Larry McDonald, the esteemed author of "The Bear Traps Report" and former leader of US macro strategy at Société Générale, has forecasted a significant bull market for assets that stand to gain from enduringly high inflation levels.
McDonald, who shared his insights on the Forward Guidance podcast by Blockwork, anticipates that inflation will persistently exceed the Federal Reserve's 2% target, potentially fluctuating between 3% and 4% over the next decade.
McDonald attributes this sustained inflation to various factors, including the effects of reshoring, governmental fiscal stimuli, and a robust job market. He further highlights that escalating geopolitical tensions, reminiscent of the inflationary impacts of the Vietnam War in the 1970s, are contributing to this trend, ushering in a protracted era of inflationary pressures.
However, this scenario heralds a boon for "inflation beneficiaries" - sectors and assets likely to flourish amidst sustained price increases. McDonald identifies a range of commodities and hard assets, such as nickel, aluminum, uranium, copper, gold, oil, and gas, as primary beneficiaries. He suggests that the energy sector alone could be valued at approximately $2 trillion, hinting at a significant reallocation of capital from leading growth stocks, including the tech-heavy 'Magnificent Seven', to these commodities and hard assets.
This shift is underscored by the recent surge in gold prices to record highs, signaling an emerging trend of capital migration worth multiple trillions that the market is yet to fully anticipate.
Despite this, the consensus among investors leans towards an expectation of inflation reverting to the Federal Reserve's long-term goal within the next year. This is evidenced by the 1-year inflation expectations, which receded to 2.07% in March, as per the Federal Reserve Bank of Cleveland. This perspective emerges even as inflation rates have moderated significantly from their 2022 peaks, with consumer prices registering a 3.2% increase in February.
McDonald's perspective places him among the more cautious voices on Wall Street today, especially with his continued warnings regarding the stock market and inflation trajectory. His forecasts include a potential stock market downturn of up to 30% over the forthcoming two months, driven by the repercussions of rising interest rates on the economy—a prediction he had similarly made in 2023, a year that surprisingly saw the stock market ascend by 25%.
