JP

Peeking Into the Future with Ray Kurzweil

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future of technology

This is the most important research piece you will ever read, bar none. But you have to finish it to understand why. So, I will get on with the show.

I have been hammering away at my followers at investment conferences, webinars, and strategy luncheons this year about one recurring theme. Things are good, and about to get better, a whole lot better.

The driver will be the exploding rate of technological innovation in electronics, biotechnology, and energy. The 2020s are shaping up to be another roaring twenties, and asset prices are going to go through the roof.

To flesh out some hard numbers about growth rates that are realistically possible and which industries will be the leaders, I hooked up with my old friend, Ray Kurzweil, one of the most brilliant minds in computer science.

Ray is currently a director of Engineering at Google (GOOG), heading up a team that is developing stronger artificial intelligence. He is an MIT grad with a double major in computer science and creative writing. He was the principal inventor of the CCD flatbed scanner, the first text-to-speech synthesizer, and the commercially marketed large-vocabulary speech recognition.

When he was still a teenager, Ray was personally awarded a science prize by President Lyndon Johnson. He has received 20 honorary doctorates and has authored 7 books. It was upon Ray’s shoulders that many of today’s technological miracles were built.

His most recent book, The Singularity is Near: When Humans Transcend Biology, was a New York Times best seller. In it he makes hundreds of predictions about the next 100 years that will make you fall out of your chair.

I met Ray at one of my favorite San Francisco restaurants, Morton’s on Sutter Street. I ordered a dozen oysters, a filet mignon wrapped in bacon, and drowned it all down with a fine bottle of Duckhorn Merlot. Ray had a wedge salad with no dressing, a giant handful of nutritional supplements, and a bottle of water. That’s Ray, one cheap date.

The Future of Man

A singularity is defined as a single event that has monumental consequences. Astrophysicists refer to the Big Bang and black holes in this way. Ray’s singularity has humans and machines merging to become single entities, partially by 2040 and completely by 2100.

All of our thought processes will include built-in links to the cloud, making humans super smart. Skin that absorbs energy from the sun will eliminate the need to eat. Nanobots will replace blood cells, which are far more efficient at moving oxygen. A revolution in biotechnology will enable us to eliminate all medical causes of death.

Most organs can now be partially or completely replaced. Eventually, they all will become renewable by taking one of your existing cells and cloning it into a completely new organ. We will become much more like machines, and machines will become more like us.

The first industrial revolution extended the reach of our bodies, and the second is extending the reach of our minds.

And, oh yes, prostitution will be legalized and move completely online. Sound like a turn off? How about virtually doing it with your favorite movie star? Your favorite investment advisor? Yikes!

Ironically, one of the great accelerants towards this singularity has been the war in Iraq. More than 50,000 young men and women came home missing arms and legs (in Vietnam, these were all fatalities, thanks to the absence of modern carbon fiber body armor).

Generous government research budgets have delivered huge advances in titanium artificial limbs and the ability to control them only with thoughts. Quadriplegics can now hit computer keystrokes merely by thinking about them.

Kurzweil argues that exponentially growing information technology is encompassing more and more things that we care about, like health care and medicine. Reprogramming of biology will be the next big thing and is a crucial part of his “singularity.”

Our bodies are governed by obsolete genetic programs that evolved in a bygone era. For example, over millions of years, our bodies developed genes to store fat cells to protect against a poor hunting season in the following year. That gave us a great evolutionary advantage 10,000 years ago. But it is not so great now, with obesity becoming the country’s number one health problem.

We would love to turn off these genes through reprogramming, confident that the hunting at the supermarket next year will be good. We can do this in mice now, which, in experiments, can eat like crazy, but never gain weight.

The happy rodents enjoy the full benefits of caloric restriction, with no hint of diabetes or heart disease. A product like this would be revolutionary, not just for us, health care providers, and the government, but, ironically, for fast food restaurants as well.

Within the last five years, we have learned how to reprogram stem cells to rebuild the hearts of heart attack victims. The stem cells are harvested from skin cells, not human embryos, ducking the political and religious issue of the past.

And if we can turn off genes, why not the ones in cancer cells that enable them to pursue unlimited reproduction, until they kill their host? That development would cure all cancers and is probably only a decade off.

The Future of Computing

If this all sounds like science fiction, you’d be right. But Ray points out that humans have chronically underestimated the rate of technological innovation.

This is because humans evolved to become linear-thinking animals. If a million years ago we saw a gazelle running from left to right, our brains calculated that one second later it would progress ten feet further to the right. That’s where we threw the spear. This gave us a huge advantage over other animals and is why we became the dominant species.

However, much of science, technology, and innovation grows at an exponential rate, and it is where we make our most egregious forecasting errors. Count to seven, and you get to seven. However, double something seven times and you get to a billion.

The history of the progress of communications is a good example of an exponential effect. Spoken language took hundreds of thousands of years to develop. Written language emerged thousands of years ago, books in a 100 years, the telegraph in a century, and telephones 50 years later.

Some ten years after Steve Jobs brought out his Apple II personal computer, the growth of the Internet went hyperbolic. Within three years of the iPhone launch, social media exploded out of nowhere.

At the beginning of the 20th century, $1,000 bought 10 X-5th power worth of calculations per second in our primitive adding machines. A hundred years later, a grand got you 10 X 8th power calculations, a 10 trillion-fold improvement. The present century will see gains many times this.

The iPhone itself is several thousand times smaller, a million times cheaper, and billions of times more powerful than computers of 40 years ago. That increases the price per performance by the trillions. More dramatic improvements will accelerate from here.

Moore’s law is another example of how fast this process works. Intel (INTC) founder Gordon Moore published a paper in 1965 predicting a doubling of the number of transistors on a printed circuit board every two years. Since electrons had shorter distances to travel, speeds would double as well.

Moore thought that theoretical limits imposed by the laws of physics would bring this doubling trend to an end by 2018, when the gates become too small for the electrons to pass through. For decades, I have read research reports predicting that this immutable deadline would bring an end to innovation and technological growth and bring an economic Armageddon.

Ray argues that nothing could be further from the truth. A paradigm shift will simply allow us to leapfrog conventional silicon-based semiconductor technologies and move on to bigger and better things. We did this when we jumped from vacuum tubes to transistors in 1949, and again in 1959, when Texas Instruments (TXN) invented the first integrated circuit.

Paradigm shifts occurred every ten years in the past century, every five years in the last decade, and will occur every couple of years in the 2020s. So fasten your seatbelts!

Nanotechnology has already allowed manufacturers to extend the 2018 Moore’s Law limit to 2022. On the drawing board are much more advanced computing technologies, including calcium-based systems, using the alternating direction of spinning electrons, and nanotubes.

Perhaps the most promising is DNA-based computing, a high research priority at IBM and several other major firms. I earned my own 15 minutes of fame in the scientific world 40 years ago as a member of the first team ever to sequence a piece of DNA, which is why Ray knows who I am.

Deoxyribonucleic Acid makes up the genes that contain the programming that makes us who we are. It is a fantastically efficient means of storing and transmitting information. And it is found in every single cell in our bodies, all 10 trillion of them.

The great thing about DNA is that it replicates itself. Just throw it some sugar. That eliminates the cost of building the giant $2 billion silicon-based chip fabrication plants of today.

The entire human genome is a sequential binary code containing only 800 MB of information, which, after you eliminate redundancies, has a mere 30-100 MB of useful information, about the size of an off-the-shelf software program, like Word for Windows. Unwind a single DNA molecule, and it is only six feet long.

What this means is that, just when many believe that our computer power is peaking, it is in fact just launching into an era of exponential growth. Supercomputers surpassed human brain computational ability in 2012, about 10 to the 16th power (ten quadrillion) calculations per second.

That power will be available on a low-end laptop by 2020. By 2050, this prospective single laptop will have the same computing power as the entire human race, about 9 billion individuals. It will also be small enough to implant in our brains.

The Future of the Economy

Ray is not really that interested in financial markets, or, for that matter, making money. Where technology will be in a half century and how to get us there are what get his juices flowing. However, I did manage to tease a few mind-boggling thoughts from him.

At the current rate of change, the 21st century will see 200 times the technological progress that we saw in the 20th century. Shouldn’t corporate profits, and therefore share prices, rise by as much?

Technology is rapidly increasing its share of the economy and its influence on other sectors. That’s why tech has been everyone’s favorite sector for the past 30 years and will remain so for the foreseeable future. For two centuries, technology has been eliminating jobs at the bottom of the economy and creating new ones at the top.

Stock analysts and investors make a fatal flaw in estimating future earnings based on the linear trends of the past, instead of the exceptional growth that will occur in the future.

In the last century, the Dow appreciated from 100 to 10,000, an increase of 100 times. If we grow at that rate in this century, the Dow should increase by 10,000% to 1 million by 2100. But so far, we are up only 6%, even though we are already 14 years into the new century.

The index is seriously lagging, but will play catch-up in a major way during the 2020s, when economic growth jumps from 2% to 4% or more, thanks to the effects of massively accelerating technological change.

Some 100 years ago, one-third of jobs were in farming, one-third were in manufacturing, and one-third were in services. If you predicted that in a century farming and manufacturing would each be 3% of total employment and that something else unknown would come along for the rest of us, people would have been horrified. But that’s exactly what happened.

Solar energy use is also on an exponential path. It is now 1% of the world’s supply but is only seven doublings away from becoming 100%. Then we will consume only one 10,000th of the sunlight hitting the Earth. Geothermal energy offers the same opportunities.

We are only running out of energy if you limit yourself to 19th-century methods. Energy costs will plummet. Eventually, energy will be essentially free when compared to today’s costs, further boosting corporate profits.

Hyper-growth in technology means that we will be battling with deflation for the rest of the century, as the cost of production and price of everything fall off a cliff. That makes our 10-year Treasury bonds a steal at a generous 2.60% yield, a full 460 basis points over the real long-term inflation rate of negative 2% a year.

US Treasuries could eventually trade down to the 0.40% yields seen in Japan only a couple of years ago. This means that the bull market in bonds is still in its early stages and could continue for decades.

The upshot for all of these technologies will rapidly eliminate poverty, not just in the US, but around the world. Each industry will need to continuously reinvent its business model or disappear.

The takeaway for investors is that stocks, as well as other asset prices, are now wildly undervalued, given their spectacular future earnings potential. It also makes the Dow target of 1 million by 2100 absurdly low, and off by a factor of 10 or even 100. Will we be donning our “Dow 100 Million” then?

Other Random Thoughts

As we ordered dessert, Ray launched into another stream of random thoughts. I asked for Morton’s exquisite double chocolate mousse. Ray had another handful of supplements. Yep, Mr. Cheap Date.

The number of college students has grown from 50,000 to 12 million since the 1870s. A kid in Africa with a cell phone has more access to accurate information than the president of the United States did 15 years ago.

The great superpower, the Soviet Union, was wiped out by a few fax machines distributing information in 1991.

Company offices will become entirely virtual by 2025.

Cows are very inefficient at producing meat. In the near future, cloned muscle tissue will be produced in factories, disease-free, and at a fraction of the present cost, without the participation of the animal. PETA will be thrilled.

Use of nano materials to build ultra-light but ultra-strong cars cuts fuel consumption dramatically. Battery efficiencies will improve by 10 to 100 times. Imagine powering a Tesla Model S1 with a 10-pound battery! Advances in nanotube construction mean the weight of the vehicle will drop from the present 3 tons to just 100 pounds, but it will be far safer.

Ray is also on a scientific advisory panel for the US Army. Uncertain about my own security clearance, he was reluctant to go into detail. Suffice it to say that the weight of an M1 Abrams main battle tank will shrink from 70 tons to 1 ton, but it will be 100 times stronger.

A zero tolerance policy towards biotechnology by the environmental movement exposes their intellectual and moral bankruptcy. Opposing a technology with so many positive benefits for humankind and the environment will inevitably alienate them from the media and the public, who will see the insanity of their position.

Artificial intelligence is already far more prevalent than you understand. The advent of strong artificial intelligence will be the most significant development of this century. You can’t buy a book from Amazon, withdraw money from your bank, or book a flight without relying on AI.

Ray finished up by saying that by 2100, humans will have the choice of living in a biological or in a totally virtual, online form. In the end, we will all just be files.

Personally, I prefer the former, as the best things in life are biological and free!

I walked over to the valet parking, stunned and disoriented by the mother load of insight I had just obtained, and it wasn’t just the merlot talking, either! Imagine what they talk about at Google all day.

To buy The Singularity is Near at discount Amazon pricing, please click here. It is worth purchasing the book just to read Ray’s single chapter on the future of the economy.

 

 

future of technology

 

future of technology

Did You Say “BUY” or “SELL”

 

The Future is Closer than You Think

april@madhedgefundtrader.com

The Next Commodity Supercycle Has Already Started

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When I closed out my position in Freeport McMoran (FCX) near its max profit earlier this year, I received a hurried email from a reader asking if he should still keep the stock. I replied very quickly:

“Hell, yes!”

When I toured Australia a couple of years ago, I couldn’t help but notice a surprising number of fresh-faced young people driving luxury Ferraris, Lamborghinis, and Porsches.

I remarked to my Aussie friend that there must be a lot of indulgent parents in The Lucky Country these days. “It’s not the parents who are buying these cars,” he remarked, “It’s the kids.”

He went on to explain that the mining boom had driven wages for skilled labor to spectacular levels. Workers in their early twenties could earn as much as $200,000 a year, with generous benefits.

The big resource companies flew them by private jet a thousand miles to remote locations where they toiled at four-week on, four-week off schedules.

This was creating social problems, as it is tough for parents to manage offspring who make far more than they do.

The Great Commodity Boom has started, and in fact, we are already years into a prolonged super cycle.

China, the world’s largest consumer of commodities, is currently stimulating its economy on multiple fronts, including generous corporate tax breaks and relaxed reserve requirements. Get a trigger like the impending settlement of its trade war with the US, and it will be off to the races once more for the entire sector.

The last bear market in commodities was certainly punishing. From the 2011 peaks, copper (COPX) shed 65%, gold (GLD) gave back 47%, and iron ore was cut by 78%. One research house estimated that some $150 billion in resource projects in Australia were suspended or cancelled.

Budgeted capital spending during 2012-2015 was slashed by a blood-curdling 30%. Contract negotiations for price breaks demanded by end consumers broke out like a bad case of chicken pox.

The shellacking was reflected in the major producer shares, like BHP Billiton (BHP), Freeport McMoran (FCX), and Rio Tinto (RIO), with prices down by half or more. Write-downs of asset values became epidemic at many of these firms.

The selloff was especially punishing for the gold miners, with lead firm Barrack Gold (GOLD) seeing its stock down by nearly 80% at one point, lower than the darkest days of the 2008-9 stock market crash.

You also saw the bloodshed in the currencies of commodity-producing countries. The Australian dollar led the retreat, falling 30%. The South African Rand has also taken it on the nose, off 30%. In Canada, the Loonie got cooked.

The impact of China cannot be underestimated. In 2012, it consumed 11.7% of the planet’s oil, 40% of its copper, 46% of its iron ore, 46% of its aluminum, and 50% of its coal. It is much smaller than that today, with its annual growth rate dropping by more than half, from 13.7% to 2.3% in 2020.

What happens to commodity prices if China recovers the heady growth rates of yore? It boggles the mind. If China doesn’t step up, then India certainly will.

The rise of emerging market standards of living will also provide a boost to hard asset prices. As China goes, so do its satellite trading partners, who rely on the Middle Kingdom as their largest customer. Many are also major commodity exporters themselves, like Chile (ECH), Brazil (EWZ), and Indonesia (IDX), are looking to come back big time.

As a result, Western hedge funds will soon be moving money out of paper assets, like stocks and bonds, into hard ones, such as gold, silver (SIL), palladium (PALL), platinum (PPLT), and copper.

A massive US stock market rally has sent managers in search of any investment that can’t be created with a printing press. Look at the best-performing sectors this year, and they are dominated by the commodity space.

The bulls may be right for as long as a decade thanks to the cruel arithmetic of the commodities cycle. These are your classic textbook inelastic markets.

Mines often take 10-15 years to progress from conception to production. Deposits need to be mapped, plans drafted, permits obtained, infrastructure built, capital raised, and bribes paid in certain countries. By the time they come online, prices have peaked, drowning investors in red ink.

So a 1% rise in demand can trigger a price rise of 50% or more. There are not a lot of substitutes for iron ore. Hedge funds then throw gasoline on the fire with excess leverage and high-frequency trading. That gives us higher highs, to be followed by lower lows.

I am old enough to have lived through a couple of these cycles now, so it is all old news for me. The previous bull legs of super cycles ran from 1870-1913 and 1945-1973. The current one started for the whole range of commodities in 2016. Before that, it was down for seven years.

While the present one is short in terms of years, no one can deny how business cycles will be greatly accelerated by the end of the pandemic.

Some new factors are weighing on miners that didn’t plague them in the past. Reregulation of the US banking system has forced several large players, like JP Morgan (JPM) and Goldman Sachs (GS), to pull out of the industry completely. That impairs trading liquidity and widens spreads— developments that can only accelerate upside price moves.

The prospect of falling US interest rates is also attracting capital. That reduces the opportunity cost of staying in raw metals, which pay neither interest nor dividends.

The future is bright for the resource industry. While the gains in Chinese demand are smaller than they have been in the past, they are off a much larger base. In 20 years, Chinese GDP has soared from $1 trillion to $14.5 trillion.

Some 20 million people a year are still moving from the countryside to the coastal cities in search of a better standard of living and improved prospects for their children.

That is the good news. The bad news is that it looks like the headaches of Australian parents of juvenile high earners may persist for a lot longer than they wish.

Buy all commodities on dips for the next several years.

 

 

 

 


 

april@madhedgefundtrader.com

The Market Outlook for the Week Ahead, or The Looking Glass Market

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We all read Alice in Wonderland when we were kids. In it, Alice enters a strange world where everything is the opposite of reality. Chess pieces can walk, and cats can talk.

Traders these days can be forgiven for believing that they have also stepped through the looking glass and entered a strange world where up is down, expensive is cheap, and IPO’s which offer zero added value see their shares rocket on the first day.

The big conundrum is how high a market can go when the economy is clearly headed into a recession. The short answer is that stocks can go up quite a lot in a looking glass world.

Try as I may, it is tough to find positive data points on the economy. Real estate is in free fall, agriculture looks like a Great Depression replay, and international tourism has virtually disappeared. Foreign trade is a disaster area. If you work in construction or restaurants, your life is hell. The 14%-15% earnings growth reported in Q1 will likely drop to zero by year-end. But if you are in a Bitcoin business, it is boom times.

The 23% rally we have seen off the April 9 (SPY) 4,800 bottom has been one of the most dramatic in history. It has also been one of the narrowest. The bull was led really by just 50 technology stocks we all know and love. The other 450 companies in the S&P 500 are still down on the year, with the indexes at all-time highs.

The “Wall of Worry” has crumbled and disappeared.

Erratic government policies are to blame for this extreme volatility, which changes by the day, if not by the hour. One minute, there is a 145% tariff on imports from China and a complete cutoff of rare earth supplies to US technology companies; the next minute, there isn’t.

My old friend Ken Griffin at Citadel tells me this has been the most difficult trading year in his company’s 25-year history because the swings in basic economic assumptions have been so wide and violent. Same-day options are driving the market, greatly increasing any downside volatility, like we saw in 1987, 2000, and 2025.

I agree.

Most concerning is the flow of money into crypto plays, which are sucking in much of the speculative money in the market. That’s why gold (GLD) has sold off 5% in the past two weeks, with hot money moving over to more fashionable digital plays.

Some of the recent crypto IPO’s have been laughable in their pretensions. Circle International Group (CRCL) promises to issue stablecoins based on US dollars. In other words, you are taking on the credit risk of a small startup to own a US dollar just so it can be cheaply transferred. Yet the shares soared from $31 to $300 after it went public, giving it a market capitalization of an eye-popping $50 billion.

This will end in tears.

When the entire crypto industry was worth only $2 trillion, it could have all gone to zero and not have much effect on the economy, which it almost did. It was mostly Millennials who got wiped out, betting their life savings on hopes and prayers and then finding themselves in court, vainly trying to get their money back.

Now, the total crypto market is worth $7 trillion and is growing rapidly. If it gets much bigger and then all that money gets lost, it could trigger another Great Depression. Past periods of uncertainty brought a flight to safety. Now there is a flight to crap.

It all underlines the extreme short-termism of the modern business. It’s become a “take the money and run” economy. Tough luck for your retirement fund if you forget to sit down when the music stops playing.

It all sets up a trading range for the S&P 500 for the rest of 2025 of 5,500 to 6,500. I expect some kind of weakness in the summer. Then we get a grind up to year-end.

AI stocks will be the leaders and will dominate the global economy for the next decade. That’s why investors are willing to look through trade wars, the Iran War, and a war on immigrants, and hope for the best. Financials will follow on the promise of future deregulations, which will assure another financial crisis down the road.

Cybersecurity will be another big frontrunner. Algorithms are becoming so sophisticated that enormous expenditures will be required to keep the bad guys at bay. Cybersecurity spending could be an incredible 10X AI spending. Morgan Stanley estimates that spending will increase from $15 billion in 2021 to $135 billion by 2030. CrowdStrike (CRWD), the current leader, has become a big winner for Mad Hedge this year.

The Cybersecurity industry is made up of 4,000 players, most of which are small and private. Five big companies dominate: CrowdStrike (CRWD), Palo Alto Networks (PANW), Fortinet (FTNT), Zscaler (ZS), and Broadcom (AVGO), and will eventually gobble up the rest, leading to trillion-dollar market valuations. It’s the old concentration play again.

An interest rate cut from the Fed by year-end to get the US out of recession is another stimulus for traders. That brings me to a sector I abandoned last October and left for dead, the homebuilders. With rate cuts a certainty by May 2026 at the latest, you might start thinking about buying bombed-out homebuilders’ names now. Investors are dying to pick up any sector that hasn’t doubled in the last three months, which has growth potential. I’m talking about (DHI), (KBH), (PHM), and (LEN).

My June performance rocketed up to +15.32%, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +45.01%. My trailing one-year return exploded to a record +100.46%. That takes my average annualized return to +51.14%, and my performance since inception to +796.90%. These are all non-compounded numbers.

It was a week when the market ground up every day except for Friday. I stopped out of my long in gold (GLD) for a small loss. I then jumped into another short position in (TSLA), which then immediately fell apart. That leaves me with 90% cash and 10% short Tesla. The June 20 option expiration saw us bring home maximum profits in (MSTR), (TSLA), (BA), (WPM), (AAPL), (TLT), (QQQ), AND (SPY).

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

On Monday, June 30, at 8:30 AM EST, the Dallas Fed Manufacturing Index is printed.

On Tuesday, July 1, at 7:30 AM, the Jolts Job Openings Report is announced.

On Wednesday, July 2, at 1:00 PM, we get the Challenger Job Cuts.

On Thursday, July 3, we get Weekly Jobless Claims. We also get the Nonfarm Payroll Report for June.

On Friday, July 4, the US has a National Holiday. All markets are closed.

Punitive Tariffs Return on July 9, possibly bringing the stock rally to a grinding halt. Yes, that would include the 145% tariff for China. Countries are hesitant to sign deals without knowing how these sectoral levies will impact them, and some, like India, are pushing for commitments from Washington that any deal will match the best agreement offered to any other nation.

Consumer Sentiment Improves, in June to a four-month high, with the final June sentiment index increasing to 60.7 from 52.2 a month earlier. Consumers expect prices to rise 5% over the next year, down from 6.6% in May, and they see costs rising at an annual rate of 4% over the next five to 10 years. Despite the improvement in sentiment, consumers remain anxious about the potential impact of tariffs, and their views are still consistent with an economic slowdown and an increase in inflation to come. It’s really very simple: rising share prices make people more confident.

US Equity Funds See Sixth Weekly Outflow, as of June 25, as investors took profits near record highs and stayed on edge ahead of key growth and inflation data. According to LSEG Lipper data, investors withdrew a net $20.48 billion from U.S. equity funds during the week, posting their largest weekly net sales since March 19.

Bitcoin Buying Firms are Multiplying. Over the past year, the number of bitcoins held by companies has jumped nearly 170 per cent. A total of about 130 listed firms hold a combined $87bn of bitcoin, equivalent to about 3.2 per cent of all the bitcoins that will ever exist. MicroStrategy (MSTR) started the trend and now holds a heart-stopping $33 billion in Bitcoin. Among those pivoting to a “bitcoin treasury” strategy is the Trump family media firm. While some firms’ main focus is on buying bitcoin, others are hoarding it while still running other, larger business lines.

As for me, to say that I was an unusual hire for Morgan Stanley back in 1983 was an understatement, a firm known as being conservative, white shoed, and a paragon of the establishment. They normally would not have touched me with a ten-foot pole, except that I spoke Japanese when they wanted to get into Japan. 

Of 1,000 employees, there were only three from California. The other two were drop-dead gorgeous Stanford grads, daughters of the president of the Philippines, hired to guarantee the firm’s leadership of the country’s biannual bond issue.

When the book Liar’s Poker was published, many in the company thought I wrote it under the pen name of Michael Lewis. Today, the real Michael lives a few blocks away from me, and I kid him about it whenever I bump into him at Whole Foods.

At one Monday morning meeting, the call went out, “Does anyone have a connection with the Teamsters Union? I raised my hand, mentioning that my grandfather was a Teamster while working for Standard Oil of California during the Great Depression (it was said at the time that there was never a Great Depression at Standard Oil. It was true).

It turned out that I was virtually the only person at Morgan Stanley who didn’t have an Ivy League degree or an MBA.

My boss informed me that “You’re on the team.”

At the time, the US Justice Department had seized the Teamsters Pension Fund because the Mafia had been running it for years, siphoning off money at every opportunity. I made the pitch to the Justice Department, a more conservative bunch of straight arrows you never saw, all wearing dark suits and white business shirts.

It was crucial that we won the deal as Barton Biggs was just starting up the firm’s now immensely profitable asset management division, and a big mandate like the Teamsters would give us instant credibility in the investment community.

We won the deal!

Once the papers were signed, the entire Teamsters portfolio was dumped in my lap, and I was ordered to fly to Las Vegas to investigate. It didn’t hurt that I was half Italian. It was thought that the Teamsters might welcome me.

The airport was still a tiny, cramped affair, but offered an abundance of slot machines. Steve Wynn was building The Mirage Hotel on the strip. Howard Hughes was still holed up in the penthouse of the Desert Inn. Tom Jones, Frank Sinatra, Siegfried & Roy, Wayne Newton, and Liberace had star billing.

It turned out that the Teamsters Pension Fund owned every seedy whorehouse, illegal casino, crooked bookie, and drug dealer in town. If you wanted someone to disappear, they could arrange that too. As Lake Powell has dried up, missing persons started reappearing.

I returned to New York and wrote up my report. I asked Barton to sign off on it, and he said, “No thanks, you own this one.”

So it was with a heavy heart that I released a firmwide memo stating that employees of Morgan Stanley were no longer allowed to patronize the “Kit Kat Lounge”, the “Bunny Farm”, the “Mustang Ranch”, and 200 other illicit businesses in Nevada.

I never lived down that memo.

I actually knew about some of these places a decade earlier because they were popular with the all-male staff of the Nuclear Test Site, where I had once worked an hour north of Las Vegas as a researcher and mathematician.

Then later in the early 2000’s I had to drive my son from Lake Tahoe to the University of Arizona, and we drove right past the entrance to the Nuclear Test Site. The “Kit Kat Lounge”, the “Bunny Farm” were long gone, but the Site access had improved from a dusty, potholed dirt road to a four-lane superhighway.

That’s defense spending for you.

Even today, 40 years later, my old Morgan Stanley friends kid me if I know where to have a good time in Vegas, and I laugh.

But whenever I ride the subway in New York, I still get on at the front of the train, just to be extra careful. Accidents can happen.

 

 

 


Good Luck and Good Trading,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

 

 

 

april@madhedgefundtrader.com

A Buy Write Primer

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I have a feeling we are going to do a lot of buying in 2025, so it’s time to refresh your knowledge about “Buy Writes.”

There is always a way to make money in the stock market. Get the direction right, and the rest is a piece of cake.

But what if the market is going nowhere, trapped in a range, with falling volatility? Yes, there is even a low-risk, high-return way to make money in this kind of market, a lot like the one we have now.

And that’s the way markets work. It’s like watching a bouncing ball, with each successive bounce shorter than the previous one. Thank Leonardo Fibonacci for this discovery (click here for details).

Which means a change in trading strategy is on order. The free lunch is over. It’s finally time to start working for your money.

When you’re trading off a decade low its pedal to the metal, full firewall forward, full speed ahead, damn the torpedoes. Your positions are so aggressive and leveraged that you can’t sleep at night.

Some 16 months into the bull market, not so much. It’s time to adjust your trades for a new type of market that continues to appreciate, but at a slower rate and not as much.

Enter the Buy Write.

A buy write is a combination of positions where you buy a stock and also sell short options on the same stock against the shares at a higher price, usually on a one-to-one basis.

“Writing” is another term for selling short in the options world because you are, in effect, entering into a binding contract. When you sell short an option, you are paid the premium the buyer pays, and the cash sits in your brokerage account, accruing interest.

If the stock rallies, remains the same price, or rises just short of the strike price you sold short, you get to keep the entire premium.

Most buy writes take place in front-month options, and the strike prices are 5% or 10% above the current share price. I’ll give you an example.

Let’s say you own 100 shares of Apple (AAPL) at $140.  You can sell short one August 2021 $150 call for $1.47. You will receive the premium of $147.00 ($1.47 X 100 shares per option). Remember, one option contract is exercisable into 100 shares.

As long as Apple shares close under $150 at the August 20 option expiration, you get to keep the entire premium. If Apple closes over $150, you automatically become short 100 Apple shares. Then you simply instruct your broker to cover your short in the shares with the 100 Apple shares you already have in your account.

Buy writes accomplish several things. They reduce your risk, pare back the volatility of your portfolio, and bring in extra income. Do these writes, and it will enhance the overall performance of your portfolio.

Knowing when to strap these babies on is key. If the market is going straight up, you don’t want to touch buy writes with a ten-foot pole as your stock will be called away and you will miss substantial upside.

It’s preferable to skip dividend-paying months, usually March, June, September, and December, to avoid your short option getting called away mid-month by a hedge fund trying to get the dividend on the cheap.

You don’t want to engage in buy writes in bear markets. Whatever you take in with the option premium, it will be more than offset by losses on your long stock position. You’re better off just dumping the stock instead.

Now comes the fun part. As usual, the are many ways to skin a cat.

Let’s say that you are a cautious sort. Instead of selling short the $150 strike, you can sell the $155 strike for less money. That would bring in $79 per option. But your risk of a call away drops too.

You can also go much further out in your expiration date to bring in more money. If you go out to the January 18, 2022, expiration, you will take in a hefty $6.67 in option premium, or $667 per option. However, the likelihood of Apple rising above $150 and triggering a call away by then is far greater.

Let’s say you are a particularly aggressive trader. You can double your buy-write income by doubling your option short sales at the ratio of 2:1. However, if Apple closes above $150 by expiration day, you will be naked short 100 shares of Apple.

It is likely you won’t have enough cash in your account to meet the margin call for selling short 100 shares of Apple, so you will have to buy the shares in the market immediately. It’s something better left to professionals.

How about if you are a hedge fund trader, have a 24-hour trading desk, a good in-house research department, and serious risk control? Then you can entertain “at-the-money buy writes.”

In the case of Apple, you could buy shares and sell short the August 20 $140 calls against them for $4.45 and potentially take in $4.45 for each 100 Apple shares you own. Then you make a decent profit if Apple remains unchanged or goes up less than $4.45.

That amounts to a $3.18% return in 34 trading days and annualizes out at 26%. In bull markets, hedge funds execute these all day long, but they have the infrastructure to manage the position. It’s better than a poke in the eye with a sharp stick.

There are other ways to set up buy writes.

Instead of buying stock, you can establish your long position with another call option. These are called “vertical bull call debit spreads” and are a regular feature of the Mad Hedge Trade Alert Service. “The ‘vertical’ refers to strike prices lined up above each other. The ‘debit’ means you have to pay cash for the position instead of getting paid for it.

How about if you are a cheapskate and want to get into a position for free? Buy one call option and sell short two call options against it for no cost. The downside is that you go naked short if the strike rises above the short strike price, again triggering a margin call.

Here is my favorite, which I regularly execute in my own personal trading account. Buy long-term LEAPS (Long Term Equity Anticipation Securities) spreads like I recommended with the (AAPL) January 21 $120-$130 vertical bull call spread for $5.20.

It closed at $7.21, up 38.65%.

This was a bet that one of the world’s fastest-growing companies would see its share unchanged or higher in seven months. In Q1, Apple’s earnings grew at an astonishing 35% to $23.6 billion. Sounds like a total no-brainer, right?

If I run this position all the way to expiration, and I probably will, the total return will be ($10.00 – $5.20 = $4.80), or ($4.80/$5.20 = 92.31%) by the January 21, 2022, option expiration. This particular expiration benefits from the year-end window dressing surge and the New Year asset allocation into equities.

 

Whenever we have a big up month in the market, I sell short front-month options against it. In this case, that is the August 20 $150 calls. This takes advantage of the accelerated time decay you get in the final month of the life of an option, while the time decay on your long-dated long position is minimal.

Keep in mind that the deltas on LEAPS are very low, usually around 10% because they are so long dated. That means your front-month short should only be 10% of the number of shares owned through your LEAPS in order to set delta neutral. Otherwise, you might get hit with a margin call you can’t meet.

After doing this for 53 years, it is my experience that this is the best risk/reward options positions available in the market.

To make more than 92.31% in seven months, you have to take insane amounts of risk, or engage in another profession, like becoming a rock star, drug dealer, or Bitcoin miner.

I’m sure you’d rather stick to options trading, so good luck with LEAPS.

 

 

Mad Hedge Fund Trader

The Nine Worst Trades in History

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As you are all well aware, I have long been a history buff. I am particularly fond of studying the history of my own avocation, trading, in the hope that the past errors of others will provide insights into the future.

History doesn’t repeat itself, but it certainly rhymes.

So, after decades of research on the topic, I thought I would provide you with a list of the eight worst trades in history. Some of these are subjective, some are judgment calls, but all are educational. And I do personally know many of the individuals involved.

Here they are for your edification, in no particular order. You will notice a constantly recurring theme of hubris.

1) Ron Wayne’s sales of 10% of Apple (AAPL) for $800 in 1976

Say you owned 10% of Apple (AAPL) and you sold it for $800 in 1976. What would that stake be worth today? Try $120 billion. That is the harsh reality that Ron Wayne, 89, faces every morning when he wakes up, one of the three original founders of the consumer electronics giant.

Ron first met Steve Jobs when he was a spritely 21-year-old marketing guy at Atari, the inventor of the hugely successful “Pong” video arcade game.

Ron dumped his shares when he became convinced that Steve Jobs’ reckless spending was going to drive the nascent startup into the ground, and he wanted to protect his own assets in a future bankruptcy.

Today, Apple is worth $3.07 trillion. Co-founders Jobs and Steve Wozniak each kept their original 45% ownership. Today Jobs’ widow, Laurene Powell Jobs, has a 0.5% ownership in Apple worth $153 billion, while the value of Woz’s share remains undisclosed but is a lot.

Today, Ron is living off a meager monthly Social Security check in remote Pahrump, Nevada, about as far out in the middle of nowhere as you can get, where he can occasionally be seen playing the penny slots.

 

 

2) AOL’s 2001 Takeover of Time Warner

Seeking to gain dominance in the brave new online world, Gerald Levin pushed old-line cable TV and magazine conglomerate Time Warner to pay $164 billion to buy upstart America Online in 2001. AOL CEO Steve Case became chairman of the new entity. Blinded by greed, Levin was lured by the prospect of 130 million big-spending new customers.

It was not to be.

The wheels fell off almost immediately. The promised synergies never materialized. The Dotcom Crash vaporized AOL’s business the second the ink was dry. Then came a big recession and the Second Gulf War. By 2002, the value of the firm’s shares had cratered from $226 billion to $20 billion.

The shareholders got wiped out, including “Mouth of the South” Ted Turner. That year, the firm announced a $99 billion loss as the goodwill from the merger was written off, the largest such loss in corporate history. Time Warner finally spun off AOL in 2009, ending the agony.

Steve Case walked away with billions and is now an active venture capitalist. Gerald Levin left a pauper and is occasionally seen as a forlorn guest on talk shows. The deal is widely perceived to be the worst corporate merger in history.

 

Buy High, Sell Low?

 

3) Bank of America’s Purchase of Countrywide Savings in 2008

Bank of America’s CEO, Ken Lewis, thought he was getting the deal of the century, picking up aggressive subprime lender Countrywide Savings for a bargain $4.1 billion, a “rare opportunity.”

As a result, Countrywide CEO Angelo Mozilla pocketed several hundred million dollars. Then the financial system collapsed, and suddenly we learned about liar loans, zero money down, and robo-signing of loan documents.

Bank of America’s shares plunged by 95%, wiping out $500 billion in market capitalization. The deal saddled (BAC) with liability for Countrywide’s many sins, ultimately paying out $40 billion in endless fines and settlements to aggrieved regulators and shareholders.

Ken Lewis was quickly put out to pasture, cashing in on an $83 million golden parachute, and is now working on his golf swing. Mozilo had to pay a number of out-of-court settlements, but was able to retain a substantial fortune, and is still walking around free.

The nicely tanned Mozilo is also working on his golf swing.

 

 

4) The 1973 Sale of All Star Wars Licensing and Merchandising Rights by 20th Century Fox for Free

In 1973, my former neighbor, George Lucas, approached 20th Century Fox Studios with the idea for the blockbuster film, Star Wars. It was going to be his next film after American Graffiti, which had been a big hit earlier that year.

While Lucas was set for a large raise for his directing services – from $150,000 for American Graffiti to potentially $500,000 for Star Wars – he had a different twist ending in mind. Instead of asking for the full $500,000 directing fee, he offered a discount: $350,000 off in return for the unlimited rights to merchandising and any sequels.

Fox executives agreed, figuring that the rights were worthless and fearing that the timing might not be right for a science fiction film.

In hindsight, their decision seems ridiculously short-sighted.

Since 1977, the Star Wars franchise has generated about $27 billion in revenue, leaving George Lucas with a net worth of over $3 billion by 2012. In 2012, Disney paid Lucas an additional $4 billion to buy the rights to the franchise

The initial budget for Star Wars was a pittance at $8 million, a big sum for an unproven film.  So, saving $150,000 on production costs was no small matter, and Fox thought it was hedging its bets.

George once told me that he had a problem with depressed actors on the set while filming. Harrison Ford and Carrie Fisher thought the plot was stupid and the costumes silly.

Today, it is George Lucas who is laughing all the way to the bank.

 

$150,000 for What?

 

5) Lehman Brothers’ Entry Into the Bond Derivatives Market in the 2000s

I hated the 2000s because it was clear that men with lesser intelligence were using other people’s money to hyperleverage their own personal net worth. The money wasn’t the point. The quantities of cash involved were so humongous that they could never be spent. It was all about winning points in a game with the CEOs of the other big Wall Street institutions.

CEO Richard Fuld could have come out of central casting as a stereotypical bad guy. He even once offered me a job, which I wisely turned down. Fuld took his firm’s leverage ratio up to 100 times in an extended reach for obscene profits. This meant that a 1% drop in the underlying securities would entirely wipe out its capital.

That’s exactly what happened, and 10,000 employees lost their jobs, sent packing with their cardboard boxes with no notice. It was a classic case of a company piling on more risk to compensate for the lack of experience and intelligence. This only ends one way.

Morgan Stanley (MS) and Goldman Sachs (GS) drew the line at 40 times leverage and are still around today, but just by the skin of their teeth, thanks to the TARP.

Fuld has spent much of the last five years ducking in and out of depositions in protracted litigation. Lehman issued public bonds only months before the final debacle, and how he has stayed out of jail has amazed me. Today, he works as an independent consultant. On what, I have no idea.

 

Out of Central Casting

 

6) The Manhasset Indians’ Sale of Manhattan to the Dutch in 1626

Only a single original period document mentions anything about the purchase of Manhattan. This letter states that the island was bought from the Indians for 60 Dutch guilders worth of trade goods, which would consist of axes, iron kettles, beads, and wool clothing.

No record exists of exactly what the mix was. Indians were notoriously shrewd traders and would not have been fooled by worthless trinkets.

The original letter outlining the deal is today kept at a museum in the Netherlands. It was written by a merchant, Pieter Schagen, to the directors of the West India Company (owners of New Netherlands) and is dated 5 November 1626.

He mentions that the settlers “have bought the island of Manhattan from the savages for a value of 60 guilders.” That’s it. It doesn’t say who purchased the island or from whom they purchased it, although it was probably the local Lenape tribe.

Historians often point out that North American Indians had a concept of land ownership different from that of the Europeans. The Indians regarded land, like air and water, as something you could use but not own or sell. It has been suggested that the Indians may have thought they were sharing, not selling.

It is anyone’s guess what Manhattan is worth today. Just my old two-bedroom 34th-floor apartment at 400 East 56th Street is now worth $2 million. Better think in the trillions.

 

 

 

7) Napoleon’s 1803 Sale of the Louisiana Purchase to the United States

Invading Europe is not cheap, as Napoleon found out, and he needed some quick cash to continue his conquests. What could be more convenient than unloading France’s American colonies to the newly founded United States for a tidy $7 million? A British naval blockade had made them all but inaccessible anyway.

What is amazing is that President Thomas Jefferson agreed to the deal without the authority to do so, lacking permission from Congress, and with no money. What lies beyond the Mississippi River, then, was unknown.

Many Americans hoped for a waterway across the continent, while others thought dinosaurs might still roam there. Jefferson just took a flyer on it. It was up to the intrepid explorers, Lewis and Clark, to find out what we bought.

Sound familiar? Without his bold action, the middle 15 states of the country would still be speaking French, smoking Gitanes, and getting paid in Euros.

After Waterloo in 1815, the British tried to reverse the deal and claim the American Midwest for themselves. It took Andrew Jackson’s (see the $20 bill) surprise win at the Battle of New Orleans to solidify the US claim.

The value of the Louisiana Purchase today is incalculable. But half of a country that creates $17 trillion in GDP per year and is still growing would be worth quite a lot.

 

Great General, Lousy Trader

 

8) The John Thomas Family Sale of Nantucket Island in 1740

Yes, my own ancestors are to be included among the worst traders in history. My great X 12 grandfather, a pioneering venture capitalist investor of the day from England, managed to buy the island of Nantucket off the coast of Massachusetts from the Indians for three ax heads and a sheep in the mid-1600s. Barren, windswept, and distant, it was considered worthless.

Two generations later, my great X 10 grandfather decided to cut his risk and sell the land to local residents just ahead of the Revolutionary War. Some 17 of my ancestors fought in that war, including the original John Thomas, who served on George Washington’s staff at the harsh winter encampment at Valley Forge during 1777-78. Maybe that’s why I have an obsession about not wasting food?

By the early 19th century, a major whaling industry developed on Nantucket, fueling the lamps of the world with smoke-free fuel. By then, our family name was “Coffin,” which is still abundantly found on the headstones of the island’s cemeteries.

One Coffin even saw his ship, the Essex, rammed by a whale and sunk in the Pacific in 1821. He was eaten by fellow crewmembers after spending 99 days adrift in an open lifeboat. Maybe that’s why I have an obsession with not wasting food?

In the 1840s, a young itinerant writer named Herman Melville visited Nantucket and heard the Essex story. He turned it into a massive novel about a mysterious rogue white whale, Moby Dick, which has been torturing English literature students ever since. Our family name, Coffin, is mentioned seven times in the book.

Nantucket is probably worth many tens of billions of dollars today as a playground for the rich and famous. Just a decent beachfront cottage there rents for $50,000 a week in the summer.

The 2015 Ron Howard film, The Heart of the Sea,  is breathtaking. Just be happy you never worked on a 19th-century sailing ship.

Yes, it’s all true and documented.

 

Hi Grandpa!

 

9) The Sales of Babe Ruth’s Contract for $110,000 in 1919

Boston Red Sox owner Harry Frazee wasn’t really interested in baseball. His first love was producing shows on Broadway in New York. The club was having financial troubles, with WWI dropping game attendance at Fenway Field by 35%.

So when the New York Yankees offered to buy the contract for an up-and-coming player named Babe Ruth for $125,000, then playing in only his third year of professional baseball, he jumped at the chance. The Babe was tough to manage, a regular habitue of bars and whorehouses, frequently showing up to games drunk or with a severe hangover. But the slugger broke the home run record in the 1919 season at 29 and was fodder for the newspapers.

The sale proved to be the baseball deal of the century. Babe Ruth brought in tens of millions of dollars for the Yankees. A new stadium was built in 1923 for the staggering sum of $2.4 million ($2.3 billion in today’s money) to house the 75,000 fans who wanted to see the Babe play. It was referred to as “the House that Ruth Built.”

My grandparents attended games there from nearby Bronx during the legendary 1927 season, when the team was known as “Murderer’s Row.” I used to get free tickets from Morgan Stanley right behind home plate during the 1980s and took my kids.

The Babe hit a record 60 home runs during the 1927 season and a lifetime total of 714 home runs. The record stood for 47 years when it was broken by Hank Aaron. Babe Ruth died of throat cancer in 1948 at the age of 53, the obvious result of excessive cigar smoking.

What did Harry Frazee do with his $110,000? He financed the production of No No Nanette, one of Broadway’s great blockbuster musicals of the 1920s.

 

Promissory Note Paying for the Purchase of Babe Ruth’s Contract in 1919

 

Babe Ruth, or the “Bambino”

DougD

My Favorite Secret Economic Indicator

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It is the end of the school year at the University of California, and as a single parent, the unenviable task of retrieving my daughters out of the dorms for the holidays fell to me.

When I arrived, I was stunned to find nothing less than a war zone. Both sides of every street were lined with mountains of trash, the unwanted flotsam and jetsam cast aside by departing students.

Computer desk, embarrassingly stained mattresses, broken lava lamps, and an assortment of heavily worn Ikea furniture were there for the taking. Newly arriving students were sifting through the piles looking for that reusable gem.

Diminutive Chinese teenagers were seen pushing massive suitcases on wheels down the sidewalk on their way back to Shanghai, Beijing, and Hong Kong. The university attempted to bring order to the chaos by strategically placing dumpsters on every block, but they were rapidly filled to overflowing.

It was all worth it because of the insight it gave me into one of my favorite, least-known leading economic indicators. When I picked up the truck at U-HAUL, the lot was absolutely packed with returned vehicles, and there were more parked on both sides of the streets.

The booking agent told me there is a massive influx of people moving into California from the Midwest and the Northwest, with the result that lots all over the San Francisco Bay Area are filled to capacity.

I love this company because, in addition to providing a great service, they get the first indication of any changes to the migratory habits of Americans. The last time I saw this happen was after the dotcom bust, when thousands of tech-savvy newly unemployed pulled up stakes in the foggy city and moved to Lake Tahoe to work in “the cloud.”

Bottom line: California is enjoying a resurgence of hiring and new economic growth, most likely driven by Artificial Intelligence. This is what the stock market is screaming at us right now.

 

U-Haul Ad

 

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april@madhedgefundtrader.com

Testimonial

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It’s so great having John as my Personal Investment 911.  Even when he was navigating the current of his excellent Summit … it took him less than 3 minutes to answer my questions & guide me on my way.  I’m underway & making hay … thank you, John

Andy 
Sarasota, Florida

 

april@madhedgefundtrader.com

The Market Outlook for the Week Ahead, or Welcome to Groundhog Day

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The market has to go down before it goes up. That is the short answer to your first question of the day.

How much down is anyone’s guess.

Lots of pain, no gain. That pretty much describes the stock market this year.

I’m sure you all remember the classic comedy Groundhog Day. In it, a hapless Bill Murray is forced to live the same day over and over again.

Well, here we are again. It’s February 18, one more time. The S&P 500 is back at $6,050. Stocks are just as expensive at a price earnings multiple of 23X. The market focus on AI is just as narrow as ever. Ten-year US Treasury yields are dead unchanged at 4.35%. Only gold (GLD) and silver (SLV) are higher. And the economic outlook is lower.

So will this Groundhog Day yield the same results as the last one?

The trade war 90-day delay ends on July 9, opening the way for the biggest tariff increases in 95 years. So far, we only have one promised agreement with the UK, where we already have a trade surplus. The budget bill is stalled in Congress but promises to add $3.5 to $5 trillion to the National Debt. Oh, and we may be about to enter a new war in the Middle East, sending oil prices, and therefore inflation, soaring.

And traders want to pay the highest prices in history for the riskiest asset classes? They say that markets climb a wall of worry. This market has climbed a Mount Everest of worry.

Personally, I’m going on a buyer’s strike, refusing to enter any new trades unless the Volatility Index ($VIX) tops $20 again, and preferably $30. I’ll just quietly grow older until the next trade comes to me and fade the next big move, whether it is up or down.

The good news is that in 2026, the outlook should improve. The US has suffered from a restrictive monetary policy since 2022, when inflation took off like a scalded chimp.

The Federal Reserve has since shrunk its balance sheet from $9.6 trillion to $6.7 trillion. That is why the bulk of the stock market performed poorly during this time.

Next year, US fiscal and monetary policy will both become accommodative at the same time for the first time in four years. That will be the result of record government deficit spending and the Fed finally lowering interest rates. This will be a boon for risk of all types, especially for equity investors. International stocks will be the big winner, thanks to a weak dollar, followed by technology growth stocks and cyclicals.

It all perfectly sets up a trading range for the S&P 500 for the rest of this year of 5,500-6,500, with most of the gains taking place in the final four months of the year.

Which brings us to the US dollar (UUP).

The S&P 500 ($SPX) has seen 12 corrections of 10% or more over the last 13 years. The US dollar appreciated in every single one, except for this year. That means the greenback’s flight to safety qualities are gone, possibly for good.

What can pee on the Goldilocks parade for 2026? There are two big ones.

Oil rises above $100, which could happen tomorrow if Israel attacks Iran’s Kharg Island, the country’s main export terminal. China gets 1.6 million barrels of oil a day from this facility, built back in my day by America’s Amoco. Its loss would force China into the oil spot market. At that point, $100 a barrel would look like a bargain.

The other big worry is that the bond market could collapse, thanks to a 7% debt-to-GDP ratio and rising, the highest in history. Everyone agrees that the world was more willing to lend to Joe Biden than to Donald Trump. How that anomaly manifests itself in the interest rate markets remains to be seen.

What if we get a new Fed governor in a year who immediately cuts interest rates by 200 basis points while inflation is high and accelerating, as has already been promised? The resulting bond market crash would make previous ones pale in comparison. All the market would see is the double-digit inflation this would guarantee, putting 10% plus yields for 10- and 30-year bonds in range.

 

Fed governor Jay Powell pretty much tipped his hand with the first sentence of his June 18 press conference: “On achieving our dual mandate goals of maintaining maximum employment and stable prices.” That’s what’s important to the Fed.

The Fed’s GDP expectations for 2025 were cut from 1.7% to 1.4%, while inflation and unemployment expectations are rising. This is Jay Powell’s way of saying there will be no interest rate cuts in 2025, and possibly none for an entire year, without actually saying so. It will be up to the next Fed governor to cut interest rates in the face of rising inflation, whoever that is.

It’s a perfect stagflationary forecast. The number of Fed voters opposed to a rate cut rose from 4 to 7 last week, dashing any rate cut hopes. Monster tariffs will deep-six that outcome.

A real buyer’s strike for 30-year US Treasury bonds is just a matter of time. This has already happened in Japan, where yields are at 50-year highs.

Usually, when there is a new war in the Middle East, you can count on a headlong flight to safety as investors pour into US Treasury bonds.

Not this time.

Israel’s attack on Iran has instead prompted a substantial selloff in the bond market, taking the (TLT) down a welcome $3.00 (I was short). It is further evidence that the “Sell America” trade is still on, that American exceptionalism is over, and that foreigners are using every opportunity to withdraw money from the US. The US dollar hitting a new three-year low last week is further confirmation of this.

The zero return for stocks this year, compared to two back-to-back 20% gains for the last two years, was no surprise to me. In fact, I expected it. Not because I am a biased, left-leaning, Birkenstock-wearing hippie from the 1960s, but because I am an avid market historian.

To give you some idea of how politicized the market has become, some 58% of Republicans expect government policies to take stocks to new all-time highs this year, while only 12% of Democrats believe so.

According to Bespoke Research, an independent firm, if you had invested $1,000 only with every Republican president since 1953, your return would be $27,400. If you had invested $1,000 only with every Democratic president since 1953, your return would be $$61,800. However, if you remained fully invested the entire time through the presidents of both parties, your profit would be a staggering $1.69 million.

Invest according to your own political persuasion at your own peril.

Fed Leaves Interest Rates Unchanged. GDP expectations were cut from 1.7% to 1.4% for 2025, while inflation and unemployment expectations rose. It’s a perfect stagflationary forecast. I don’t expect any rate cuts this year because of tariff-driven inflation, as Jay Powell believes.

The Economy is Sinking, according to Fed Governor Jay Powell. Uncertainty about tariffs and inflation appears to be taking its toll on the economy. Members of the Federal Reserve’s monetary-policy committee lowered their projections for annualized growth in America’s gross domestic product to just 1.4% for 2025 on Wednesday.

More AI Cuts Hit the Jobs Market. Microsoft plans to lay off several thousand employees within weeks. It’s the latest knock-on effect of investment in artificial intelligence, where efficiencies come from increased AI capabilities, and there is a need to offset spending on the technology. Microsoft will cut thousands of jobs in its sales department and other teams from July.  Microsoft plans to invest $80 billion in its current fiscal year to build out data centers that train models and run AI applications. The latest cuts come on top of a reduction of around 6,000 jobs in May across product and software developer roles. Microsoft had around 228,000 full-time employees at the end of June last year.

New Export Restriction on China Slaps Chip Stocks. A US official told top global semiconductor makers that he wanted to revoke waivers they have used to access American equipment in China. Such a move is expected to escalate trade tensions. The Philadelphia Stock Exchange Semiconductor Index, a closely watched benchmark, fell as much as 2% after the report was published.

Housing Starts Hit 5-Year Low. Multifamily apartments dropped 30% MOM as a record supply hits the market. Single-family home starts fell 7% YOY. All housing-related stats are falling off a cliff.

Weekly Jobless Claims Fall, down 5,000 to 245,000. The report from the Labor Department on Wednesday showed widespread layoffs in the prior week, which had boosted claims to an eight-month high. Though some technical factors accounted for the elevation in claims, layoffs have risen this year, with economists saying President Donald Trump’s broad tariffs had created a challenging economic environment for businesses.

US Crude Inventories Hit One-Year Low. Crude inventories fell by 11.5 million barrels to 420.9 million barrels in the week ending June 13, the EIA said. The rise in exports came even as the price differential between Brent and WTI futures narrowed in recent weeks, a move that typically discourages exports. Companies are attempting to shrink inventories of an asset whose price is falling.

Retail Sales Dive, declining 0.9% MOM, even more than the 0.6% drop expected from the Dow Jones consensus. The decline followed a 0.1% loss in April and came at a time of unease over tariffs and geopolitical tensions. Sales rose 3.3% from a year ago. One more recession indicator.

Homebuilder Sentiment Hits Pandemic Low. Higher mortgage rates and uncertainty in the broader economy continue to weigh on consumers — and consequently on the nation’s homebuilders. Builder sentiment in June dropped 2 points from May to 32 on the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). Anything below 50 is considered negative.

Solar Stocks Crash, because the Senate spending bill accelerates the phase-out of subsidies. The oil industry gets to keep all of its subsidies. The lack of tax credits will make the solar panels less cost-competitive against other sources of power. A homeowner installing a $20,000 system today could qualify for a $6,000 credit on their taxes; the legislation would change that, making the homeowner take on the entire $20,000 cost.

Long-term U.S. bonds have Become Pariahs.  Bond investors, anticipating the Federal Reserve will hold interest rates unchanged again this week, are moving away from longer-dated Treasuries as they temper expectations for an aggressive easing given the lower chance of a U.S. recession. Their flight away from the long end of the curve also reflects worries about the House tax and spending bill, which will take the National Debt up by $3 trillion or more.

My June performance rocketed up +12.10%, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +42.59%. My trailing one-year return exploded to a record +97.88%. That takes my average annualized return to +51.26%, the first time I‘ve hit the $51 handle, and my performance since inception to +794.48%.

It has been another busy week in an otherwise dead market. The June 20 option expiration brought us expirations at max profit of positions in (TSLA), (WPM), and (MSTR). With the expiration, I have shrunk my book to 80% cash, 10% “RISK OFF,” and 10% “RISK ON.”

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

 

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

On Monday, June 23, at 8:30 AM, the Existing Home Sales are printed.

On Tuesday, June 24, at 7:30 AM, the S&P Case Shiller National Home Price Index is announced.

On Wednesday, June 25, at 1:00 PM, we get the New Home Sales.

On Thursday, June 26, we get Weekly Jobless Claims. We also get the final report for Q1 GDP.


On Friday, June 27, at 7:30 AM, we get the Core PCE Price Index, an inflation read. At 1:00 PM, the Baker Hughes Rig Count is published.

As for me, it was in 1986 when the call went out at the London office of Morgan Stanley for someone to undertake an unusual task. They needed someone who knew the Middle East well, spoke some Arabic, was comfortable in the desert, and was a good rider.

The higher-ups had obtained an impossible-to-get invitation from the Kuwaiti Royal family to take part in a camel caravan into the Dibdibah Desert. It was the social event of the year.

More importantly, the event was to be attended by the head of the Kuwait Investment Authority, who managed over $100 billion in assets. Kuwait had immense oil revenues, but almost no people, so the bulk of its oil revenues were invested in Western stock markets. An investment of goodwill here could pay off big time down the road.

The problem was that the US had just launched air strikes against Libya, destroying the dictator, Muammar Gaddafi’s royal palace, our response to the bombing of a disco in West Berlin frequented by US soldiers. Terrorist attacks were imminently expected throughout Europe.

Of course, I was the only one who volunteered.

My managing director didn’t want me to go, as they couldn’t afford to lose me. I explained that in reviewing the range of risks I had taken in my life, this one didn’t even register. The following week found me in a first-class seat on Kuwait Airways headed for the Middle East in turmoil.

A limo picked me up at the Kuwait Hilton, just across the street from the US embassy, where I occupied the presidential suite. We headed west into the desert.

In an hour, I came across the most amazing sight – a collection of large tents accompanied by about 100 camels. Everyone was wearing traditional Arab dress with a ceremonial dagger. I had been riding horses all my life, camels not so much. So, I asked for the gentlest camel they had.

The camel wranglers gave me a tall female, which is more docile and obedient than the males. Imagine that! Getting on a camel is weird, as you mount them while they are sitting down. My camel had no problem lifting my 180 pounds.

They were beautiful animals, highly groomed, and in the pink of health. Some were worth millions of dollars. A handler asked me if I had ever drunk fresh camel milk, and I answered no. They didn’t offer it at Safeway. He picked up a metal bowl, cleaned it out with his hand, and milked a nearby camel.

He then handed me the bowl with a big smile on his face. There were definitely green flecks of manure floating on the top, but I drank it anyway. I had to, lest my host lose face. At least it was white. Its body temperature was warm and much richer than cow’s milk.

The motion of a camel is completely different from that of a horse. You ride back and forth in a rocking motion. I hoped the trip was short, as this ride had repetitive motion injuries written all over it. I was using muscles I had never used before. Hit your camel with a stick and they takes off at 40 miles per hour.

I learned that a camel is a super animal ideally suited for the desert. It can ride 100 miles a day, and 150 miles in emergencies, according to TE Lawrence, who made the epic 600-mile trek to Aqaba in only four weeks in the height of summer. A camel can live 15 days without water, converting the fat in its hump.

In ten miles, we reached our destination. The tents went up, clouds of dust rose, the camels were corralled, and the cooking began for an epic feast that night.

It was a sight to behold. Elaborately decorated huge three-by-five wide bronze plates were brought overflowing with rice and vegetables, and every part of a sheep you can imagine, none of which was wasted. In the center was a cooked sheep’s head with the top of the skull removed so the brains were easily accessible. We all ate with our right hands only. I won’t tell you what the left hand is used for.

I learned that I was the first foreigner ever invited to such an event, and the Arabs delighted in feeding me every part of the sheep, the eyes, the brains, the intestines, and the gristle. I pretended to love everything, and lay back and thought of England. When they asked how it tasted, I said it was great. I lied.

As the evening progressed, the Johnny Walker Red came out of hiding. Alcohol is illegal in Kuwait, and formal events are marked by copious amounts of elaborate fruit juices. I was told that someone with a royal connection had smuggled in an entire container of whiskey, and I could drink all I wanted.

The next morning, I was awoken by a bellowing camel and the worst headache in the world. I threw a rock at him to get him to shut up, and he sauntered over and peed all over me.

The things I did for Morgan Stanley!

Four years later, Iraq invaded Kuwait. Some of my friends were kidnapped and held for ransom, while others were never heard from again.

The Kuwait government said it would pay for the war if we provided the troops, tanks, and planes. So they sold their entire $100 million investment portfolio and gave the money to the US.

Morgan Stanley got the mandate to handle the liquidation, earning the biggest commission in the firm’s history. No doubt, the salesman who got the order was considered a genius, earned a promotion, and was paid a huge bonus.

I spent the year as a Marine Corps captain, flying around assorted American generals and doing the odd special op. I got shot down and still set off airport metal detectors. No bonus here. But at least I gained an insight and an experience into a medieval Bedouin lifestyle that is long gone.

They say success has many fathers. This is a classic example.

You can’t just ride out into the Kuwait desert anymore. It is still filled with mines planted by the Iraqis. There are almost no camels left in the Middle East, long ago replaced by trucks. When I was in Egypt in 2019, I rode a few mangy, pitiful animals held over for the tourists.

When I passed through my London Club last summer, the Naval and Military Club on St. James Square, whose portrait was right at the front entrance?  None other than that of Lawrence of Arabia.

It turns out we were members of the same club in more ways than one.

Stay healthy,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

John Thomas of Arabia

 

Checking Out the Local Camel Milk

This One Will Do

 

Traffic in Arabia

 

 

Good Luck and Good Trading,

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

My Old Pal, Leonardo Fibonacci

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I remember the 12th century like it was yesterday.

In those days, the leading intellectuals used to get together and drink wine by the gallon, which then was really little more than rotten grape juice. The problem was that we all used to pass out before anybody came up with a great idea.

Then someone started importing coffee from the Middle East, and thinkers stayed awake long enough to produce great thoughts.

Enter the Renaissance.

One of the guys I used to hang out with then was named Leonardo Fibonacci. Good old Leo was a man after my own heart, a world-class nerd and geek, with a penchant for mathematics.

His dad was a diplomat from the Court at Pisa to the Algiers sultanate who had a nice little import/export business on the side. It is safe to say that there was probably as little action in Algiers then as there is today. I know, because I’ve been there.

Instead of camping out in his dad’s basement and staying depressed like a lot of young men these days, Leo killed time trolling the local bazaars for interesting used books he could buy on the cheap.

Remember, this was before texting. That was not hard to do since most people couldn’t read. He took the trouble to learn Arabic and translated them back into Latin. Ancient math books were his specialty.

It didn’t take Leo long to figure out that the Arabs had developed a numbering system vastly superior to the Roman numerals then in use in Europe. Most importantly, they mastered the concept of zero and the placement of digits in addition and subtraction. The Arabs themselves, in fact, lifted these concepts from archaic Indian mathematicians as far back as the 6th century.

If you don’t believe me about the significance of this discovery, try multiplying CCVII by XXXIV. (The answer is VIIXXXVIII, or 7,038). Try designing a house, a bridge, or a computer software program with such a cumbersome numbering system.

Leo didn’t just stop there. He also discovered a series of numbers, which seemed to have magical predictive powers. The formula is extremely simple. Start with zero, add the next number, and you have the next number in the series.

Continue the progression and you get 0,1,1,2,3,5,8,13,21,34,55…. and so on. It’s no surprise that the sequence became known as the “Fibonacci Sequence”.

The great thing about this series is that if you divide any number in it by the next one, you get a product that has become known as the “Golden Ratio”. This number is 1:1.618, or 0.618 to one.

Fibonacci’s original application for this number was to predict the growth rate of a population of breeding rabbits. 

Then some other mathematicians started poking around with it. It turns out the Great Pyramid in Egypt was built to the specification of a Fibonacci ratio. So is the rate of change of the curvature in a seashell or a human ear. So is the ratio of the length of your arms to your legs.

Upon closer inspection, the Fibonacci turned out to be absolutely everywhere, from the structure of the tiniest cell to the swirl of the largest galaxies in the universe.

Fibonacci introduced his findings in a book entitled “Liber Abaci”, or “Free Abacus” in English, which he published in 1202. In it he proposed the 0-9 numbering system, place values, lattice multiplication, fractions, bookkeeping, commercial weights and measures, and the calculation of interest. It included everything we would recognize as modern mathematics.

The book launched the scientific revolution in Europe that led us to where we are today, and was a major bestseller. In fact, you can still buy it on Amazon, making it the longest continuously published book in history.

Enter the stock market. By the end of the 19th century, some observers noticed that share prices tended to move in predictable patterns on charts. In particular, they always seemed to advance and pull back around the numbers forecast by my friend, Fibonacci, seven hundred years earlier. 

These people came to be known as “technical analysts,” as opposed to fundamental analysts, who look at the underlying business behind each company.

By the 1930s, Fibonacci numbers had worked their way into mainstream technical analytical theories, such as Elliot Wave. Today, most market tracking software and data systems, like Bloomberg, will automatically throw up Fibonacci support and resistance numbers on every stock chart.

Why am I talking about this? It’s because I am frequently asked how I pick the precise strike prices for options in my own Trade Alert Service. I use a combination of moving averages, moving average convergence-divergence (MACD) indicators, Bollinger bands, Fibonacci numbers, and a chant taught to me by an old Yaqui Indian shaman.

And I do all of this only after going over the underlying fundamentals of the stock or index with a fine tooth comb. I can’t be any clearer than that.

Enter the high-frequency traders. Knowing that the bulk of us rely on Fibonacci numbers for our short-term trading calls, they have developed algorithms that seek to exploit that preference.

They enter a large number of stop loss orders to sell just below a “Fibo” support level, then put up fake, but extremely large offers just above it, which are usually cancelled. Only 1% of these orders ever get executed.

When conventional traders see these huge offers to sell, they panic, dump their stocks, and trigger the stop losses. The HFTs then jump in and cover their own shorts for a quick profit, sometimes only for a fraction of a penny.

The net effect of these shenanigans is to make Fibo numbers less effective. Fibo support is just not as rock solid as it used to be, nor is resistance. This is why the performance of several leading technical analysts has seriously deteriorated in recent years.

Although their importance is now somewhat diluted, I still enjoy Fibonacci numbers, as I see them in nature all around me. They occasionally have other uses, such as in cryptography.

When I watched The Da Vinci Code sequel, “Angels & Demons”, and listened to the clues, I recognized the handiwork of my old friend Leo. The rest of the audience sat there clueless, except for the group in the next row wearing “UC BERKELEY” hoodies.

For the fellow geeks and nerds among you, here are the precise Fibonacci numbers indicating support and resistance, which you will find on a stock chart.

Fibonacci Ratios

Fibonacci ratios are mathematical relationships, expressed as ratios, derived from the Fibonacci sequence. The key Fibonacci ratios are 0%, 23.6%, 38.2%, and 100%. 

          

 

The key Fibonacci ratio of 0.618 is derived by dividing any number in the sequence by the number that immediately follows it. For example: 8/13 is approximately 0.6154, and 55/89 is approximately 0.6180.

  

The 0.382 ratio is found by dividing any number in the sequence by the number that is found two places to the right. For example: 34/89 is approximately 0.3820.

The 0.236 ratio is found by dividing any number in the sequence by the number that is three places to the right. For example: 55/233 is approximately 0.2361.

The 0 ratio is :

 

Leonardo Fibonacci (Maybe)

 

DougD

Testimonial

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Thank John for his ceaseless banter. I enjoy this service so much. Great stories!!!!

I hope our paths cross soon.

Thank you.

 

Bill
North Carolina

 

John Thomas

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