is: how to pay for $1 trillion of infrastructure without raising taxes. The pie is only so big, they argue, but a gas tax is the most likely with a focus on heavy users like Amazon. The answer is new infrastructure grows the pie and so pays for itself over time. As detailed in a previous missive of ours on infrastructure: the improved efficiency of interstate commerce and commute to work times will stimulate the economy enough to generate more tax revenue. Infrastructure should pay for itself in ten years or less. The Department of Transportation is due to release its proposal soon, which we suspect will make exactly that point, which in turn will provide Senate Republicans with exactly the political cover they need.

Political risks to a delay are high and real. Nearly 40% of still employed make less than $40,000 a year. If unemployment remains high, the Democrats may sweep in November.

Normally, infrastructure bills take a long time to hammer together as they are as contentious as they are complicated. One would usually assume it can’t be done quickly. However, the vibrant threat of political extinction is a powerful prod to Republicans to pass infrastructure legislation.

Yet Democrats face their own risks. Why would they hand Trump a major victory before the election? Democrats want to say to their constituents that they passed an environmental bill masquerading as an infrastructure bill. So political risks cut both ways since if Senate Republicans pass their own massive infrastructure bill only to have it rejected by the House, that will be used as a campaign weapon Republicans will use against Democrats. What’s good for the goose is good for the gander. Current betting odds have Democrats doing well come November. But now they have the memory of pain. Polls looked good for Dems the last presidential election cycle. Obviously, they haven’t forgotten.

Biden’s True Love, the Rails

But let us assume no infrastructure bill is passed before election day, and Biden wins. What then? Well, while all of Biden’s policy papers are written by others. Per ACG Analytics in Washington Biden has a long track record of promoting transportation. A train station is named in honor of him. The “Joseph R. Biden, Jr. Railroad Station”, also known as Wilmington station, is one of Amtrak’s busiest stops, serving nine Amtrak trains as it is part of the Northeast Corridor. Further, Dems won’t give up on some kind of Green New Deal, and the Green New Deal, for all its sociological ramifications, has to have a major transportation component, particularly under a Biden stewardship.

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Surging Second Wave Risk Assures Colossal Infrastructure Spending

What would tip the balance in favor of an early infrastructure bill? Worse Covid-19 numbers coupled with a marked slowdown in opening up the economy. The worse the economic news is in the weeks ahead, the more likely an infrastructure bill is in the near term before year-end. Over $8 trillion of U.S. GDP resides in troubled states. The Texas governor, for one, has publicly expressed concern.  We note, in passing, that Europe seems to be emerging from lockdowns in a less sloppy manner than is the USA. Their equity markets and the Euro, seemingly, as a result, are performing better than ours.

Copper and Baltic Dry Index are Telling Us Something
With large fiscal plans coming out of China, the U.S., and the UK, the global commodity complex has caught a bid. Above all, with over $30T in hiding-out in U.S. Treasuries, U.S. Corporate Bonds, and U.S. Big Tech stock certificates, all that PAPER wealth needs an inflation hedge in REAL tangible assets, now MORE than EVER. Bullish commodities.

Populism’s Next Act Will Demand a Colossal Fiscal Response

We’re face to face with the meta-macroeconomic background of Central Banks providing the groundwork for the rise of populism. For over a decade, central banks have done all the heavy lifting, and now its time to pay the piper. The link isn’t direct. The causal relation isn’t proximate. However, QE is the ground cause behind populism’s rage. By inflating financial assets, wealth inequality has gone through the roof. Fact. Central Bankers’ protestations to the contrary. This has not gone unnoticed by the huddled masses. The concentration of capital, if carried to excess, leads to revolution. Lost in the discussion of this topic is this simple observation: the USA is the only country in the world that has more guns than people, at 120 guns per 100 people, as per the Small Arms Survey conducted in 2017. No other country comes close. If a minority crushes a well-armed majority, the price will be quite high, as history teaches. Social upheavals have been around for as long as we have historical records. The Social War in ancient Rome, for example, lasted from 91BC to 87BC and centered on tribes and cities conquered by Rome 200 years priorly. These peoples were not enfranchised even though they had fought shoulder to shoulder with Romans in the creation of their empire. They believed they should be treated as equals. The Roman Senate disagreed. A devastating civil war ensued, which Rome ultimately won. However, after its victory, the Roman Senate didn’t want to go through another Social War, so the demands for equal citizenship were finally granted. 50,000 Roman men of fighting age fell in the conflict, out of an adult man population of less than 900,000. A similar ratio of men killed for the USA today would number ten million dead. We note that according to the latest polling data, fully a third of Americans believe a Civil War is in the offing. Inequality’s explosion over the last decade nearly guarantees a meaningful infrastructure plan solution.

The Battle for the US Senate

The GOP took 18 Senate seats back in the 2010, 2014, and 2018 elections, a mean reversion shift to the Dems is more than overdue. While the Republicans seem split between those in the Senate who don’t want excess spending, vs. those such as the White House who embraces excess spending, it should be noted that a Democratic sweep would probably lead to but a narrow Senate majority for the Dems and some of the newly anointed will have won narrow victories themselves from States with large conservative populaces.  So Republicans will most likely be left with a modicum of leverage. The betting odds for a Democratic takeover of the Senate has increased from 32% to 52%, a remarkable change. The Republicans feel pressure at the state level as well, where more Republican states will have to allow legalized gaming and legal recreational cannabis use to financially survive. States are thirsting for new creative revenue solutions.

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One unknown is the accuracy of presidential polling. Presidential polls have become notoriously unreliable. Given that few people will admit they are Trump supporters, it is hard to gauge his real support. And even the betting odds are suspect since they report dollars wagered, but Trump supporters make smaller bets because they have less money to wager. So on a numerosity basis, the betting odds are closer. One can say with confidence, however, that directionally Trump’s reelection chances have worsened since the beginning of the year. However, if “only” 35% of the population are die-hard Trump supporters, it is hard to see how ignoring them after a Democratic “landslide” would “heal” the country. But the Democrats plan to not merely ignore Trump voters but to destroy them for the simple reason that progressives utterly despise and disdain them. This is hardly a secret. It should be noted that geographically liberals are in highly concentrated positions with their backs to the water, a fact that would have delighted Augustus Caesar had he found himself in similar circumstances to conservatives today. Geography is destiny, even in a civil war. So: The King is dead! Long live the King! Or as the Who put it in “Won’t Get Fooled Again”: “Meet the new boss. Same as the old boss.” Politics is about power, not justice.

The initial and essential purpose of the lockdown was to flatten the curve so as not to have the hospital system overwhelmed. The result is over forty hospitals have gone bankrupt or have shut down entirely. So while the prospects of an infrastructure bill lifts materials stocks, no one is talking about building new hospitals.

But there is hope. There is hope indeed for a new bipartisan consensus has emerged: China is bad and big tech is bad. One can debate about which political party will address these two issues with greater vigor, but both will cooperate with each other in a fundamental supply chain reconfiguration, and new regulations on and split up of big tech. It is thus conceivable that upcoming legislation on infrastructure will be followed by further significant legislation on more than one front and supported by both parties and the majority of the American people. Generationally, it seems inevitable that more eco-friendly laws will be passed. And there is broad consensus across the electorate that every single citizen, without exception, should be equal under the law. All of these speak to a greater populism that might well unify the country, not divide it. And infrastructure build-out, of both the old and the new, may well lead the way.

When it comes to Washington policy, we highly recommend setting up a call with our associates at ACG Analytics. Email if interested. There has never been a more important time to discuss the political impact on sector rotation in the United States.

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Random Acts of Kindness

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*Our institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.

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Zig Ziglar once said, “you can get anything in life you want if you just help enough other people get what they want.” It’s the little things in life that are often the big things and keep us all going. Let’s focus on the right direction.

“So on the subway home, a homeless guy was asking for money. Young. Mid-twenties. Physically fit but a little off his rocker. Usually, I am annoyed by that type of thing and was about to shake my head, but at the last second, I gave him a $20. He was so happy, naturally. As he walked away he said to himself, “What a good guy!” And for a moment, I felt kind of good. Of course, that faded quickly, but I realized that it was among the top ten nicest things that someone said to me in a month. I really didn’t know what the lesson was other than it is nice when someone says something nice to you. I didn’t expect it. I guess it was the sincerity, enthusiasm, and certainty in his voice when he said it, as much if not more than what he said. Then he sat down a few seats away all excited and called someone on his cell phone. It was his daughter and he asked her to tell mommy he would be home soon because he got money for dinner much more quickly than he thought. So there is a lesson way beyond my vanity there.”

Herb Lust



Human, All Too Human

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*Our institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.


Email to get on our live Bloomberg chat over the terminal, institutional investors only. 

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Great Read – Still in a Bear Market?

Friedrich Nietzsche published his first work in his recognizably mature style in the late 1870s, entitled “Human, All Too Human.” It expresses the will to overcome human failure through an understanding via philosophical insight.

One Large Tremor, How Rare?
Over the past 20 years, there have been 5032 trading days. Only 92 days had drawdowns of -3% or more. That is just 1.8% of trading days. However, 43 of the 92 (47%) were within 1 week of each other. Yes – something that has happened just 1.8% of trading days in the past two decades, yet 47% of the time it occurs again in the same week. Meanwhile, 52 of the 92 were in the same 2 weeks (57%) and 57 of the 92 were in the same month (62%). You can partly see this dynamic above with the ‘bunches’ of large drawdowns. Bottom line; Large drawdowns are commonly followed by more large drawdowns in the days and weeks to come. Very large tremors like the one we experienced last week, DO NOT come alone.

Lots of Weak hands, No Conviction

With so many investors playing “don’t fight the Fed roulette” -conviction is NOT high in the latest bull run. You can make a strong argument, we’re in a bear rally for U.S. equities. It’s clearly a musical chairs market in our view, there are a lot of weak hands on the playing field, rookie investors playing with capital which is NOT sticky. During the entire rally off the March low, the S&P did not get overbought until last week’s post-recovery high, as per the RSI (relative strength index, see below). In bull markets, the various overbought/oversold indicators should stay overbought for three months (see below Q3 and Q4 2019), enjoying some of the bull run’s best gains. In bear markets, if the RSI ever gets overbought, the most you can hope for is that it stays overbought for several days.

RSI Failure with NO Follow Through
We make the argument, this must be a rally within a bear market. Instead of the overbought RSI leading to acceleration, it leads to a historic collapse. How significant? Thursday’s 6.9% drawdown puts in at number 25 going back to the 1920s.  That ain’t bull market action, my friend.

The Robinhood Rally

Last week with the S&P 500 touching 3232, Robinhood sported 33,000,000 separate stock positions, compared to 17,000,000 in March. Rookies prefer to chase rallies, NOT buy heavy capitulation selling with the S&P 500 down near 2300. Sure, every bull market has two to three day selling squalls of three to four percent. They are great and fun to take advantage of. What happened today was completely different. It really does look like the second leg of the rally after the one-month consolidation around 2800 was a Robinhood rally. Breathtaking stupidities abounded, with the poster child being bankrupt Hertz equity rallying from 75 cents to over $6, sporting a market cap of $900 million at the recent peak while the unsecured bonds were trading at steep discounts to par, and even secured paper was in the low 90s! Well, we got back near $2 today. Still ridiculous but obviously the Robinhood crowd was immolated. Which is nice.

Anecdotal: professional race car drivers were talking about getting into the market because their twenty-something clients were making so much money day trading.  A famous blogger on a famous site that has nothing to do with finance told his more than 2 million followers that equities were the easiest game in town because stocks only go up.

Not Nothing

It is “not nothing” that the NASDAQ made a token new high and failed. It is “not nothing” that the S&P pulled even to where it had been 365 days earlier and failed. It is “not nothing”. It is awful. You should accelerate at those levels IF it’s a bull market. Equities flunked that test for size.

Had you shorted the market when Stanley Druckenmiller admitted he was wrong about the rally, you’d be sitting pretty right now. That was the sell signal. This is not to insult Mr. Drunkenmiller at all. Quite the contrary. He is obviously one of the most brilliant investors of all time. But that is precisely the point! When even a man of such genius can’t take it anymore, it’s the top. The lesson is: he’s a genius AND a human being. And all humans have a capitulation point. Without exception. Does anyone doubt Dave Tepper’s genius? No one I know. But he covered his NASDAQ short days before the Dotcom peak. Why? Because he is a human being. And oh, by the way, his best years lay ahead. I’m sure the same holds true for Stanley Druckenmiller.

A little history. A year ago when the S&P hit 3,000, it was expensive. When it then hit 3,100, it was really expensive. When it hit 3,200, it was jaw-droppingly expensive. When it traversed 3,300, it was simply incomprehensible. And where was the VIX index? The low single digits. And when the S&P peaked at 3,233 a few days ago, where was the VIX? In the mid-twenties, after having based there for weeks! Oh yeah, people wanted to hedge their gains, still Covid risks dontchya know, blah blah blah blah blah. Nice, but that is just a BS way of saying pros didn’t believe the rally. But in bull markets, the pros do in fact believe. And they believe in it with all their heart and soul. It’s the human thing to do. There is no long term bull market in all of history that the pros missed entirely. Late to the game? Sure. Sold too early? Happens all the time. Miss it completely without even a small slice out of the middle? It just doesn’t happen. That said, during the entire basing period, the VIX held below its 20-day moving average. Well, it sailed above it with conviction today baby. And you can gamma and skew yourself until you’re cross-eyed, but it ain’t good news to blow up over a moving average that had held VIX in check for so long.

And by the way, where exactly did the S&P fail again? Well, there is a fat gap just above the recent peak that marked the initial break earlier this year of the recent crash. Not just any gap, gentle reader, but THE gap. Literally the mother of the most violent sell-off in a century. A bull market should waltz through that. Not this market, though.

Ah, you say, but second Covid wave fears and some other something in some headline somewhere that you read, that’s what caused today’s carnage. Oh really? What about the time-honored adage that bull markets climb a wall of worry? It’s not the news, it’s the reaction to the news that counts. In a bull market, bad news is greeted with buying, not with historic selling.

Fear replaced greed today. And that is human, all too human.



To Have and Have Not; Corporate Inequality is Soaring with Colossal Bond Sales – Where’s the Best Risk-Reward?

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*Our institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.

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One of Ernest Hemingway’s classics, “To Have and Have Not” was published during the depression in 1937. The scene is set after a wealthy man sneaks off without paying his bill to the fishing boat captain after a three-week fishing trip, leaving the captain destitute, forcing him to a life of crime. The 1930s connectivity to 2020 is ominous-looking out to 2021-2023. At what point does capitalism break on the back of social unrest? Let us explore.

% of Total Profits Coming from the Largest 100 Companies*

2020: 90%
2017: 84%
1997: 52%
1977: 48%

*U.S. publicly traded corporations, Wall St. Journal data and the Bear Traps Report. We are capitalist, with a profound love for capitalism, but is this trend sustainable? It’s clear, events like Lehman’s failure in 2008 and COVID19 2020, only exacerbate a Hayek’s Road to Serfdom. We MUST be prepared for what’s coming.

The Haves and Have Nots

In financial markets today, we also face a case of the “Haves” and the “Have Nots”. The Fed is not a solvency provider for the benefit of the “Have Nots”, but a liquidity provider for the benefit of the “Haves”. It’s survival of the fittest, complete with steroid injections. Sure, liquidity can help some companies that are hurt but not destroyed by the pandemic. But it is a fantastic boon to the real “Haves” that are not in distress at all. All but free money allows cheap financing to garner a still greater percentage of the economy. Classic Marxian concentration of capital. Meanwhile, the “Have Nots” who are heavily impacted by the pandemic, still can’t raise new debt capital, even in today’s awash-in-capital funding world. They are left helpless and forced to not only file for bankruptcy but downsize their operations by firing employees, rendering them destitute, like the hero of Hemingway’s novel.

Horrible Long Term Breadth
As you can see above, the S&P 500 equal-weighted index relative performance against the Nasdaq 100 is unsightly. Remember, an equal-weighted index treats all 500 stocks equally, unlike the S&P 500 SPY ETF where a few stocks are holding up the index. Over the last 5 years, the Nasdaq 100 is 116% higher vs. 31% for the S&P 500 equal-weighted index.

US Treasury Debt Issuance

2021: $4.10T
2020: $5.20T
2019: $1.10T
2018: $1.20T
2017: $0.60T
2016: $0.60T
2015: $0.65T
2014: $0.70T
2013: $0.80T
2012: $1.10T
2011: $1.1T
2010: $1.6T
2009: $1.5T

*Net Marketable Treasury Issuance, Guggenheim. One MUST ask, with the US government coming to borrow at this pace, how much will be left for the have nots of corporate America? 

Extreme Inequality – One Uneven Playing Field
Everyone knows the Federal Reserve has expanded their balance sheet by nearly $3T in recent months, but few realize the colossal distortions that are forming in markets. Our friends at Artemis Capital Management have a unique lens on market distortions – while the mad mob was playing “don’t fight the Fed” roulette in February, they were getting long volatility at very attractive prices. See their powerful chart above.  The strange thing is, the same crowd that was telling us “don’t fight the Fed” in February – is piling back into the Nasdaq again. They’ll NEVER learn, but why should they when the Fed bails them out each time? Year-to-date the Nasdaq 100 QQQs are +2.6%, while the Russell 2000 is -24.1%. Remember, 44% of the Qs are in just six stocks (Facebook, Apple, Amazon, Netflix, Google, and Microsoft). Where’s the trade? There is one sector we believe which will dramatically outperform the Nasdaq over the next 24 months, email for our special report.

Recent debt issuance has been phenomenal, well outstripping former years.

Weekly US Investment Grade New Bond Issue Supply

2020: $81B
2019: $42B
2018: $37B
2017: $34B
2016: $42B
2015: $41B
2014: $35B
2013: $27B
2012: $26B

*Nearly $800B YTD, four-week moving average above marking each year’s highest level. Bloomberg data. Last year, US investment-grade bond issuance was near $1.05T, at the current (unsustainable) pace – 2020 will end up close to $2.4T, fueling corporate inequality.

Bonds for Sale
Companies are raising a COLOSSAL amount of cash, preparing for a long period of uncertainty. After extremely tight financial conditions, many U.S. corporations were shutout from borrowing in March. Today, they’re running to the open arms of investment banks -trying to get their hands on fresh capital. Many claim we’re entering a period of debt deflation, which begs the question. With capital markets this – wide-open – (see above) is it inflationary or deflationary? BY DEFINITION, debt deflation comes with extremely tight credit conditions leading to deflation. As you can see, the Fed is seeking to AVOID deflation while creating an environment where capital is easily accessible. The bottom line, the HAVE NOTs are forging deflation risk, at the same time the HAVEs are bringing on inflation risk in our view. 

Two-Tiered Access to Capital

So, who are these “Haves” with unfettered access debt markets at almost free interest rate levels, rates well below what U.S. Treasuries yielded only a few months ago? Most are NASDAQ 100 companies and multi-nationals.

And, who are the “Have Nots”? The Russell 2000 and other small caps, who, by the way, employ a lot of people.

Nasdaq QQQ Extreme Richness to Russell 2000 IWM
Is the Fed picking winners and sowing the seeds of losers? As central banks suppress interest rates with trillions of dollars of asset purchases (much of the buying U.S. Treasuries), bond prices are NOT the only thing moving higher. Why? It all comes down to the net present value of cash flows, a premium builds in Nasdaq equities during QE periods. A 1.25% 30 year U.S. Treasury yield makes corporate cash flows more valuable, it’s that simple. Large companies can borrow at far cheaper levels than small companies and it’s becoming exponentially unfair. The relationship between the Nasdaq QQQs and small-cap equities is reaching blood-curdling extremes. Since Q4 2018, the 2000 stocks in the Russell are flat and the Qs are up nearly 60%. One group has had easy access to capital powering stock buybacks, the other has not. It’s corporate inequality at its worst. Where’s the trade? There is one sector we believe which will dramatically outperform the Nasdaq over the next 24 months, email for our special report.

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The Power of Hot Air – Inside the Secondary Market Corporate Credit Facility (SMCCF) 

“Boeing just raised $25 billion on a deal that was met with $70 billion in orders, making it the sixth-largest corporate bond placement on record. In fact, investment-grade corporate bond issuance this year has broken the previous monthly record twice, with March volume of $262 billion breaking the previous record in May 2016 of $168 billion, and April volume of $285 billion breaking March’s record. Year-to-date investment-grade bond issuance through April totals $765 billion, putting 2020 on track to easily surpass last year’s total of $1.1 trillion. Many companies, including Boeing, Southwest, and Hyatt Hotels, have likely gained access to financing simply on the strength of the government’s intentions to intervene in credit markets. Successful debt offerings have also been completed by recent fallen angels like Ford and Kraft Heinz, both of which had corporate bonds trading at or near distressed levels only weeks ago. This was a real success for corporate bond issuers, but it was also a success for the Fed. The Fed has yet to buy a single bond in the SMCCF, but the mere announcement of the program has managed to tighten credit spreads dramatically and greatly ease liquidity issues.)”

Our friend Scott Minerd, CIO Guggenheim

Solvency vs. Liquidity

In our global, New York Times best-seller, we break down the difference between a solvency and liquidity crisis. In the case of the latter, sometimes healthy firms collapse because they can’t access the credit window, the Fed can address this risk. The former focuses on companies that can’t survive no matter how much they can borrow – they need a large cash flow boost. The Fed is helpless here, fiscal policy can provide some relief.

Equity Returns Sorted by Credit Ratings
We are entering a period that will be extremely difficult for passive asset management. The days of blindly placing capital in index funds (S&P 500 SPY) and outperforming are over. Looking forward, if you cannot pick the winners from the losers – you will underperform. We believe long/short active asset managers are coming into a bull market in terms of incoming assets under management. As you can see above, credit leads equities. If you don’t understand the credit risk, you shouldn’t be in the stock.

Political Risk Surging Across Fixed Income and Equity Markets

Populist movements and political risk is SURGING across equity and fixed income markets. FAANG equities, for example, will have a significant target on their back moving forward as Washington moves to either break up these companies or find new, creative ways to tax them. Another example is found in the  Fed’s Primary Market Corporate Credit Facility. This tool is designed to have the central bank buy debt directly from issuers – WITH strings attached.  As a reminder, Treasury provided $75B of collateral to these programs, that the Fed leverages 10:1, to buy $250B in the secondary market and $500B in primary market debt. We hear some issuers will NOT sign up for it. Why? Some are thinking only ~20 companies (Ford, GM etc) because the government’s terms require CEO and CFO sign-off and potentially leave them exposed to some sort of congressional/government probes in the future, which many issuers may want to avoid. Translation, companies don’t want to become the next Fannie and Freddie. The GSEs went into Federal assistance (conservatorship) a decade ago and have NEVER come out of Uncle Sam’s grip with hundreds of BILLIONs of dollars in profits swept to the U.S. Treasury.


However, there is a flaw to being one of the “Haves” if the number of “Have Nots” increases exponentially. Even the “Haves” need customers, and those customers may be fast disappearing as the “Have Nots” experience rolling bankruptcies and downsizings.

The savings rate recently vaulted (nearly doubled) to 25%, and for good reason, given the times in which we live. After a decade long buying binge, Americans have enough stuff. And as the super-charged unemployment compensation from the stimulus bill expires July 31st, the excess income it offered will evaporate, and fees for Netflix will decline. Companies can create all the content they want for people who have no money or who are desperately saving what little they have. Multi-hundred dollar smartphones? Forget it. Pay to play apps? Not a chance. Pay for movies? They’re free on Pluto. Keep your old phone and use the free apps you already have.

So the “Haves” become the “Have Nots” down the road. Look at it this way. Say a yacht was worth $30 million six months ago. What is it worth now that there are no buyers? Zero. What happens to private golf courses when half the members quit? They fold. Luxury cars? A bid here. A bid there. But the aspirational shopper is gone. Some asset prices can and will crash. High-end contemporary art is already offered at a 30% discount.

And what happens to that portion of spending attributable to keeping up with the Joneses when the Joneses run out of luck? Kaput. So much for multiple once in a lifetime vacations every year.

As the core of the economy is hollowed out, the number of “Haves” joining the ranks of the “Have Nots” will only increase.

This is part and parcel of “The Fourth Turning”. Over the next 6-8 weeks, correlation will rise across equity market sectors.

Money Supply Surge

Beware – broad money supply year-over-year percent growth is now at a record 18.5%, this is sowing the seeds of inflation 6-12 months out. We say this with HIGH conviction. More than QE1, QE2 or QE3 combined, the Fed’s nearly $1T of asset purchases in April is at an unsustainable pace. In the inflation recipe, there are three primary ingredients and we have them all; a) large printing to fund government spending, MMT, b) a large budget deficit, c) a significant supply shock.

Total Returns YTD

Nasdaq 100: +0.14%
Berkshire: -19.35%

1 Year

Nasdaq 100: +14.09%
Berkshire: -15.5%

3 Year

Nasdaq 100: +60.02%
Berkshire: +10.02%

Since 2000

Nasdaq 100: +181.08%
Berkshire: +412.02%***

Bloomberg data

Buffett is NOT Interested

Over the weekend we learned Berkshire Hathaway has been a net seller of stocks this year. Even with a $137B war chest of cash – Buffett has no interest in making a large purchase. Keep in mind, his pile of greenbacks is up from $53B in 2016! This is fascinating, clearly, Buffett doesn’t want to play the “don’t fight the fed” roulette – he’s waiting for real value. Clearly, low rates put FAANMG like equities in high demand. Buffett doesn’t want to chase, play musical chairs in these stocks, thus he continues to get swamped on a relative performance basis. What could stop this seemingly endless trend? Just the slightest hint of INFLATION will crush the Nasdaq 100, unimaginable destruction. Join us below for our special report:

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Fed’s Tool Kit and the Power of Forward Guidance

“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.

Financial Times, February 20, 2020

*Our institutional client flatform includes; financial advisors, family offices, RIAs, CTAs, hedge funds, mutual funds, and pension funds.

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In our New York Times bestseller, we take a deep dive into a wounded global economy and the weapons central banks have in their back pocket. Looking over the last 15 years,  two primary exogenous shocks brought the U.S. economic ecosystem to its knees; Lehman Brothers failure and COVID19. Nearly every time the Fed raised the inflation bar needed to get off the accommodation gravy train – certain asset prices responded forcefully, some FAR more than others. Let’s explore…

What is Forward Guidance and How do Asset Classes Perform During Weeks when it has been Aggressively Used?

On Wednesday, April 29th the Federal Reserve meets for the first time since mid-March, that’s close to 27 million jobless claims ago. Unimaginable heartbreak and destruction will very likely result in an even more creative tool kit from central banks.

It’s all about the Fed conveying more certainty of the economic data allowing them to stay lower for longer. The whole point is new language – in the statement – allowing for an overshoot on inflation. Acceptance of a level – well above – their well stated 2% PCE target.

This Week: The Ultimate Message from the Fed

a) If things get better, they’ll stay HIGHLY accommodative.
b) If economic conditions deteriorate further, they’ll offer markets even more creative accommodation.

The only path forward is massive accommodation or more accommodation.

The Fed has Five Primary Weapons, BUT really JUST ONE; 

1) Rate cuts are out of gas (the Fed has cut its upper-bound target rate from 2.50% in July, to 0.25% in March).
2) Unconventional balance sheet creativity (is out of gas for now, the political backlash coming at high yield buying promises is growing. We believe the Fed wants to keep this powder dry. They have yet to buy a high yield bond).
3) Forward guidance (lots of bullets in the chamber)
4. YCC (yield curve control, NOT there yet).
5. Negative interest rates (NOT there yet).*

***‘Unprecedented situations require unprecedented actions. That’s why the U.S. Federal Reserve should fight a rapidly deepening recession by taking interest rates below zero for the first time ever’

Narayana Kocherlakota, Federal Reserve Bank of Minneapolis

***So far this has been the most aggressive discussion on the Fed going negative yield, but how much influence does an ex-Fed President have? We say NOT much. The real tell – trial balloon – would be coming out of a Lael Brainard speech, that’s not happening, as of yet. 

Have Gold Bugs figured out Gold is a Rates Trade?

Precious metals are NOT inflation driven for now. Weak inflation data and higher gold prices go hand in hand, this is the opposite of what “gold bugs” have been preaching for the last 30 years. Many don’t realize precious metals respond to heightened deflation risk as much as they do to inflation risk.

Over the last 40 yrs, we’ve been lectured on the relationship between gold / silver and inflation, but it’s really about price stability. Markets have been pricing in deflationary risks for much of this year. The bottom line, all you need to know is when central banks lose control of prices – it triggers meaningful tailwinds for precious metals.

How do Asset Classes Perform?
Forward Guidance – What’s fascinating is, the first 4 times they used it in the post-Lehman era – the market believed them (2008-2012). Gold and Silver responded forcefully early on, each of the 4 times. Then, the weapon (forward guidance) became the “boy that cried wolf” in 2012. The markets smelled out the coming 2013 taper and gold and silver collapsed.

How do Asset Prices Respond?

Over the years, the FOMC used forward guidance to support economic activity and a return of inflation to its 2 percent target.  Gold and Silver responded to these events meaningfully: (see the attached chart above).

December 16, 2008: The FOMC lowered its target for the federal funds rate to a range of 0 to 1/4 percent, which the FOMC considered an effective lower bound. In addition, the Committee stated that “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Back in 2008, from December 15 to February 20 of the following year; Silver was 42% higher with Gold 26% to the upside.

March 18, 2009: The FOMC replaced “for some time” with “for an extended period” in its postmeeting statement. Back in 2009, from March 17 to December 1st, silver was 54% higher while gold surged 34%.

August 9, 2011: The FOMC announced it will likely keep the federal funds rate at exceptionally low levels “at least through mid-2013.” Back in 2011, from August 8 to September 6, Gold was 16% higher with silver up 14%. 

January 25, 2012: The FOMC replaces “at least through mid-2013” with “at least through late 2014.” Back in 2012, from early January to March 1st, gold was 14% higher with silver up close to 35%. Precious metals investors were front-running the Fed for much of 2011-2012.

September 13, 2012: In conjunction with the announcement of its third large-scale asset purchase program (henceforth “LSAP3”), the FOMC states that it “expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In addition, it indicates that exceptionally low levels for the federal funds rate are likely to be warranted “at least through mid-2015.” Back in 2012, from August to October, Silver was 30% higher with gold up 12%.

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The Week Ahead

Rate cuts get vaporized in a swift economic downturn. This week, the Fed will tell us if they use forward guidance now – with force – while the US economy’s struggles are in deep/early stage, we’ll actually have a chance at fighting off deflation and the negative rate trap in Europe and Japan. The bottom line, they will back up the truck on forward guidance. 

A Lot is at Stake

As our friend Chris Cole points out, some people think private equity is a “defensive asset.” It’s NOT. In a global recession, state pensions with over 71% exposure to equity-like assets, will face a $3-10T solvency problem if Japan-like deflation occurs without greater allocation to true diversifiers like gold, silver, and long equity volatility strategies. We are coming to a point where real interest rate returns are pushed so low that investors holding the debt won’t want to hold it and will start to move to something they think is better. In our view, investors desperately want a deflation or inflation hedge.

Our Tweet from June 2019, Gold $1378
We love technical analysts, some of our closest associates are in this profession, BUT let us be VERY clear. Looking at charts without a macro overlay lens only shows you half the picture. As you can see above, back in June 2019, the technical picture was bright for gold. Even more attractive – budget deficits in Washington were surging and a trade war was punishing the global economy. Both factors were forcing the Fed into a far more accommodative policy stance, gold’s ultimate fuel.

An Ugly Budget Coming out of Washington

U.S. budget deficit increased by $140 billion during the first nine months of last year to $747.1 billion as government revenues and spending both hit records. BEFORE covid19 arrived – the Treasury Department’s deficit was up 23.1% over the same period a year before with tax receipts rising by just 2.7%. The Trump administration forecasted a deficit for the full budget year, which ended on Sept. 30, topping $1 trillion, up from a deficit of $779 billion the year before. This number is NOW close to $4T. The US’s budget deficit will end the fiscal year at almost 18% of GDP, its highest level since the year after World War II ended and up from 4.6% in 2019: CBO data. Congressional Budget Office says coronavirus aid, likely recession to cause the deficit to reach $3.7 trillion this year.

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Funding Colossal Liabilities

The world is facing a colossal need to fund liabilities – this will fule the mad rush into alternatives, Next, there simply is not enough capital to meet the needs for it – large deficits that are being monetized. We are about to come into a world with thousands of Yanis Varoufakis like leftists – private property rights are fleeting.

Bond BUYERS BEWARE – the Left wants your Capital

“I shall wear the creditors’ loathing with pride.”

Yanis Varoufakis

*”Yanis” Varoufakis is a Greek economist, academic, philosopher and politician. He has been Secretary-General of MeRA25, a left-wing political party, since he founded it in 2018. A former member of Syriza, he served as Minister of Finance from January to July 2015 under Prime Minister Alexis Tsipras.

Down the Road Ahead

Central bank asset purchases, currency depreciation, and large tax increases have increased the conflicts between the capitalist haves and the socialist have-nots. Holders of debt will receive very low or negative nominal and real returns in currencies that are weakening, which will de facto be a wealth tax.

Federal Reserve’s Balance Sheet

2020: $6.6T
2019: $3.7T
2018: $4.2T
2017: $4.5T
2016: $4.5T
2015: $4.5T
2014: $4.5T
2013: $3.7T
2012: $2.8T
2011: $2.8T
2010: $2.3T
2009: $1.8T
2008: $0.8T

*Gold $1050 to $1750 since Q4 2015.

What is Forward Guidance, and how is it used in the Federal Reserve’s Monetary Policy?
Per the Fed’s own claims, forward guidance is a tool that central banks use to provide communication to the public about the likely future course of monetary policy. When central banks provide forward guidance, individuals and businesses will use this information in making decisions about spending and investments. Thus, forward guidance about future policy can influence financial and economic conditions today.  The Federal Open Market Committee (FOMC) began using forward guidance in its postmeeting statements in the early 2000s. Before increasing its target for the federal funds rate in June 2004, the FOMC used a sequence of changes in its statement language to signal that it was approaching the time at which a tightening of monetary policy was warranted (for a review of that experience, see Feds Note “The Effects of FOMC Communications Before Policy Tightening in 1994 and 2004”).  In the aftermath of the global financial crisis, the FOMC reduced its federal funds rate target nearly to zero and then used forward guidance to provide information about likely future monetary policy. For example, the postmeeting statement issued in December 2008 noted that the Committee anticipated that weak economic conditions were “likely to warrant exceptionally low levels of the federal funds rate for some time.” The FOMC’s forward guidance has evolved over time; eventually, the Committee’s guidance indicated that the future path of the federal funds rate would depend upon how future economic conditions changed. In addition, the FOMC used forward guidance language about the flow-based asset purchase program that it undertook in September 2012.

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 Investors Beware

“Bonds are a claim on money and governments are likely to continue printing money to pay their debts with devalued money. That’s the easiest and least controversial way to reduce the debt burdens and without raising taxes. My guess is that bonds will provide bad real and nominal returns for those who hold them, but not lead to significant price declines and higher interest rates because I think that it is most likely that central banks will buy more of them to hold interest rates down and keep prices up. In other words, I suspect that the new paradigm will be characterized by large debt monetizations that will be most similar to those that occurred in the 1940s war years. So, the big question worth pondering at this time is which investments will perform well in a reflationary environment? A world with large liabilities coming due and with significant internal conflict between capitalists and socialists, as well as external conflicts. Most people now believe the best “risky investments” will continue to be equity and equity-like investments, such as leveraged private equity, leveraged real estate, and venture capital, and this is especially true when central banks are reflating. As a result, the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash).  I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better-balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

Ray Dalio, July 2019

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