Larry McDonald, founder of the Bear Trap Report, an investment research firm, believes that the global economy will continue to grow. He expects inflation to continue and a strong bull market in commodity markets, especially in energy stocks.
In an interview with The Market/NZZ, McDonald, a former Lehman Brothers veteran, reveals which investment strategies will work best for the coming recovery, as well as which stocks he favors and what indicators investors should pay particular attention to in the coming months.
Looking at the global commodity markets, MacDonald is optimistic.
This year, markets have experienced intense volatility. Cyclical stocks have had a tough time due to Brexit, international trade frictions, and epidemics. Conversely, technology stocks have been quite bright, with large technology companies such as Apple, Microsoft, and Amazon dominating the stock market.
Over the past decade or so, the market has experienced Brexit, the fiscal conservative trend in the U.S., trade frictions, and now the neo-crown epidemic, all of which have hindered growth one after the other and have had a huge economic impact.
When it comes to the investment outlook for the next few years, MacDonald believes that soon, the U.S. government will have to adopt an expansionary fiscal policy, which will have a positive impact on the markets that follow, and once the epidemic is over, a synchronized global economic boom can be expected.
“The last decade has been a period of policy austerity, but now, trade frictions will gradually ease, Brexit is nearing its end, and the neo-crown epidemic is expected to be contained. This will be a boom time for commodities and we are at the beginning of that cycle.”
Short-Term Risks Remain, Watch for Increased Default Risks
Asked to comment on the recent strong growth in equities, McDonald said there are risks for financial markets in the short term: in the US, the controversy over the election remains. In addition, the next phase of the fiscal stimulus bill is still unclear. If a new stimulus package is not agreed upon, the credit risk for the real estate sector will undoubtedly be pushed up.
He believes there is a huge problem in the real estate industry. Many major cities need to soften the blow of the epidemic. All these mayors and governors are taking steps to seal off parts of the economy in an attempt to slow the spread of the epidemic. But they are not counting the damage. Just last week, New York City announced that they plan to lay off nearly 10,000 people working in the subway system and that all subway lines will lose 40% of their jobs, a move that will increase the risk of default on commercial mortgages.
However, he said that the Federal Reserve will not make a repeat of the subprime mortgage crisis and they are taking steps to curb that risk.
Energy Markets Are Doing Well, 60/40 Strategy No Longer Applicable
In terms of specific industries, Mr. McDonald noted that signs of a global economic recovery are already evident in the shipping industry, with container freight rates soaring. A similar trend will be seen in the energy business, and severe capacity shortages could boost fossil fuel prices as early as next summer.
He believes that investors may pull out of technology stocks and instead tend to invest in energy companies like Caterpillar and ExxonMobil, where the industrial and energy sectors have greater growth potential.
When it comes to the impact of inflation, he says the traditional 60/40 portfolio will shift to something like a 50/30 portfolio, and then the remaining 20% will shift to commodities.
“An important leading indicator in this cycle compared to previous cycles is that bonds in the energy sector have outperformed equities by a wide margin, which is a very big buy signal. If energy demand picks up quickly, there will be far less supply in the U.S. and the rest of the world.
That’s why we will have a supply crisis around August of next year, when prices will soar to around $100 a barrel.”
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