MacroVoices #536 Larry Mcdonald: The Migration is Upon us

Larry McDonald frames the current market as a replay of Q4 2021, when inflation was again dismissed as transitory before equities fell 35 to 40 percent and the NASDAQ lost 7 to 8 trillion dollars in valuation. Super core CPI is running at 3.7 percent against a prior decade high of 3 percent, and annualizing the last three months produces a 5.2 percent rate by year end, implying headline inflation of 6 to 8 percent a year from now. Sticky inflation is attributed partly to the Strait of Hormuz having been closed for 100 days and partly to AI capital expenditure, with data center spending expectations now at 5.4 trillion dollars over the next four to five years, up from roughly 3.5 trillion 18 months ago. Interest on US debt is 1.1 trillion dollars over the next 12 months versus 300 billion when the last hiking cycle began, which McDonald says prevents the Fed from hiking meaningfully and sets up a significant steepening of the 2s30s yield curve.

The central market stress McDonald identifies is a wave of simultaneous equity supply. The NASDAQ 100 rose from 30 trillion to 41 trillion dollars in under 50 trading days, a move he says has no historical precedent. Google's secondary raised roughly 80 billion dollars, and SpaceX at a roughly 2 trillion dollar valuation, combined with Anthropic and OpenAI, implies 200 to 250 billion dollars of immediate IPO-related capital demand. More consequentially, lockup expirations six to twelve months after listing could unlock approximately 3 trillion dollars of additional supply by end of 2027, with SpaceX restricted shares coming out around December 2026. McDonald draws a direct parallel to Facebook's 40 to 50 percent drawdown in its first year as lockup shares were released, and to 1999 to 2000 when tech insiders distributed equity to retail ahead of a major drawdown. Townsend added that if Democrats take both houses of Congress in November, partisan gridlock could coincide with that 3 trillion dollar overhang.

The S&P 500 has significantly underperformed the equal-weight index over the last 10 days, which McDonald reads as Mag7 selling to raise capital for incoming IPOs. Convertible bond issuance over the last three to four weeks is up significantly over the same period last year, mirroring CFO activity seen in Q3 and Q4 of 2021 that preceded a 30 to 40 percent drawdown in 2022. Triple-C rated high yield bonds are blowing out in yield even as the broader high yield market appears stable, signaling consumer stress concentrated in the bottom 60 to 65 percent of consumers. Restaurant stocks and Home Depot have been heavily sold, with Home Depot down nearly 30 percent and McDonald's and Lowe's down close to 19 to 20 percent. Patrick identified 7300 on the S&P 500 as a key support level, estimating a break below it could trigger 100 to 150 billion dollars of CTA forced liquidation with 7000 as the logical first target.

McDonald's central thesis is a great migration from financial assets into hard assets and companies that control them. Energy and materials equities carry very cheap free cash flow yields while NASDAQ 100 valuations are near all-time high CAPE and PE ratios. Healthcare has been sold down from 16 percent to 8 percent of the S&P 500 despite baby boomers averaging around 70 years old and controlling approximately 79 trillion dollars of wealth, and McDonald predicts it will be a big winner in the second half of the year as momentum unwinds. He also identifies oil services companies SLB and Weatherford as major AI beneficiaries, and Intuitive Surgical as unloved and under-owned with surgical robotics data analogous to Tesla's road data, calling it a screaming buy on its 200-week moving average on a five to ten year horizon.

Gold broke below its 200-day moving average with a low print of 4047, and Townsend warned that if the Hormuz crisis extends to year end, gold could test 3000. McDonald argues weak-hand investors have been flushed from gold miners, creating one of the best trade setups currently available. Agnico Eagle is trading at 5.9 times enterprise value to EBITDA, roughly 40 percent off recent highs, with 6 to 7 billion dollars of free cash flow and 2 billion dollars of buybacks underway. McDonald estimates 10 to 15 percent downside and 200 percent upside, and predicts gold reaches 6500 dollars an ounce within one year. His service is buying gold miners only in thirds and quarters given uncertainty about further downside.

On uranium, McDonald sees a severe supply demand imbalance developing from 2027 through 2029, driven by producers overpromising timelines by one to two years, a brain drain of engineers to Bitcoin mining and AI, and utility buyers who will be forced to step up purchases within 12 to 18 months because uranium has no futures market. Townsend cautioned that uranium miners fell 30 to 45 percent during the 2024 trade war and yen carry trade blowup, and said he is not in any rush to add to positions but maintains it is the opportunity of the decade on a fundamental basis. Tourmaline Oil is identified as a separate AI beneficiary through trapped Canadian natural gas assets, with hyperscalers already in active discussions about co-locating data centers nearby, and McDonald's price target implies 15 to 20 percent downside and 200 percent upside.