I am constantly barraged with emails from gold bugs who passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).
They claim the move in the yellow metal we are seeing is only the beginning of a 30-fold rise in prices similar to what we saw from 1972 to 1979, when it leaped from $33 to $950.
To match the 1936 peak value, when the monetary base was collapsing, and the double top in 1979 when gold futures first tickled $950, the precious metal has to increase in value by eight times, or to $9,600 an ounce.
I am long-term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. It makes my own one-year $5,000 prediction positively wimp-like by comparison.
The seven-year spike up in prices we saw in 1979, which found me in a very long line in Johannesburg, South Africa to unload my own Krugerrands, was triggered by a number of one-off events that will never be repeated.
Some 40 years’ worth of demand was unleashed all at once when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation later peaked at around 20%.
Newly enriched sellers of oil had a strong historical affinity with gold. South Africa, the world's largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster, threatening gold supplies. We are nowhere near the same geopolitical neighborhood today, and hence my more subdued forecast.
But then again, I could be wrong.
If you took all the gold in the world and melted it into a cube, it would only have 63 feet on a side. That includes all the yellow metal accumulated by the ancient Pharos of Egypt, mined by the Spanish in Latin America, and discovered by 49ers during the California gold rush. I‘m not counting all the gold sitting at the bottom of the ocean, sunk by storms and privateers.
Suffice it to say, there isn’t much of element 79 on the periodic chart (AU) around. Its value is in its scarcity.
The geopolitical outlook has also changed in favor of gold. China, Russia, and Iran have become large-scale accumulators to bypass international sanctions. Gold is also a depleting asset. Barrick Gold (GOLD) isn’t opening new mines at 15,000 feet in the Andes Mountains because they like the clear air.
The cost of gold mining equipment is also rising at four times the inflation rate. You know those tires on those huge Caterpillar 797 trucks? They cost $200,000 each, and there is a one-year waiting list.
All this makes the barbarous relic a strong “BUY” for me.
Do You Have any Retreads?
https://www.madhedgefundtrader.com/wp-content/uploads/2011/11/bricks.jpg217250Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2025-03-25 09:02:502025-03-25 10:26:04The Ultra Bull Case for Gold
It’s official: Absolutely no one is confident in their long-term economic forecasts right now. I heard it from none other than the chairman of the Federal Reserve himself. The investment rule book has been run through the shredder.
It has in fact been deleted.
That explains a lot about how markets have been trading this year. It looks like it is going to be a reversion to the mean year. Forecasters, strategists, and gurus alike are rapidly paring down their stock performance targets for 2025 to zero.
When someone calls the fire department, it’s safe to assume that there is a fire out there somewhere. That’s what Fed governor Jay Powell did last week. It raises the question of what Jay Powell really knows that we don’t. Given the opportunity, markets will always assume the worst, that there’s not only a fire, but a major conflagration about to engulf us all. Jay Powell’s judicious comments last week certainly had the flavor of a president breathing down the back of his neck.
It's interesting that a government that ran on deficit reduction pressured the Fed to end quantitative tightening. That’s easing the money supply through the back door.
For those unfamiliar with the ins and outs of monetary policy, let me explain to you how this works.
Since the 2008 financial crisis, the Fed bought $9.1 trillion worth of debt securities from the US Treasury, a policy known as “quantitative easing”. This lowers interest rates and helps stimulate the economy when it needs it the most. “Quantitative easing” continued for 15 years through the 2020 pandemic, reaching a peak of $9.1 trillion by 2022. For beginners who want to know more about “quantitative easing” in simple terms,please watch this very funny video.
The problem is that an astronomically high Fed balance sheet like the one we have now is bad for the economy in the long term. They create bubbles in financial assets, inflation, and malinvestment in risky things like cryptocurrencies. That’s why the Fed has been trying to whittle down its enormous balance sheet since 2022.
By letting ten-year Treasury bonds it holds expire instead of rolling them over with new issues, the Fed is effectively shrinking the money supply. This is how the Fed has managed to reduce its balance sheet from $9.1 trillion three years ago to $6.7 trillion today and to near zero eventually. This is known as “quantitative tightening.” At its peak a year ago, the Fed was executing $120 billion a month quantitative tightening.
By cutting quantitative tightening, from $25 billion a month to only $5 billion a month, or effectively zero, the Fed has suddenly started supporting asset prices like stocks and increasing inflation. At least that is how the markets took it to mean by rallying last week.
Why did the Fed do this?
To head off a coming recession. Oops, there’s that politically incorrect “R” word again! This isn’t me smoking California’s largest export. Powell later provided the forecasts that back up this analysis. The Fed expects GDP growth to drop from 2.8% to 1.7% and inflation to rise from 2.5% to 2.8% by the end of this year. That’s called deflation. Private sector forecasts are much worse.
Just to be ultra clear here, the Fed is currently engaging in neither “quantitative easing nor “quantitative tightening,” it is only giving press conferences.
Bottom line: Keep selling stock rallies and buying bonds and gold on dips.
Another discussion you will hear a lot about is the debate over hard data versus soft data.
I’ll skip all the jokes about senior citizens and cut to the chase. Soft data are opinion polls, which are notoriously unreliable, fickle, and can flip back and forth between positive and negative. A good example is the University of Michigan Consumer Confidence, which last week posted its sharpest drop in its history. Consumers are panicking. The problem is that this is the first data series we get and is the only thing we forecasters can hang our hats on.
Hard data are actual reported numbers after the fact, like GDP growth, Unemployment Rates, and Consumer Price Indexes. The problem with hard data is that they can lag one to three months, and sometimes a whole year. This is why by the time a recession is confirmed by the hard data, it is usually over. Hard data often follows soft data, but not always, which is why both investors and politicians in Washington DC are freaking out now.
Bottom line: Keep selling stock rallies and buying bonds and gold (GLD) on dips.
A question I am getting a lot these days is what to buy at the next market bottom, whether that takes place in 2025 or 2026. It’s very simple. You dance with the guy who brought you to the dance. Those are:
Best Quality Big Tech: (NVDA), (GOOGL), (AAPL), (META), (AMZN)
Big tech is justified by Nvidia CEO Jensen Huang’s comment last week that there will be $1 trillion in Artificial Intelligence capital spending by the end of 2028. While we argue over trade wars, AI technology and earnings are accelerating.
Cybersecurity: (PANW), (ZS), (CYBR), (FTNT)
Never goes out of style, never sees customers cut spending, and is growing as fast as AI.
Best Retailer: (COST)
Costco is a permanent earnings compounder. You should have at least one of those.
Best Big Pharma: (AMGN), (ABBV), (BMY)
Big pharma acts as a safety play, is cheap, and acts as a hedge for the three sectors above.
March is now up +2.92% so far. That takes us to a year-to-date profit of +12.29% in 2025. That means Mad Hedge has been operating as a perfect -1X short S&P 500 ETF since the February top. My trailing one-year return stands at a spectacular +82.50%. That takes my average annualized return to +51.12%and my performance since inception to +764.28%.
It has been another busy week for trading. I had four March positions expire at their maximum profit points on the Friday options expiration, shorts in (GM), and longs in (GLD), (SH), and (NVDA). I added new longs in (TSLA) and (NVDA). This is in addition to my existing longs in the (TLT) and shorts in (TSLA), (NVDA), and (GM).
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.
UCLA Andersen School of Business announced a “Recession Watch,” the first ever issued. UCLA, which has been issuing forecasts since 1952, said the administration’s tariff and immigration policies and plans to reduce the federal workforce could combine to cause the economy to contract. Recessions occur when multiple sectors of the economy contract at the same time.
Retail Sales Fade, with consumers battening down the hatches for the approaching economic storm. Retail sales rose by less than forecast in February and the prior month was revised down to mark the biggest drop since July 2021.
This Has Been One of the Most Rapid Corrections in History, leaving no time to readjust portfolios and put on short positions.
The rapid descent in the S&P 500 is unusual, given that it was accomplished in just 22 calendar days, far shorter than the average of 80 days in 38 other examples of declines of 10% or more going back to World War II.
Home Builder Sentiment Craters to a seven-month low in March as tariffs on imported materials raised construction costs, a survey showed on Monday. The National Association of Home Builders/Wells Fargo Housing Market Index dropped three points to 39 this month, the lowest level since August 2024. Economists polled by Reuters had forecast the index at 42, well below the boom/bust level of 50.
BYD Motors (BYDDF) Shares Rocket, up 72% this year, on news of technology that it claims can charge electric vehicles almost as quickly as it takes to fill a gasoline car. BYD on Monday unveiled a new “Super e-Platform” technology, which it says will be capable of peak charging speeds of 1,000 kilowatts/hr. The EV giant and Tesla rival say this will allow cars that use the technology to achieve 400 kilometers (roughly 249 miles) of range with just 5 minutes of charging. Buy BYD on dips. It’s going up faster than Tesla is going down.
Weekly Jobless Claims Rise 2,000, to 223,000. The number of Americans filing new applications for unemployment benefits increased slightly last week, suggesting the labor market remained stable in March, though the outlook is darkening amid rising trade tensions and deep cuts in government spending.
Copper Hits New All-Time High, at $5.02 a pound. The red metal has outperformed gold by 25% to 15% YTD. It’s now a global economic recovery that is doing this, but flight to safety. Chinese savers are stockpiling copper ingots and storing them at home distrusting their own banks, currency, and government. I have been a long-term copper bull for years as you well know. New copper tariffs are also pushing prices up. Buy (FCX) on dips, the world’s largest producer of element 29 on the Periodic Table.
Boeing (BA) Beats Lockheed for Next Gen Fighter Contract for the F-47, beating out rival Lockheed Martin (LMT) for the multibillion-dollar program. Unusually, Trump announced the decision Friday morning at the White House alongside Defense Secretary Pete Hegseth. Boeing shares rose 5.7% while Lockheed erased earlier gains to fall 6.8%. The deal raises more questions than answers, in the wake of (BA) stranding astronauts in space, their 737 MAX crashes, and a new Air Force One that is years late. Was politics involved? You have to ask this question about every deal from now on.
Carnival Cruise Lines (CCL) Raises Forecasts, on burgeoning demand from vacationers, including me. The company’s published cruises are now 80% booked. Cruise lines continue to hammer away at the value travel proposition they are offering. However, the threat of heavy port taxes from the administration looms over the sector.
My Ten-Year View – A Reassessment
We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.
On Monday, March 24, at 8:30 AM EST, the S&P Global Flash PMI is announced.
On Tuesday, March 25, at 8:30 AM, the S&P Case Shiller National Home Price Index isreleased.
On Wednesday, March 26, at 1:00 PM, the Durable Goods are published.
On Thursday, March 27, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get the final report for Q1 GDP.
On Friday, March 28, the Core PCE is released, and important inflation indicator. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I received calls from six readers last week saying I remind them of Ernest 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 work.
I visited his homes in Key West, Cuba, and Ketchum Idaho.
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 Ernest 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 also 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 now glued to the tables.
As for last summer, I stayed in the Hemingway Suite at the Hotel Post in Cortina d’Ampezzo Italy where he stayed in the late 1940’s to finish a book. Maybe some inspiration will run off on me.
Hemingway’s Living Room in Cuba, Untouched Since 1960
Earnest in 1918
Typing at Hemingway’s Typewriter in Italy from the 1940’s
The Red Cross Uniform Hemingway Wore when He was Blown Up in 1917
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2024/01/John-thomas-typewriter.png11861124april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2025-03-24 09:02:532025-03-24 13:19:15The Market Outlook for the Week Ahead, or The Special No Confidence Issue
Below please find subscribers’ Q&A for the March 19 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: I tried to get into ProShares Short S&P500 (SH), it seems pretty illiquid. How did you get in?
A: Well, before I actually sent out the trade alert, I tested the liquidity of the SH seeing if you could get anything done. This is an easy thing to buy on up days in the market when others are taking profits. It is a really difficult thing to get into on down days in the market because you have so many long-only mutual funds trying to hedge their exposure through buying the (SH). We literally had just one up day at the beginning of the month, and I was able to increase my position tenfold and had no trouble getting my price on the LEAPS at $0.50. If you waited one day, you would have had to pay $0.60 for the same position, and that’s because the volatility explodes on this thing. If you look at the charts, the 1x short play has actually delivered enormous returns, as well as the 2x. It’s outperforming 2 to 1. So you have to buy when other people are selling, that’s the only way to get in and out of the (SH). Of course, I’m buying these things with the intention of running these to expiration.
Q: Is it time to sell US stocks?
A: Yes but only on the up days like today. Don’t sell into a pit, don’t sell into bottoms—wait for rally days like today. That's a good place to reduce risk and add some short positions like the ProShares Short S&P500 (SH) and the ProShares UltraShort S&P500 (SDS).
Q: How did you miss the rotation to Europe and China in emerging markets?
A: Very simple—if you ignore something for 15 years, it’s easy to miss a turn. I also missed the turn in Japan, which I ignored for 35 years. The real reason though is that I underestimated the extremity of this government, its economic policies, and the chaos it would create. I think almost everyone underestimated what the new government would actually do and how it would affect the stock market. If I knew ahead of time that the government would adopt recessionary policies, I would have done everything to get my money out of the US and into Europe and China, but this kind of unfolded with a shock a day, sometimes a shock an hour, and markets don’t like shocks and surprises, so they sold off. The more a stock had gone up in the last six months, the more it went down when the new government came into office.
Q: What are your downside targets for the market?
A: Now that we are in recession, I think any 5% rally off the recent low at 5500, you want to sell. The market could rally 3-5% off the bottom—that would be half of the recent loss. Then you’d want to get rid of more longs, cut your portfolio down to a few very high-quality positions, and add downside protection by buying the ProShares Short S&P500 (SH), the ProShares UltraShort S&P500 (SDS), doing buy rights on the calls and buying outright puts. That would be my recommendation. Eventually I see the S&P 500 falling to 5,000 by the summer, and if I’m wrong, it’s going down 30% to 4,500. That is a deep recession scenario, which we are on the track for unless the government suddenly reverses its draconian policies. This is the most extreme government in American history.
Q: Are you going to use the selloff to get into Costco (COST) after a 20% selloff?
A: Absolutely. I’ve been trying to get into Costco for years and it’s just always been too expensive. They keep increasing earnings every year —investors are willing to pay very high multiples for that. This time around, I am going to get into Costco because they are an absolutely outstanding company. By the way, my mentor at Morgan Stanley was a guy named Barton Biggs, who created the asset management division some 40 years ago. He was close friends with Sam Walton, the founder of Walmart, and Sam Walton was a huge admirer of Costco, which was just starting up then. I’m surprised they never took over the company, which is too big to take over now.
Q: What to buy at the bottom?
A: You want to buy what was leading right before we went into this collapse. Those are financials, and the highest quality profit making of the Mag7 which include Nvidia (NVDA), Amazon (AMZN), Alphabet (GOOGL), Meta (META), as well as cybersecurity stocks like Palo Alto Networks (PANW), Fortinet (FTNT), Zscaler (ZS) and so on.
Q: Why are you making your recession call when we have no evidence of that fact?
A: If you wait for proof of recession, that often is the market bottom. And that could be August of this year. You know, I talk to hundreds of businessmen around the world, and everyone is saying business is slowing. Companies stop making decisions. Customers stop buying. Everyone's afraid of the tariffs. Nobody knows what's going to happen next. Business confidence is terrible. That adds up to a recession, but data tends to move very slowly, so we won't see it in the data for months. If you're a stock trader, you don't have the luxury of waiting for confirmation of the data. By the time you get it, the move is over. But if you cut half of government spending or 12% of GDP, the recession outcome is guaranteed. It's not a speculation. That is the government's goal: to cause a recession, so they can have a recovery going into the next election to take credit for.
Q: If Alphabet (GOOGL) is broken up, what will happen to the company?
A: With all of these big tech breakups, the parts will be worth a lot more than the whole. The individual pieces can be sold off at much bigger premiums creating new companies with more stock liquidity. This is what happened with AT&T (T) in 1982. I participated in that, and the parts were worth more than the original AT&T was within two years. I expect that to happen to Alphabet, and I expect that to happen if Amazon (AMZN) is broken up— eventually, these companies become so big, they become too big to manage. And if the management sees they can get 100% premium on a spinoff, they'll take it so fast it makes your head spin.
Q: None of the 90% gain in stock prices during the Biden administration was a result of his policies.
A: That's absolutely correct. He stayed out of the way, which is the best thing that governments can do—get the hell out of the way. American capitalism on its own will innovate and create profits far faster than any other economic system in history. Biden did quite a good job of staying away.
Q: Why are credit spreads still okay to do in this environment?
A: Because the implied volatility on the options are so high, you can get insane amounts of money—in the money like 30% or 40% —and get trades done and have a 0% chance of taking a loss on that. Suddenly you're being paid double to take risks on these option trades. The classic example is the $88-$90 call spread in Nvidia (NVDA), which we have expiring on Friday, March 21. We never even got close to $90, but the implied volatility on the day we added that trade was a ridiculous 75%. So, it's almost impossible to lose money when you put on trades with implied volatility in the options of 75%.
Q: What's your long-term target on gold now that your last long-term target of 3,000 finally got hit?
A: Yes, we've been recommending gold (GLD) for seven years now. In that time, it's doubled: $1,500 to $3,000. I'm now looking for $5,000 in gold by 2030, in five years. I got a feeling that flight-to-safety plays are going to be very popular in the world going forward. And by the way, people who did look for Bitcoin to protect them in any downturns: Bitcoin actually went down three times faster than the S&P 500 in the last month.
Q: Will stocks rise if the Fed cuts interest rates?
A: No, they won't, because the only reason the Fed will cut interest rates is if inflation falls, and right now, inflation is about to see a big upturn as those import duties of 25% or 50% work their way through the system. A lot of companies are front-running price increases before they even pay the tariffs and try to carve out some extra margin for themselves in advance. On Wednesday, Jay Powell said he expects inflation to rise from 2.5% to 2.8% by yearend and this will prove to be a low number. That is his “president breathing down the back of his next” forecast.
Q: What are your favorite Chinese stocks?
A: Well, a lot of these leading stocks have already gone up 50% or more since the beginning of the year as capital flees the United States and goes abroad. But if you held a gun to my head and said you had to buy two, I would buy Baidu (BIDU), and I would buy Alibaba (BABA). Those would be my Chinese picks. Alibaba is the closest thing you get to an Amazon in China.
Q: Has the dollar hit its lows this year?
A: No. Risk of the next Fed rate move is an interest rate cut. That is going to hang over the dollar and the currency markets for the entire year. And I don't see any recovery in the dollar this year. In fact, it's easy to see much lower lows, and higher highs in the foreign currencies. Buy (FXA), (FXE), (FXC), and (FXB) on dips.
Q: How do you feel about natural gas?
A: I would not be a buyer here. I think we've had a terrific run off of extreme cold weather—believe me, we got some of that in Nevada too—and that is starting to fade now. This is historically when that gas starts to fade for the year. Long term, my view on gas is bullish because of increased exports to China. We have a very pro-energy administration here; that means taking off the export restraints on natural gas, which can only be good for the gas companies and the gas price. China has basically told us they'll take all the natural gas they can get from us because every shipload of gas they buy (LNG) means less coal they have to burn.
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 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
It’s a good thing that the #MeToo movement wasn’t around 40 years ago. For if it was, Morgan Stanley would have been publicly humiliated in the press daily.
The firm was an “old boy” network on steroids. Employees with skirts definitely worked overtime in those prehistoric days.
However, firms evolve over the vast expanse of time. Back then, Morgan Stanley was a 1,000-man private partnership hidden away in the old General Motors building on Avenue of the Americas. Today, it is a 50,000-member global behemoth in your face on Times Square.
The share price has changed a bit, too. The average cost of my original partnership shares is 25 cents. They traded at a split-adjusted $1,000 a share today. My own share has risen 4,000 times from my original cost. And you wonder why brokers are so rich. It’s 100% capital gain now.
And like Warren Buffet, I never sold my shares so I wouldn’t have to pay the capital gains taxes. In fact, my shares cost far less than the company’s 85-cent quarterly dividend today.
It wasn’t always like this. Morgan drank the Kool-Aid big time during the 2000’s real estate bubble. When the bill came due, the firm almost went under, with the stock trading down to $5 (which was still 20 times more than my cost). Only a government bailout in the form of the TARP kept my former partners from losing everything.
The Morgan Stanley of today is a shadow of its former self in other ways. There are no more wild practical jokes, BSD’s, Masters of the Universe, or Liar’s Poker.
I can’t imagine the heads of the various equity trading desks meeting at my Manhattan Sutton Place coop to play high/low poker every Friday night, as they did for years. Carl Icahn lived a couple of floors down.
No one bets the ranch anymore. Morgan Stanley has become boring. However, boredom has a silver lining as it also brings stability, and stock investors absolutely love stability, as we are finding out now. As incredible as it may sound, Morgan Stanley has become the safe play on Wall Street.
While investors considered the immense trading profits the firm once made as coming out of a black box, fee-based earnings are predictable and reliable as a coupon stream.
You can see this newfound boredom in the firm’s employee compensation. A decade ago, it was 78% of investment banking revenue, compared to only 18% now. In my day, the janitor wouldn’t work for that.
You can thank my late mentor, Barton Biggs, for planting the seeds of the modern firm in the early 1980’s. For it was he who founded the firm’s fee-based asset management division, which is the great wellspring of profits today. Since 2005, Wealth Management’s share of profits has leaped from almost nothing during my tenure to 25% to 45% now. Today, Morgan Stanley manages an incredible $6.6 trillion, and 15% more two months ago.
Mortgage loans to customers collateralized by their shareholdings is currently the second largest source of profits. These didn’t even exist in my day (Lou Ranieri at Salomon Brothers had the lock on this business back then).
Morgan Stanley has learned some hard lessons along the way. It was forced by the Dodd-Frank financial regulation act to massively recapitalize. No more 40:1 leverage. 10:1 is much safer.
As a result, its capital position has more than doubled from $35 billion during the dark days of the 2008 crash to an astonishing $180 billion today. Profit margins are the highest since the Dotcom Bubble top in 1999. The firm is even now crafting products and services aimed at the growing band of wealthy Millennials.
Sobriety is in.
Goldman Sachs, on the other hand, has stuck to the old Wild West ways. Its earnings remain volatile, as several recent disappointing quarters of bond trading losses have attested to. The firm is now significantly smaller than Morgan, and its share price has been punished accordingly, lagging the heady appreciation of Morgan shares.
Here’s the main reason I love my old firm. It is in the catbird seat for what I call the “Exploding Deficit” trade, whereby all future investment is driven by the prospect of rising inflation.
Banks are absolutely in the sweet spot for this strategy, as is gold (GLD).
Add all this up and you have my explanation for sending out my past Trade Alerts for a long position in Morgan Stanley. They won’t be the last ones.
As for those poker nights, I think some of you guys out there still owe me a couple of grand.
Not a Bad Play
https://www.madhedgefundtrader.com/wp-content/uploads/2018/02/morgan-stanley-street-e1517545425110.jpg253400april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2025-03-14 09:02:432025-03-14 15:52:15Remembering the Old Days at Morgan Stanley
There isn’t a CEO in the country who hasn’t halted capital investment in the face of today’s unprecedented uncertainty. You can’t invest in a business without a credible GDP forecast, and Q1 is certain to deliver a large negative number, the first half of a recession.
There isn’t a consumer that isn’t cutting back on spending. With the price of everything rising, they have no choice. Entire markets, like real estate, are frozen.
Worst of all, there isn’t an investor who hasn’t postponed additional stock purchases. There is an unprecedented capital flight out of the US and into Europe and China taking place. Anything American, like the US dollar, has suddenly become toxic.
One of my favorite expressions is that “Money is like water; it flows to wherever it is treated best.” Right now, there is a Panama Canal’s worth of money flowing elsewhere, or into 90-day US Treasury bills.
And stocks are down by only 8.13% so far?
Welcome to government by reality TV.
The goal isn’t to create jobs, grow the economy, and help stabilize the world. The intention is to shock, amaze, appall, upset, disrupt, and maximize clicks for certain online social media platforms and websites. If so, they are wildly successful. So far, investors are giving the show very poor ratings, subterranean ones, and a definite thumbs down.
Last week was the worst one for stocks in two years. The Magnificent Seven are now down 15% year to date, and I bet that Tesla (TSLA), its stock down 50% in less than three months, is running at an operating loss. I would not be surprised if the country’s retirement savings have cratered by 10% so far in 2025.
Last week, I called my weekly letter “Armageddon”. I was too modest, reticent, and cautious. It should have been entitled “Armageddon on Steroids.” The US economy is probably in recession now, but we won’t see a hint of this until the Q1 numbers are out on April 30 and the confirmation on August 28.
The implications are global.
It's not a recession I’m worried about; it’s a Great Depression, a recession that a broken economy can’t get out of.There isn’t an economy in the world that isn’t being disrupted and turned on its head.
All asset classes are now screaming a recession. Oil is at a six-month low, interest rates are at a three-month low, and both the S&P 500 (SPY) and NASDAQ (QQQ) have broken their 200-day moving averages for the first time in 3 years when they fell 32% and 40%, respectively. And that was when interest rates were still at zero. The Atlanta Fed has ratcheted down its Q1 GDP forecast down to 2.4%, part one of a recession.
If you went to top up your coffee, you probably missed a 600-point move in the Dow Average ($INDU).
And here is the next black swan that is going to bite you.
The U.S. trade deficit surged in January, as import growth dwarfed a smaller increase in exports by 10:1. Imports rose 10% to $401.2 billion as businesses rushed to beat the tariffs, knocking 1.5% off of GDP. Exports climbed by a mere 1.2% to $269.8 billion. That yielded a net deficit of $131.4 billion, 34% greater than the $98.1 billion deficit in December. February is likely to be worse.
The Trump administration is setting up the perfect stagflation economy, with falling growth and rising prices. I suffered through this in the 1970s during the Nixon, Ford, and Carter administrations, and believe me, it was no fun. The triggers were two oil shocks and taking the US off the gold standard. This time, the Trigger is Trump.
It was a grim time. This was when the Dow Average flatlined for a decade, and stockbrokers drove taxis to make a living. It’s why, out of university, I went to work for The Economist magazine in London for ten years instead of heading straight for Wall Street. Brokers weren’t hiring. I didn’t get to Morgan Stanley until 1983, a year after the great bull market began.
The complete collapse of the banking sector has a very clear message: We are now in a recession. That means a 20% drawdown in this correction is a sure thing, and a 50% crash is not impossible. The promised deregulation and easier M&A policies never showed.
Keep adding protection through raising cash, executing buy-writes, and piling on bearish ETFs like the (SH) and (SDS). Tariffs will drop corporate profits by half if they continue and will wipe them out completely if they are increased in a future escalation.
When you impoverish your customers, as the tariffs are doing to Canada and Mexico practically overnight, you impoverish yourself. Their recession becomes our recession.
By the way, the jobs impact on the federal budget has been wildly exaggerated. Federal government jobs are at 3 million, versus 5 million state jobs, and 15 million local government jobs. Salaries account for only 4% of the federal budget as government employees are generally low-paid workers. If you cut them by half or by 1.5 million workers, it only knocks off 2% from federal spending.
Each government job directly creates two new private sector jobs or bout 5 million jobs.
The last safe job in the country was a government job. For centuries, government workers accepted lower pay in exchange for safety and stability. Government unions have not been allowed to go on strike. That contract has been broken this year. Companies are piggybacking their only layoffs on top of the government ones, using them as cover. This will have a leveraged effect on pushing unemployment upward.
Here's another reality check. Per capita, government jobs have been falling for a decade.
The US population rises by about 1% a year and increased to 340 million in 2024. It is up by 22 million in ten years. Population increases alone demanded the gross increase in government jobs of 300,000. Federal government jobs, in fact, have been growing at a declining rate for the past decade when compared to the private sector.
Oh, and you wanted to know about Tesla? The downside target is $140, last summer’s low, or down 72% from the top when Tesla was under 23 government investigations. If that doesn’t hold, we’re going to the 2022 low of $105, down 79%, but only if Elon Musk cares, which so far, he doesn’t. But Tesla will have no government investigations underway.
As for Nvidia, I am much more bullish. I see it going down to $90, down 41% from the top.
Read it and weep.
The Money Is Now Pouring Out
February is now flat at -0.87% return so far, which most people will take given this year’s 8.13% swan dive in the (SPY). That takes us to a year-to-date profit of +8.60%so far in 2025. That means Mad Hedge has been operating as a perfect short S&P 500 ETF since the February high. My trailing one-year return stands at a spectacular +81.34%. That takes my average annualized return to +49.91%and my performance since inception to +760.49%.
It has been a busy week for trading. I cut my risk by stopping out of a long in (JPM) near cost. I added a bearish downside play with the (SH) and a short in (GM). I started taking profits on my short positions that had completely collapsed, such as with the (TLT) and (TSLA). I used the meltdown to add very deep in-the-money long with (NVDA). Next week will probably be as busy.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.
Try beating that anywhere.
Layoffs Hit Five-Year High.Challenger, an international firm that helps laid-off workers find new jobs, said that job losses spiked a whopping 245% to 172,017 last month, higher than any month since the middle of the COVID-19 pandemic in July 2020 and the highest in any February since 2009. The layoffs have only just begun.
ADP Collapses, with private sector hiring falling to only 77,000, a two-year low. Companies are frozen in the headlights, unable to take action in a trade environment that is changing by the day and an economy that is rapidly deteriorating. It’s another recession confirmation data point.
Atlanta Fed Says US GDP Shrank by -2.4% in Q1 of 2025, meaning we are already well on our way into recession. The Atlanta Fed always has the most extreme forecasts. That’s the latest reading from the Atlanta Federal Reserve Bank's GDP Now model, which is considered the central bank's primary tool for measuring growth in real-time.
January Trade Deficit Hits 80-Year High, as importers rushed to beat business killing Trump tariffs. The goods trade gap surged 25.6% to $153.3 billion last month, the Commerce Department's Census Bureau said on Friday. Goods imports vaulted 11.9% to $325.4 billion. The problem for investors is that this money is subtracted from the US GDP calculation, as these are products made abroad and not in America. Expect horrific economic numbers going forward.
Consumer Spending Falls to Four-Year Low at -0.5%.US consumers unexpectedly pulled back on spending on goods like cars in January amid extreme winter weather, and a slowdown in services, if sustained, may raise concerns about the resilience of the economy. Inflation-adjusted consumer spending fell by the biggest monthly decline in almost four years after a robust holiday season. The drop in outlays was driven by an outsize decline in motor vehicle purchases and drops in categories like recreational goods.
Bitcoin Gives Up All Post-Election Gains, plunging from $108,000 to 82,000, down 24%. My bet is that in bear markets, crypto will fall faster than stocks. Avoid all crypto.
The Oil Market is in Turmoil, with crude prices dropping below $66, a four-month low. A global recession is looming large. The administration has pulled Chevron out of Venezuela, losing 300,000 barrels a day there. But OPEC has increased production, and Iraq has been pressured into reopening its northern pipeline. “Drill baby, drill” threatens to swamp American consumers with excess supply. Avoid all energy plays for now.
The Tesla Collapse Accelerates, with February sales in Germany down -76%, Norway down -46%, and France -26%. The company is also falling behind in China, and there is no way US sales targets will be met. Consumers don’t want to make a political statement with an EV purchase. Shares are now down 49% in three months. Sell all (TSLA) rallies. The final target could be $140 a share, last summer’s low. Where is the CEO?
Germany Passes Massive $1.3 Trillion Spending Stimulus, devoted to defense spending and infrastructure. It caused the biggest drop in German bond prices and rise in yields in 35 years. It was enough to drag US interest rates up, giving bonds here a terrible day. Germany is now expanding its growth while we are shrinking ours. Is Germany now the global economic engine and the US the caboose?
The New Magnificent Seven Speaks German, with European defense rising 30% so far in 2025. After being dead money for 20 years, the Frankfurt stock market has suddenly come alive. The goal is to replace American weapons in Ukraine with German ones. Among the largest defense companies, Germany’s Rheinmetall (RHM) rose 14% on Tuesday, and Italy’s Leonardo (LDO) closed 16% higher, while BAE Systems (BA) was up 15% at the end of trading. France’s Thales (HO) rose 16%, and aircraft makers Dassault Aviation (AM) and Saab (SAAB) rose 15% and 12%, respectively.
Weekly Jobless Claims Fall, by 21,000 to 221,000. Turbulence lies ahead from tariffs on imports and deep government spending cuts. That was flagged by other data on Thursday showing layoffs announced by U.S.-based employers jumped in February to levels not seen since the last two recessions amid mass federal government job cuts, canceled contracts, and fears of trade wars.
My Ten-Year View – A Reassessment
We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
My Dow 240,000 target has been pushed back to 2035.
On Monday, March 10, at 8:30 AM EST, the Consumer Inflation Expectations are announced.
On Tuesday, March 11, at 8:30 AM, the JOLTS Job Openings Report isreleased.
On Wednesday, March 12, at 8:30 AM, the Consumer Price Index is printed.
On Thursday, March 13, at 8:30 AM, the Weekly Jobless Claims are disclosed. We also get the Producer Price Index.
On Friday, March 14, at 8:30 AM, the University of Michigan was announced as well At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, since many of you are now planning long-overdue summer vacations, I thought I would pass on what I learned from the ultimate travel guru of all time before he passed away last year.
After all, who knows how long it will be until the next pandemic? The next decade, next year, or next week?
When I backpacked around Europe in 1968, I relied heavily on Arthur Frommer’s legendary paperback guide, Europe on $5 a Day, which then boasted a cult-like following among impoverished but adventurous Americans. The charter airline business was then booming, plunging airfares, and suddenly Europe came within reach of ordinary Americans like me.
Over the following years, he directed me down cobblestoned alleyways, dubious foreign neighborhoods, and sometimes converted WWII air raid shelters to find those incredible travel deals. When he passed through town some 50 years later, I jumped at the chance to chat with the ever-cheerful, worshipped travel guru.
Frommer believed there are three sea change trends going on in the travel industry today. Business is moving away from the big three travel websites, Travelocity, Orbitz, and Priceline, who have more preferential lucrative but self-enriching side deals with airlines than can be counted, towards pure aggregator sites that almost always offer cheaper fares, like Kayak.com, Sidestep.com, and Fairchase.com.
There is a move away from traditional 48-person escorted bus tours towards small group adventures, like those offered by Gap Adventures, Intrepid Tours, and Adventure Center, that take parties of 12 or less on culturally eye-opening public transportation.
There has also been a huge surge in programs offered by universities that turn travelers into students for a week to study the liberal arts at Oxford, Cambridge, and UC Berkeley. His favorite was the Great Books program offered by St. John’s University in Santa Fe, New Mexico.
Frommer says that the Internet has given a huge boost to international travel, but warns against user-generated content, 70% of which is bogus, posted by the hotels and restaurants touting themselves.
Frommer turned an army posting in Berlin in 1952 into a travel empire that publishes 340 books a year, or one out of every four travel books on the market. I met him on a swing through the San Francisco Bay Area (his ticket from New York was only $150), and he graciously signed my tattered, dog-eared original 1968 copy of his opus, which I still have.
Which country has changed the most in his 60 years of travel writing? France, where the citizenry has become noticeably more civil since losing WWII. Bali is the only place where you can still actually travel for $5/day, although you can see Honduras for $10/day. Always looking for a deal, Arthur was on his way to Chile, the only country in the world he had never visited.
Arthur Fromer passed away in 2024 at the age of 95.
Arthur’s Last Big Play in Bali
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2018/07/bali-girl.jpg334472april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2025-03-10 09:02:522025-03-10 10:21:08The Market Outlook for the Week Ahead, or The Economy is Grinding to a Halt
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