BONDS ARE BACK: The “Race for Cash” Is Getting Dangerous | Larry McDonald & Michelle Makori
Larry McDonald warns that bond market crashes creating attractive yields are competing with equities for capital, while corporate AI spending and government borrowing create a 'race for cash' that mirrors conditions before the 1987 crash. He predicts a rotation from growth stocks to hard assets like gold and silver, with rate cuts likely by early 2025 as recession risks mount.
Summary
In this in-depth conversation, Larry McDonald, a macro strategist and former Lehman Brothers VP, discusses the current state of financial markets and economic conditions. The core thesis centers on the bond market crash making bonds attractive again after years of underperformance, while simultaneously creating systemic stress through competition for capital.
McDonald highlights a 'race for cash' dynamic where three major borrowers compete for capital: the U.S. government running massive deficits, corporations spending on AI infrastructure (hyperscalers raising hundreds of billions), and other sovereigns with fiscal problems. Investment-grade bond issuance has ballooned from $1.1 trillion in 2023 to potentially $1.9 trillion in 2024, while corporate bonds now offer equity-like returns—citing examples like Apple bonds trading at 48 cents on the dollar and Google bonds at steep discounts.
McDonald argues this competitive pressure is creating a 'supernova economy' reminiscent of summer 1987—strong growth on the surface masking internal market damage. He notes that 40+ major consumer brands are down 30-70% (McDonald's, Home Depot, Lululemon, Nike), representing a hidden crash despite S&P 500 all-time highs. This is driven by a $300 billion consumer tax from higher rates and energy prices, crushing the bottom 60-70% of income earners while AI infrastructure investment booms.
On inflation, McDonald acknowledges his earlier predictions of 4-7% inflation reaching only 3.4% headline and 3% core PCE were wrong, attributing the miss primarily to rent declines representing 20-25% of inflation indices. However, he argues the official data masks true inflation experiences and notes methodology changes in PCE calculations that revised down core inflation by 36 basis points.
Regarding Fed policy, McDonald expects a pivot from rate hike expectations to rate cuts by Q1 2025. He cites the consumer stress, debt service costs (now $1.1-1.2 trillion annually), and historical precedent—the Fed has never hiked with consumer stocks down 30% and confidence at 2014 lows. He predicts this environment will favor duration, REITs, utilities, and hard assets.
McDonald introduces 'financial repression' as the long-term strategy: the Fed and Treasury working to push real interest rates below inflation while managing debt through stable coins, modified bond issuance patterns (less long-term paper), and forced capital flows. Stable coin adoption (growing from $100B to $300-400B recently, potentially reaching $2 trillion) will lock emerging market capital into U.S. Treasury bills, creating a captive buyer base while inflating away debt.
On geopolitical risks, he notes rising socialist political movements in the U.S. (DSA candidates) and France, driven by inflation grievances, creating political term premium risk in bond markets. He draws parallels to historical examples like Weimar inflation preceding political extremism.
For investment opportunities, McDonald recommends: (1) beaten-down consumer brands during October-November tax-loss selling season, particularly Nike, Clorox, and Lululemon; (2) silver down 50% from highs, targeting $100+ within two years with 60s gold-silver ratio normalizing to 30-40s; (3) long-duration bonds (TLT) in a 'category 5 capitulation'; and (4) healthcare/AI plays like Intuitive Surgical and Baxter that will benefit from AI integration.
Key Insights
- Investment-grade corporate bond issuance has exploded from $200-400 billion annually to potentially $600-700 billion next year, directly competing with Treasury auctions that have become among the weakest in 20 years, creating crowding-out dynamics in capital markets.
- Despite the S&P 500 reaching all-time highs, more than 40 major brands are down 30-70% and nearly 40% of the market is in bear markets—a breadth divergence not seen since the 2000 dot-com crash, with only the Magnificent 7 tech stocks keeping the index elevated.
- The Fed cannot pursue a normal hiking cycle because the combination of $300 billion in consumer taxes from higher rates and energy prices, plus $1.1-1.2 trillion in annual debt service, creates recession risk that will force a pivot to rate cuts by Q1 2025 despite tough Fed rhetoric.
- Financial repression strategy involves using stable coins to force $2+ trillion of emerging market capital into U.S. Treasury bills, with Amazon and Fed-connected issuers controlling stable coin infrastructure, effectively creating a captive buyer base while real yields stay negative.
- Rising socialist political movements (DSA gaining 10-15+ House seats plus a governor and potential senator) are being driven by inflation grievances, creating political term premium in bond yields similar to how 1920s hyperinflation in Germany enabled extremist politics.
Topics
Transcript
[0:00] That's the biggest threat to the [music] equity market that we've had in a long time. The bond markets crashed and all of those thousands of bonds out there are starting to offer equity length returns. [music] >> So, you're saying bonds are back. What does that mean? >> It's definitely a crowding out and it's a race for cash. The testosterone spending contest in Silicon Valley has gone absolutely nuts. There's no return on capital visibility and they're all trying to spend spend outspend each other. Not everyone can win, but they're spending as if everyone's [music] going [0:32] to win. >> So, it seems as though the private sector is now competing directly with the US government…
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