I always get my best ideas when hiking up a steep mountain carrying a heavy backpack.
Yesterday, I was just passing through the 9,000-foot level on the Tahoe Rim Trail when suddenly, the fog lifted and the skies cleared. I was hit with an epiphany.
It was my “AHA” moment.
The next American Golden Age, the next Roaring Twenties, started on March 23.
However, you have to dive deep into investor psychology to reach that astonishing conclusion.
The conundrum of the day is why stocks are trading at a plus 30X multiple two months into a Great Depression. The economic data has been so horrific that the mainstream news has been reporting them.
Some 30 million unemployed on the way to 51 million? Those are Fed numbers, not mine (click here for the link ). Over 52% of small businesses going bankrupt in the next six months? A GDP that is shrinking at an amazing -40% annualized rate?
Yet, we have a Dow Average that has risen a breathtaking 38% in six weeks. The market has essentially dropped 38% and risen 38% over three months, with the Volatility Index (VIX) making a brief visit to the $80 handle.
To understand these massive contradictions, you have to understand what investors think they are buying. They are not hoovering up stocks that are cheap, offer value, or at the bottom of an economic cycle.
Instead, they are investing in a hope, a vision, an expectation that the coming decade will bring a major economic boom. Yes, they are buying my coming American Golden Age.
Only 10% of the value of a stock is reflected in current year earnings, according to Dr. Jeremy Siegal at the Wharton School of Economics (click here to go to the site). The other 90% is in the following nine years. Investors have written off this year’s earnings and are paying up for the following nine.
Long term followers of this newsletter are well aware of my approaching forecast of the next Roaring Twenties (click here for the link).
Except that this time we have a catapult, the pump-priming effects of the pandemic. The government has stepped in with $14 trillion worth of fiscal and monetary stimulus. Creative destruction is taking place at an exponential rate. Companies have to become hyper-efficient overnight or die.
It’s not rocket science. More than 85 million millennials are aging into their peak spending years, buying homes, cars, and all the luxuries of life. Every time this has happened for the past century, US economic growth leaped to 4%.
It happened in the 1920s, the 1960s, the 1990s, and is about to take place in the 2020s. And with each pop in growth, the stock market rises about 400%. Look at your long-term charts and you’ll see I’m dead right.
That takes us from the March 23 Dow Average low at 18,000 up to 72,000 by 2030, except that it’s a low number. Throw in the hyper-acceleration of innovation by the technology and biotech sectors, a Dow 120,000 is within reach.
You may recall that number from my marketing pitches, except that this time it’s happening. In a decade you are going to look like an absolute genius by following the recommendation of the Mad Hedge Fund Trader.
It also means that we may not see market corrections of any more than 10% this year. That would take us down to a Dow Average of 22,500, and an (SPX) of 2,600 in the coming months. That’s where you should jump in and buy with both hands. The only way I would be wrong is if the US epidemic explodes to unimaginable levels, which is not impossible.
Last week, U-6 unemployment rates exploding to a stratospheric 22.8%. The rate was far higher among high school graduates, but only 8% for college grads. Some 20.2 million lost jobs, ten times the previous record, and more than seen during the Great Depression. The BLS (click here) said the true figure was probably 5% higher due to counting anomalies and a huge backlog of data. And this is just the beginning. The good news is that next month, only 10 million jobs will be lost.
NASDAQ (QQQ) turned positive for 2020, and the followers who piled into tech LEAPS at the March bottom are eternally grateful. Tech and biotech are the only places to be. Everywhere else is a waste of time and money. The entire country is turning into a tech economy or going out of business. Buy tech on dips.
Warren Buffet sold all his airline shares, taking a major loss, including Delta (DAL), Southwest (LUV), American (AA) and United (UAL). The Fed’s $50 billion airline bailout blocked him from making a real killing. His Berkshire Hathaway (BRK/A) (click here) owned close to 10% of all of them. The complete collapse of tourism and business travel are the issues. He sees no recovery in the foreseeable future. They don’t call him the “Oracle of Omaha” for nothing.
US Auto Sales are down a mind-blowing -48% in April, the worst on record. Only 8.6 million cars were sold in the US against last year’s annual rate of 17 million. Toyota and Honda saw the biggest falls as their ships can’t unload due to lack of storage space.
The US Treasury will borrow $3 Trillion this Quarter to fund the massive bailout programs. Announced programs amount to 20 times the $789 billion 2009 rescue package, which Republicans opposed. I’m increasing my bond shorts. Sell short (TLT) again, even if we don’t get a decent rally. Oh, and Trump is threatening a default too. He doesn’t see the connection.
Bonds crashed on massive issuance, with the Treasury announcing a record 20-year bond floatation. Yields hit a one-month high. With the (TLT) down $18 from its recent high, I am taking profits on my bond shorts. I’ll be selling the next rally….again. This could be my core trade for the next decade.
Consumer Debt soared to $14.3 trillion in Q1, a new all-time high. A lot of people are living on their credit cards right now.
Trump threatens to cancel China trade deal, blaming them for Covid-19, sending stocks into a 400-point dive. The last time he did this, shares plunged 20%. It’s all part of an effort to divert attention from the administration’s disastrous handling of the pandemic. America’s Corona deaths are now 20 times China’s, and they are still an emerging nation. Just what we needed, a renewed trade war on top of a pandemic-caused Great Depression, as if the market needed more uncertainty. Sell rallies in the (SPY)
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $0 a barrel, and many stocks down by three quarters, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade.
My Global Trading Dispatch performance had one of the best weeks in years again, up a gob-smacking +6.46%. We are now only 0.65% short of a new all-time high.
My aggressive short bond positions came in big time on the back of theannounced $3 trillion in new debt issuance in Q2. Short bonds are far and away the better quality trade of buying stocks at these elevated levels.
May is up +6.46%, taking my 2020 YTD return up to 2.59%. That compares to a loss for the Dow Average of -13.43% from the February top. My trailing one-year return exploded to 43.77%. My ten-year average annualized profit returned to +34.14%.
This week, Q1 earnings reports continue, and so far, they are coming in much worse than the most dire forecasts. We also get the monthly payroll data, which should be heart-stopping to say the list.
The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, May 11 at 10:00 AM, the April US Inflation Expectations are out. Caesar’s Entertainment (CZR) and Marriot International (MAR) report earnings.
On Tuesday, May 12 at 5:00 PM, the NFIB Small Business Optimism Index for April is released. Toyota Motors (TM) reports earnings.
On Wednesday, May 13 at 9:30 AM, the ever fascinating weekly Cushing Crude Oil Stocks is announced. Cisco Systems (CSCO) reports earnings.
On Thursday, May 14 at 8:30 AM, we get another blockbuster Weekly Jobless Claims. Advanced Micro Devices (AMD) reports earnings.
On Friday, May 15 at 7:30, AM the Empire State Manufacturing Index is published. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I’ll continue my solo circumlocution of the 160 mile Tahoe Rim Trail every afternoon in ten-mile segments. Why solo? Do you know anyone else who wants to hike 160 miles at 10,000 feet in two weeks?
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
We Had a 3 Month Warning of the Pandemic and Did Nothing
