The U.S. debt crisis is spiraling and Larry McDonald says the market hasn’t priced it in.
With over $37 trillion in debt and $1 trillion in annual interest payments, the U.S. is barreling toward what McDonald calls a “Liz Truss moment”: a surge in bond issuance that could trigger market chaos. In this eye-opening interview, The Bear Traps Report founder and bestselling author joins James Connor to explain why we’re entering a stagflationary regime eerily similar to the 1970s and why your portfolio needs to adapt.
Topics discussed in part I:
- Why the U.S. faces a debt-driven crisis of confidence
- The real S&P 500 earnings (hint: it’s not $270, but much lower)
- A $4 trillion rotation out of Big Tech
- How capital is fleeing U.S. markets and into global value
- Why hard assets like gold, oil, copper, and coal are set to outperform
- What “financial repression” means for your money
Don’t miss part II of this insightful and actionable interview coming out tomorrow!
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Larry McDonald 0:00
We’re basically at a trillion dollar deficit already, and that’s including one month with Trump, or whatever it is. So it’s basically the the last three months of Biden, versus in the last month, the first month and a half, two months of Trump. You’re in over a trillion dollar deficit. And so now we run into a situation where, if you do have slowing growth later in the year, and your interest costs are still at a trillion and your tax receipts come down, then you’re really in a in a panic, because that will cause a massive, massive, massive migration of capital.
James Connor 0:40
Larry, thank you very much for joining us today. How are things in Panama?
Larry McDonald 0:43
Excellent, excellent. Nice to be on the road. You know, the speaking tour the book is really doing well, especially, you know, Latin America. North America,
James Connor 0:52
good. I want to ask you about that. Before I do that, though, I want to ask you why you decided on Panama. I speak to an investors all over the world. I just spoke to somebody recently there in the Grand Cayman, somebody else in the Bahamas, somebody else in Costa Rica. Why did you decide on Panama? Well, you
Larry McDonald 1:09
know, we wanted to grow the business throughout. You know, if you’re going to fly to Brazil or Chile, if you want to develop a business in South America, it’s great to have a hub in Panama. And we looked around the world, and it just had this ingredient of infrastructure, incredible access to, you know, the hub, the airlines that operate in Panama have great diversity into South America, into North America, and, you know, quality life, taxation, there’s a lot of what I’ve noticed over the last decade, the amount of like high net worth families that either have a backup plan somewhere, is going up dramatically, whether or not they’re, you know, people that don’t like Trump, that want an exit, or people that didn’t like Biden and Kamala, they want to have. It’s incredible. How many people now have a backup plan to the United States?
James Connor 2:07
Yeah, very interesting. You didn’t mention Trudeau.
Larry McDonald 2:12
There’s a lot of Canadians in Panama. I mean, it’s incredible. And you know, there’s, there’s better taxation advantages for Canadians and Americans, though, oh
James Connor 2:20
my god, don’t even start talking about taxes. And this is one thing a lot of people inside of Canada, they’ll realize we’re continuously being taxed on after tax dollars. It’s virtually impossible to get ahead here. But I don’t want to talk about Canada. I want to talk about your new book. You just made mention of the fact that you’re on the road quite a bit. You’re traveling also through North America, South America, Europe. And I’m curious, when you’re speaking to these groups, what sort of feedback are you hearing? What? What are people really concerned about now? Because there is so much going on in the world. Well,
Larry McDonald 2:55
most investors have been in the 2010 to 2020 portfolio. In 2022 we had a stagflation scare that the Fed put that out with rate hikes. But now interest on the debt is around a trillion dollars, and tax receipts in the United States are call it just a little under 5 trillion. So when you’re when your interest costs relative to your tax receipts get up near 20% relative to the developed world, like Germany’s at 1.5% and maybe Italy and France, you know the bad boys in Europe, or maybe four to 5% United States is interest costs as a percentage of tax receipts, is getting up near 20% and so over the last, you know, five years, people kind of got comfortable with that 2010 to 2020 portfolio, even in the face of 2022 stagflation. But now, with the second bout of slowing growth, elevated inflation, people are really starting to rebalance their portfolio construction. And our vision in the book, How to listen to market speak, is that we’re really going back to a two, let’s say a 19 6970 to 1980 portfolio construction, which had much more contributions to hard asset companies, and the percentage of companies in the S, p5, 100 that were value or hard asset driven, whether it be gold or oil or metals and materials, those percentages were a lot higher in a in a stagflationary world.
James Connor 4:42
So I totally understand why people are so concerned about the debt. And I just want to mention one point. When Trump first came to power in 2016 the federal debt was at $18 trillion and you just mentioned it’s now a $37 trillion interest is well over a trillion. Dollars, and it’s only going to skyrocket here in the coming years. But I’m surprised this is the number one concern with a lot of investors, and because I would just think with everything that’s happened here in the last three months, it would be trade wars.
Larry McDonald 5:13
No, yeah, it’s trade wars. But what I mean is, let’s say you have a trade war that’s slowing growth. Tariffs mean, at least the perception is, I mean, the media says that every day, 100 times a day, the perception is, trade war equals tariffs and slower growth. That’s stagflation. Okay,
James Connor 5:32
so I want to talk about the debt a little bit more, and because, as we just mentioned, the the interest expenses are well over a trillion dollars, and how is the current administration going to finance this debt? Because this is one thing that I’ve you and I have spoken about in the past, the previous administration is really put this current administration into a real bind.
Larry McDonald 5:55
Well, Biden did something very interesting in the last month of of his term, which was the first month of this year, I guess the fiscal year, if you look at it, we’re basically at a trillion dollar deficit already, and that’s including one month with Trump, or whatever it is. So it’s basically the the last three months of Biden, versus in the last month, the first month and a half, two months of Trump, you’re at over a trillion dollar deficit. And so now we run into a situation where, if you do have slowing growth later in the year, and your interest costs are still at a trillion and your tax receipts come down, then you’re really in a in a panic, because that will cause a massive, massive, massive migration of capital. And the one important thing, the probably the most important takeaway from this sit down is you gotta remember Sarbanes Oxley Now this was a piece of legislation that came out during the, you know.com, bust, and it forced companies to be more forthcoming around earnings. And what we’ve noticed is, when there’s a rate of change in the economic data, the amount of companies, whether it be FedEx or Delta Airlines, United Airlines, there’s at least 30 companies that dramatically change their outlook. And that rate of change was really spectacular relative to the last like five to 10 years. But the street, the street economy economists and the street strategists on Wall Street, they’re not beholden to Sarbanes Oxley, so they’ve been hiding out at $270 of S, p5, 100 earning projections. And if you look at what the CFOs are saying on one hand and what the street saying on the other, the real earnings for the S, p5 100 are probably, if you believe the CFOs, are probably not 270 probably 230 and that means you’re really trading it. You know, potentially 2425 times earnings up here, even up here, 5600 ish, 5700 ish. And but if you throw an 18 multiple on there, like a lower multiple, then the s, p should be a 4100 not 5600 so this, these, these are the types of things that people are trying to process right now. And
James Connor 8:17
I guess the other big issue the government is facing right now is how they’re going to finance all of this debt, because a lot of it’s coming due here in the coming year. Maybe you can just tell us how much is coming due, and how do you think they’re going to refinance it?
Larry McDonald 8:30
So that’s the big, big wild card for September, because right now we’re at the debt ceiling in the United States, so there’s no new debt issuance. But it’s, you know, it’s a $17 trillion you know, year where that amount is rolling over. And right now you can, as bonds come due, the Treasury can issue that amount. So we’re at the debt ceiling. The thing that so we run an institutional chat with hedge funds, mutual funds and pension funds in about 30 plus countries behind me, and the one thing I’m hearing from the the you know, most sophisticated institutional investors, is that when you get to September, the debt ceiling will be fixed at some point in probably August. We have a piece of legislation on the Hill in Washington right now around reconciliation, but once they raise that debt ceiling, then the Treasury has to catch up. Because remember, from January to September 1 is pretty much no new debt issuance and net debt issuance, and that means there’s going to be a spectacular comeback or kind of catch up. And we think there’s going to be a Liz trust moment later in the year where they really have to juice, you know, those, those bond sales, to catch up. And that’s, that’s where you can probably run it to some, some very interesting times later in the year.
James Connor 9:57
Maybe you can just expand on that when you say a Liz truss. Moment, what exactly do you mean? Well,
Larry McDonald 10:01
Liz truss was a politician in the UK that came up with a very impact, you know, ambitious plan around, you know, tax cuts and things like that. And in, if you think about the the GOP in the United States, they want to cut taxes. But interest, like I said, interest as a percentage of of interest as a percentage of of your spending is very high. Interest as percentage of of, you know, you’re just your total budget is very high. So if you try to cut taxes, you’re going to lower tax receipts. The theory is that you will increase tax receipts over time, but in the near term, you’re lowering your tax receipts while your interest costs are still pretty high. And you know that is starting to freak out the bond market. So if you look at what the GOP is putting together on the hill, they want to raise taxes through tariffs, which is fine, you know, but they really believe they can raise two, $300 billion but then they’re going to cut taxes in, in with, with, with, with tax cuts. And so that whole, that whole dynamic of, you know, tariffs, was slow down the economy and then cutting taxes, there’s kind of like a gap where you could get the growth on the other side to make up for the tax cuts and get higher tax revenue. That’s the old laugh for curve laughter theory, where you know tax cuts lower tax revenue immediately and then give you a big tax boost as the economy grows. But there’s a gap in the middle, and that’s kind of what happened in the 80s, where you have high interest rates, high interest costs, the growth isn’t there yet, and then you’re really in a stagflationary world. That’s where your oil names are dramatically outperform, your copper names, your gold and silver and your mag seven type growth names underperform. That’s what the market’s starting to tell us. And
James Connor 12:02
so there, the Fed’s really in between a rock and a hard spot, because they got to get interest rates down. But at the same time, this inflation continues to be very sticky, and we just had the Fed increase their inflation expectations for 2025 just recently. What are your thoughts on inflation? So
Larry McDonald 12:21
they’ve been playing a game with inflation. They the Biden team, in the last year did almost, you know, another $2 trillion deficit spending. And at the same time, we cut interest rates 100 basis points from September, you know, on. And so we have all these secular inflationary forces that are really not going away, and they’re creating, like, if you look at inflation expectations, they’re creating this, like, bounce and inflation. And so once you get a weaker dollar, because a slower gross in the United States, which we’re already getting, the dollar’s down a lot that’s going to further feed into inflation. And so the Trump team is trying to slow things down, to calm that down, but it’s going to take a lot, because what Stan Druckenmiller, what a lot of the great traders, investors, have always said, is that once inflation gets above, say, 678, percent, it gets under the seat cushions. It gets under the carpets. And it just takes so much unemployment to get rid of that. And so it lingers and lingers and lingers. And that’s what the 80s and the 70s, 80s and early 90s were all about.
James Connor 13:39
Yeah, I saw an interview with Paul Tudor Jones in late 2024 and what he was saying about 2025 was that all roads lead to inflation, and so it looks like it’s it’s happening because it’s not going away, that’s for sure. So I want to talk about the US economy now and get your thoughts on that can’t believe q1 is out of the way. And here we are in the early part of q2 already, but we’ve already seen profit warnings out of the Airlines, Delta American and southwest all came out with profit warnings. They said a large part of the decrease in profitability and flying has to do with the uncertainty associated with the trade wars and the tariffs. We’ve seen other companies come out. Walmart actually came out, and they took their ex their expectations down for 2025 once again, just citing uncertainty associated with the current economic environment. Nike also took their numbers down. But what are your thoughts on the US economy, and do you think there’s concern for a recession this year?
Larry McDonald 14:39
Yes. So if you look at the Atlanta Fed, or the New York Fed, a lot of these regional bank surveys, they all point toward, like today the Dallas Fed, they all point toward a dramatic rate of change that is pretty rare in in like I said, earlier Wall Street’s caught still in. Kind of the bullish camp, but the rate of change of all the data, and like you said, the way the transports are acting, the way the to us, one of the great leading indicators are the tertiary financials. So your Synchrony Financial your one main, your subprime lenders, your alley, they’re all telling you that we’re coming to a hard landing kind of recession and so and you look at bonds, I mean the bond market, bonds are rallying pretty violently into higher inflation expectations. If you look at break evens, the two year break evens are going dramatically north, and that’s inflation expectations. At the same time, the 10 year, five year, Treasury are rallying and lowering yield. And that’s tell you that it’s just we’re coming into like a slower growth period, probably inflation with probably recession, with sticky inflation. That’s going to really force right now there’s still 24 trillion in the NASDAQ, 100 in 2022 when we had this kind of like stagflation scare, there was 20 trillion in the NASDAQ 100 and by the end of the year, was little bit more than 12 trillion. So at that time, almost $8 trillion moved from growth to value over to hard asset companies. And right now, so far, in February, we had 27 trillion in the NASDAQ 100 now we have about little bit more than 23 so so far, the NASDAQ 100 lost close to $4 trillion and that money is moving into gold miners, European equities, global value, your ew type funds and all kinds of companies that control assets in the ground. So
James Connor 16:45
I want to ask you about the hard assets or real assets, but before I do that, I just want to continue on with this one point you made about bonds. The 10 year has been very volatile. This year, it’s currently trading around or has a yield of around 420 but it’s got as high as 470 as low as 380 What’s this volatility telling us? It’s
Larry McDonald 17:06
telling us that we have a problem in Washington around spending, tax receipts, a new administration’s coming in that’s promising. You know, all this growth in the long term deregulation, but they want to take the pain as far away from the midterms as possible. And we’ve said this. We’ve said this in our reports in in November and December and January, in our in our bear traps Turning Point reports that if you talk to people on the Trump team. They want to take the pain as far away from the midterms as possible. That’s that kind of translates into the bond market, into, you know, when one day you’re worried about stagflation and and higher inflation, the next day you’re worried about slower growth, that’s creating this kind of violent moves in the bond market. And the bottom line is, you know that those lower yields are pointing toward a big, big slowdown, because they’re lower yields with high inflation.
James Connor 18:10
And to your point, this is what you mentioned earlier, but they want to get the rates down. They want to cause some short term pain, slow the economy down, get interest rates down, and this is going to help the refinancing. Yeah,
Larry McDonald 18:22
that’s that’s the problem is you have to, like Janet Yellen issued, so the the Biden team, the Treasury Secretary, Janet Yellen, she issued two to three standard, more T bills than longer dated bonds. And all that means is she issued a lot of like, one month bills, three month bills, six month bills, one year bills, and so we have a tremendous amount of debt. We’re almost like an emerging market country. We’re financing the United States of America on the front end of the yield curve. And that is a very bad recipe that has to be termed out. The Trump team knows it, and so they’re trying to, they’re trying to create some stress to get yields lower so they can sell bonds and they can lock in those 10 year bonds at lower yields.
James Connor 19:09
She’s probably sitting around in some private club right now having a scotch, thinking she did a great job. Well, Sherry. She looks like a
Larry McDonald 19:17
I tell you one thing, both Republicans and Democrats. The only way out of a $37 trillion debt hole is two ways, a debt jubilee default, which we, you know, we talked about in the book How to listen to markets speak one more, one more. Plug there and but a debt jubilee default, like in Argentina, or which is a reset, or just a massive financial repression, which is just trying to push interest rates down below the rate of inflation. And once you do that, you can monetize that and get out of it, that kind of 37 $38 trillion debt hold,
James Connor 19:57
right? And when you say a giant Finance. Financial recession. You mean, like a serious recession, like we saw, well,
Larry McDonald 20:04
I’m sorry, financial repression, repression. Okay, so, so the financial repression, all that means is, is like forcing the banks to own more treasuries, forcing Japan, our trading partners, to own more treasuries. And get, you know, maybe the Fed comes in and buys treasuries, but forcing bond yields or interest rates below the rate of inflation. If you can do that, you can inflate your way out of the debt. So
James Connor 20:30
as an investor, if I’m trying to position myself for such an event, I always look at the TLT. So that’s why I play bonds. How? So right now it’s trading around 90 bucks. I think it was as high as 170 back in 2020, how should an investor play these tlts? Okay,
Larry McDonald 20:50
so the tlts rallied quite a bit over the last two months because Scott dissent and Trump and tariffs are scaring things. You can own the TLT here, but you want to be careful, because in the old days, you’re upside with bonds. In other words, you’re downside in yields versus in the old days, you know, 2010 to 2020 if you had an economic slowdown, you can get a one and a half percent 10 year. And in that case, the TLT would trade it would go from like 92 up till maybe 120 you know. But if, if, if rates because of structurally higher interest rates and inflation and stagflation, and, you know, real irresponsibility in Washington by Republicans and Democrats, if rates are really at a higher like a higher plane, and inflation is at a higher trajectory than the old days, which we think it is, then you want to make sure you’re not you maybe want to think about the eMLC, your emerging market local currency bond fund, which, if the dollar is weaker, and you have that, you basically Just want to have a bond portfolio that is diversified across the world, instead of having, you know, too much exposure, exposure to the United States. You
James Connor 22:09
mentioned a term earlier. I want to ask you about now, and that’s capital migration. And with all this uncertainty we’re seeing in the US, we’ve seen a lot of money flow out of the US. The S, P was down 10% it’s only down 5% now, we’ve had nice little snap back here in the last few days, but at the same time, if you’re looking at q1 the money, a lot of money, has moved into Europe. And the DAX, for example, it’s up 15% year to date, the FTSE, not up as much, maybe 5% but we’ve seen a lot of money flow out of the US and into Europe. Do you see this trend continuing? Yes, because at the end of the day,
Larry McDonald 22:47
if the United States is in a fiscal contraction mode, if you look at what we called American exceptionalism, the strong dollar, everything was driven by massive fiscal spending, and when you massive fiscal spend, you get higher interest rates. That drives money into the United States, and you’re spending your deficit spending is like 7% deficit spending per year in the United States versus Europe was like down at, you know, 3% but now the United States is in a fiscal contraction mode. Europe’s and fiscal expansion and the valuations, like I said earlier, you’re really at, like you’re probably right now, at 2324 times earnings on S, p5, 100 companies, because we’re slowing down. And in Europe, you can buy companies at 14 times, and maybe 15 times. In Brazil, 12 times. So we’ve reached the point where, because we’re no longer in American exceptionalism, massive def spending, we’re in fiscal contraction mode that’s starting to force money outside the United States, and that’s what’s causing this migration of capital. So you want to think about the EW portfolio, which is a global value basket in it, if you look at the top holdings, your BHPs, you know, your your your Rio Tinto is, you know, companies that own a lot of hard assets and commodities.
James Connor 24:14
And so if we do get a big contraction in earnings in the s, p for this year, where do you see it
Larry McDonald 24:19
going? Yeah, I think, I think, like, we’re going to go probably down to 230 $220 and you throw an 18 multiple on that, you know, instead of, like, a high multiple, like the what happens is, when you’re in a slower growth environment with stagflation, stocks should trade at 15 times earnings. If you know 15 times earnings, and you’re down at, you know 18 to 15 times, and you’re down at 230 you’re you’re basically somewhere between 30 540 4300 and so and the s, p right now is the 5700 so that that’s a big, big correction in the market. And. If you look from 1968 to 81 the market was flat, but oil names were up, you know, 60% you know. So look at stocks like Weatherford or or stocks like slumber. J, great earnings power, buying back stocks. You can look at the OI H, you can look at ETFs in the coal space are pretty the coal names are very cheap. So you just want to, at the end of the day, what you want to do is, if interest rates are relatively high and inflation is high relative to history, the DCF model, which is discounted cash flow model, you want to be in companies that have assets in the ground different like different types of companies led the market from 1968 to 81 It wasn’t big growth stocks like Google or Facebook or Amazon. It was companies that actually you know your your Rio Tinto type companies, your new mods, your barracks, those types of companies, your Exxon Mobil’s right now, Exxon and Chevron’s combined market cap is the two premier oil companies in the world. The combined market cap this month was only 29% of Nvidia. I mean, think of that the combined market cap of so if there’s 24 trillion in the NASDAQ 100 close to 3 trillion in Nvidia. As money migrates out of that kind of growth into value, that’s where a whole new portfolio construction is going to start to reappear in like three, four or five years from now, even a year from now, you should you could see, you know, big oil or commodity companies back in those top 1020, names, into the s, p5, 100, your barracks, or your new mods
James Connor 26:44
and so, okay, so you’re bullish on oil, bullish on that Gas. What about gold? You touched on it earlier.
