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Get Ready for the Coming Golden Age

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950s, and which I still remember fondly.

This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call "intergenerational arbitrage" will be the principal impetus. The main reason that we are now enduring two "lost decades" of economic growth is that 80 million baby boomers are retiring to be followed by only 65 million "Gen Xers."

When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and "RISK ON" assets such as equities, and more buyers of assisted living facilities, health care, and "RISK OFF" assets such as bonds.

The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward six years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.

That is when you have 65 million Gen Xers being chased by 85 million of the "millennial" generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes.

The middle-class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990s.

The stock market rockets in this scenario. Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists. A 5% annual gain takes the Dow to 28,000 by 2019.

After that, after a brief dip, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 100,000 by 2030. If I'm wrong, it will hit 200,000 instead.

Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well.

The 100-year supply of natural gas (UNG) we have recently discovered through the new "fracking" technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies.

Since 1995, the United States Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC's share of global reserves is collapsing.

This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.

Mileage for the average U.S. car has jumped from 23 to 24.7 miles per gallon in the past couple of years, and the administration is targeting 50 mpg by 2025. Total gasoline consumption is now at a five-year low.

Alternative energy technologies will also contribute in an important way in states such as California, accounting for 30% of total electric power generation by 2020, and 50% by 2030.

I now have an all-electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the U.S. from a net importer to an exporter of energy, with hugely positive implications for America's balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term.

That sets up a multiyear short for the world's big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it's great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos.

But at the enterprise level this is enabling speedy improvements in productivity that are filtering down to every business in the U.S., lowering costs everywhere.

This is why corporate earnings have been outperforming the economy as a whole by a large margin.

Profit margins are at an all-time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development.

When the winners emerge, they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area.

This is because the Golden State thumbed its nose at the federal government 10 years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn't afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 20 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday.

What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver's seat on these innovations? The USA.

There is a political element to the new golden age as well. Gridlock in Washington can't last forever. Eventually, one side or another will prevail with a clear majority.

This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but for which nobody wants to be blamed.

That means raising the retirement age from 66 to 70 where it belongs and means-testing recipients. Billionaires don't need the maximum $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up.

A Pax Americana would ensue.

That means China will have to defend its own oil supply, instead of relying on us to do it for them. That's why they have recently bought a second used aircraft carrier. The Middle East is now their headache.

The national debt then comes under control, and we don't end up like Greece.

The long-awaited Treasury bond (TLT) crash never happens. The Fed has already told us as much by indicating that the Federal Reserve will only raise interest rates at an infinitesimally slow rate of 25 basis points a quarter.

Sure, this is all very long-term, over-the-horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won't kick in for another decade.

But some individual industries and companies will start to discount this rosy scenario now.

Perhaps this is what the nonstop rally in stocks since 2009 has been trying to tell us.

Dow Average 1908-2018

Another American Golden Age is Coming

May 14, 2018

Diary, Newsletter

Global Market Comments
May 14, 2018
Fiat Lux

Featured Trade:
(THURSDAY, JUNE 14, 2018, NEW YORK, NY, GLOBAL STRATEGY LUNCHEON),
(THE MARKET OUTLOOK FOR THE WEEK AHEAD, OR TAKING ANOTHER BITE AT THE APPLE),
(AAPL),
(FAREWELL TO DAVID ROCKEFELLER)

The Market Outlook for the Week Ahead, or Taking Another Bite at the Apple

Diary, Newsletter, Research

What happens after markets test the top end of a range? They test the bottom end of the range. So, the game here is to pick where and when is the next short-term top.

Now that Q1 earnings are out of the way, there is no major positive driver of the market for two more months, until the end of July, when the Q2 earnings start to roll out. And they will be good.

That leaves us only geopolitical shocks and chaos from Washington as the major market influences, and none of those are going to be positive. When traders shift from a focus on earnings to fear, the result is usually negative for share prices.

One major event that occurred last week but was totally ignored by the media was the administration's trade negotiating team scampering back from China completely empty handed. They called his bluff. So, the trade war is still on, it's just moved from the front burner to the back burner. Don't get complacent.

And here is the worrisome issue for the bulls. Q1 earnings were up 25.5% YOY, one of the best in my long career. Revenues accounted for 8.3%, margin improvements 8.1%, new tax breaks 7.6%, and share buybacks 1.5%. This means that 35.6% of the total earnings were from one-time only benefits that aren't going to be there next year.

Given that the global economy is slowing down, revenue and margin improvement will probably drop by half next year. That means the best case for Q1 2019 earnings will show a drop from 25.5% to only 8.2%.

It's not a matter of IF the market will top out, but WHEN. Enjoy the bull move while it lasts. It isn't going to be there next year.

I decided to sit out the current leg up in the market. I didn't think it would be big or sustained enough to squeeze in another round trip. Besides, after shooting out 26 Trade Alerts in April earning an eye-popping 12.54% profit, not only was my staff exhausted, so were the followers.

My year-to-date return stands at a robust 19.30%, my trailing one-year returns have risen to 55.59%, and my eight-year sits at an 295.77% apex.

And remember, the market is making this move in the face of rising oil prices and interest rates, always bull market killers.

Of course, nobody at Apple (AAPL) cares about any of this one wit, as its stock blasted through to new all-time highs every day last week. Steve Jobs' creation is on a race to a $1 trillion market capitalization and was worth $930 billion at the market high. That's when Apple will have the same GDP as Russia or Australia.

The dividend yield has fallen to 1.56%. The company is increasingly being viewed as a luxury brand commanding a much higher multiple than the 9X that it earned when it was perceived as a lowly hardware company. By the way, Ferrari (RACE) has a price earnings multiple of 39X versus Apple's current 16X ex-cash.

I'll be raising my target for the stock from $200 to $220 as soon as I get time to write the report. Steve Jobs must be smiling down from Heaven. By the way, this service first recommended Apple as a strong "BUY" in 2010 when the shares traded at $10. That's a gain of 1,900%. Click here for the link.

Apple's stellar gains were part of a much broader move back into technology, which we expected. It turns out that the semiconductor cycle IS NOT ending after all, as predicted by the neophyte coverage of UBS.

Suddenly, all is forgiven at Facebook (FB), as the shares are now 2% short of an all-time high. Amazon is going from strength to strength, with Amazon Web Services' cloud business now accounting for an impressive $50 billion of sales and is growing at a breakneck 50% a year.

It all goes back to my seminal rule of investing that has worked for my entire 50-year career. While much of the rest of the U.S. economy is slowly fading from the scene, TECHNOLOGY ALWAYS COMES BACK!

The last of the Q1 earnings reports will dribble out this week.

On Monday, May 14, at 3:00 PM, we get a deluge of Feds speakers, now that the quiet period from the last meeting is over.

On Tuesday, May 15, at 8:30 AM EST, we receive the April Retail Sales, which has been red hot as of late. Home Depot (HD), a long-time Mad Hedge favorite, reports.

On Wednesday, May 16, at 8:30 AM, the April Housing Starts. Cisco Systems (CSCO) reports.

Thursday, May 17, leads with the Weekly Jobless Claims at 8:30 AM EST, which remained unchanged last week at 211,000, a 43-year low. At 10:00 AM EST, the April Index of Leading Economic Indicators is released, a compilation of 10 forward-looking statistics compiled by the private Conference Board. Applied Materials (AMAT) reports.

On Friday, May 18, we wrap up with the Baker Hughes Rig Count at 1:00 PM EST. Deere & Co. (DE) reports.

As for me, I'll be working in the garden this weekend. It's time to plant the pumpkins if I want nice jack-o-lanterns by Halloween, the tomatoes are thriving, and I will have an ample supply of fresh pepper this coming winter.

Good Luck and Good Trading.

Rolling in the Clover

Farewell to David Rockefeller

Diary, Newsletter, Research

Watching Sotheby's sell off the possessions of David Rockefeller, the memories came flooding back.

A Picasso went for a staggering $115 million, while a Monet fetched $80 million. A leather easy chair estimated at $300 sold for $8,000.

I've seen then all, either at the downtown headquarters of Chase Manhattan Bank, which Rockefeller turned into an art museum, or at dinner parties at his posh Upper East Side mansion.

I was sitting across the desk from Bob Baldwin, the chairman of Morgan Stanley. It was 1982, and I was 30 years old.

He carefully studied my resume in his hand. Then he picked up the phone and hit a button on speed dial to call David Rockefeller.

Rockefeller, the chairman of Chase Manhattan Bank, picked up.

Baldwin said, "I have a John Thomas sitting in front of me." He paused a second, and then hung up.

"He says you're alright," and Bob offered me a job on the spot to get the firm into the international equity business.

That's how I started a long and illustrious career at Morgan Stanley.

I eventually became one of the most successful traders in the company, and at one point accounted for 80% of equity division profits.

It is also where I learned the knowledge that I am passing on to you today through the Diary of a Mad Hedge Fund Trader and my trade mentoring service.

I have David Rockefeller to thank for getting me started.

So, it was with a heavy heart that I learned that he passed away recently at the ripe old age of 101.

Rockefeller was the youngest grandson of oil baron John D. Rockefeller, the founder of the Standard Oil Company. The modern-day spin-offs include ExxonMobil, Chevron, Amoco, and parts of British Petroleum.

The Sherman Antitrust Act was passed specifically to break up Rockefeller's oil refining monopoly.

Rockefeller was America's first billionaire.

Rockefeller could have had an easy life of moneyed leisure in high society.

He chose otherwise.

He grew up in a Manhattan 54^th Street mansion attended by armies of nannies and servants, where his parents dressed black tie for dinner every night.

He remembers his doting grandfather, John D., who only gave him dimes "to keep us thrifty."

His mother founded the New York Museum of Modern Art in 1929, for which Rockefeller became chairman in later years.

He took the trouble to get a PhD in Economics from the University of Chicago in 1940, supporting Franklin Delano Roosevelt's deficit spending to end the Great Depression.

The family was horrified, as FDR's 90% maximum tax rate substantially whittled down the family's fortune by the time John Kennedy repealed it in 1962.

I got to know David Rockefeller well during the 1970s when I covered U.S. banking for The Economist magazine, and he spearheaded Chase Manhattan Bank's aggressive international expansion.

Rockefeller became the unofficial ambassador for the brash, unvarnished capitalism of the day. He wreaked establishment.

For a decade, whenever I interviewed major world leaders, such as Zhou Enlai of China, Ferdinand Marcos of the Philippines, Emperor Hirohito of Japan, or Margaret Thatcher of Great Britain, I would often bump into Rockefeller on the way out.

It was a bygone era, when major clients were courted primarily through the social register.

Eventually, international business came to account for 80% of Chase Manhattan's total profits.

It is perhaps fitting that Rockefeller was an early supporter of the construction of the original World Trade Center in downtown Manhattan, just walking distance from his bank.

I used to meet Rockefeller in his cavernous office on the 65^th floor of the Chase Manhattan building near Wall Street. He sat behind a polished hardwood desk the size of Montana.

Also known for his immense art collection, almost every floor of the building was decorated with favorite pieces from his personal collection. There was even a Chagall on the way to the men's room.

In perhaps the greatest compliment every paid me, he told me he had 70,000 names in his Rolodex, and I was one of them.

Wow! To be in David Rockefeller's Rolodex! Did you get that mom?

Rockefeller was always charming and gracious to a T. He was the guy who was friendly to everyone, with a great sense of humor, even when he didn't have to be.

He was offered the post of U.S. Treasury Secretary by multiple administrations and turned them down every time. He preferred to spend more time on his prized collection of beetles instead, the largest in the world.

He worked well into his 90s and maintained an office on the 56^th floor at Rockefeller Center, which his father had built to create jobs in New York during the Great Depression.

Because I was one of a handful of Morgan Stanley officers who spoke fluent Japanese, I was recruited to the team that sold Rockefeller Center to the Japanese for $1.3 billion in 1989. It was one of the largest real estate transactions in history at that time.

The last time I saw Rockefeller was at a gala black tie event for his 90^th birthday at the Museum of Modern Art, where tables were selling for $90,000 a piece.

Rockefeller used the event to announce a staggering $100 million gift to the museum.

So, thank you David Rockefeller for all your help, and a life well lived.

They don't make them like you anymore.

You will be missed.

May 14, 2018 - Quote of the Day

Diary, Newsletter, Quote of the Day

"It's easier to get out of Cuba than to get out of Facebook," said a market analyst.

May 11, 2018

Diary, Newsletter

Global Market Comments
May 11, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(MAY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (MU), (NVDA), (AMZN), (GOOGL),
(TLT), (SPX), (MSFT), (DAL),
(MAD HEDGE DINNER WITH BEN BERNANKE)

Wednesday, June 13, 2018, Philadelphia, PA, Global Strategy Luncheon

Diary, Newsletter

Come join me for lunch at the Mad Hedge Fund Trader's Global Strategy Update, which I will be conducting in Philadelphia, PA, on Wednesday, June 13, 2018. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.

I'll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there, too. Tickets are available for $238.

I'll be arriving at 11:45 AM, and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at an exclusive downtown private club. The precise location will be emailed with your purchase confirmation.

I look forward to meeting you and thank you for supporting my research.

To purchase a ticket, please click here.

May 9 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers' Q&A for the Mad Hedge Fund Trader May 9 Global Strategy Webinar with my guest co-host Bill Davis of the Mad Day Trader.

As usual, every asset class long and short was covered. You are certainly an inquisitive lot, and keep those questions coming!

Q: Would you still short Facebook (FB)?

A: Right now, no. I thought the dynamics changed off the last earnings report, so the answer is no. We have made a ton of money trading Facebook this year, and all of it has been from the long side.

Q: How will the election affect the market?

A: It will go down into the election, but you'll then get a strong rally as the uncertainty fades away. It really makes no difference who wins. It is the elimination of uncertainty that is the big issue.

Q: Do you have a price to buy Micron Technology (MU) or NVIDIA (NVDA), or do you want to wait for a crash day?

A: I want to wait for a crash day, because even though these are great companies, on the down days, they fall twice as fast as any other stock. Your entry point is very important in that situation.

Q: Do you see opportunities to sell short the U.S. Treasury bond market (TLT) again?

A: Yes. But wait for the four-point rally not the two-point rally.

Q: Rising interest rates should benefit banks - why are they such horrible performers?

A: The double in bank stocks in 2017 fully discounted this year's interest rate move. For banks to really perform interest rates have to move higher still, which they will eventually.

Q: When will the yield curve invert and what will be the implications?

A: You can take the Fed's current rate of interest rate rises (which is 25 basis points every three months) and essentially calculate that the yield curve inverts at the end of 2018 or the beginning of 2019. Recessions and bear markets always follow six months after that inversion takes place. That's when interest rates start to rise very sharply as bond investors panic and unwind all their leveraged long positions.

Q: Why are you not involved with Amazon (AMZN) and Google (GOOGL)?

A: I've already taken big profits in both of these and I'm just waiting for another serious dip before I get back in again.

Q: What happens to stock buybacks?

A: While other investors are pulling out of the market, stock buybacks are doubling. But, that is only happening, essentially, in the tech stocks - they're the buyback kings. If you don't have a serious buyback program this year, your stock is falling. Companies are the sole net buyers of the market this year, and they are only buying their own stocks.

Q: What do you see the upper and lower end of the S&P 500 (SPY) range to November?

A: I think we've already got it: 2,550 on the low side, 2,800 on the high side - that a 10% range and you can expect it to get narrower and narrower going into November. After that, we get an upside breakout to new all-time highs.

Q: When will rates be negative next?

A: In the next recession, the bottom of which will be in 2 to 2.5 years; that's when interest rates in the U.S. could go negative, as they did in Japan and Europe for several years.

Q: What is your No. 1 pick in the market today?

A: We love Microsoft (MSFT) long term. However, right now the background macro picture is more important than stock selection than any single name, so we're keeping a position in Microsoft in the Mad Hedge Technology Letter, but not in Global Trading Dispatch. We're sort of hanging back, waiting for another sell-off before we touch anything on the long side in GTD. Remember, the money is made on a buy in the new position, not on the sell going out.

Q: Was the semiconductor chip sell-off overdone?

A: Absolutely - the negative report was put out by a new analyst to the industry who doesn't know what he's talking about. If you ask all the end users of the chips, all they talk about is A.I., and that means exponential growth of chip demand.

Q: Is it a good time to buy airline stocks (DAL)?

A: No, until we get a definitive peak in oil, and a speed up again in the economy, you don't want to touch economically sensitive sectors like the airlines.

May 11, 2018 - Quote of the Day

Diary, Newsletter, Quote of the Day

"There's a 70% chance the whole thing will fail," said Jeff Bezos when pitching his parents for a $100,000 investment in his start-up, Amazon (AMZN) in 1994.

May 10, 2018

Diary, Newsletter

Global Market Comments
May 10, 2018
Fiat Lux

Featured Trade:
(TUESDAY, JUNE 12, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(THE END OF THE IRAN NUCLEAR DEAL AND YOUR PORTFOLIO),
(USO), (XOM), (OXY), (CVX), (DAL), (XLP),
(UPGRADING OUR CUSTOMER SUPPORT)