Research Archives - Mad Hedge Fund Trader

Has the Recession Already Started?

It started with a slow drip.

Then it became a trickle.

Now it is an undeniable torrent.

Negative economic data reports, once as rare as hen's teeth, have suddenly become as common as NRA bumper stickers at a Trump rally. The economic data flow has definitely turned sour.

Is this a growth scare? Or is it the beginning of a full-blown recession, the return of which investors have been dreading for the past nine years.

The data flow was hotter than hot going into January, taking the stock market to a new all-time high.

We only got final confirmation of this a few weeks ago, when the last report on Q4 GDP rose by 0.2% to 2.9%, one of the best readings in years.

Then the rot began.

At first it was just one or two minor, inconsequential reports here and there. Then they ALL turned bad. Not by large amounts, but by small incremental ones, frequent enough to notice.

The February Dallas Fed General Business Activity Index dropped from 28 to 21, the March Institute of Supply Management Manufacturing Activity declined from 61 to 59, while Services Activity shaved a point, from 59 to 58.

The big one has been the March Nonfarm Payroll Report - that printed a soft 103,000 - which was far below the recent average of 200,000.

As recently as this morning, the National Association of Home Builders Sentiment Index dropped a point from 70 to 69.

When you see one cockroach, it is easy to ignore. When it becomes a massive infestation, it is a different story completely.

The potential explanations for the slowdown abound.

There is no doubt that the Trade War with China is eroding business confidence, as is the secret renegotiation of the North American Free Trade Agreement (NAFTA).

Decisions on major capital investments by companies were a slam dunk three months ago. Now, many are definitely on hold.

There is abundant evidence that the Chinese are scaling back investment in the US and pausing new trade deals with American counterparties. They have been boycotting purchases of new US Treasury bonds for eight months.

The new import duty for Canadian timber is raising the cost of low-end housing, worsening affordability and causing builders to cut back.

Instead they are refocusing efforts on high-end housing where profit margins are much wider.

Shooting wars with Syria, North Korea, and Iran are permanently just over the horizon, further giving nervous investors pause.

And the general level of chaos coming out of Washington, including the unprecedented level of administrations firings and resignations, are scaring a lot of people.

Since I am a person who puts my money where my mouth is every day of the year, I'll give you my 10 cents worth on what all this really means.

Two weeks ago I started piling into to an ultra-aggressive 100% "RISK ON" trading book, loading the boat with a range of asset classes, including longs in financial and technology stocks, and gold and big shorts in the bond market.

My bet is that while however serious all of the above concerns may be, they pale in comparison with Q1 2018 earnings growth of historic proportions that is now unfolding, prompted by the December tax bill.

The second 10$ correction of 2018 had nothing to do with fundamentals. It was all about hot money retreating to the sideline until the bad news waned and the good news returned.

And so it has. Forecast Q1 earnings are now looking to come in above 20% YOY. These will be reports for the ages.

My bet has paid off in spades, with followers of my Mad Hedge Trade Alert Service up 10.70% so far in April, up +17.46% in 2018, and up a breathtaking 54.04% on a trailing 12-month basis. It is a performance that causes my competitors to absolutely weep.

If fact, the rest of 2018 could play out exactly as it has done so far, with frantic sell-offs following the end of each quarterly reporting period, followed by slow grind-up rallies leading into the next. Technology will lead the rallies every time.

Which means we may go absolutely nowhere in the indexes 2018, but have a whole lot of fun getting there. If you see this coming you can make a ton of money trading around it.

With our current positions, Mad Hedge followers could be up 25% on the year as soon as mid-May.

Which raises the question of, "When will the recession really start?"

My bet is sometime in 2019, when earnings growth downshifts from 20% to 10% or even 5%.

If this happens in the face of an inverting yield curve where short-term interest rates are higher than long-term ones, and a continuing trade war AND shooting wars, and broadening Washington scandals, then a recession becomes a sure thing.

A bear market should precede that by about six months.

So date those high-risk positions, don't marry them.

Where The Economist "Big Mac" Index Finds Currency Value

Diary, Newsletter, Research

My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its "Big Mac" index of international currency valuations.

Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.

The index counts the cost of McDonald's (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.

What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai baht are cheap.

I couldn't agree more with many of these conclusions. It's as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.

I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.

The World's Most Expensive Big Mac

The Market Outlook for the Week Ahead, or The Week That Nothing Happened

Diary, Newsletter, Research

This was the week that American missiles were supposed to rain down upon war-torn Syria, embroiling Russia in the process. It didn't happen.

This was the week that the president was supposed to fire special prosecutor Robert Mueller, who with his personal lawyer is currently reading his private correspondence for the past decade with great interest. That didn't happen either.

It was also the week that China was supposed to raise the stakes in its trade war with the United States. Instead, President Xi offered a conciliatory speech, taking the high road.

What happens when you get a whole lot of nothing?

Stocks rally smartly, the S&P 500 (SPY) rising by 2.87% and the NASDAQ (QQQ) tacking on an impressive 3.45%. Several of the Mad Hedge long positions jumped by 10%.

And that pretty much sums up the state of the market today.

Get a quiet week and share prices will naturally rise, thanks to the power of that fastest earnings growth in history, stable interest rates, a falling dollar, and gargantuan share buybacks that are growing by the day.

With a price earnings multiple of only 16, shares are offering investors the best value in three years, and there is very little else to buy.

This is why I am running one of the most aggressive trading books in memory with a 70% long 30% short balance.

Something else unusual happened this week. I added my first short position of the year in the form of puts on the S&P 500 right at the Friday highs.

And, here is where I am sticking to my guns on my six-month range trade call. If you buy every dip and sell every rally in a market that is going nowhere, you will make a fortune over time.

Provided that the (SPY) stays between $250 and $277 that is exactly what followers of the Mad Hedge Fund Trader are going to do.

By the way, 3 1/2 months into 2018, the Dow Average is dead unchanged at 24,800.

Will next week be so quiet?

I doubt it, which is why I'm starting to hedge up my trading book for the first time in two years. Washington seems to be an endless font of chaos and volatility, and the pace of disruption is increasing.

The impending attack on Syria is shaping up to more than the one-hit wonder we saw last year. It's looking more like a prolonged air, sea, and ground campaign. When your policies are blowing up, nothing beats like bombing foreigners to distract attention.

Expect a 500-point dive in the Dow Average when this happens, followed by a rapid recovery. Gold (GLD) and oil prices (USO) will rocket. The firing of Robert Mueller is worth about 2,000 Dow points of downside.

Followers of the Mad Hedge Trade Alert Service continued to knock the cover off the ball.

I continued to use weakness to scale into long in the best technology companies Alphabet (GOOGL) and banks J.P. Morgan Chase (JPM), and Citigroup (C). A short position in the Volatility Index (VXX) is a nice thing to have during a dead week, which will expire shortly.

As hedges, I'm running a double short in the bond market (TLT) and a double long in gold (GLD). And then there is the aforementioned short position in the (SPY). I just marked to market my trading book and all 10 positions are in the money.

Finally, I took profits in my Apple (AAPL) long, which I bought at the absolute bottom during the February 9 meltdown. I expect the stock to hit a new all-time high in the next several weeks.

That brings April up to a +5.81% profit, my trailing one-year return to +50.23%, and my eight-year average performance to a new all-time high of 289.19%. This brings my annualized return up to 34.70%.

The coming week will be a slow one on the data front. However, there has been a noticeable slowing of the data across the board recently.

Is this a one-off weather-related event, or the beginning of something bigger? Is the trade war starting to decimate confidence and drag on the economy?

On Monday, April 16, at 8:30 AM, we get March Retail Sales. Bank of America (BAC) and Netflix (NFLX) report.

On Tuesday, April 17, at 8:30 AM EST, we receive March Housing Starts. Goldman Sachs (GS) and United Airlines (UAL) report.

On Wednesday, April 18, at 2:00 PM, the Fed Beige Book is released, giving an insider's view of our central bank's thinking on interest rates and the state of the economy. Morgan Stanley (MS) and American Express (AXP) report.

Thursday, April 19, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a fall of 9,000 last week. Blackstone (BX) and Nucor (NUE) report.

On Friday, April 20, at 10:00 AM EST, we get the Baker Hughes Rig Count at 1:00 PM EST. Last week brought an increase of 8. General Electric (GE) and Schlumberger (SLB) report.

As for me, I'll be heading into San Francisco's Japantown this weekend for the annual Northern California Cherry Blossom Festival. I'll be viewing the magnificent flowers, listening to the Taiko drums, eating sushi, and practicing my rusty Japanese.

Good Luck and Good Trading.

Trading the New Volatility

Diary, Newsletter, Research

I have been trading the Volatility Index (VIX) since it was first created in 1993.

Let me tell you, the Volatility Index we have today is not your father's Volatility Index.

The (VIX) was originally a weighted measure of the implied volatility of just eight S&P 100 at-the-money put and call options.

Ten years later, in 2004, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors' expectations on future market volatility. That formula continues until today.

There were two generational lows in the (VIX) that have taken place since inception.

The first was in 1998 during the heyday of the mammoth hedge fund Long-Term Capital Management. The firm sold short volatility down to the $8 level and used the proceeds to buy every bullish instrument in the universe, from Japanese equities to Danish mortgage bonds and Russian government debt.

Then the Russian debt default took place and the (VIX) rocketed to $40. LTCM suffered losses in excess of 125% of its capital, and went under in two weeks. It took two years to unwind all the positions, while the (VIX) remained $40 for a year.

To learn more detail about this unfortunate chapter in history, please read When Genius Failed by Roger Lowenstein. The instigator of this whole strategy, John Meriwether, once tried to hire me and is now safely ensconced in a massive estate at Pebble Beach, CA.

The second low came in January of 2018, when the (VIX) traded down to the $9 handle. This time around, short exposure was industrywide. By the time the (VIX) peaked on the morning of February 6, some $8 billion in capital was wiped out.

So here we are back with a (VIX) of $20.48. But I can tell you that there is no way we have a (VIX) $20.48 market.

This is because (VIX) is calculated based on a daily closing basis. It in no way measures intraday volatility, which lately has become extreme.

During 11 out of the last 12 trading days, the S&P 500 intraday range exceeded 2%. This is unprecedented in stock markets anywhere any time.

It has driven traders to despair, driven them to tear their hair out, and prompted consideration of early retirements. The price movements imply we are REALLY trading at a (VIX) of $50 minimum, and possibly as high as $100.

Of course, everyone blames high frequency traders, which go home flat every night, and algorithms. But there is a lot more to it than that.

Heightened volatility is normal in the ninth year of a bear market. Natural buyers diminish, and volume shrinks.

At this point the only new money coming into equities is through corporate share buybacks. That makes us hostage to a new cycle, that of company earnings reports.

Firms are now allowed to buy their own stock in the run up to quarterly earnings reports to avoid becoming afoul of insider trading laws. So, the buyers evaporate a few weeks before each report until a few weeks after.

So far in 2018 this has created a cycle of stock market corrections that exactly correlate with quiet periods. This is when the Volatility Index spikes.

And because the entire short volatility industry no longer exists, the (VIX) soars higher than it would otherwise because there are suddenly no sellers.

So, what happens next when companies start reporting Q1, 2018 earnings? They announce large increases in share buybacks, thanks to last year's tax bill. And a few weeks later stocks take off like a scalded chimp, and the (VIX) collapses once again.

That's why the Mad Hedge Fund Trader Alert Service is short the (VIX) through the IPath S&P 500 VIX Short Term Futures ETN (VXX) April, 2018 $60-$65 in-the-money vertical bear put spread.

Just thought you'd like to know.

It's All About What Happens Next

Diary, Newsletter, Research

Stock markets are only in the business of discounting what happens next. I spend so much time anticipating the coming moves in shares that I can't even remember what I had for breakfast.

This is why technical analysis is such a bust as an investment strategy, except on an intraday basis only, as it is entirely founded on historical data. It is 100% backward looking.

So, I'll take you through the same thought experiments that convinced me to adopt a much more aggressive stance toward the markets after spending two months hiding in the weeds.

What happens after stocks hit new highs? They hit new lows, as they did on April 1, when the Dow Average plunged to 23,600.

What happens after markets hit new lows? They hit new highs again, supported by the strongest earning reports in history, which begin on Friday, April 13.

What happens after the inflation scare we received in the January Nonfarm Payroll Report with the surprise pop in average hourly earnings?

Inflation non-events, which unfolded with average hourly wages that came in subdued with the February and March Nonfarm Payroll Reports.

What follows a trade war? Trade peace, which is yet to come, but will arrive eventually nevertheless.

All of this points to stock markets that are in the process of putting in the lows for 2018. That means it is time to start ramping up your risk, as I did with three rapid Trade Alerts yesterday.

What does this look like on the charts? Alphabet (GOOGL) is a perfect example, which is in the process of putting in a very convincing triple bottom around the $1,000 level, right around the 200-day moving average.

What if I'm wrong?

After all the trade war continues to inflame by the day, the algorithms are still running amok, and the president still has a Twitter account.

What did it today? The Congressional Budget Office forecast of $1 trillion deficits running indefinitely? Or the FBI raids on the offices of the president's personal lawyer?

Then markets will edge down to the next support levels, about 4% lower than the most recently visited bottom, or about 22,600 in the Dow Average.

So, it would seem that the really smart thing to do here is to build options positions that can take that 4% hit, and STILL expire at their maximum profit points.

And this is exactly what I have been doing for the past two weeks: piling on long positions in the best technology stocks, and adding to short positions in bonds.

For fans of LEAPS, long dated out-of-the-money option call spreads one year or more out, this is the best time this year to get involved.

I'll give you an example.

BUY one June 21, 2019 $1,000 call at $145.00
SELL one June 21, 2019 $1,050 call at $120.00

NET COST = $25.00

In the event that (GOOGL) closes over $1,050 on June 21, 2019, or up 3% from today's closing level, the profit on this position would amount to $25.00 from an initial cost of $25.00, or a 100% gain in 14 months.

The only catch is that if the recession comes sooner than expected, the value of this position falls to zero in 14 months.

If you go deeper out-of-the-money with your strike prices, the potential profit rises by a multiple.

You can generate this kind of astronomical return with any of the FANGs assuming no real movement of the stock in a year.

It looks pretty good to me.

You heard it here first.

Winter Is Ending

How America's Plunging Education Surplus Will Damage Your Portfolio

Diary, Newsletter, Research

For the first time in 40 years, the number of foreign students applying for American colleges and universities is declining.

The drop is particularly noticeable at University of California, Berkeley, where Asian students account for about 10% of incoming freshmen. This is turning the Golden State's education budget upside-down, because foreigners pay almost triple the tuition of in-state residents, some $41,942 a year for the 2018-2019 school year.

Trump's China bashing has been widely reported throughout the Middle Kingdom, scaring away prospective applicants.

Who wants to attend school in a country at war with the homeland - trade or the shooting kind?

So has the upturn in attacks in the US on minorities, be they religious, ethnic, national, or otherwise.

Trump certainly made that attitude crystal with his attempted immigration bans, now blocked by the courts.

Students are worried they will be physically attacked, or deported by an aggressive immigration department. That is if they can even get into the country in the first place.

It isn't just California schools that are getting hit. Institutions of higher learning across the nation are reporting similar drawdowns.

Foreign students are instead applying to British and European schools, or not going abroad at all to save money.

If this sorry trend continues, it will cause substantial damage to the American education system, the US economy as a whole, US influence abroad, and the US dollar (UUP).

Higher education has grown into a gigantic service industry for America, with a massively positive impact on our balance of payments, generating an impact on the world far beyond the dollar amounts involved.

According to the nonprofit Institute of International Education, there are 819,644 foreign students in the US today.

This combined student body pays an average out-of-state tuition of $25,000 a year each totaling some $24 billion. The positive impact on the US balance of payments and the US dollar exchange rate is huge.

China is far and away the dominant origin of these students, accounting for 235,597.

South Korea and India take the No. 2 and No. 3 slots, thanks to the generous scholarships provided by their home governments. Saudi Arabia and Brazil are showing the fastest growth rates.

A fortunate few, backed by endowed chairs and buildings financed by wealthy and eager parents, land places at prestigious universities such as Harvard, Princeton, and Yale.

The top destinations of foreign students are the University of Southern California in Los Angeles, CA, the University of Illinois at Urbana-Champaign, Indiana's Perdue University, and New York University, with each of these claiming 9,000 foreign students.

However, the overwhelming majority enroll in the provinces in a thousand rural state universities and junior colleges of which most of us have never heard.

Many of these schools now have diligent admissions officers scouring the Chinese hinterlands looking for new applicants.

A college degree once was a uniquely American privilege. In 1974 the US led the world, with 24% of the population getting a sheepskin.

Today, it has fallen to 16^th, with 28% completing a four-year program, lagging countries such as South Korea, Canada, and Japan.

The financial windfall has enabled once sleepy little schools to build themselves into world-class institutions of higher learning, with 30,000 or more students.

They boast state-of-the-art facilities, much to the joy of local residents and budget-constrained state education officials.

Furthermore, the overwhelming leadership of education industry is steadily Americanizing the global establishment.

I can't tell you how many times over the decades I have run into the Persian Gulf sovereign fund manager who went to Florida State, the Asian CEO who attended Cal State Hayward, or the African finance minister who fondly recalled rooting for the Kansas State Wildcats.

Remember the recently ousted president of Egypt, Mohamed Morsi? He was a former classmate of mine at the University of Southern California. Go Trojans! Do you think he was singing "Fight on For Old SC" in his jail cell?

Those who constantly bemoan the impending fall of the Great American Empire can take heart by merely looking inland at these impressive degree factories. These students are not clamoring to get into universities in Beijing, Moscow, or Tokyo.

Not a few marry and permanently settle in the US, while many others take their American brides home. Saudi Arabia is home to some 50,000 such wives, who had to agree to sharia law and give up driving to obtain resident permits.

It also explains why the dollar is so strong in the face of absolutely gigantic, structural trade deficits.

When a foreign student pays tuition to a US school, it is treated as an export of a service in terms of the US balance of payments, much like a car or an airplane, our country's largest exports.

Rising exports mean that more dollars are staying home and fewer are going abroad, strengthening the value of the greenback.

And $24 billion and change offsets a lot of imports of cheap electronics, clothing, and toys from China.

The US has plenty of capacity to expand this trade in services. More than 70% of foreign students are concentrated in just 200 of the country's 4,000 colleges.

The University of California has blazed a path that many other cash-strapped institutions are certain to follow. During the financial crisis, the world's greatest public university saw two back-to-back 40% budget cuts from Sacramento.

So, it made up the shortfall by bumping up foreign admissions from 5% to 10%, largely from Asia. They must pay $38,000 a year in tuition, compared to $18,000 for in-state residents.

What is the upshot of all of this for the locals? It is now a lot harder to get an "A" in Math at UC Berkeley.

The Market Outlook for the Week Ahead, or Here's the Big Call

Diary, Newsletter, Research

Well that tears it!

Flamethrowers! Yes, on the list of 125 products that China is imposing new 25% import duties are flamethrowers.

And I was so looking forward to getting a flamethrower of my own with which to singe lazy and errant stock analysts from whom we all are afflicted.

I guess I'll just have to buy American, which I already do with my cars (Teslas).

The real call here is that the NASDAQ has entered a well-defined trading range, from 6,600 to 7,600, where it will remain trapped for six months until the November midterm congressional elections. After that, we will rally 10% in year-end rally.

The deep in-the-money call spread strategy I employ is ideally suited to this kind of go-nowhere market. While other traders are tearing their hair out, you'll be raking in the money every month as if you've just been adopted by a new rich uncle.

The president, absolutely cacophonous about the riches created by a rising stock market, has developed lockjaw in a falling one.

The reason was provided by trade advisor Peter Navarro, who said quite simply that the markets were wrong in their belief that trade wars decimate share prices.

My half century of trading tells that markets are never wrong, only people are.

And while the chief architect of our China trade policy has never been there, I managed to find it in 1974. It's easy. You just head east.

Here are some harsh numbers to show you how quixotic the administration policies are. By imposing $25 billion in import duties to protect dying American industries, investors cut $3 trillion off of US stock market capitalization.

That is a 120:1 risk reward AGAINST us. That's NOT the kind of trade I'm used to strapping on.

I'm sure the Chinese are thinking, "How would you like to lose another $3 trillion?" "How about a recession and bear market?" and "See you $25 billion and raise you $50 billion!"

Here is a number that gets lost in translation of the $1 trillion in two-way trade between the US and China. Some 90% of the profits accrue to the US. It is an issue that officials in Beijing have been complaining to me about for decades, which essentially makes them the low-waged manufacturing colony.

That iPhone X that Foxconn makes for $100 Apple (AAPL) sells for $1,000 in the US.

One then has to ask the cogent question, "If you're winning the game, why change the rules?"

The Chinese are not a nation you want to antagonize. They endured 2 million casualties in Korea just to inflict 50,000 on us. Chosin Reservoir looms large in my family - the best fighting retreat in history carried out by the Marine Corp.

The Chinese can also suffer more pain than Americans, with most only one or two generations out of a $300 annual per capita income.

Will the US November congressional election affect economic fundamentals" I doubt it. The mere fact that the election is out of the way is worth a 10% stock market rally into year-end.

The March Nonfarm Payroll Report was a disappointment for the second month in a row, coming in at a feeble 103,000. The headline unemployment rate remains at a decade low of 4.1%.

The stock market didn't care, with the overwhelming focus now on trade issues.

The really important numbers now, Average Hourly Earnings, were up a slightly inflationary 0.3%, but no one noticed.

The January and February reports we revised downward by a steep 50,000.

Manufacturing gained 22,000 jobs, Health Care was up 22,000, and Professional and Business Services up 33,000. Construction lost 15,000 jobs, thanks to raising interest rates.

The Broader U-6 "Discouraged Worker" unemployment rate dropped 0.2% to 8.0%, a new decade low.

As a stand-alone number, the report is not important. However, look at it in the context of a rising tide of recent, slightly negative economic data reports and one has to start to get concerned. Is it the weather, or the beginning of something larger?

We are only a week off from when the Q1, 2018 earnings season kicks off, which will probably deliver some of the strongest reports in US history.

Until then, the data reports will be relatively benign.

On Monday, April 9, nothing of note is announced.

On Tuesday, April 10, we receive March NFIB Small Business Optimism Index.

On Wednesday, April 11, at 8:30 AM EST, we learn the all-important Consumer Price Index, the most important read on inflation. Bed Bath & Beyond (BBBY) reports.

Thursday, April 12, leads with the Weekly Jobless Claims at 8:30 AM EST, which saw a dramatic rise of 24,000 last week (another bad number). BlackRock (BLK) reports.

On Friday, April 13, at 10:00 AM EST, we get the JOLTS Report on private sector job openings. It is the big day for bank earnings, with Citigroup (C), JP Morgan (JPM), and Wells Fargo (WFC) all reporting.

The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.

Followers of the Mad Hedge Trade Alert Service enjoyed one of their best weeks in years. Executing on the views above, I nailed the market bottom, hauling in an eye-popping 5.06% in performance in a single day.

I artfully used the huge sell-off days to pile on long positions in Google (GOOGL) and JP Morgan (JPM), and sell short US Treasury bonds and volatility (VXX). On the up days I bought gold (GLD).

It all worked like a charm, and every position is now profitable.

That brings April up to a +4.76% profit, my trailing one-year return to +49.72%, and my eight-year average annualized return up to 34.55%. We are an eyelash short of a new all-time performance high.

As for me, I'll be shutting down my Lake Tahoe estate for a while, not that the snow has turned to rain. The lake level is at a 118-year high, and Reno, NV, is worried about flooding. All the floodgates are open.

What a winter! I barely had time to tear myself away from my screens to visit the slopes.

Good Luck and Good Trading.

Is the Stock Market Calling a Democratic Win in November?

Diary, Newsletter, Research

If true, the implications for your stock portfolio could be momentous. So why is the stock market REALLY going down?

The oil industry would far and away be the worst affected. That explains why big companies such as Exxon Mobile (XOM) are hitting new one-year lows, even though the price of Texas tea has risen by an impressive 50% since the summer.

Also taken out to the woodshed for a spanking have been steel and coal. It is fascinating to note that the shares of the supposed beneficiaries of the trade war, coal (KOL) and steel (X), have on average dropped twice as much as the victims, such as technology, since the correction began in February.

China buys some 70% of all US coal exports, which is why the principal US rail routes have shifted from going from North-South to East-West.

Tape readers believe it is a direct outcome of the tit-for-tat trade war with China. But given the small numbers out so far I believe this is being vastly overexaggerated by the media.

The $100 billion out of $1 trillion in two-way trade, generating a total of $25 billion in new tariffs between the two countries, is too small to even affect the GDP numbers.

Academics and Fed watchers argue that the infinitesimal rate of interest rate hikes by our central banks, six in three years, is finally starting to bite. It's just a matter of time before the frog realizes that it has been boiled.

Technology is the lead sector in the market, and it doesn't borrow AT ALL, accounting for 25% of market capitalization, funding growth entirely through cash flow.

In Washington there is a different view.

Plunging share indexes, bringing the biggest intraday swings seen in a decade, can only mean one thing. The Democrats may be about to retake Congress.

The Democrats only need to seize 24 seats in the House and two seats in the Senate to achieve a simple majority.

So far, some 38 House Republicans have announced they are not running for reelection. It's not because they are tired of exercising power. It's because they don't believe they can survive either a Democratic onslaught, or a primary challenge from the far right wing of their own party.

They also are facing the lowest presidential popularity ratings ever seen for a midterm election. Until a few weeks ago, Trump was scraping the basement with a 36% approval, also it has ticked up recently.

So if the Dems take control, what are the investment implications?

A president from one party and a congress from the other is a fairly common occurrence. That was the state of affairs during the past six years of the Obama administration, and the past two years of George Bush's.

In other words, it's a survivable situation.

It has long been said that markets love gridlocked government. At the end of the day, they wish Washington would go away so everyone can get on with the important business of making money.

For a start, a Democratic win would assure that no important legislation would be passed into law for two years.

But it goes beyond that. Majority control means that the Democrats would get control of the chairmanships of every committee. That means that the investigation of Trump's various actions would escalate from a slow burn to a full-fledged flash fire.

While this may occupy the headlines of newspapers, it will have minimal impact on the markets or the economy. Only the hard cases will even notice.

And now for a quickie civics lesson, which I understand they don't teach in high school anymore.

A Democratic win in the Senate would almost certainly bring an impeachment trial, where only a simple major majority of 51 is required. That would stall markets for about three months.

And no matter how rosy the prospects are for Democratic gains, they are unlikely to reach the two-thirds majority needed for an actual conviction.

For that the Dems would have to win 94 seats, a near impossibility in this heavily gerrymandered country. Just to get a simple majority in the House, the Democrats have to win 58% of the popular vote. But they could reach a tipping point.

In short, it's all looking like 1975 all over again. What happened after 1975? After collapsing 45%, then rallying from a Nixon resignation low of a Dow Average of 550 to 1,000, it then took EIGHT YEARS for stocks to rally another 1,000 points.

Wall Street shrank dramatically, and many brokers become taxi drivers. It's not a pleasant prospect, except that today they would become Uber drivers.

I remember it like it was yesterday.

The endless bear market was a major reason why I started my career as a financial journalist for The Economist magazine in London rather than heading straight for Wall Street.

Once the new bull market started in 1983, I was inside Morgan Stanley (MS) within a year, while it was still private.

And thanks to Bob Baldwin for the job, a Navy man and Ivy Leaguer who lived to 95!

If the election was held tomorrow, the Democrats would almost certainly get control. But the election is not tomorrow, it is in seven months, and in politics that could be seven lifetimes.

Polls could improve for Trump. But then they could get a whole lot worse, too. And then there is Robert Mueller constantly lurking at the periphery.

In the end, markets might not do much of anything in a gridlocked government.

Much of the prosperity of America has occurred independent of the goings on in the nation's capital. It has taken place in spite of, not because of government policies.

Technology companies, now 25% of the economy (it was 26% two weeks ago) will continue to push the envelope forward at a hyperaccelerating rate, creating trillions of dollars in new shareholder value.

Thank goodness for that!

However, the volatility to get to nothing could be extreme, as we now are witnessing.

Dow Average 1972-83

The Crash Coming to a Market Near You

Diary, Newsletter, Research

I'm sure that most of you are spending your free time devouring the utterly fascinating pages of "Fire and Fury" these days, now in its 12th week on the New York Times best-seller list.

I, however, am reading slightly different subject matter.

As obscure, academic, and abstruse the "Global Dollar Credit: Links to US Monetary Policy and Leverage" may sound, published by the Bank for International Settlements (BIS), it has been an absolute blockbuster among strategists at the major hedge funds.

And given the apocalyptic conclusions of the report, it might well rank as one of the best horror stories of the year, worthy of the bloodiest zombie flick.

I'll give it to you in a nutshell.

Corporate borrowers outside the US have ramped up their borrowing astronomically over the past 17 years, from $2 trillion to $9 trillion.

This makes them extraordinarily sensitive to any rise in US interest rates and the dollar. Emerging market debt alone has doubled to $4.5 trillion.

Easy money has encouraged mal investment and overinvestment in projects that never would have seen the light of day if unlimited financing were not available at 1%. In other words, it is all a giant house of cards ready to collapse.

I know a lot of you thrive on folk-based economic theories you picked up on the Internet based on monetarism, Austrian economics, and the theories of Friedrich August von Hayek, that all have the dollar collapsing under a mountain of debt.

In fact, the complete opposite has come true. The global economy has become "dollarized," with companies and governments in almost all nations relying on the buck as their principal means of financing.

The end result of all this has been to vastly expand the power of the Federal Reserve far beyond America's borders. Even the smallest rise in US interest rates, such as the 1/4% hike mooted for June, could trigger a cascade of corporate defaults around the world.

Think of subprime, with a turbocharger, running on pure nitro.

This is having a huge deflationary effect on the economies of many emerging nations.

Malaysia's sovereign wealth fund has almost gone under after a series of bad bets against the dollar. There is thought to be another troubled dollar short coming out of Hong Kong worth $900 million.

This is forcing countries to liquidate their US Treasury Bonds to cover local losses.

Further exacerbating the situation has been the crash of the price of oil, which has turned producing countries from suppliers to takers of liquidity to the global credit markets. Even after last year's monster rally, oil is still trading at 60% below the 2011 peak.

The net net of all of this is to increase the risk of surprise blowups overseas, both by banks and the private borrowers. This will increase the volatility of financial instruments everywhere.

The Bank for International Settlements is an exclusive club of the world's central banks. It is based in Basel, Switzerland (great swimming in the Rhine there), with further offices in Hong Kong and Mexico City. Its goal is it to coordinate policies among different nations.

The BIS was originally founded in 1930 to facilitate payment of German reparations following the Versailles Treaty ending WWI.

As a regular groupie on the central banking scene, I have been reading the research publications for many decades.

It All Started Here in Versailles

Why You Should Care About the LIBOR Crisis

Diary, Newsletter, Research

You know those bond shorts you're carrying on my recommendation? They are about to pay off big time.

We are only one more capitulation sell-off day in the stock market from bonds starting to fall like a rock.

There is a financial crisis taking place overseas, which you probably don't know, or care about.

Here is my one-liner on this: You should care.

The London Interbank Offered Rate (LIBOR) is a measure of the cost of short-term borrowing in Europe. It is essentially their version of our own Fed funds rate. And here's the problem. It has been rising almost every day for two months.

If you read the financial press, you probably already know about LIBOR as the subject of a bid rigging scandal that prompted billion-dollar fines and jail terms for the parties involved.

You can take this as the opening salvo in the coming credit crisis. It probably won't start to seriously bite here in the US for two years. But it is already hurting the profitability of European banks now.

A staggering $350 trillion in loans in the US and abroad are tied to LIBOR-based loans, including $1.2 trillion in mortgages for high-end homeowners. Rising interest rates for this debt bring immediate pain.

You can see this clearly is the cost of funds around the world, as outlined by the charts below.

Saudi Arabia's cost of funds, or SAIBOR, historically a net supplier of funds to the continent thanks to its perennial oil surplus, has just been raised 60 basis points, the first such move in a decade.

It is causing cash squeeze in Hong Kong, as seen through escalating HIBOR rates. Even Australian banks, normally seen as the bedrock of the global financial system, have seen the sharpest rise in interest rates in eight years.

Of course, the reasons for the global credit squeeze here at home are screamingly obvious. The US government is in the process of tripling its annual borrowing needs, as the budgets deficit soars from $400 billion to $1.2 trillion.

Exacerbating the influence on the markets is the US Treasury's new preference for short-term borrowing instead of the long-term kind, thus boosting the cost of shorter-term money.

This is to reduce the immediate up-front cost of borrowing. Like so many administration policies, it is reaping a short-term paper advantage for a very much higher long-term real cost.

As we are just entering a 20-year bear market for bonds, the Feds should be borrowing as much long-term money as they possibly can.

This is what private corporations are doing, such as Apple (AAPL) and Goldman Sachs (GS), issuing 30- to 100-year bonds, even though they don't need the money.

The tax bill passed at the end of 2017 also has had the unintended side effect of raising European rates. US companies now are mobilizing some $2.5 trillion to bring home at minimal tax rates.

That has brought them to unload longer term investments and shift the funds into overnight commercial paper, further boosting rates.

You normally don't see this kind of divergence in domestic and foreign costs of money without some kind of credit crisis.

Nervous eyes are cast toward Germany's Deutsche Bank (DB), holder of the world's largest derivatives book, and whose share price has plunged a stunning 30% in two months. Clearly, the insider money is getting out. Expect to hear a lot more about Deutsche Bank in the coming months.

I have said all along that the true cost of the tax bill won't be in the immediate up-front price tag, but the long-range unintended consequences.

You don't turn America's $20.5 trillion economy on a dime without creating a lot of disruption. And now they want to pass a second tax bill!