How to Listen When Markets Speak: Risks, Myths, and Investment Opportunities in a Radically Reshaped Economy

by Lawrence G. McDonald, James Patrick Robinson Narrated by James Patrick Robinson

Overview

A New York Times bestselling author and leading expert on market risk argues that seismic shifts in the global economy will trigger a multi-trillion-dollar migration of wealth, outlining new rules of investing for the forward-thinking.
 
“I can't tell you how much I learned from How to Listen When Markets Speak. The historical perspectives and insights are something every investor needs to know. Buy this book.”-Mark Cuban

From Wall Street to the White House, the fantasy of an eventual “return to normal” is still alive and well, nurtured by dangerously outdated theories. But the economic world as we know it-and the rules that govern it-are over. In the coming decade, we'll witness sustained inflation, a series of sovereign and corporate debt crises, and a thundering of capital out of financial assets into hard assets. 
  
Few are prepared. 
  
Lawrence G. McDonald, founder of the economic research platform The Bear Traps Report, got a real-world education in market risk when, as a Lehman Brothers VP, he watched the firm ignore flashing warning signs before its collapse. His analysis led him to identify twenty-one indicators for gauging the health of an economy and detecting early signals of opportunity and danger. 
  
In How to Listen When Markets Speak, McDonald unveils his unique predictive models, connecting surprising dots between past, present, and future and outlining actionable trading ideas for staying a beat ahead of the markets. Readers will learn: 

¿ How disastrous Fed policy will collide with an increasingly fragmented geopolitical landscape to keep U.S. inflation near 3-5% for the next decade
¿ How growing demand for oil and gas, underinvestment in urgently needed energy infrastructure, and cozy Russia-Saudi Arabia relations will lift the base price of energy to historic levels
¿ Why hard assets and rare minerals like lithium and cobalt will outperform growth stocks, U.S. treasuries, and overcrowded passive investment strategies-how to detect bearish and bullish trends in advance
¿ How passive investing and the vehicles intended to democratize finance have fueled bubbles and ideological skew by large market participants, leaving millions of 401(k)s and IRAs at risk
¿ Why America will likely lose its position as a global superpower and holder of the world's premier reserve currency, and may be forced to slash Social Security, Medicare, and military spending 

Rather than merely doomsaying, How to Listen When Markets Speak equips readers to make sense of our current moment, resist reactionary narratives and baseless analysis, and preserve their wealth in turbulent times. When markets speak, it pays to listen. 

*Includes a downloadable PDF of charts and graphs from the book

Editorial Reviews

From the Publisher

I can’t tell you how much I learned from How to Listen When Markets Speak. The historical perspectives and insights are something every investor needs to know. Buy this book.”—Mark Cuban, founder of Cost Plus Drugs and longtime Shark Tank investor

“Larry McDonald’s deep knowledge, experience, and insights have been invaluable in shaping my investment strategies, and How to Listen When Markets Speak is no different. It will sit on the edge of my desk, ready to refer back to frequently. I highly recommend it to anyone keen to protect their wealth in tumultuous times.”—Raoul Pal, CEO and co-founder of Real Vision
 
“As a journalist who is paid to be skeptical, I have been tracking Larry McDonald’s views on markets for many years. His provocative, passionate, and sometimes prophetic insights are always worth pondering, even (or especially) when you disagree—and reading his analysis has often helped me to see the situation more clearly. I don’t always sit in the same camp, but I appreciate his consistent focus on value investing. His latest book offers strong riposte to the tech hype, bull-market euphoria, and wishful thinking about a soft landing—it is thought-provoking work, particularly at a time when the global zeitgeist and order are changing in profound ways.”—Gillian Tett, columnist and editorial board at Financial Times, Provost at King’s College, Cambridge, and author of Anthro-Visio
 
“As soon as I finished How to Listen When Markets Speak, I took a long, hard look at my portfolio. Any investor with skin in the game needs to buy this book.”—Niall Ferguson, Stanford historian and author of The Ascent of Money and Doom
 
“Smart people listen carefully, and they use what they hear to continually question their assumptions. When it comes to markets and their impact on our lives, things change—even the big things. Larry McDonald's, How to Listen When Markets Speak is a consistently compelling contribution to today's debate on the future of financial markets and a challenge to assumptions that have outlived their value.”—Ian Bremmer, political scientist and president of the Eurasia Group

Product Details

BN ID:	2940159867841
Publisher:	Penguin Random House
Publication date:	03/26/2024
Edition description:	Unabridged
Sales rank:	748,432

Read an Excerpt

1

The End of an Era

It was the afternoon of March 8, 1983. A tropical breeze swept across endless acres of citrus orchards and into Orlando, fluttering the flags on the limousine pulling up in front of the Sheraton Twin Towers. Immaculate as ever, in a navy suit offset by a white linen pocket square, President Ronald W. Reagan was led to a podium where he delivered a speech that would be remembered for decades. In it, he called the USSR an “evil empire” and took steps to shore up NATO’s nuclear deterrent to counteract the Soviet Union’s.

The United States and the Soviet Union were already in an arms race that would peak three years after Reagan stepped up to that podium. The Cold War had started in 1947. By 1975, a red line had been carved right down the northern hemisphere, dividing East from West, with the East protected by a Soviet military of 5.5 million men and about twenty thousand nuclear missiles. In the next ten years the number of missiles would double. It was nothing short of a standoff, a display of muscle flexing on the grandest scale, neither camp daring to open a line of communication.

Despite that muscular display, the Soviet Union’s economy was in tough shape. The nation spanned fifteen republics, eleven time zones, and a swath of land 6,200 miles wide—from Kaliningrad in the west all the way to a desperately cold spit of land on the Chukchi Sea known as Uelen. But landmass rarely equals wealth, happiness, or opportunity. For the Soviets, it didn’t even promise a hot meal. Corruption, the absence of a free market, and a costly proxy war in the Hindu Kush, where the mujahideen were covertly supported by the Pentagon and the Saudis, severely hampered the economy. Images of breadlines and empty supermarket shelves were often seen in Western newspapers.

Reagan’s “rhetorical rearmament” achieved its intended effect of rattling his adversary. By 1985, the Soviets had amassed a total of 39,000 nuclear missiles, with close to 6,000 aimed directly at the United States. America met this threat by stockpiling over 21,000 warheads. The world was one technical fault away from total annihilation.

The big man in the White House knew that the USSR could easily buckle under a disillusioned military and an educated populace living in near squalor, with little chance of a better life. Then came the 1986 nuclear accident at Chernobyl and the Politburo’s decision to stall the public announcement for two days. Even then, its twenty-second televised statement was vague, assuring listeners that authorities were handling the situation. The surge of radiation poisoning, of course, was not under control. And while the Politburo avoided addressing this new public health crisis, Mikhail Gorbachev, the new general secretary of the Soviet Communist Party and de facto leader of the country, pored over the reports of death, injury, and ruination: across great tracts of land, lives, homes, and even entire towns were torn apart. He wrote afterward that his conscience could no longer be involved with nuclear arms.

Later that same year, a black motorcade snaked through the middle of Reykjavik, Iceland, stopping at a whitewashed building known as Hofdi House. It was a blustery, sodden morning, the skies platinum above the bank of photographers in waiting. Gorbachev, in a knee-length cashmere overcoat, trotted up the steps to be greeted by President Reagan.

Reagan looked at Gorbachev for a beat, at a man born and raised in Soviet Russia under the most hard-line communist rulers: men like Josef Stalin, Nikita Khrushchev, and Leonid Brezhnev (whose eighteen-year reign was defined by economic stagnation). And here was Gorbachev, an educated man standing before the president of the United States, against every possible communist belief. He may have been only five feet nine inches tall, but history would remember him as a giant of democracy. Gorbachev was there to discuss a nuclear arms reduction, for which he would later be given a Nobel Peace Prize. Reagan smiled at him in that classic cowboy way, and the two men shook hands as if they were already friends, the whole world watching. For the USSR, this was a giant step toward dissolution.

The concept of hope has been one of the most potent forces in the history of mankind.

That simple emotion has been responsible for more victories against the odds than any machine or weapon. It’s how the Greeks, desperately outnumbered, defeated ten thousand Persian soldiers in 490 b.c. on the plain of Marathon. It’s how Winston Churchill rallied Great Britain and its allies to fight the tyranny of Nazi Germany. And it’s how, in the last year of the 1980s, half a million citizens of East Germany staged a mass protest along the perimeter of the Berlin Wall, turning their backs on the bankrupt state. On the night of November 9, 1989, the concrete divider separating East and West Germany was finally torn down.

The Soviet Union was in free fall by late 1991. Despite Gorbachev’s hopes for radical liberalization, piecemeal reforms couldn’t save an economic system founded on centralized control. On Christmas Day, the bright red flag flying above the Kremlin, with its yellow hammer and sickle representing the solidarity between industrial proletarians and farmworkers, was lowered for the last time. Gorbachev abolished the Communist Party of the Soviet Union and then resigned as president of the USSR.

The collapse of the Soviet Union became the great representation of global peace that settled like a blanket on international trade and free markets throughout the world. The bitter tensions that had plagued geopolitics since the start of the Cold War had finally been extinguished.

But what does the fall of the Soviet Union in the 1990s have to do with your portfolio in the 2020s?

Everything!

Because the collapse of the USSR helped shift the world from a multipolar to a unipolar order, one that revolved around a single dominant player. Backed by an outrageously robust economy and an overwhelming military force, the United States could crush challengers like ants. Under this new world order, a massive, interconnected system of global trade and security blossomed. Countries that took advantage of it prospered. Global trade went from less than $5 trillion in 1990 to $28 trillion in 2022, contributing to an increase in global GDP from $20.7 trillion to $96.5 trillion.

The unipolar world order entailed many different things across many domains—for instance, reducing the urgency of maintaining large standing armies—but for investors, its most crucial effect was its unprecedented disinflationary power. The surging supply of everything from raw materials (sourced from Russia) to finished goods and cheap labor (sourced from Asia, and especially China) stamped out inflation in Europe and the United States until 2021. Inflation went from 7 percent in the 1970s to 3 percent in the 1990s to 1.7 percent in the 2010s.

This allowed the Treasury yield, also known as the risk-free rate—the fixed rate of return on government Treasuries, which are considered to be zero risk because they are backed by the U.S. taxpayer—to decline from 15 percent in 1981 to less than 1 percent in the 2010s. Declining Treasury yields make fixed-income investments like government bonds less attractive and push investors toward riskier asset classes in search of higher returns. Price-to-earnings (PE) multiples—a measure of how much investors are willing to pay per dollar of company earnings, reflecting general market sentiment—expand when the risk-free rate goes down. Sure enough, the S&P 500’s PE ratio went from 7x in the early 1980s to 30x in the late 1990s and in 2021.

This disinflation was one of the most important contributors to the epic bull market in risk assets. Profit margins exploded as financial assets—growth stocks and bonds—took off. Investors love a stable, low-inflation environment. It lowers the cost of capital for businesses to invest in and for investors to borrow. The S&P 500 went from 323 in 1990 to 4,800 in 2021, an increase of 1,300 percent. If you’d put $1,000 in the S&P on the day World War II ended, you would have had $23,000 by 1990—but by the end of 2021, that amount would have grown to $343,000. In other words, those three decades of disinflation enabled a radically new approach to portfolio construction.

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