Global Market Comments
January 8, 2025
Fiat Lux
2025 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPY), (QQQ), (IWM), (GS), (MS), (JPM), (BAC), (C), (BLK),
(TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD), (FXE), (FXY), (FXB), (FXE), (FXA)
(FCX), (BHP), (RIO), (VALE), (DBA), (DIG), (USO), (DUG), (UNG), (USO),
(XLE), (LNG), (CCJ), (VST), (SMR), (GLD), (DGP), (SLV), (PPTL), (PALL),
(ITB), (LEN), (KBH), (PHM), (DHI)
I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.
By day, I have a comfortable seat next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini can navigate it.
I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.
We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.
I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.
Chicago’s Union Station
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way, like Omaha, Salt Lake City, and Reno, to Google obscure data points and download the latest charts.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains so much about our country today.
I have posted many of my favorite photos from the trip below, although there is only so much you can do from a moving train and an iPhone 16 Pro.
Somewhere in Iowa
The Thumbnail Portfolio
Equities – buy dips, but sell rallies too
Bonds – avoid
Foreign Currencies – avoid
Commodities – avoid
Precious Metals – avoid
Energy – avoid
Real Estate – avoid
1) The Economy – Cooling
I expect a modest 2.0% real GDP growth with a 4.0% inflation rate, giving an unadjusted shrinkage of the economy of negative -2% for 2025. That is down from 0% in in 2024. This may sound discouraging, but believe me, this is the optimistic view. Some of my hedge fund buddies are expecting a zero return over the next four years.
Virtually all independent economists expect the new administration's economic policies will be a drag on both the US and global economies. Trade wars are bad for everyone. When your customers are impoverished, your own business turns south. This is a big deal, since the Magnificent Seven, which accounted for 70% of stock market gains last year, get 60% of their profits from abroad.
The ballooning National Debt is another concern. The last time Trump was in office, he added $10 trillion to the deficit through aggressive tax cuts and spending increases. If this time, he adds another $10-$15 trillion, the National Debt could reach $50 trillion by 2030.
There are two issues here. For a start, Trump will find it a lot harder and more expensive to fund a National Debt at $50 trillion than $20 trillion. Second, borrowing of this unprecedented magnitude, double US GDP, will send interest rates soaring, causing a recession.
The only question then is whether this will be a pandemic-style recession, which took stocks down 30% and recovered quickly, or a 2008 recession which demolished stocks by 52% and dragged on for years.
Hope for the best but expect the worst, unless you want to consider a future career as an Uber driver.
2) Equities – (SPY), (QQQ), (IWM), (GS), (MS), (JPM), (BAC), (C), (BLK)
The outlook for stocks for 2025 is pretty simple. You are going to have to work twice as hard to make half the money you did last year with twice the volatility. You will not be able to be as nowhere near aggressive in 2025 as you were in 2024 It’s a dream scenario for somebody like me. For you, I’m not so sure.
It’s not that US companies aren't growing gangbusters. I expect 2% GDP growth, 15% profit growth, and 12% net margin growth in 2025. But let’s face reality. Stocks are the most expensive they have been in 17 years and we know what happened after 2008. Much of the stock market gain achieved last year was through hefty multiple expansions. This is not good.
Big tech companies might be able to deliver 20% gains and are still the lead sector for the market. Normally that should deliver you a 15%, or $800 gain in the S&P 500 (SPX). We might be able to capture this in the first half of 2025.
Financials will remain the sector with the best risk/reward, and I mean the broader definition of the term, including banks, brokers, money managers, and some small-cap regional banks. The reason is very simple. Their income statements will get juiced at both ends as revenues soar and costs plunge, thanks to deregulation.
No passage of new laws is required to achieve this, just a failure to enforce existing ones. The hint for this is a new SEC chair whose primary interest is promoting the Bitcoin bubble. Buy (GS), (MS), (JPM), (BAC), (C), and (BLK).
However, this is anything but a normal year. Uncertainty is at an eight-year high, thanks to an incoming administration. If the promised policies are delivered, inflation will soar and interest rates will rise, as they already have. We could lose half or all of our stock market gains by the end of 2025.
The big “tell” for this was the awful market performance in December, down 5%. The Dow Average was down ten days in a row for the first time in 70 years. Santa Claus was unceremoniously sent packing. People Are clearly nervous. But then they should be with a bull market that is approaching a decrepit five years in age.
There is a bullish scenario out there and that has Trump doing absolutely nothing in 2025, either because he is unwilling or unable to take action. After all, if the economy isn’t actually broken, why fix it? Better yet, if you own an economy it is better not to break it in the first place.
Nothing substantial can pass Congress with a minuscule one-seat majority in the House of Representatives. There will be no new presidential action through tariffs and only a few token, highly televised deportations, not enough to affect the labor market.
Stocks will not only hold, but they may add to the 15% first-half gains for the year. I give this scenario maybe a 50% probability.
The first indication this is happening is when the presidential characterization of the economy flips in a few months from the world’s worst to the world’s best with no actual change in the numbers. Trump will take all the credit.
You heard it here first.
3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)
Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, or dinner.
There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returned home by train because their religion forbade travel by automobiles or airplanes.
The big question to ask here after a 100-basis point rise in bond yields in only three months is whether the (TLT) has suffered enough. The short answer is no, not quite yet, but we’re getting close. Fear of Trump policies should eventually take ten-year US Treasury bond yields to 5.00%, and then we will be ready for a pause at a nine-month bottom. After that, it depends on how history unfolds.
If Trump gets everything he wants, inflation will soar, bonds will crash, and 5.00% will be just a pit stop on the way to 6.00%, 7.00%, and who knows what? On the other hand, if Trump gets nothing he says he wants, then both bonds stocks and bonds will rise, creating a Goldilocks scenario for all balanced portfolios and investors.
That also sets up a sweet spot for entry into (TLT) call spreads close to 5.00% yields. A politician campaigning on one policy, then doing the opposite once elected? Stranger things have happened. The black swans will live.
A Visit to the 19th Century
4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
If your basic assumption for interest rates is that they stay flat or rise, then you have to love the US dollar. Currencies are all about expected interest rate differentials and money always pours into the highest-paying ones. Tariffs will add fat to the fire because any reduction in international trade automatically reduces American trade deficits and is therefore pro-dollar.
This means that you should avoid all foreign currency plays like the plague, including the Euro (FXE), Japanese yen (FXY), British Pound (FXB), Canadian dollar (FXE), and Australian dollar (FXA).
A strong greenback comes with pluses and minuses. It makes our exports expensive and less competitive and therefore creates another drag on the economy. It demolishes traditional weak dollar plays like emerging markets and precious metals. On the other hand, it attracts substantial foreign investments into US stocks and bonds, which has been continuing for the past decade.
Above all, be happy you are paid in US dollars. My foreign clients are getting crushed in an increasingly expensive world.
5) Commodities (FCX), (BHP), (RIO), (VALE), (DBA)
Look at the chart of any commodity stock and you see grim death. Freeport McMoRan (FCX), BHP (BHP), and Rio Tinto (RIO), they’re all the same. They’re all afflicted with the same disease, over-dependence on a robustly growing China, which isn’t growing robustly, if at all.
I firmly believe that this will continue until the current leadership by President Xi Zheng Ping ends. He has spent the last decade globally expanding Chinese interests, engaging in abusive trade practices, hacking, and attacking American allies like Taiwan and the Philippines. You can only wave a red flag in front of the US before it comes back to bite you. A trade war with the US is now imminent.
This will happen sooner than later. The Chinese people don’t like being poor for very long. This is why I didn’t get sucked in on the Chinese long side in the fall, as many hedge funds did.
If China wants to go back to playing nice, as they did in the eighties and nineties, China should return to return to high growth and commodities will look like great “Buys” down here. If they don’t, American growth alone should eventually pull commodities up, as our economy is now growing at a long-term average gross unadjusted 6.00% rate. So the question is how long this takes.
It may pay to start nibbling on the best quality bombed-out names now, like those above.
6) Energy (DIG), (USO), (DUG), (UNG), (USO), (XLE), (LNG), (CCJ), (VST), (SMR)
Energy was one of the worst-performing sectors in the market for the second year in a row and 2025 is looking no better. New supplies are surging, while demand remains stuck in the mud, with the US now producing an incredible 13.5 million barrels a day. OPEC is dead.
EVs now make up 10% of the US auto fleet, and much more in other countries, are making a big dent. Some 50% of all new car sales in China, the world’s largest market, are EVs. The number of barrels of oil needed to increase a unit of American GDP is plunging, as it has done for 25 years, through increased efficiencies. Remember your old Lincoln Continental that used to get eight miles per gallon? Now it gets 27.
Worse yet, a major black swan hovers over the sector. If the Ukraine War somehow ends, some ten million barrels a day of Russian oil will hit the market. Oil prices should plunge to $50 a barrel.
There are always exceptions to the rule, and energy plays not dependent on the price of oil would be a good one. So is natural gas, which will benefit from Cheniere Energy’s (LNG) third export terminal coming online, increasing exports to China. Ukraine cutting off Russian gas flowing to Europe will assure there is plenty of new demand.
But I prefer investing in sectors that have tailwinds and not headwinds. Better leave energy to the pros who have the inside information they need to make money here.
If someone is holding a gun to your head tell you that you MUST invest in energy, go for the new nuclear plays like (CCJ), (VST), and (SMR). We are only at the becoming of the small modular reactor trend, which could accelerate for decades.
7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.
The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly, that it blew a passenger train over on its side.
In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.
We also see countless abandoned 19th-century gold mines and the broken-down wooden trestles leading to huge piles of tailings, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.
We certainly got a terrific run on precious metals in 2025, with gold at its highs up 33% and silver up 65%. The miners did even better. Even after the post-election selloff, it was still one of the best-performing asset classes of the year.
But the heat has definitely gone out of this trade. The prospect of higher interest rates for longer in 2025 has sent short-term traders elsewhere. That’s because the opportunity cost of owning precious metals is rising since they pay no interest rates or dividends. And let’s face it, there was definitely new competition for hot money from crypto, which doubled after the election.
The sector is not dead, it is resting. Central bank buying of the barbarous relic continues unabated, especially among sanctioned countries, like Russia and China. Gold is still the principal savings vehicle for many Chinese. They are not going to recover confidence in their own currency, banks, or government anytime soon. And there is still slow but steadily rising industrial demand from solar sectors.
Gold supply has also been falling for years, while costs are rising at least at double the headline inflation rate. So it’s just a matter of time before the supply/demand balance comes back in our favor. Where the final bottom is anyone’s guess as gold lacks the traditional valuation parameters of other asset classes, like dividends or interest paid. We’ll just have to wait for Mr. Market to tell us, who is always right.
Give (GLD), (SLV), (GDX), (GOLD), and (WPM) a rest for now but I’ll be back.
Crossing the Great Nevada Desert Near Area 51
8) Real Estate (ITB), (LEN), (KBH), (PHM), (DHI)
The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving bands of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley, California.
Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.
Real estate was a nice earner for us in 2024 in the new homes sector. The election promptly demolished this trade with the prospect of higher interest rates for longer. Expect this unwelcome drag to continue in 2025.
I am not expecting a housing crash unless interest rates take off. More likely it will continue to grind sideways on low volume. That’s because the market has support from a structural shortage of 10 million homes in the US, the debris left over from the 2008 housing crash. That’s why there is still a Millennial living in your basement. Homebuilders now prioritize profit margins over market share.
I expect this sector to come back someday. New homebuilders have the advantage of offering free upgrades and discounted in-house financing. Avoid for now (DHI), (KBH), (TOL), and (PHM).
9) Postscript
We have pulled into the station at Truckee amid a howling blizzard.
My loyal staff have made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been cooling in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 80 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!
The Golden Gate Bridge and the soaring spire of Salesforce Tower are just coming into view across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro, iPad, and iPhone, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak tonight and still get home in time to watch the ball drop in New York’s Times Square on TV.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.
Good luck and good trading in 2025!
John Thomas
The Mad Hedge Fund Trader
Global Market Comments
November 21, 2023
Fiat Lux
Featured Trade:
(THE NEW OFFSHORE CENTER: AMERICA), (SPY),
(THE CHINA VIEW FROM 30,000 FEET)
(DBC), (DYY), (DBA), (PHO), (FCX)
I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom (click here for their home page).
So, I jumped at the chance to have breakfast with Shanghai-based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients.
These are usually sedentary affairs, but Dominic spits out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed.
Asia has accounted for 50% of the world's GDP for most of human history. It dipped down to only 10% over the last two centuries but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels.
A $500 billion infrastructure-oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn’t work, they had another $500 billion package sitting on the shelf. But with a GDP of only $19 trillion today, don’t count on China bailing out our $24 trillion economy.
China is trying to free itself from an overdependence on exports by creating a domestic demand-driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, and PCs, and to live in big cities. They’ll want bandwidth too.
Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending.
Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra-Asian trade exceeds trade with the West.
Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the latter. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.
To me, this all adds up to buying on the next substantial dip in big core longs in commodities (DBC) and the 2X (DYY), food (DBA), Freeport McMoRan (FCX), and water (PHO).
A quick Egg McMuffin next door filled my other needs.
Global Market Comments
November 2, 2023
Fiat Lux
Featured Trade:
(THE SECOND AMERICAN INDUSTRIAL REVOLUTION),
(INDU), (SPY), (QQQ), (GLD), (DBA),
(TSLA), (GOOGL), (XLK), (IBB), (XLE)
(TESTIMONIAL)
Circulating among the country’s top global strategists this year, visiting their corner offices, camping out in their vacation villas, or cruising on their yachts, I am increasingly hearing about a new investment theme that will lead markets for the next 20 years:
The Second American Industrial Revolution.
It goes something like this.
You remember the first Industrial Revolution, don’t you? I remember it like it was yesterday.
It started in 1775 when a Scottish instrument maker named James Watt invented the modern steam engine. Originally employed for pumping water out of a deep Shropshire coalmine, within 32 years it was powering Robert Fulton’s first commercially successful steamship, the Clermont, up the Hudson River.
The first Industrial Revolution enabled a massive increase in standards of living, kept inflation near zero for a century, and allowed the planet’s population to soar from 1 billion to 7 billion. We are still reaping its immeasurable benefits.
The Second Industrial Revolution is centered on my own neighborhood of San Francisco. It seems like almost every garage in the city is now devoted to a start-up.
The cars have been flushed out onto the streets, making urban parking here a total nightmare. These are turbocharging the rate of technological advancement.
Successes go public rapidly and rake in billions of dollars for the founders overnight. Thirty-year-old billionaires wearing hoodies are becoming commonplace.
However, unlike with past winners, these newly minted titans of industry don’t lock their wealth up in mega mansions, private jets, or the Treasury bond market. They buy a Tesla Plaid for $150,000 with a great sound system and full street-to-street auto-pilot (TSLA), and then reinvest the rest of their windfall in a dozen other startups, seeking to repeat a winning formula.
Many do it.
Thus, the amount of capital available for new ideas is growing by leaps and bounds. As a result, the economy will benefit from the creation of more new technology in the next ten years than it has seen in the past 200.
Computing power is doubling every year. That means your iPhone will have a billion times more computing power in a decade. 3D printing is jumping from the hobby world into large-scale manufacturing. In fact, Elon Musk’s Space X is already making rocket engine parts on such machines.
Drones came out of nowhere and are now popping up everywhere.
It is not just new things that are being invented. Fantastic new ways to analyze and store data, known as “big data” are being created.
Unheard new means of social organization are appearing at breakneck, leading to a sharing economy. Much of the new economy is not about invention, but organization.
The Uber ride-sharing service created $50 billion in market capitalization in only five years and is poised to replace UPS, FedEx, and the US Postal Service with “same hour” intracity deliveries. Now they are offering “Uber Eats” in my neighborhood, which will deliver you anything you want to eat, hot, in ten minutes!
Airbnb is arranging accommodation for 1 million guests a month. They even had 189 German guests staying with Brazilians during the World Cup there. I bet those were interesting living rooms on the final day! (Germany won).
And you are going to spend a lot of Saturday nights at home, alone if you haven’t heard of Match.com, eHarmony.com, or Badoo.com.
“WOW” is becoming the most spoken word in the English language. I hear myself saying I every day.
Biotechnology (IBB), an also-ran for the past half-century, is sprinting to make up for lost time. The field has grown from a dozen scientists in my day 40 years ago, to several hundred thousand today.
The payoff will be the cure for every major disease, like cancer, Parkinson’s, heart disease, AIDS, and diabetes, within ten years. Some of the harder cases, such as arthritis, may take a little longer. Soon, we will be able to manipulate our own DNA, turning genes on and off at will. The weight loss drugs Wegovy and Ozempic promise to eliminate 75% of all self-inflicted illnesses.
The upshot will be the creation of a massive global market for these cures, generating immense profits. American firms will dominate this area, as well.
Energy is the third leg of the innovation powerhouse. Into this basket, you can throw in solar, wind, batteries, biodiesel, and even “new” nuclear (see NuScale (SMR)). The new Tesla Powerwall will be a game changer. Visionary, Elon Musk, is ramping up to make tens of millions of these things.
Use of existing carbon-based fuel sources, such as oil and natural gas, will become vastly more efficient. Fracking is unleashing unlimited new domestic supplies.
Welcome to “Saudi America.”
The government has ordered Detroit to boost vehicle mileage to an average of 55 miles per gallon by 2030. The big firms have all told me they plan to beat that deadline, not litigate it, a complete reversal of philosophy.
Coal will be burned in impoverished emerging markets only, before it disappears completely. Energy costs will drop to a fraction of today’s levels, further boosting corporate profits.
Coal will die, not because of some environmental panacea, but because it is too expensive to rip out of the ground and transport around the world, once you fully account for all its costs.
Years ago, I used to get two pitches for venture capital investments a quarter, if any. Now, I am getting two a day. I can understand only half of them (those that deal with energy and biotech, and some tech).
My friends at Google Venture Capital are getting inundated with 20 a day each! How they keep all of these stories straight is beyond me. I guess that’s why they work for Google (GOOGL).
The rate of change for technology, our economy, and for the financial markets will accelerate to more than exponential. It took 32 years to make the leap from steam engine-powered pumps to ships and was a result of a chance transatlantic trip by Robert Fulton to England, where he stumbled across a huffing and puffing steam engine.
Such a generational change is likely to occur in 32 minutes in today’s hyper-connected world, and much shorter if you work on antivirus software (or write the viruses themselves!). And don’t get me started on AI!
The demographic outlook is about to dramatically improve, flipping from a headwind to a tailwind in 2022. That’s when the population starts producing more big spending Gen Xers and fewer over-saving and underproducing baby boomers. This alone should be at least 1% a year to GDP growth.
China is disappearing as a drag on the US economy. During the nineties and the naughts, they probably sucked 25 million jobs out of the US.
With an “onshoring” trend now in full swing, the jobs ledger has swung in America’s favor. This is one reason that unemployment is steadily falling. Joblessness is becoming China’s problem, not ours.
The consequences for the financial markets will be nothing less than mind-boggling. The short answer is higher for everything. Skyrocketing earnings take equity markets to the moon. Multiples blast off through the top end of historic ranges. The US returns to a steady 5% a year GDP growth, which it clocked in the recent quarter.
What am I bid for the Dow Average (INDU), (SPY), (QQQ) in ten years? Did I hear 240,000, a seven-fold pop from today’s level? Or more?
Don’t think I have been smoking the local agricultural products from California in arriving at these numbers. That is only half the gain that I saw from 1982 to 2000, when the stock average also appreciated 17-fold, from 600 to 10,000.
They’re playing the same movie all over again. Except this time, it’s on triple fast forward.
There will also be commodities (DBA) and real estate booms. Even gold (GLD) gets bid up by emerging central banks bent in increasing their holdings to Western levels as well as falling interest rates.
I tell my kids to save their money, not to fritter it away day trading now because anything they buy in 2020 will increase in value tenfold by 2033. They’ll all look like geniuses like I did during the eighties.
What are my strategist friends doing about this forecast? They are throwing money into US stocks with both bands, especially in technology (XLK), biotech (IBB), and bonds (JNK).
This could go on for decades.
Just thought you’d like to know.
It’s Amazing What You Pick Up on These Things!
Global Market Comments
August 15, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or WHAT THE MARKET IS REALLY DISCOUNTING NOW),
(SPY), (TLT), (AAPL), (AXP), (KO), (XOM). (TBT), (SNOW), (NFLX), (ARKK), (ETHE),
(NLR), (CCR), CORN), (WEAT), (SOYB), (DBA), (UUP), (FXA), (FXC), (BA), (TSLA)
After a half-century in the markets, I have noticed that it is the investors with the correct long-term views who make the biggest money. My favorite example is my friend, Warren Buffet, who doesn’t care if an investment turns good in five minutes or five years.
Buffet’s Berkshire Hathaway (BRKB) is the largest outside investor in Apple (AAPL). And guess what his cost has been? By the time you add up the compounded dividends he has collected since he started buying the stock in 2011, it's zero. The value today? $15.5 billion.
Buffet didn’t buy Apple for its hardware, iPhone, or iTunes. He bought it for the brand, which has improved astronomically. Look at Berkshire’s portfolio and it is packed with brands, like American Express (AXP), Coca-Cola (KO), and Exxon (XOM).
When did Buffet last buy Apple? In May when it hit $130.
That’s why Warren Buffet is Warren Buffet and you are you.
While the inflation news last week has been great and it is likely to get better, I believe that investors are missing the bigger, more important long-term picture.
The fact is that markets are now discounting an earlier than expected end to the Ukraine War, much earlier.
I get constant updates on the war from the Joint Chiefs of Staff, Britain’s Defense Committee, and NATO headquarters and I can tell you that the war has taken a dramatic turn in Ukraine’s favor just in the last two weeks.
Russian casualties have topped 80,000, nearly half the standing army. They have lost 2,200 of their 2,800 operational tanks. Some 120 front line aircraft have been destroyed. This week, Ukraine attacked the principal Russian air base in Crimea, leaving the smoking ruins of seven more aircraft there.
Russia is in effect fighting a modern digitized war with 50-year-old Cold War weapons and it isn’t working. Its generals have no experience fighting wars against determined opposition. Putin would do better listening to the retired generals on CNN for military advice.
America’s High HIMARS (the M142 High Mobility Artillery Rocket System) has become the Stinger missile of this war. The Lockheed Martin (LMT) factory in Camden, Arkansas that makes these missiles is running 24/7 on doubled orders.
The sanctions against Russia have been wildly successful. The Russian economy is utterly collapsing. What oil they are selling now is at half price. Aircraft are being cannibalized for parts to keep others flying. Much of the educated middle class has fled the country. Draft dodging is rampant.
What does all this mean for you and me?
The commodity price spike the war prompted has ended and most are now in steep downtrends. Gold (GLD), where the Russians were major buyers, has been flat as a pancake. This has put our inflation numbers into freefall. Interest rate fears peaked in June and are now in the rear-view mirror.
As is always the case, markets have seen these developments and correctly ascertained their consequences far before we humans did (except for maybe me). It has been no surprise that they have been tracking the Russian defeat day by day and have been on an absolute tear since June 15.
Even small techs suffering 18-month bear markets have now begun major recoveries, with companies like Snowflake (SNOW), up 50%, Netflix (NFLX), up 39%, and Cathie Wood’s Innovation Fund (ARKK) up 57%. Even crypto has returned from the grave, with Ethereum (ETHE) up an eye-popping 105%.
But don’t go gaga over stocks just yet.
The Fed ramps up quantitative tightening in September to $95 billion a month and will deliver another interest rate hike. That's why I am running a double short in the bond market (TLT), (TBT) once again.
We also have the midterms to worry about which, with recent developments, promise to be more contentious than ever. Look for another round of tiring new election fraud claims.
That’s great because these events will give us good entry points lower down for trade alerts, not the short-term top we are looking at right now.
It helps that with ten-year US Treasury yields at 2.80%, it has an effective price earning multiple of 37, while stocks growing earnings at 10% a year boast a price earnings multiple of only 16. That sets up a massive, long stock/short bond trade which Mad Hedge will be pushing well on into 2023.
And you know what?
The smart guys I know in the hedge fund community are starting to model for the next Fed interest rate CUT. Markets will love it and discount this far in advance.
If you want to get on the train with me before it leaves the station, just keep reading this newsletter.
Yes, markets are now being driven by rate cuts and peace prospects, not rate rises and war!
Your retirement fund will love it.
I just thought you’d like to know.
CPI Dives to 8.5%, down 0.6% in July. The peak is in, and stocks rallied 500. Look for another drop in August, with gasoline prices falling daily. The 800-pound gorilla in the room has exited.
The Producer Price Index Dives 0.5%, confirming last week’s weak CPI number. And many core prices are indicating that we will get another drop when the August numbers are reported in September. It was worth another 300-point rally in the Dow Average, which is getting seriously overbought.
Consumer Inflation Expectations dive to 6.2% for the coming year and only 3.2% for three years. according to a New York Fed Survey. Expectations for food costs saw the largest decline. The CPI is out on Wednesday. No doubt a media onslaught over a coming recession has a lot to do with it.
Elon Musk Sells $6.9 billion worth of Tesla (TSLA) Stock, explaining the $100 drop in the shares last week. Ostensibly, this is to pay for Twitter if he loses his court case. Musk clearing took advantage of a 60% rise in (TSLA) to head off distress sales in the future. Musk also opened the door to share buy backs in the future. Buy (TSLA) on dips.
85,000 IRS Agents are Headed Your Way, but only if the government can hire them and only if you are a billionaire or a profitable large oil company. The rest of us will be ignored by this unpublicized portion of the Biden inflation bill.
US Dollar (UUP) Takes a Hit on CPI Report, which effectively showed that the US saw deflation in July. The greenback is pulling back the 20-year highs which gave you the cheapest European vacation in your lives. The prospect of interest rates rising at a slower pace is dollar negative. Buy (FXA) and (FXC) on dips.
Boeing (BA) Delivered its First 787 Dreamliner in a year, after long-awaited regulatory approval. The monster 30% rise in the shares off the June low predicted as much. A global aircraft shortage helps. Airbus is going to have to start earnings its money again. Keep buying (BA) on dips.
Weekly Jobless Claims Pop 12,000 to 262,000, a new high for the year. It’s not at concerning levels yet but is definitely headed in the wrong direction. Maybe it’s just a summer slowdown? Maybe not.
Shipping Container Charges are Plunging Everywhere, except in the US, which currently has the world’s strongest economy. It’s a sign that global supply chain problems are easing. But the US leads the world in demurrage, or delays, with New York the worst, followed by Long Beach.
Import Prices are Plunging, thanks to a super strong dollar, taking more pressure off of inflation. They fell 1.4% in July according to the Department of Labor. Easing supply chain problems are helping. Biden has had the run of the table for months now
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil prices now rapidly declining, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
My August performance climbed to +2.14%. My 2022 year-to-date performance ballooned to +56.97%, a new high. The Dow Average is down -7.0% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 74.76%.
That brings my 14-year total return to 569.53%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.96%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 93 million, up 300,000 in a week and deaths topping 1,037,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, August 15 at 8:30 AM EDT, the New York Empire State Manufacturing Index for August is released.
On Tuesday, August 16 at 8:30 AM, the Housing Starts for July are out.
On Wednesday, August 17 at 8:30 AM, Retail Sales for July are published. At 11:00 AM the Fed Minutes from the last meeting are printed.
On Thursday, August 18 at 8:30 AM, Weekly Jobless Claims are announced. Existing Home Sales for July are announced.
On Friday, August 19 at 2:00 the Baker Hughes Oil Rig Count is out.
As for me, while we’re all waiting for the dog days of August to end, it is time to reminisce about my old friend George Schultz who passed away last year at the age of 101.
My friend was having a hard time finding someone to attend a reception who was knowledgeable about financial markets, White House intrigue, international politics, and nuclear weapons.
I asked who was coming. She said Reagan’s Treasury Secretary George Shultz. I said I’d be there wearing my darkest suit, cleanest shirt, and would be on my best behavior, to boot.
It was a rare opportunity to grill a high-level official on a range of top-secret issues that I would have killed for during my days as a journalist for The Economist magazine. I guess arms control is not exactly a hot button issue these days.
I moved in for the kill.
I have known George Shultz for decades, back when he was the CEO of the San Francisco-based heavy engineering company, Bechtel Corp in the 1970s.
I saluted him as “Captain Schultz”, his WWII Marine Corp rank, which has been our inside joke for years. Now that I am a major, I guess I outrank him.
Since the Marine Corps didn’t know what to do with a PhD in economics from MIT, they put him in charge of an anti-aircraft unit in the South Pacific, as he was already familiar with ballistics, trajectories, and apogees.
I asked him why Reagan was so obsessed with Nicaragua, and if he really believed that if we didn’t fight them there, would we be fighting them in the streets of Los Angeles as the then-president claimed.
He replied that the socialist regime had granted the Soviets bases for listening posts that would be used to monitor US West Coast military movements in exchange for free arms supplies. Closing those bases was the true motivation for the entire Nicaragua policy.
To his credit, George was the only senior official to threaten resignation when he learned of the Iran-contra scandal.
I asked his reaction when he met Soviet premier Mikhail Gorbachev in Reykjavik in 1986 when he proposed total nuclear disarmament.
Shultz said he knew the breakthrough was coming because the KGB analyzed a Reagan speech in which he had made just such a proposal.
Reagan had in fact pursued this as a lifetime goal, wanting to return the world to the pre nuclear age he knew in the 1930s, although he never mentioned this in any election campaign. Reagan didn’t mention a lot of things.
As a result of the Reykjavik Treaty, the number of nuclear warheads in the world has dropped from 70,000 to under 10,000. The Soviets then sold their excess plutonium to the US, which has generated 20% of the total US electric power generation for two decades.
Shultz argued that nuclear weapons were not all they were cracked up to be. Despite the US being armed to the teeth, they did nothing to stop the invasions of Korea, Hungary, Vietnam, Afghanistan, and Kuwait.
Schultz told me that the world has been far closer to an accidental Armageddon than people realize.
Twice during his term as Secretary of State, he was awoken in the middle of the night by officers at the NORAD early warning system in Colorado to be told that there were 200 nuclear missiles inbound from the Soviet Union.
He was given five minutes to recommend to the president to launch a counterstrike. Four minutes later, they called back to tell him that there were no missiles, that it was just a computer glitch projecting ghost images on a screen.
When the US bombed Belgrade in 1989, Russian president Boris Yeltsin, in a drunken rage, ordered a full-scale nuclear alert, which would have triggered an immediate American counter-response. Fortunately, his generals ignored him.
I told Schultz that I doubted Iran had the depth of engineering talent needed to run a full-scale nuclear program of any substance.
He said that aid from North Korea and past contributions from the AQ Khan network in Pakistan had helped them address this shortfall.
Ever in search of the profitable trade, I asked Schultz if there was an opportunity in nuclear plays, like the Market Vectors Uranium and Nuclear Energy ETF (NLR) and Cameco Corp. (CCR), that have been severely beaten down by the Fukushima nuclear disaster.
He said there definitely was. In fact, he was personally going to lead efforts to restart the moribund US nuclear industry. The key here is to promote 5th generation technology that uses small, modular designs, and alternative low-risk fuels like thorium.
Schultz believed that the most likely nuclear war will occur between India and Pakistan. Islamic terrorists are planning another attack on Mumbai. This time, India will retaliate by invading Pakistan. The Pakistanis plan on wiping out this army by dropping an atomic bomb on their own territory, not expecting retaliation in kind.
But India will escalate and go nuclear too. Over 100 million would die from the initial exchange. But when you add in unforeseen factors, like the broader environmental effects and crop failures (CORN), (WEAT), (SOYB), (DBA), that number could rise to 1-2 billion. This could happen as early as 2023.
Schultz argued that further arms control talks with the Russians could be tough. They value these weapons more than we do because that’s all they have left.
Schultz delivered a stunner in telling me that Warren Buffet had contributed $50 million of his own money to enhance security at nuclear power plants in emerging markets.
I hadn’t heard that.
As the event ended, I returned to Secretary Shultz to grill him some more about the details of the Reykjavik conference held some 36 years ago.
He responded with incredible detail about names, numbers, and negotiating postures. I then asked him how old he was. He said he was 100.
I responded, “I want to be like you when I grow up”.
He answered that I was “a promising young man.” I took that as encouragement in the extreme.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
We’re Getting Pretty High
Global Market Comments
June 7, 2022
Fiat Lux
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Global Market Comments
August 16, 2019
Fiat Lux
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