The Race for Cash Has Started. Hard Assets Are the Exit.
Larry McDonald told the lovely Michelle Makori on The Real Story that the biggest threat to equities in a long time is not a recession headline. It is the bond market. Bonds have crashed, and the coupons left behind are starting to look like stock returns. That is a race for cash, and not everyone gets funded.
“The bond market crash, which is epic, has created a dynamic where bond prices come down and they’re starting to offer equity like returns.”
The bidders are colliding. Sovereigns in the United States, France, and Britain overspent and undertaxed. The Strait of Hormuz, in his telling, has been shut long enough to keep inflation pressure in the tape. Silicon Valley is running a testosterone spending contest on top of that. Investment grade borrowing that used to be $200 billion to $400 billion a year is headed, on his numbers, toward $600 billion to $700 billion. The private sector is now competing with the Treasury for the same dollars. Fed Chair Kevin Warsh has said the same thing about hyperscalers. McDonald calls it crowding out.
“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 going to win.”
Under the index, he says, the crash is already on. Forty world class brands are down 30 to 70 percent. Anything facing the consumer is cracking. Smart money he talks to is comparing this summer to the summer of 1987, a supernova boom sitting on a bond accident.
The playbook he wants is less index, more of what has already crashed, and a eye on the long bond until the stress forces the policy turn.
“Everything’s screaming, take down exposure to the index and either get long bonds or get long the part of the market that’s already crashed.”
The $40 trillion debt load is the part that does not get solved by a higher coupon. McDonald’s path is financial repression. The Fed and the Treasury work together to hold rates under inflation. Stablecoins, in his map, become a new bid for T bills. By January or February he expects the stress to pull rate cuts back onto the table. That is the catalyst for the assets that hate a high real yield.
“By January, February, we’re going to start looking at rate cuts because of all this stress in the system building. And that’s where your REITs, your utilities, your bonds, your gold, silver are going to just absolutely crush the market.”
Gold, he told Makori, has upside toward $7,000. Silver is the position he sold earlier in the year and has been buying back. Makori asked him when triple digit silver comes back. The chapter on the tape is the silver outlook and the ratio. He did not treat the metal as finished. He treated the pullback as the entry, ahead of the repression trade.
Hard assets are the rotation. The index is masking the consumer crash. The race for cash is the bond market offering stock like returns while Silicon Valley and the Treasury bid for the same money. When that bid breaks and cuts return, McDonald wants the metal, not the multiple.
