Larry McDonald, founder of the Bear Traps Report, takes a deep dive into tech and determines that many of the “FAANG” stocks face significant downside risk over the next few years. He highlights the growing threat of populism and the political backlash against big tech, notes the companies’ valuations from a fundamental perspective, and considers a pairs trade to play the situation, in this interview with Justine Underhill. Filmed on July 23, 2019.

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FANG Falling from Rising Political Risk (w/Larry McDonald)
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Transcript:
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JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today, we're sitting down with Larry McDonald of the Bear Traps Report. It is great to have you here.
LARRY MCDONALD: Thanks, Justine.
JUSTINE UNDERHILL: So, the Fang stocks and specifically, a lot of the tech giants have been fueling the market rally that we've seen this year, whether it's Microsoft, Apple, Amazon, Facebook, they've accounted for about 20% of the S&P 500 rally. And that's about the same that we saw in 2017 and for a lot of 2018. So do you see this trend continuing, that Fang stocks, that tech giants will power the rally?
LARRY MCDONALD: Absolutely not. But there has to be a reason in the catalyst. Perma bears are not popular people, and I don't want to be perceived as a perma bear. But there is a political firestorm coming at us that is unprecedented. Inequality has exploded over the last decade, not just Mr. Trump's fault. President Obama and Mr. Trump, more central bankers have created a vicious cycle of inequality. And you have left leaning politicians on the Democratic Party side that are going to do a number of debates this year. And you have a President in the White House that is captured the populist vote of America. And there's really a competing mechanism between the White House and Democrats. The Democrats lost these middle class voters to Trump. And in the 2016 election, the Democratic Party wants those people back. And what you'll see is tremendous noise and pressure from the Democrats, Bernie on all the Fangs through the- not just the primaries, but the debates, very public. And President Trump will see this and we've already seen this in the last month, will start to really fight back and make more noise on his populist agenda against the Fangs. So the backdrop on that alone is going to be extremely difficult for the Fangs to make new highs from here.
JUSTINE UNDERHILL: So do you think it's going to just be noise? Or is it going to be actual action?
LARRY MCDONALD: That's the thing. President Trump, one, he'll have two punches. The first punch is noise. And that's what he's been doing the last month, like two weeks ago, he hosted a social media summit, where he really came after Google and Facebook. But the next step is just looking at inequality, looking at the percentage of- let me give you a stat, in say the 1950s, 1960s, the percentage of profits that were coming out of the top hundred companies was like 45%, 50%. Now, we're up to 86%. So within Google and Facebook, in particular, those are the two primary bad actors, you have just a real problem coming at them from the DOJ, FTC. And you're going to see real action, because that's President Trump's antidote to Democrats. It's not just talk but following up with action, because the Democratic Party, obviously, is not in control of the White House, so he'll counter their noise with action, his administration, very aggressive action as you head toward the election against we think Facebook and Google.