MHFTR

The New AI Book that Investors are Scrambling For

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A better headline for this piece would be “The Future of You,” as artificial intelligence is about to become so integral to your work, your investment portfolio, and even your very existence that you won’t be able to live without it, quite literally.

Well, do I have some great news for you. A blockbuster book about the state of play on all things AI will be released on September 25, and I managed to obtain and read an advanced copy. It is entitled: AI Superpowers: China, Silicon Valley, and the New World Order by Dr. Kai-Fu Lee.

The bottom line: The future is even more unbelievable than you remotely imagined. We are at the very early days of this giant megatrend, and the investment opportunities will be nothing less than spectacular.

And here is a barn burner. The price of AI is dropping fast as hundreds of thousands of new programmers pour into the field. Those $10 million signing bonuses are about to become a thing of the past.

Dr. Lee is certainly someone to take seriously. He obtained one of the first Ph.D.’s in AI from Carnegie Mellon University. He was the president of Google (GOOG) China and put in stints at Microsoft (MSFT) and Apple (AAPL). Today, he is the CEO of Sinovation Ventures, the largest AI venture capital firm in China, and is a board director of Alibaba (BABA).

AI is nothing more than deep learning, or super pattern recognition. Dr. Lee dates the onset of artificial intelligence to 1952, when an IBM mainframe computer learned to play checkers and beat human opponents. By 1955, it learned to develop strategies on its own.

Dr. Lee sees the AI field ultimately divided into two spheres of dominance, the U.S. and China. No one else is devoting a fraction of the resources needed to become a serious player. The good news is that Russia and Iran are nowhere in the game.

While the U.S. dominates in the original theory and algorithms that founded AI, China is about to take the lead in applications. It can do this because it has access to mountains of data that dwarf those available in America. China processes three times more mobile phones, five times more Internet customers, 10 times more eat-out orders, and 50 times more mobile transactions. In a future where data is currency, this is huge.

The wake-up call for China in applications took place two years ago when U.S. and Korean AI programs beat grandmasters in the traditional Chinese game of Go. Long a goal of AI programmers, this great leap forward took place 20 years earlier than had been anticipated. This created an AI stampede in the Middle Kingdom that led to the current bubble.

The result has been applications that are still in the realm of science fiction in the U.S. The Chinese equivalent of eBay (EBAY), Taobao, doesn’t charge fees because its customer base is so big it can remain profitable on ad revenues only. Want to be more beautiful in your selfies sent to friends? A Chinese app will do that for you, Beauty Plus.

The Chinese equivalent of Yelp, Dianping, has 600,000 deliverymen on mopeds. The number of takeout meals is so vast that it has been able to drop delivery costs from $6 a meal to 60 cents. As a result, traditional restaurants are dying out in China.

Teachers in Chinese schools no longer take attendance. Students are checked off when they enter the classroom by facial recognition software. And heaven help you if you jaywalk in a Chinese city. Similar software will automatically issue you a citation with a fine and send it to your home.

Credit card fraud is actually on the decline in China as dubious transactions are blocked by facial matching software. The bank simply calls you, asks you to look into your phone, takes your picture, and then matches it with the image they have on file.

Dr. Lee sees AI unfolding in four waves, and there are currently companies operating in every one of these (see graph below):

1) Internet AI

The creation of black boxes and specialized algorithms opened the door to monetizing code. This was the path for today’s giants that dominate online commerce today, Google (GOOG), Amazon (AMZN), JD.com (JD), and Facebook (FB). Alibaba (BABA), Baidu (BIDU), and Tencent followed.

2) Business AI

Think big data. This is the era we just entered, where massive data from online customers, financial transactions, and health care led to the writing of new algorithms that maximize profitability. Suddenly, companies can turn magic knobs to achieve desired goals, such as stepping up penetration or monetization.

3) Perception AI

Using trillions of sensors worldwide, analog data on any movement, facial expression, sound, and image are converted into digital data, and then mined for conclusions by more advanced algorithms. Cameras are suddenly everywhere. Amazon’s Alexa is the first step in this process, where your conversations are recorded and then mined for keywords about your every want and desire.

Think of autonomous fast food where you walk in your local joint and it immediately recognizes you, offers you your preferred dishes, and then auto bills your online account for your purchase. Amazon has already done this with a Whole Foods store in Seattle.

4) Autonomous AI

Think every kind of motion. AI will get applied to autonomous driving, local shuttles, factory forklifts, assembly lines, and inspections of every kind. Again, data and processing demand take an enormous leap upward. Tesla (TSLA), Waymo (GOOG), and Uber are already very active in this field.

The book focuses a lot on the future of work. Dr. Lee creates a four-part scatter chart predicting the viability of several types of skills based on optimization, compassion, creativity, and strategy (see below).

If you are a truck driver, in customer support, or a dishwasher, or engage in any other repetitive and redundant profession your outlook is grim. If you can supplement AI, such as a CEO, economist, or marketing head you’ll do fine. People who can do what AI can’t, such as teachers and artists, will prosper.

The Investment Angle

There have been only two ways to invest in AI until now. You can buy shares in any of the seven giants above, whose shares have already risen for 100- or 1,000-fold.

You can invest in the nets and bolts parts providers, such as NVIDIA (NVDA), Advanced Micro Devices (AMD), Micron Technology (MU), and Lam Research (LRCX), which provide the basic building blocks for the Internet infrastructure.

Fortunately for our paid subscribers, the Mad Hedge Trade Alert Service caught all of these very early.

What’s missing is the “in-between companies,” which are out of your reach because they are locked up in university labs or venture capital funds. Many of these never see the light of day as public companies because they get taken over by the tech giants above. It’s effectively a closed club that won’t let outsiders in. It’s a dilemma that vexes any serious technology investor.

When quantum computing arrives in a decade, you can take all the functionality above and multiply it by a trillion-fold, while costs drop a similar amount. That’s when things really get interesting. But then, I’ve seen trillion-fold increases in technology before.

I hope I live to see another.

 

 

 

 

 

Personally, I Prefer the Original

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Taking a Break

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When things can’t be better, they really can’t get any better, and there is no upside left.

As I expected, big tech companies announced earnings for the ages, the top four totaling a staggering $56.6 billion in profits in Q2, or $226.4 billion annualized. That compares to total US Q1 profits of $2.347 trillion. Then their stocks fell apart, with Amazon leading the charge to the downside.

To say tech earnings were impressive would be a vast understatement, with Apple (AAPL) coming in at $21.7 billion, Amazon (AMZN) at $7.8 billion, Facebook (FB) at $10.4 billion, and Microsoft (MSFT) at $16.7 billion.

However, since we are in the “What have you done for me lately” business, what do we have to look forward in August?

Covid cases are soaring nationally tripling off the 15,000 a day lows of a month ago. The delta variant is twice as contagious and twice as fatal as earlier ones. Mask mandates are back in the big cities, pushing back economic growth and a jobs recovery out into 2022. The least vaccinated stated are seeing hospital systems overwhelmed once again. School reopenings are now an unknown, and if they do, it will be with masks.

I sent my kids to a Boy Scout camp this week. On the second day, two unvaccinated staff members tested positive for delta and the county immediately shut the place down, sending home 500 disappointed scouts and parents. Dreams of long sought merit badges went up in smoke. The same thing is happening across the entire economy.

The next three months are historically the worst performing of the year, generating an average 0.03% over the last 100 years. Inflation reports are going to remain high for the rest of the year. The Fed has a new reason to keep interest rates a zero for longer, bad for banks, brokers, commodities, and industrials.

Oh, and the next round of spectacular tech earnings are three months away.

There is another factor in play. Investors have made the most money in their lives over the last 16 months, including me. The temptation to take the money and run is strong and irresistible. Traders have visions of Ferraris dancing in their eyes. This alone would bring on an overdue 5%-10% pull back.

So what is the smart thing to do here? Sell all your short-term positions but keep all your long-term positions and LEAPS. The market isn’t going down enough to justify the round-trip expenses and capital gains taxes.

If you have new cash flows keep it in money market funds. People will be shocked by the speed and viciousness of the coming selloff. But when it occurs, the best buying opportunity in a year will be on its knees begging for your attention.

It may feel cataclysmic, another Armageddon, and like the end of the world, but it won’t be. After all, we have seen no less than 36 10% corrections in my lifetime. The investors who hung in made the most money every single time.

I’ll tell you when we hit bottom with a raft of new LEAPS recommendations, provided I can get them out fast enough.

The Fed stands pat, keeping overnight rates at 0%-0.25%. The delta variant has pushed the taper off three months, but Jay Powell gave the barest of hints that it is the next step to take. We have 9 million unemployed and 9 million job openings but there is a massive skills gap, with jobless waitresses and retails in over supply and coders and artificial intelligence specialist sought after. It’s all the result of 40 years of under investment in our education system.

US Q2 GDP comes in at 6.5%, one of the strongest in economic history, but less than forecasts that were as high as 10%. Supply chain restraints we the main explanation for the shortfall. All that does is push growth into 2022, when people CAN get parts and labor. In the meantime, personal consumption soared by 11.8%, the hottest report since 1952, proving the demand is there.

Covid Cases triple from recent lows to 43,700 a day. Blame the delta variant, which originated in India, and now accounts for 86% of new cases. Twice as contiguous, with a greater fatality rate and more long-term effect, delta is prompting the return of mask mandates in several cities. Only the unvaccinated are affected. This could be the trigger for the next correction.

Smart phones will deliver the next big chip shortage, even if the chip shortage for cars abates. The bad news? There are 22 times more phones produced each year than cars, 1.4 billion versus only 64 million in 2020. Out of the frying pan and into the fire.

S&P Case Shiller smashes all records, up 17% YOY for national home prices. Phoenix (25.9%), San Diego (24.7%), and Seattle (23.4%) lead. These numbers are past “extraordinary.” Expect it to continue.

New Homes Sales plunge to 676,000, down 6.6% on a signed contract basis, but prices are up 6%. Inventories are up from 5 months to a still low 6.5 months. Shortages of land, labor, and materials are still the big issue.

Pending Home Sales drop 1.9% in June on a signed contract bases. High prices are curing high prices, with the Case-Shiller National Home Price Index up 17% YOY. The south and west posted the biggest declines. Single family homes have dropped for three months in a row to a one year low.

China meltdown continues, with the Beijing government apparently withdrawing from western capital markets. It’s all about showing the world who is in charge and punishing the billionaires by destroying their stocks. They are wiping out $1 trillion in equity per day and don’t care if you get hit as well. Cathy Wood’s Ark Innovation ETF (ARKK) is dumping everything they have. Avoid China at all cost.

Tesla announces first $1 billion profit in Q2, despite losing $23 million in Bitcoin. That is 10X the year ago report. They could have made a lot more if they had more chip supplies. The energy business brought in a rapidly growing $800 million in revenues. The Austin and Berlin Gigafactory’s are coming online at the end of the year, allowing them to scale globally. The Cybertruck is on hold and production of Powerwall’s cut back until they can get more chip supplies, creating extreme shortages. Buy (TSLA) on dips. There’s a 10X from here.

Tesla claims No.2 auto sales spot in Europe in June, just behind Volkswagen’s Golf, and beathing Daimler Benz, Audi, Fiat, and Renault. The company shipped 25,697 Model 3’s, which is perfect for the continent’s tight spaces, short distances, and green preferences. Big government subsidies to switch from internal combustion engines helped too.

Tesla Profits

Bitcoin tops $40,000 in a massive short covering rally. Tesla may start taking the crypto currency as payment for new vehicles and Amazon (AMZN) may get into the game as well. While China is studying way to make a digital yuan (CYB) and Europe a digital Euro (FXE), the US congress sees such a move as pointless.

Robinhood IPO (HOOD) Bombs, trading down as much as 12% from its $38.00 IPO price. That leaves it with a still impressive $29 billion market capitalization, a fifth the size of Morgan Stanley. What happens when individuals get their allocations? No “diamond hands” here. It looks like a “BUY” after it drops by half opportunity, just like Tesla after its IPO. The facilitator of meme stock frenzies has best ever year is behind it, or until we get another pandemic. The company has already paid $127 million in fines and almost went under in January. Avoid (HOOD) for now.

My Ten Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!

My Mad Hedge Global Trading Dispatch saw a modest +0.61% in July. My 2021 year-to-date performance appreciated to 69.21%. The Dow Average was up 14.16% so far in 2021.

I stuck with my four positions, a long in (JPM) and a short in the (TLT) and a double short in the (SPY). I bled all the way until Friday, when big hits to tech stocks took the (SPY) down and edging me up to a positive return for July. That leaves me 60% in cash. I’m keeping positions small as long as we are at extreme overbought conditions.

That brings my 11-year total return to 491.76%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 12.15%, easily the highest in the industry.

My trailing one-year return retreated to positively eye-popping 107.72%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Corona virus cases at 34.9 million and rising quickly and deaths topping 613,000, which you can find here.

The coming week will bring our monthly blockbuster jobs reports on the data front.

On Monday, August 2 at 7:00 AM, the Manufacturing PMI for July is published. NXP Semiconductor (NXP) reports.

On Tuesday, August 3, at 7:30 AM, Factory Orders for June are released. Amgen (AMGN), Eli Lily (LLY), and Alibaba (BABA) report.

On Wednesday, August 4 at 5:30 AM, the ADP Private Employment Report is published. Uber (UBER) and General Motors (GM) report.

On Thursday, August 5 at 8:30 AM, Weekly Jobless Claims are announced. Square (SQ) reports.

On Friday, August 6 at 8:30 AM, we get the Nonfarm Payroll Report for July. Berkshire Hathaway (BRKB) reports.

As for me, I am reminded of my own summer of 1967, back when I was 15, which may be the subject of a future book and movie.

My family summer vacation that year was on the slopes of Mount Rainier in Washington state. Since it was raining every day, the other kids wanted to go home early. So my parents left me and my younger brother in the hands of Mount Everest veteran Jim Whitaker to summit the 14,411 peak (click here for his story). The deal was for us to hitch hike back to Los Angeles when we got off the mountain.

In those days, it wasn’t such an unreasonable plan. The Vietnam war was on, and a lot of soldiers were thumbing their way to report to duty. My parents figured that since I was an Eagle Scout, I could take care of myself.

When we got off the mountain, I looked at the map and saw there was this fascinating country called “Canada” just to the north. So, it was off to Vancouver. Once there, I learned there was a world’s fair going on in Montreal some 2,843 away, so we hit the TransCanada Highway going east.

We ran out of money in Alberta, so we took jobs as ranch hands. There we learned the joys of running down lost cattle on horseback, working all day at a buzz saw, inseminating cows, and eating steak three times a day. I made friends with the cowboys by reading them their mail, which they were unable to do. There were lots of bills due, child support owed, and alimony demands.

In Saskatchewan, the roads ran out of cars, so we hopped a freight train in Manitoba, narrowly missing getting mugged in the rail yard. We camped out in a box car occupied by other rough sorts for three days. There’s nothing like opening the doors and watching the scenery go by with no billboards ad, the wind blowing through your hair!

When the engineer spotted us on a curve, he stopped the train and invited us to up the engine. There, we slept on the floor, and he even let us take turns driving! That’s how we made it to Ontario, the most mosquito-infested place on the face of the earth.

Our last ride into Montreal offered to let us stay in his boat house as long as we wanted so there we stayed. Thank you, WWII RAF bomber pilot Group Captain John Chenier!

Broke again, we landed jobs at a hamburger stand at Expo 67 in front of the imposing Russian pavilion. The pay was $1 an hour and all we could eat. At the end of the month, Madame Desjardin couldn’t balance her inventory, so she asked how many burgers I was eating a day. I answer 20, and my brother answered 21. “Well, there’s my inventory problem” she replied.

And then there was Suzanne Baribeau, the love of my life. I wonder whatever happened to her?

I had to allow two weeks to hitch hike home in time for school. When we crossed the border at Niagara Falls, we were arrested as draft dodgers as we were too young to have driver’s licenses. It took a long conversation between US Immigration and my dad to convince them we weren’t.

We developed a system where my parents could keep track of us. Long distance calls were then enormously expensive. So, I called home collect and when my dad answered he asked what city the call was coming from. When the operator gave him the answer, he said he would not accept the call. I remember lots of surprised operators. But the calls were free, and dad always knew where we were.

We had to divert around Detroit to avoid the race riots there. We got robbed in North Dakota, where we were in the only car for 50 miles. We made it as far has Seattle with only three days left until school started.

Finally, my parents had a nervous breakdown. They bought us our first air tickets ever to get back to LA, then quite an investment.

I haven’t stopped traveling since, my tally now topping all 50 states and 135 countries.

And I learned an amazing thing about the United States. Almost everyone in the country is honest, kind, and generous. Virtually every night, our last ride of the day took us home and provided us with an extra bedroom or a garage to sleep in. The next morning, they fed us a big breakfast and dropped us off at a good spot to catch the next ride.

It was the adventure of a lifetime and am a better man for it.

Stay healthy.

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

Summit of Mt. Rainier 1967

 

McKinnon Ranch Bassano Alberta 1967

 

American Pavilion Expo 67

 

Hamburger Stand at Expo 67

 

Picking Cherries in Michigan 1967

 

 

 

 

 

 

Mad Hedge Fund Trader

July 28 Biweekly Strategy Webinar Q&A

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July 28 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the July 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV.

Q: What is your plan with the (SPY) $443-$448 and the $445/450 vertical bear put spreads?

A: I’m going to keep those until we hit the lower strike price on either one and then I’ll just stop out. If the market doesn’t go down in August, then we are going straight up for the rest of the year as the earnings power of big tech is now so overwhelming. Sorry, that’s my discipline and I’m sticking to it. Usually, what happens 90% of the time when we go through the strike, and then go back down again by expiration for a max profit. But the only way to guarantee that you'll keep your losses small is by stopping out of these things quickly. That’s easy to do when you know that 95% of the time the next trade alert you’ll get is a winner.

Q: Are you still expecting a 5% correction?

A: I am. I think once we get all these great earnings reports out of the way this week, we’re going to be in for a beating. I just don't see stocks going straight up all the way through August, so that’s another reason why I'm hanging on to my short positions in the S&P 500 (SPY).

Q: What’s the best way to play CRISPR Therapeutics (CRSP) right now?

A: That is with the $125-$130 vertical bull call spread LEAPS with any maturity in 2022. We had a run in (CRSP) from $100 up to $170 and I didn’t take the damn profit! And now we’ve gone all the way back down to $118 again. Welcome to the biotech space. You always take the ballistic moves. Someday I should read my own research and find out why I should be doing this. For those who missed (CRSP) the last time, we are one proprietary drug announcement, one joint venture announcement, or one more miracle cure away from another run to $170. So that will probably happen in the next year, you get the $125-$130 call spread, and you will double your money easily on that. 

Q: I’m down 40% on the United States Treasury Bond Fund (TLT) January $130-$135 vertical bear put spread LEAPS. What would you do?

A: Number one, if you have any more cash I would double up. Number two, I would wait, because I would think that starting from the Fall, the Fed will start to taper; even if they do it just a little bit, that means we have a new trend, the end of the free lunch is upon us, and the (TLT) will drop from $150 down to $132 where it was in March so fast it will make your head spin. I'm hanging onto my own short position in (TLT). If you are new to the (TLT) space and you want some free money, put on the January 2020 $150-$155 vertical bear put spread now will generate about a 75% return by the January 21, 2022 options expiration. I just didn't figure on a 6.5% GDP growth rate generating a 1.1% bond yield, but that’s what we have. I'm sorry, it’s just not in the playbook. Historically, bonds yield exactly what the nominal GDP growth rate is; that means bonds should be yielding 6.50% now, instead of 1.1%. They will yield 6.5% in the future, but not right now. And that's the great thing about LEAPS—you have a whole year or 6 months for your thesis to play out and become right, so hang on to those bond shorts. 

Q: Do you have any ideas about the target for Facebook (FB) by the end of the year?

A: I would say up about 20% from current levels. Not only from Facebook but all the other big tech FANGS too. Analysts are wildly underestimating the growth of these companies in the new post-pandemic world.

Q: Do you think the worst of the pandemic will be over by September?

A: Yes, we will be back on a downtrend by September at the latest and that will trigger the next leg up in the bull market. Delta with its great infectious and fatality rates is panicking people into getting shots. The US government is about to require vaccinations for all federal employees and that will get another 5 million vaccinated. Americans have the freedom to do whatever they want but they don’t have the freedom to kill their neighbors with fatal infections.

Q: What should I do with my China (BABA), (BIDU), (FXI) position? Should I be doubling down?

A: Not yet, and there’s no point in selling your positions now because you’ve already taken a big hit, and all the big names are down 50% from the February high. I wouldn't double down yet because you don’t know what's happening in China, nobody does, not even the Chinese. This is their way of addressing the concentration of the wealth in the top 1% as has happened here in the US as well. They’re targeting all the billionaire stocks and crushing them by restricting overseas flotations and so on, so it ends when it ends, and when that happens all the China stocks will double; but I have absolutely no idea when that's going to happen. That being said, I have been getting phone calls from hedge funds who aren’t in China asking if it's time to get in, so that's always an interesting precursor.

Q: What happened to the flu?

A: It got wiped out by all the Covid measures we took; all the mask-wearing, social distancing, all that stuff also eliminates transmission of flu viruses. Viruses are viruses, they’re all transmitted the same way, and we saw this in the Rite Aid (RAD) earnings and the 55% drop in its stock, which were down enormously because their sales of flu medicines went to zero, and that was a big part of their business. I didn’t get the flu last year either because I didn’t get Covid; I was extremely vigilant on defensive measures in the pandemic, all of which worked.

Q: Why would the Fed taper or do much of anything when Powell wants to be reappointed in February 2022?

A: I don’t think he is going to get reappointed when his four-year term is up in early 2022. His policies have been excellent, but never underestimate the desire of a president to have his own man in the office. I think Powell will go his way after doing an outstanding job, and they will appoint another hyper dove to the position when his job is up.

Q: What are your thoughts on the Chinese electric auto company Nio competing here in the U.S.?

A: They will never compete here in the U.S. China has actually been making electric cars longer than Tesla (TSLA) has but has never been able to get the quality up to U.S. standards. Look what happened to Nikola (NKLA) who’s founder was just indicted. Avoid (NIO) and all the other alternative startup electric car companies—they will never catch up with Tesla, and you will lose all your money. Can I be any clearer than that? 

Q: You recently raised the ten-year price target up for the Dow Average from 120,000 to 240,000. What is Nasdaq's target 10 years out?

A: I would say they’re even higher. I think Nasdaq (NASD) could go up 10X in 10 years, from 14,000 to 140,000 because they are accounting for 50% of all earnings in the U.S. now, and that will increase going forward, so the stocks have to go ballistic.

Q: What do you think of Intel (INTC)?

A: I don’t like it. They had a huge rally when they fired their old CEO and brought in a new one. There was a lot of talk on reforming and restructuring the company and the stock rallied. Since then, the market has started insisting on performance which hasn’t happened yet so the stock gave up its gains. When it does happen, you’ll get a rally in the stock, not until then, and that could be years off. So I'd much rather own the companies that have wiped out Intel: (MU), (NVDA), (AMD), and (TSM).

Q: When you do recommend buying the Volatility Index (VIX), do you recommend buying the (VIX) or the (VXX)?

A: You can only buy the VIX in the futures market or through ETFs and ETNs, like the (VXX), the (XVZ), and the (SVXY), or options on these. I would be very careful in buying that because time decay is an absolute killer in that security, and that's why all the professionals only play it from the short side. That's also why these spikes in prices literally last only hours because you have professionals hammering (VIX). Somebody told me once that 50% of all the professional traders in the CME make their living shorting the (VIX) and the (VXX). So, if you think you’re better than the professionals, go for it. My guess is that you’re not and there are much better ways to make money like buying 6-to-12-month LEAPS on big tech stocks.

Q: Can the Delta variant get a bigger pullback?

A: Yes. I expect one in August, about 5%. But if Delta gets worse, the selloff gets worse. You saw what it did last year, down 40% in the (SPY) in only two months, so yes, it all depends on the Delta virus. I'm not really worrying about Delta, it's the next one, Epsilon or Lambda, which could be the real killer. That's when the fatality rate goes from 2% to 50%, and if you think I'm crazy, that's exactly what happened in 1919. Go read The Great Influenza book by John Barry that came out 20 years ago, which instantly became a best seller last year for some reason.

Q: Does the Matterhorn have enough flat space on the top to stand on it?

A: Actually, there is a 6’x6’ sort of level rock to stand on top of the Matterhorn. If you slip, it’s a 5000’ fall straight down on any side, and on a good weather day in the summer, there are 200 people climbing the Matterhorn. There's sometimes a one-hour line just to take your turn to get to the top to take your pictures, and then get down again to make space for the next person. So that's what it's like climbing the Matterhorn, it's kind of like climbing Mount Everest, but I still like to do it every year just to make sure I can do it, and one year I hope to win the prize for the oldest climber of the year to climb the Matterhorn. Every year this German guy beats me; he’s two years older than me.

Q: When will Freeport McMoRan (FCX) start going up? I have the 2023 LEAPS

A: Good thing you have the two-year LEAPS because that gives you two years for inflation to show its ugly face once again. You just have to be patient with these. I think we’ll get a rally in the Fall along with all the other interest rate plays like banks, industrials, money management companies, and so on. (FCX) will certainly participate in that. In the meantime, if we get all the way down to $30 in Freeport McMoRan, I would double up your position.

Q: Why is oil (USO) not a buy? Oil is the ultimate inflation hedge.

A: Yes, unless all of the cars in the United States become electric in the next 15 years, which they will, wiping out half of all demand from the largest oil consumer. The United States consumes about 20 million barrels of oil a day, half of that is for cars, and if you take that out of the demand picture you dump 10 million barrels a day on the market and oil goes back to negative numbers like we saw last year. Never do counter-trend trades unless you’re a professional in from of a screen 24 hours a day.

Q: Should I take profits on my ProShares Ultra Technology ETF (ROM) November $90-$95 vertical bull spread and then enter a new spread when tech sells off?

A: Absolutely! When you have that much leverage and you get these price spikes, you sell! The leverage on this position is 2X on the ETF and 10X on the options for a total of 20X! Well done, nice trade and nice profit, go out and buy yourself a new Tesla and wait for the next dip in tech, which may have already started, and which could power on for the rest of August.

Q: What’s the next move for REITs?

A: REITs came off of historic lows last year; a lot of people thought they were going to go bankrupt, and for companies like (SPG) it was a close-run thing. I would be inclined to take profits on REITs here. The next thing to happen is for interest rates to go up and REITs don’t do that great in a rising rate environment.

Q: When is the off-season in Incline Village?

A: It’s the Spring and the Fall, in between ski season and the summer season. That means there are four months a year here, May/June and September/October, where I’m the only one here and the parking lots are empty. There is no one on the trails, the weather is perfect, the leaves are changing colors, and the roads aren’t crowded, so that is the time to be here. It’s a mob scene in the winter and a worse mob scene in the summer!

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy.

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

 

 

 

 

 

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Don’t Get Fooled Again

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the bear market rally is over

I received an email from a reader last week that I really had no idea what the stock market was going to do and that I was just guessing.

I answered that I couldn’t agree more. These are unprecedented times for the American economy. There is no playbook for what is going on, we’re just making it up.

“I’m guessing, Jay Powell is guessing, we’re all guessing.” I threw in an afterthought: “guessing and hoping.”

That is why the hottest inflation rate in 13 years sends interest rates into freefall when they should be soaring.

I have been one of the most bullish strategists in the market since the March 2009 low and have been richly rewarded as a result. (Even though being bearish sells more newsletters). You have been too.

I thought the market was overdue for a 7.8% correction. So, even I was flabbergasted when the latest market selloff amounted to only a meager 4.3%. There is still so much money trying to get into the market it is unable to go any lower.

Don’t get fooled again, to quote that eminent market guru, Peter Townsend.

Which raises an issue for investors. That 7.8% correction I thought was overdue is still ahead of us. That demands caution and prudence for shorter term investors. Long term investors can work on their golf swings or take that dreamed of round the world cruise.

What was especially encouraging last week was the leadership maintain by the big five tech stocks. I ran some numbers last week to see if there was more than meets the eye and came up with some eye-popping results.

The rocket fuel last week was provided by progress by an infrastructure bill that could unleash another $579 billion. That could be enough stimulus to keep the recovery on steroids powering well into 2022.

Big tech stocks saw this a month ago when they started discounting robust 2023 earnings reports much farther in advance than usual.

The top five big tech companies, Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), and Microsoft (MSFT), earned a staggering $88 billion in profits in Q1, or an annualized $332 billion.

That amounts to an average 40% YOY growth rate. Some 16.7% of total US profits of $1,984 billion was generated by only 2% of the workforce. These are positively ballistic numbers. Tech was never going to be down for long. That’s why most went to new all-time highs last week.

Don’t get fooled again.

The Infrastructure Deal is done, at $579 billion in new spending, will provide a further boost to the economy. The climate had to be cut to get Republican support. Transportation is the big winner at $312 billion. Grid and broadband upgrades received major funding. I don’t think that Biden expected to get his whole $2 trillion. It was just a negotiating strategy. Still, something is better than nothing. Look for Infrastructure 2.0 after the 2022 midterms with lots of climate spending.

NASDAQ Hit New High. Prime day has catapulted Amazon (AMZN). Microsoft (MSFT) became the second $2 trillion company and Alphabet (GOOGL) will probably be next. Apple (AAPL) is bringing up the rear but could hit new highs in the coming months. The big question is whether this is a one-night stand or a long-term relationship with the bull. Me, being the stable guy that I am, vote for the latter.

Poof, Inflation is Gone! Almost all commodity prices have given up their 2021 gains after traumatic selloffs over the past weeks. Bad boy lumber has dropped by half, and bitcoin has been slaughtered. That puts interest rate hikes on hold. In the meantime, Tesla (TSLA) and the Ark stocks are recovering. Load the boat with big tech, we are going to new all-time highs across the board. Turns out the Fed was right after all.

Weekly Jobless Claims drop to 411,000, down from the pandemic peak of 900,000 in January. We’re headed to 100,000 by yearend.

$1.2 Trillion Poured into Equities in H1, more than double the previous 2007 record. Corporate share buybacks are also approaching new highs. That means the 150-day moving average for the (SPY) should hold well into 2022. As high as we are, equities are still the best game in town.

Bitcoin battles at $30,000, for the fourth time in two months, at one point falling to a $24,000 low. China miners, about 70% of the total, are facing a total ban. Many loaded their servers on planes over the weekend and moved to unregulated Maryland or Virginia. The charts are pointing towards a $20,000 bottom. The ultra bulls are targeting $100,000 by yearend.

Existing Home Sales down for the fourth month, down 0.9% to an annualized 5.8 million in May. Shortage of supply remains the big problem with inventories at an incredible 2.5 months. Some 89% of the homes sold were on the market for less than a month. Conditions will get a lot worse before they get better.

New Home Sales dive 5.9%, thanks to shortage of supply and high prices. Labor, land, and lumber are through the roof. The median price of a home sold in May is $374,400, up a staggering 18% YOY. Supplies rose to 5.1 months. The cure for high prices is high prices. This trend should last a decade.

Amazon Prime Day Sales top $11 billion, including the Havaheart 0754 single door humane rabbit trap I bought for only $27. That made Monday and Tuesday the biggest online sales days of the year. Use the recent profit-taking to load up on (AMZN) shares and LEAPS. It’s headed to $5,000. Oh, and I’ve caught three rabbits so far.

Intel to build huge German chip factory,to address the global shortage. Germany’s largest auto industry makes it a natural location. Buy (INTC) on dips.

NVIDIA is going ballistic, with Raymond James raising its target to $900 as the best-positioned chip company over the long term. I was early at $1,000. The explosion in crypto has been a big plus. A new generation of high-end gaming is coming where (NVDA) has a complete monopoly and supplies are short. I have bought six of their GeForce and RTX graphics cards in the past month. But artificial intelligence is the big grower over the long term, which is exploding everywhere, and their $5,000 Tesla M10 GPU is dominant. Buy (NVDA) now.

We may lose Christmas, as lack of containers and ships makes transport from China problematic. Home Depot (HD) has chartered its own ship to make up for the shortfall, and Target (TGT) is considering the same. Conditions are so bad there is also a fireworks shortage for the Fourth of July where China is a major supplier (they invented them).

My Ten Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.

My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 12.62% so far in 2021.

I spent the week sitting in 100% cash, waiting for a better entry point on the long side. Up this much this year, there is no reason to reach for the marginal trade, the maybe instead of the certainty. I’ll leave that for the Millennials.

That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 123.54%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.

The coming week will be a weak one on the data front.

On Monday, June 28 at 10:30 AM, the Dallas Fed Manufacturing Index for June is out.

On Tuesday, June 29 at 9:00 AM, the S&P Case Shiller National Home Price Index is published.

On Wednesday, June 30 at 8:15 AM, the ADP Private Employment Report is released.

On Thursday, July 1 at 8:30 AM, the Weekly Jobless Claims are published.

On Friday, July 2 at 8:30 AM, the all-important June Nonfarm Payroll Report is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, I’m in Los Angeles this week visiting old friends, and I am reminded of one of the weirdest chapters of my life.

There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included free housing at the coroner's department.

I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls for $25.

Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marlin Mansfield and Jane Mansfield. He did not disappoint.

For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.

Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.

The first time I ever saw a full set of women’s underclothing, a girdle and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.

Once, I and another driver were sent to pick up a teenaged boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200”, then an astronomical sum.

A few minutes later found a hearse driving down the Santa Monica freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.

Once, I was sent to a cheap motel where a drug deal gone bad had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.

Still, I ended up with some of the best summer job stories ever.

Stay healthy.

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

 

the bear market rally is over

 

 

 

 

 

 

 

Mad Hedge Fund Trader

Back From My 50-Mile Hike

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I realized that perhaps I had bitten off too much taking the Boy Scouts on a 50-mile hike one minute into the adventure.

Cutting everything to the bone, I was only able to trim my pack down to 50 pounds. That was with chopping my food ration in half, leaving an extra cell phone battery behind, and bringing only one set of clothes.

However, I had to bring a five-pound first aid kit to care for the 14 scouts, my own tent, and all the maps needed to keep us on course.

Then at the last minute, another five pounds of medical releases, a satellite phone, and an electronic thermometer were dumped on me by worried parents, taking my load up to a bone-breaking 55 pounds.

That’s a lot for a 68-year-old. That’s a lot for anyone.

But then the Desolation Wilderness, the roof of the High Sierras, is one of the most stunningly beautiful places on the planet. All other outdoor trips for the Boy Scouts this year had been cancelled, thanks to the pandemic. And at my age, who knows how many 50-mile hikes I have ahead of me? It was now, or maybe never.

But then the Desolation Wilderness, the roof of the High Sierras, is one of the most stunningly beautiful places on the planet. All other outdoor trips for the Boy Scouts this year had been cancelled thanks to the pandemic. And at my age, who knows how many 50-miles hikes I have ahead of me? It was now, or maybe never.

We took temperatures every morning. All 50 miles were hiked with masks, as did every other group we ran into. Carpooling was banned and every parent had to bring up their own kid to Lake Tahoe. It all worked as no one got sick.

We didn’t do just any 50-mile hike. We attacked one of the toughest in the United States. The first two days demanded a 3,200-vertical climb, from Meeks Bay to Phipps Pass, from 6,200 to 9,400 feet. The kids barely noticed the altitude. The adults did.

The Desolation Wilderness (click here for permits at https://www.recreation.gov/permits/233261 ) is a 50-mile by 30-mile slab of granite left behind by the last ice age. It is graced with 100 brilliant blue lakes. It looks like a giant’s playground, with enormous boulders and huge fallen trees scattered about the landscape.

Black bears were an ever-present danger, as the area was undergoing an unprecedented “bear bloom.” Other hikers reported being harassed all night by the ursine creatures, one even invading a tent in search of food. A Cliff Bar beats clawing termites out of a dead log any day.

However, we observed the strictest of bear practices, bagging our food every night and hanging it from tall trees. It became our nightly entertainment, to see who could do the best bear bag hang. Of course, getting it down the next morning was another story.

The area had changed a lot since my grandfather brought me up to Desolation 60 years ago with a horse, a mule, a Winchester, and all the fishing gear we could carry. Then wilderness survival meant bringing in plenty of canned food and a nice 16-inch iron skillet, not the tasteless freeze-dried versions of today.

You never saw a single soul for a week. You caught your full limit of ten rainbow and brook trout as fast as you could bait the hooks. For fun, we would rummage through old log cabins outfitted with potbellied stoves for 100-year-old supplies left behind by the 19th century California gold rush. Once, we even found a crashed airplane that had been missing since the 1930s.
 
Nobody ever went up there.

This time around, we passed other hikers once an hour. Every lake was completely fished out. In fact, the park saw record crowds with people flocking to the safety of the great outdoors to flee the epidemic at home. Inexperienced with the outdoors, they attracted even more hungry bears.

The scouts developed a daily routine of cooking breakfast, breaking camp, hiking ten miles, searching for the ideal camping spot, setting up tents, and cooking dinner. In the process, they learned organization, self-sufficiency, responsibility, and survival skills. They don’t teach these in schools anymore.

Free time was spent playing cards for food. Winners accumulated highly sought-after beef stroganoff. The losers ended up with the despised chicken tetrazzini. I stuck to my granola bars.

On the last day, we straggled back to Meeks Bay worn, bleeding, exhausted, but exhilarated. Every morning, we woke up to a Christmas calendar view. The parents couldn’t believe we finished the entire challenging 50 miles without a major injury.

I was especially proud of my own 15- and 16-year old daughters, who are probably the first girls to ever complete a 50 miler in a Boy Scout event. The apples don’t fall far from the tree.

Everyone became eligible for the elite Boy Scout 50-Mile Patch, which few in the scouting movement ever achieve.

During much of the week, scouts were carping about the difficulty of the trail, the mosquitoes, and the sparse offerings of food. They fantasized about the first thing they would eat on return to civilization (banana split, pancakes with whipped cream, a Big Mac, or all three).

By the end of the week, they were talking about the next 50-mile hike. With their 2021 spring break trip to the Boy Scout Florida Sea Base cancelled, suddenly California’s Lost Coast looks very inviting.

That is, providing we can deal with the bears and the mosquitoes.

 

 

 

 

 

 

 

 

 

 

 

MHFTR

Storage Wars

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No, this piece is not about the reality TV show that has a gruff lot of hopeful entrepreneurs blindly bidding for the contents of abandoned storage lockers.

With hyper-accelerating technology creating data at an exponential rate, it is getting far too big to physically store.

In 2018, over $80 billion was spent on data centers across the country, often in the remotest areas imaginable. Bend, OR, rural West Virginia, or dusty, sun-baked Sparks, NV, yes, they’re all there.

And you know what the biggest headache for the management of many tech companies is today? A severe shortage of cost-effective data storage and the skyrocketing electric power bills to power them.

During my lifetime, storage has evolved from one-inch magnetic tape on huge reels to highly unreliable 5 ¼ inch floppy disks, then 3-inch discs, and later to compact discs.

The solid-state storage on silicon chips that hit the market six years ago was a dream, as it was cheap, highly portable, and lightning-fast. Boot up time shrank from minutes to seconds. The only problem was the heat and sitting on it when you forgot those ultra-slim designs on the sofa.

Moore’s Law, which has storage doubling every 18 months while the cost halves, has proved faithful to the bitter end. The problem now is, the end is near, as the size of an electron becoming too big to pass through a gate increasingly a limiting factor.

As of 2017, the world needed 44 gigabytes of storage per day. According to the International Data Corporation, that figure will explode to 460 billion gigabytes by 2025, in a mere seven years.

That’s when the global data sphere will reach 160 trillion gigabytes, or 160 zettabytes. It all sounds like something out of an Isaac Asimov science fiction novel.

You can double that figure again when Google’s Project Loon brings the planet’s 5 million residents currently missing from the Internet online.

In the meantime, companies are making fortunes on the build-out. Some $50 billion has to be spent this year just to keep even with burgeoning storage demand.

And guess what? Thanks to rocketing demand from electric cars and AI, memory-grade silicon is expected to run out by 2040.

All I can say is “Better pray for DNA.”

Deoxyribonucleic acid has long been the Holy Grail for data storage. There is no reason why it shouldn’t work. After all, you and I are the product of the most dynamic data storage system known to man.

All of the information needed to replicate ourselves is found in 3 trillion base pairs occupying every single cell in the human body.

To give you some idea of the immense scalability of DNA, consider this. One exabyte of data storage using convention silicon would weigh 320 metric tonnes. The same amount of information in DNA would occupy five cubic centimeters weighing five grams, or 0.18 ounce!

And here is the big advantage of DNA. Conventional silicon permits only two programming choices, “0” or “1”. Even with just that, we have been able to achieve incredible gains in computing over the last 50 years.

DNA is made of four different bases, adenine, cytosine, guanine, and thymine, which allow four squared possible combinations, or 16. The power demands are immeasurably small and it runs cool.

Also known as NAM, or nucleic acid memory, it has already burst out of the realm of science fiction. Microsoft Research (MSFT), the University of Washington, and (IBM) have all gotten it to work on a limited basis.

So far, retrieval is the biggest problem, something we ourselves do trillions of time a day every day without thinking about it.

DNA is organic, requires no silicon, and can replicate itself into infinity at zero cost. The information can last tens of thousands of years. Indeed, scientists were recently able to reconstruct the DNA from Neanderthals who lived in caves in Spain 27,000 years ago.

Yes, you can now clone your own Neanderthal. Gardening work maybe? Low-waged assembly line workers? Soldiers? Traders? I think I already know some. Look for that tell-tale supraorbital brow (click here for details).

But I diverge.

If you want to make money, like tomorrow, instead of in a decade, there are still a few possibilities on the storage front.

If you want to take a flyer on the ongoing data storage buildout, you might look at Las Vegas-based Switch (SWCH). The company IPO’d in October and has since seen its shares drop by 32%, which is normal for these small tech companies.

A much cleaner and safer play is Cisco Systems (CSCO), one of my favorite lagging old technology companies. After all, everyone needs Cisco routers on an industrial scale.\

 

 

 

 

Mad Hedge Fund Trader

The Next Trade of the Century is Here!

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We are getting to the point where great equity trades with potential huge returns are becoming few and far between. At the very least, they are only a fraction of the opportunities we saw a year ago, which was a once-in-a-century event.

So, when your trade of the century runs out, what do you do?

You find another trade of the century!

It just so happens I have such an animal.

You are all well aware of the short-selling opportunities available in the US Treasury bond market (TLT), where I have been running triple short positions since the beginning of the year. That has allowed us to rake in 6% a month in profits like clockwork.

How would you like to make more than that, a lot more, like three times more?

I have been dealing in the front-month options so far and managed to catch a $25 crash in the United States Treasury Bond Fund (TLT). If you believe that there is another $25 in the works, there are much bigger fish to fry. Simply extend your maturities and lower your strike prices through LEAPS, or Long-Term Equity Anticipation Securities.

I’ll show you how to do that, first with a conservative position, and then a much more aggressive one. Better yet, an excellent entry point for both positions is close.

The case for lower bond prices and higher interest rates is overwhelming.

With 2021 expected to be one of the strongest years for economic growth in history, there is no chance you’ll see a major rally in the US Treasury bond market from here. The only question is how fast it will fall.

This trade is basically betting that interest rates will rise in front of the biggest borrowing since civilization began.

The national debt rose from a record $23 trillion to an eye-popping $28 trillion in 2020. In 2021, it is expected to explode to $32 trillion, and possibly as high as $37 trillion by the end of 2022.  The US Treasury demands on the bond market are going to be incredible.

As much as you may admire or despise Biden’s “guns and butter” policy (the guns being aimed at Covid-19), a flood over government bond selling is on our doorstep.

It is almost mathematically impossible in this environment for bond prices to rise and interest rates to fall substantially from here. They can only go sideways at best, or down big in the worst case.

Sounds like a great short to me.

Currently, LEAPS are listed for the (TLT) all the way out until January 2023.

However, the further expiration dates will have far less liquidity than near-month options, so they are not a great short-term trading vehicle. That is why entering limit orders in LEAPS only, as opposed to market orders, is crucial.

These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.

Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.

Like all options contracts, LEAPS gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.

LEAPS have been around since 1990 and traded on the Chicago Board Options Exchange (CBOE).

To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.

If LEAPS expires "out-of-the-money" by the expiration date, you can lose all the money you spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.

Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAPS contract until the LEAPS owner exercises.

Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.

They offer vastly more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.

And for a moderate increase in risk, they present hugely outsized profit opportunities.

For the right investor, they are the ideal instrument.

So, let’s get on with my specific examples for the (TLT) to discover their inner beauty.

By now, you should all know what vertical bear spreads are. If you don’t, then please click this link for my quickie video tutorial (you must be logged in to your account).

Warning: I have aged since I made this video.

Today, the (TLT) is trading at $139.75

The cautious investor should buy the (TLT) January 2022 $130-$135 vertical bear put debit spread for $2.00. Some 50 contracts get you a $10,000 exposure. This is a bet that ten-year US Treasury yields will rise above 1.75% in eight months. Sounds like a total no-brainer, doesn't it?

 

expiration date: January 21, 2022

Portfolio weighting: 10%

Number of Contracts = 50 contracts

Here are the specific trades you need to execute this position:

Buy 50 January 2022 (TLT) $135 puts at………….………$6.00
Sell short 50 January 2022 (TLT) $130 puts at…………$4.00
Net Cost:………………………….………..………….........….....$2.00

Potential Profit: $5.00 - $2.00 = $3.00

(50 X 100 X $3.00) = $15,000 or 150.00% in eight months. In other words, your $10,000 investment turned into $15,000 with an almost sure thing bet.
 
This is a bet that the (TLT) will stay below $130.00 by the January 21, 2022 options expiration in eight months. To lose money on this position, ten-year US Treasury yields would have to stay below 1.75% from the current 1.57%, which they won’t.

Pigs would have to fly first.

Let’s say that you’re so convinced that exploding US debt will cause the (TLT) to crash again that you’re willing to take on more risk and place a bigger bet.

Here is your dream trade:

Buy the (TLT) January 2023 $120-$125 vertical bear put debit spread for $1.00. Some 100 contracts get you a $10,000 exposure. This is a bet that ten-year US Treasury yields will rise above 2.25% in 20 months.

That’s what you would expect to see during a normal economic recovery. This is the greatest economic recovery of all time.

expiration date: January 20, 2023

Portfolio weighting: 10%

Number of Contracts = 100 contracts

Here are the specific trades you need to execute this position:

Buy 100 January 2023 (TLT) $125 puts at………….………$7.75
Sell short 100 January 2023 (TLT) $120 puts at…………$6.75
Net Cost:………………………….………..………….….....$1.00

Potential Profit: $5.00 - $1.00 = $4.00

(100 X 100 X $4.00) = $40,000 or 50.00% in 20 months. In other words, your $10,000 investment turned into $40,000 with an almost sure thing bet.
 
This is a bet that the (TLT) will stay below $120.00 by the January 20, 2023 options expiration in 20 months.

Why do a put spread instead of just buying the $130 puts outright?

You need a much bigger downside move to make money on this trade. By paying only $2.00 instead of $6.00 for a position, you can triple your size, from 16 to 50 contracts for a $10,000 commitment. That triples your downside leverage on the most probable move in the (TLT), the one from $135 to $130.

That’s what real hedge funds do all day long, find the most likely profit and leverage up on it like crazy.

Let’s do the math on the two positions. If you buy the (TLT) January 2022 $130-$135 vertical bear put debit spread for $2.00, you reach a maximum value of $5.00 on expiration day at $130.

If you buy the (TLT) January 2022 $130 puts outright, at $130 on expiration day, your position is worth zero, nada, bupkiss. It gets worse. To make the same amount of profit as the spread the (TLT), or $15,000, it has to fall all the way to $122.50 to break even. Below that, you make more money than the spread, but at half the rate.

How could this trade go wrong?

There is only one thing. We get a new variant on Covid-19 that overcomes the existing vaccines and brings a fourth wave in the pandemic.

In this case, the (TLT) doesn’t crash to $120 but soars to $160 or more. We go back into recession. Both of the above positions go to zero. But if we get a fourth wave, you are going to have much bigger problems than your options positions.

So there it is. You pay your money and take your chances. That's why the potential returns on these simple trades are so incredibly high.

Enjoy.

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

 

 

The Fat Lady is Singing for the Bond Market

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Stair Step Market is Here

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The last six months have been the most successful in my 52 years of trading. The only thing that comes close were the last six months of 1989 when the Tokyo market went straight up and hit a 30-year peak.

Everything I tried worked. The trades I only thought about worked. And the 50 trade alerts I abandoned on the floor because the market moved too fast worked as well. That’s how I missed Facebook (FB) and Amazon (AMZN).

It is believed that if you set a team of monkeys loose, randomly hitting keys on typewriters, they would eventually produce Romeo and Juliet. In this market, they have been producing the entire works of Shakespeare on a daily basis.

It has been that good.

President Biden has been looking pretty good too, having presided over the best starting three-month stock market results since 1933. That is no accident. The massive stimulus and the remaking of the country he has proposed have Franklin Roosevelt’s New Deal-inspired handwriting all over them.

Yet, traders have been puzzled, perplexed, and befuddled by companies that announce the best earnings in history only to see their shares sell-off dramatically. However, the market has shown its hand.

We’ve now seen three quarters of tremendously improving earnings and stock dives. It’s a 12-week cycle that keeps repeating. Shares rally hard for six weeks into earnings, peak, and then go nowhere for six weeks. Wash, rinse, repeat, then go to new all-time highs.

But stocks don’t fall enough to justify getting out and back in again, especially on an after-tax basis. Therefore, it’s just best to lie back and think of England while your stocks do nothing.

If my analysis is correct, then it's best to imagine the rolling green hills of Kent and Wiltshire, the friendly neighborhood pub, and Westminster Cathedral until June. If you want to get aggressive, you might even sell short an out-of-the-money call option or two to protect your portfolio.

The Fed leaves rates unchanged, indicating that the economy is improving, but that interest rates are going nowhere. No surprise here. Jay Powell is still going for maximum dove. Strong Biden policy support and the rollout of the vaccine are major positives. $120 billion in bond buying continues. The Fed will keep interest rates at zero until the US economy reaches maximum employment by adding 8.4 million jobs. That could be a long wait as I suspect those jobs have already been destroyed by technology. Stocks popped on the news. The Bull lives!

Q1 GDP eExploded by 6.4%, and upward revisions are to come. That explains the 25% gain in the stock market during the first three months of the Biden administration, the best in 75 years. Coming quarters will show even stronger growth as the economy shakes off the pandemic and massive government spending kicks in. We will recover 2019 GDP peaks in the next quarter. Virtually, all economic data points will set records for the rest of 2021. Buy everything on dips.

Weekly Jobless Claims dive again to 553,000, a new post-pandemic low. One of a never-ending series of perfect data. It augurs well for next week’s April Nonfarm Payroll Report.

New Home Sales up a ballistic 20.7% YOY in March on the basis of a signed contract. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.

Pending Home Sales fell 1.9%, far below expectations, but are still up 23% YOY. Higher prices and record low supply are the problems. The Midwest leads.

Amazon sales soar by 44% in Q1, producing some of the best earnings in American corporate history. Jeff is expecting sales to reach a staggering $110-$116 billion in Q2. That’s why he hired 500,000 last year, the most of any company since WWII. Prime subscribers have grown to 200 million, including me. Ad revenues jumped an eye-popping 77%. The shares of the huge pandemic winner leaped $140 on the news. It’s all another step toward my $5,000 target.

Tesla revenues explode for 74%, and earnings soar to an eye-popping $438 million. Sales are to double or more in 2021 and are up 104% YOY. Q1 is usually the slowest quarter of the year for the auto industry. Global demand is increasing far beyond production levels. It is ducking around chip shortages by designing in a new generation that is currently available. Production of high-end X and S Models has ceased to allow more focus on the profitable Y and 3 Models. Those will resume in Q3. The shares were unchanged on the news. Keep buying (TSLA) on dips. It’s headed for $10,000.

Copper hits new 10-year high, lighting a fire under Freeport McMoRan (FCX) which we are long. We still are in the early innings of a major commodity supercycle. The green revolution goes nowhere without increasing copper supplies tenfold. A copper shock is imminent.

US Capital Spending leaps ahead, up 0.9% in March and up 10.4% YOY. The stimulus spending is working. All is well in manufacturing land, which is 12% of the US economy.

Case-Shiller explodes to the upside, the National Home Prices Index soaring 12% in February. That’s the best report in 15 years. Phoenix (+17.4), San Diego (+17.0%), and Seattle (15.4%) continue to be the big winners. This was in the face of a 50-basis point jump in home mortgage interest rates during the month. The rush to buy homes is pulling forward future demand. The perfect storm continues.

The Fed could start tapering its $120 billion a month in bond purchases as early as October, believes the Blackrock’s (BLK) Rick Rieder. When it does, expect the sushi to hit the bond market. Keep piling on those bond shorts, as I have been doing monthly, and am currently running a triple short position. Keep selling short the (TLT) on every opportunity.

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 13.54% gain during April on the heels of a spectacular 20.60% profit in March.

I used the post-earnings dip in Microsoft (MSFT) to add a new position there. I also picked up some Delta Airlines (DAL) taking advantage of a pullback there.

That leaves me 100% invested, as I have been for the last six months.

My 2021 year-to-date performance soared to 57.63%. The Dow Average is up 11.8% so far in 2021.

That brings my 11-year total return to 480.18%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.05%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 133.91%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.

The coming week will be big on the data front, with a couple of historic numbers expected.

On Monday, May 3, at 10:00 AM, the US ISM Manufacturing Index is published.  Merck (MRK) and Estee Lauder (EL) report.

On Tuesday, May 4, at 8:00 AM, total US Vehicle Sales for April are out. Union Pacific (UNP) and Pfizer (PFE) report.

On Wednesday, May 5 at 2:00 PM, the ADP Private Employment Report is released. General Motors (GM) and PayPal (PYPL) report.

On Thursday, May 6 at 8:30 AM, the Weekly Jobless Claims are printed. Regeneron (REGN) and Roku (ROKU) report.

On Friday, May 7 at 8:30 AM, we learn the all-important April Nonfarm Payroll Report. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, I received calls from six readers last week saying I remind them of Earnest Hemingway. This, no doubt, was the result of Ken Burns’ excellent documentary about the Nobel prize-winning writer on PBS last week.

It is no accident.

My grandfather drove for the Italian Red Cross on the Alpine front during WWI, where Hemingway got his start, so we had a connection right there.

Since I read Hemingway’s books in my mid-teens, I decided I wanted to be him and became a war correspondent. In those days, you traveled by ship a lot, leaving ample time to finish off his complete works.

I visited his homes in Key West and Ketchum Idaho. His Cuban residence is high on my list, now that Castro is gone.

I used to stay in the Hemingway Suite at the Ritz Hotel on Place Vendome in Paris where he lived during WWII. I had drinks at the Hemingway Bar downstairs where war correspondent Earnest shot a German colonel in the face at point-blank range. I still have the ashtrays.

Harry’s Bar in Venice, a Hemingway favorite, was a regular stopping-off point for me. I have those ashtrays too.

I even dated his granddaughter from his first wife, Hadley, the movie star Mariel Hemingway, before she got married, and when she was still being pursued by Robert de Niro and Woody Allen. Some genes skip generations and she was a dead ringer for her grandfather. She was the only Playboy centerfold I ever went out with. We still keep in touch.

So, I’ll spend the weekend watching Farewell to Arms….again, after I finish my writing.

Oh, and if you visit the Ritz Hotel today, you’ll find the ashtrays are glued to the tables.

 

Stay healthy.

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

 

 

 

Life is a Bed of Roses Right Now

 

 

 

 

 

Mad Hedge Fund Trader

April 28 Biweekly Strategy Webinar Q&A

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Below please find subscribers’ Q&A for the April 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA.

Q: There is talk of digital currencies being launched in the US. Is there any truth to that? How would that affect the dollar?

A: There is no truth to that; there is not even any serious discussion of digital currency at the US Treasury. My theory has always been that once Bitcoin works and is made theft-proof, the government will take it over and make that the digital US dollar. So far, Bitcoin has existed regulation-free; in fact, the IRS is counting on a trillion dollars in capital gains being taxed going forward in helping to address the budget deficit.

Q: If you have a choice, what’s the best vaccine to get?

A: The best vaccine is the one you can get the fastest. I know you’re a little slow on the rollout in Canada. Go for Pfizer (PFE) if you’re able to choose. You should avoid Moderna (MRNA) because 15% of people getting second shots have one-day symptoms after the second shot. But basically, you don’t get to choose, only kids get to choose because only Pfizer has done trials on people under the age of 21. So, if you take your kids in, they will all get Pfizer for sure.

Q: Should I buy Freeport McMoRan (FCX) here or wait for a bigger dip?

A: Freeport has just had a 25% move up in a week. I wouldn’t touch that. We put out the trade alert when it was in the mid $30s, and it's essentially at its maximum profit point now. So, you don't need to chase—wait for a bigger dip or a long sideways move before you get in.

Q: How do I trade copper if I don't do futures?

A: Buy (FCX), the largest copper producer in the US, and they have call options and LEAPS. By the way, if we do get another $5 dip in Freeport, which we just had, I would really do something like the (FCX) $45-$50 2023 LEAP. You can get 5 times your money on that.

Q: Time to buy oil stocks (USO) for the summer?

A: No, the big driver of oil right now is the pandemic in India. They are one of the world's largest consumers—you find out that most poor countries are using oil right now as they can’t afford the more expensive alternative sources of power. And when your biggest customer is looking at a billion corona cases, that’s bad for business. Remember, when you trade oil, you’re trading against a long-term bear trend.

Q: Would you buy Delta Airlines (DAL) at today’s prices?

A: Yes, I’m probably going to go run the numbers on today's call spread; I actually have 20% of cash left that I could spend. So that looks like a good choice—summer will be incredible for the entire airline industry now that they have all staved off bankruptcy. Ticket prices are going to start rising sharply with an impending severe aircraft shortage.

Q: What are your thoughts on the Buffet index which shows that stocks are more stretched vs GDP at any time vs 2000?

A: The trouble with those indicators is that they never anticipated A) the Fed buying $120 billion a month in US Treasury bonds, B) the Fed promising to keep interest rates at zero for three years, and C) an enormous bounce back from a once-in-a-hundred-year pandemic. That's why not just the Buffet Index but virtually all technical indicators have been worthless this year because they have shown that the market has been overbought for the last six months. And if you paid attention to your indicators, you were either left behind or you went short and lost your shirt. So, at a certain point, you have to ignore your technical indicators and your charts and just buy the damn market. The people who use that philosophy (and know when to use it, and it’s not always) are up 56% on the year.

Q: What trade categories are getting fantastic returns? It’s certainly not tech.

A: Well, we actually rotated out of tech last September and went into banks, industrial plays, and domestic recovery plays. And you can see in the stocks I just showed you in our model portfolio which one we’re getting the numbers from. Certainly, it was not tech; tech has only performed for the last four weeks and we jumped right back in that one also with positions in Microsoft (MSFT). So yes, it’s a constantly changing game; we’re getting rotations almost daily right now between major groups of stocks. The only way to play this kind of market is to listen to someone who’s been practicing for 52 years.

Q: I am 83 years old and have four grandchildren. I want to invest around $20,000 with each child. I was thinking of your bullish view on Tesla (TSLA) on a long-term investment. Do you agree?

A: If those were my grandchildren, I would give them each $20,000 worth of the ProShares Ultra Technology Fund (ROM), the 2x long technology ETF. Unless tech drops 50% from here, that stock will keep increasing at twice the rate of the fastest-growing sector in the market. I did something similar with my kids about 20 years ago and as a result, their college and retirement funds for their kids have risen 20 times. So that’s what I would do; I would never bet everything on a single stock, I would go for a basket of high-tech stocks, or the Invesco QQQ NASDAQ Trust (QQQ) if you don’t want the leverage.

Q: Do you like Amazon (AMZN) splitting?

A: I don’t think they’ll ever split. Jeff Bezos worked on Wall Street (with me at Morgan Stanley) and sees splits as nothing more than a paper shuffle, which it is. It’s more likely that he’ll break up the company into different segments because when they get to a $5 trillion market cap, it will just become too big to manage. Also, by breaking Amazon up into five companies—AWS, the store, healthcare, distribution, etc., —you’re getting a premium for those individual pieces, which would double the value of your existing holdings. So, if you hold Amazon stock, you want it to face an antitrust breakup because the flotation will double the value of your total holdings. That has happened several times in the past with other companies, like AT&T (T), which I also worked on.

Q: When is Tesla going to move and why is it going up with earnings up 74%?

A: Well, the stock moved up a healthy 46% going into the earnings; it’s a classic sell the news market. Most stocks are doing that this quarter and they did so last quarter as well. And Tesla also tends to move sideways for years and then have these explosive moves up. I think the next double or triple will come when they announce mass production of their solid-state batteries, which will be anywhere from 2 to 5 years off.

Q: How can I renew my subscription?

A: You can call customer support at 347-480-1034 or email support@madhedgefundtrader.com and I guarantee you someone will get back to you.

Q: Top gene-editing stock after CRISPR Therapeutics (CRSP)?

A: There are two of them: one is Intellia (NTLA); it’s actually done better than CRISPR lately. The second is Editas (EDIT) and you’ll find out that the same professionals, including the Nobel prize winner Jennifer Doudna here at Berkeley, rotate among all three of these, and the people who run them all know each other. They were all involved in the late 2000's fundamental research on CRISPR, and they’re all frenemies. So yes, it's a three-company industry, kind of like the cybersecurity industry.

Q: What about PayPal (PYPL)?

A: I would wait for the earnings since so many companies are selling off on their announcements. See if they sell off 3-5%, then you buy it for the next leg up. That is the game now.

Q: Do you like any 3D printing stocks like Faro Technologies (FARO)?

A: No, that’s too much of a niche area for me, I’m staying away. And that's becoming a commodity industry. When they were brand new years ago, they were red hot, now not so much.

Q: Do you see the chip companies continuing their bull run for the next few months?

A: I do. If anything, the chip shortage will get worse. Each EV uses about 100 chips, and they’re mostly the low-end $10 chips. Ford (F) said production of a million cars will be lost due to the chip shortage. Ford itself has 22,000 cars sitting in a lot that are fully assembled awaiting the chips. Tesla alone has $300 worth of chips just in its inverters, and there are two inverters in every car. So, when you go from production of 500,000 cars to a million in one year, that's literally billions of chips.

Q: The airlines are packed; what are your thoughts?

A: Yes, one of the best ways to invest is to invest in what you see. If you see airlines are packed, buy airline stocks. If you can’t hire anyone, you know the economy is booming.

Q: What about the Russel 2000 (IWM)?

A: We covered it; it looks like it wants to break out to new highs from here. By the way, there are only 1,500 stocks left in the Russell 2000 after the pandemic, mergers, and bankruptcies.

Q: Are there other ways to play copper out there like (FCX)?

A: Yes; one is the (COPX)— a pure copper futures ETF. However, be careful with pure metal ETFs of any kind because they have huge contangos and you could get a 50% move up in your commodity while your ETF goes down 50% over the same time. This happens all the time in oil and natural gas, and to a lesser degree in the metals, so be careful about that. Before you get into any of these alternative ETFs, look at the tracking history going back and I think you'll see you're much better off just buying (FCX).

Q: How long do you typically hold onto your 2-year LEAPS? Based on my research, the time decay starts to accelerate after about 3 months to one year on LEAPS.

A: Actually, with LEAPS, the reason I go out to two years is that the second year is almost free, there's almost no extra cost. And it gives you more breathing room for this thing to work. Usually, if I get my timing right, my LEAP stocks make big moves within the first three months; by then, the LEAP has doubled in value, and then you have to think about whether you should keep it or whether there are better LEAPS out there (which there almost always are). So, you sell it on a double, which only took a 30% move in the stock, or you may be committed to the company for the long term, like a Microsoft or an Amazon. And then you just run it through the expiration to get a 400% or 500% profit in two years. That is how you play the LEAP game.

Q: Are these recorded?

A: Yes, we record these and we post them on the website after about 2 hours. Just log into the site, go to “my account”, then select your subscription type (Global Trading Dispatch or Technology Letter), and “webinars” will be one of the button choices.

Q: Can you also sell calls on LEAPS?

A: Yes and the only place to do that is the US Treasury market (TLT). There you either want to be short calls far above the market, out two years, or you want to be long puts. And by the way, if you did something like a $120-$125 put spread out to January 2023, then you’re looking at making about a 400% gain. That is a bet that 20-year interest rates only go up a little bit more, to 2.00%. If you really want to bet the ranch, do something like a $120-$122 and you might get a 1000% return.

 

 

Q: What is the best LEAP to trade for Microsoft (MSFT)?

A: If you want to go out two years, I would do something like a June 2023 $290-$300 vertical bull call spread. There is an easy 67% profit in that one on only a 20% rise in the stock. I do front monthlies for the trade alert service, so we always have at least 10 or 20 trade alerts going out every month. And the one I currently have for is a deep in the money May $230-$240 vertical bull call spread which expires in 12 days.

 

Q: What is the best way to play Google (GOOG)?

A: Go 20% out of the money and buy a January 2023 $2,900-$3,000 vertical bull call spread for $20—that should make about 400%. If you want more specific advice on LEAPS, we have an opening for the Mad Hedge Concierge Service so send an email to support@madhedgefundtrader.com with subject line “concierge,” and we will reach out to you.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy.

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

 

I Think I See Another Winner

 

 

 

 

 

MHFTR

The Secret Fed Plan to Buy Gold

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With the latest effort to expand quantitative easing through the Fed purchase of individual corporate bonds, we must consider what else our central bank has up its sleeve.

With American interest rates already near zero, the markets will take the rates for all interest-bearing securities well into negative numbers. This has already happened in Japan and Germany.

At that point, our central bank’s primary tool for stimulating US businesses will become utterly useless, ineffective, and impotent.

What else is in the tool bag?

How about large-scale purchases of Gold (GLD)?

You are probably as shocked as I am with this possibility. But there is a rock-solid logic to the plan. As solid as the vault at Fort Knox.

This theory gained credence when my old friend, Judy Shelton, was appointed to the federal reserve, a noted gold bug.

The idea is to create asset price inflation that will spread to the rest of the economy. It already did this with great success from 2009-2014 with quantitative easing, whereby almost every class of debt securities were hoovered up by the government.

“QE on steroids”, to be implemented only after overnight rates go negative, would involve large-scale purchases of not only gold, but stocks, government bonds, and exchange-traded funds as well. Corporate bond purchases are simply a step in that direction.

If you think I’ve been smoking California’s largest cash export (it’s not the raisins) you would be in error. I should point out that the Japanese government is already pursuing QE to this extent, at least in terms of equity-type investments and ETFs, and already owns a substantial part of the Japanese stock market.

And, as the history buff that I am, I can tell you that it has been done in the US as well, with tremendous results.

If you thought that President Obama had it rough when he came into office in 2009 with the Great Recession on, it was nothing compared to what Franklin Delano Roosevelt inherited.

The country was in its fourth year of the Great Depression. US GDP had cratered by 43%, consumer prices crashed by 24%, the unemployment rate was 25%, and stock prices vaporized by 90%. Mass starvation loomed.

Drastic measures were called for.

FDR issued Executive Order 6102 banning private ownership of gold, ordering them to sell their holdings to the US Treasury at a lowly $20.67 an ounce.

He then urged Congress to pass the Gold Reserve Act of 1934, which instantly revalued the government’s holdings at $35.00, an increase of 69.32%. These and other measures caused the value of America’s gold holdings to leap from $4 to $12 billion. That’s a lot of money in 1934 dollars, about $208 billion in today’s money.

Since the US was still on the gold standard back then, this triggered an instant dollar devaluation of more than 50%. The high gold price sucked in massive amounts of the yellow metal from abroad creating, you guessed it, inflation.

The government then borrowed massively against this artificially created wealth to fund the landscape-altering infrastructure projects of the New Deal.

It worked.

During the following three years, the GDP skyrocketed by 48%, inflation eked out a 2% gain, the unemployment rate dropped to 18%, and stocks jumped by 80%. Happy days were here again.

Monetary conditions are remarkably similar today to those that prevailed during the last government gold buying binge.

There has been a de facto currency war underway since 2009. The Fed started when it launched QE, and Japan, Europe, and China have followed. Blue-collar unemployment and underpayment are at a decades high. The need for a national infrastructure program is overwhelming.

However, in the 21st century version of such a gold policy, it is highly unlikely that we would see another gold ownership ban.

Instead, the Fed would most likely move into the physical gold market, sitting on the bid for years, much like it recently did in the Treasury bond market for five years. Gold prices would increase by a multiple of current levels.

It would then borrow against its new gold holdings, plus the 4,176 metric tonnes worth $200 billion at today’s market prices already sitting in Fort Knox, to fund a multi trillion-dollar infrastructure spending program.

Heaven knows we need it. Millions of blue-collar jobs would be created, and inflation would come back from the dead.

Yes, this all sounds like a fantasy. But negative interest rates were considered an impossibility only years ago.

The Fed’s move on gold would be only one aspect of a multi-faceted package of desperate last-ditch measures to extend economic growth into the future which I outlined in a previous research piece (click here for “What Happens When QE Fails” by clicking here).

That’s assuming that the gold is still there. Treasury Secretary Stephen Mnuchin says he saw the gold himself during an inspection that took place on the last solar eclipse over Fort Knox in 2018. The door to the vault at Fort Knox had not been opened since September 23, 1974.

But then Steve Mnuchin says a lot of things. Persistent urban legends and internet rumors claim that the vault is actually empty or filled with fake steel bars painted gold. 

 

bringing back the gold standard

But is it Really Gold?

You Can See the Upside Breakout Coming Clear as Day

 

 

 

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