While changing planes at Heathrow airport in London last week, my partners in artificial intelligence graciously came out to join me for lunch over some of the awful food there. I can’t tell you who they are, but if I did you would fall out of your chair.

Whenever someone gets a lead in AI applications these days, mum’s the word. There’s no point in giving the competition a leg up, let alone a commanding lead. What they told me was incredibly exciting, but also terrifying. Suffice it to say that you ain’t seen nothing yet.

2023 is probably the last year when mere humans will be able to identify what’s real and what isn’t. The Turing Test, by which machines become indistinguishable from man, laid out by Dr. Alan Turing in 1950, has been conquered. Dr. Ray Kurzweil got it all wrong. We are not going to have to wait until 2040 for the Singularity to take place, whereby man and machine become one (click here for the link).

It’s happening right now.

It seems that these days. you spend half of your day proving to robots that you’re not a robot. Let me tell you that it’s about to get a lot worse. Lately, I have been irritatingly failing these tests more often because I can’t see the part of a bicycle hiding in a corner of the box next door. It won’t be long before we are working for these robots.

That could be a good thing because robots lack human flaws, like abusing their employees, getting drunk, failing to show up for work, and demanding more pay. What they WILL do is make you work FASTER, as the employees at Amazon (AMZN) found out, where workplace accidents and exhaustion at distribution centers are running rampant. Some workers can only handle six weeks of employment at a time.

It turns out that Elon Musk was the initial founding investor in ChatGBT, pumping in $1 billion in seed capital. When you’re the richest man in the world, you can do that sort of thing.

But Musk had a great falling out in 2021 when management refused to accept his absolute control of their AI in exchange for more money. That led to ChatGPT’s sale to Microsoft (MSFT) for $13 billion, a figure which, in retrospect, seems a pittance given the $1 trillion in value it is expected to create (so buy (MSFT).

By the way, ChatGPT refers to Generalized Preprogrammed Transformers in a homage to the cartoon series. That’s how nerdy these people are.

In any case, a huge conflict of interest had arisen with Tesla’s own AI efforts. One proof of this is that my own monthly insurance rates with Tesla keep going down, now at an unbelievably low $204 a month for a $165,000 vehicle.

It’s not that I’m a better driver. At my age, I’m probably getting worse. It's because the CAR keeps getting smarter, reducing the chance of an accident and therefore the risk to Tesla’s insurance division. By the way, notice how well Tesla shares have been outperforming the market lately.

Insurance industry watch out! You are about to get disrupted.

What is especially scary is that a presidential election will take place next year just when AI is hitting its stride. In 2016, many thought that the Access Hollywood videotape would make Donald Trump unelectable.

Everyone believed the video was real, but while half the voters were outraged, the other half said that’s just Trump being Trump and he got elected. If that video were released today, only half would believe it’s real while the other half would think it’s a deep fake produced by the opposition.

The possibilities boggle the mind, with multiple deep fakes already gaining airtime for next year’s primaries.

There isn’t much to say about stocks these days except that the grand finale for the current correction is fast approaching.

The UAW strike won’t cause the stock market to crash. But add it in with a prolonged government shutdown, sharply rising interest rates, and recessions in our biggest export markets in Europe and China, and suddenly the short-term downside argument becomes a lot more persuasive.

If you DO need convincing, look no further than my Mad Hedge AI Market Timing Index. It decisively broke 50 on Friday and plunged all the way down to 36. Finally, after a tortuous six months of doing nothing, we are starting to see some value in the market.

Whenever I go through periods of issuing no trade alerts for a prolonged period because the risk/reward is terrible, I get a lot of complaints from customers. After all, who wouldn’t want more trade alerts with a 90% success rate? The only way you achieve that success rate is to stay out of markets when they suck, as in now. Lately, I have noticed on down days, I get absolutely no complaints AT ALL.

I will end this dissertation by telling you a funny story. The last time I landed at San Francisco Airport, I grabbed an Uber cab home. As we departed the airport, I noticed a rolled set of plans on the floor forgotten by the previous passenger. I pointed this out to the driver, but he was from China and didn’t speak English.

So I opened up the plans and called the phone numbers listed in the key. First, I tried the University of California at San Francisco, whose name was clearly marked at the top. No luck there. The university is just too big.

Then I tried the printing company in Berkeley that produced the plans. I asked for the customer’s cell phone number, but the printer said they never released confidential client information. After some prodding, I convinced him to call his own customer and tell him I was headed back to the gate where he debarked with the plans (I can be very convincing).

By now, I was 20 minutes away from the airport, so I had ample time to examine what I had chanced on. It turns out I had blueprints of the human brain showing 100 sites where it can be connected directly to the Internet, ranking them by transmission efficiency. The owner was headed to Los Angeles to make a presentation to fellow scientists and some venture capital investors.

Yikes, I thought!

When we pulled up to the gate, there was a man looking like he had come out of central casting for the role of “scientist”, beard, glasses, and all. He was very grateful and then disappeared into the crowd running for his plane. Yes, I know it sounds like the beginning of a science fiction thriller.

I just thought you’d like to know. Yes, it’s just another day in the life for me.

So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.

That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, some 2.50 times the S&P 500 over the same period.

Some 41 of my 46 trades this year have been profitable.

The Most Important Thing That Powell Didn’t Say in Fed press conference is that quantitative tightening, or QT, continues. That drains $1 trillion a year from the financial system through bond sales until 2031 to get the Fed balance sheet down to zero. It is a negative for bonds….and the economy. The market is fixated on the 0.25% he did raise on interest rates.

UAW Strike Expanded on Friday, adding 38 new plants to the work stoppage. It’s death by a thousand cuts. The Big Three may respond with lockouts to drain union funds. Factories in Mexico are looking better every day. Elon Musk is laughing.

Industrial Production Jumps 0.4% in August, in another sign that the US has dodged the recession bullet. It’s one of the strongest numbers of the year. Capacity Utilization also rose to a high 79.7%.

Will a Government Shutdown Finally Drive Stocks Downward? Chaos rules supreme in the House of Representatives where there is a major effort to shut down the US government. Speaker Kevin McCarthy risks getting fired if he allows a spending bill to go through with Democratic support. It’s the result of a devil’s bargain made with his right wing to land the job in January. Will an impeachment inquiry into Biden be enough to placate them?

Cathie Woods’ New Take on Tesla (TSLA). As one of the earliest investors in Tesla, along with myself, it pays to listen to Cathie Woods talk about the stock. The company is headed from a current market valuation of $845 billion to $5 trillion, with two-thirds of the growth coming from its autonomous driving technology, a $15,000 upgrade. AI sold as software-as-a-service has an 80% profit margin compared to only 20%-30% for the EV business. Cathie’s bull case is $2,000 in five to ten years and her bear case is that the stock only reached $1,400. Teslas have a 40% lower accident rate than ICE cars, thanks to AI, so take the human out of the driving formula.

Oil (USO) Hits New 2023 High, with gasoline topping $5.00 a gallon in many states. There is no oil shortage or supply disruptions. This is pure price gouging, with Saudi Arabia and Russia cutting supplies by 5 million barrels/day since June and American oil companies riding on their coattails. The move coincided with a sudden and unexpected improvement in the US economic outlook, increasing demand. Too late to play on the long side here, with prices up 40% from the May lows.

National Debt (TLT) Tops $33 Trillion, or $100,000 per man, woman, and child. Not great news for bonds, as new issuance is swamping the markets. The debt has risen by 50% since 2019. Republicans want Democrats to spend less, while Democrats want Republicans to cut their spending.

My Ten-Year View

On Monday, September 25, the Chicago Fed National Activity Index is out.

On Tuesday, September 26 at 3:00 PM EST, the S&P Case Shiller National Home Price Index is released. We also get New Home Sales.

On Wednesday, September 27 at 2:30 PM, the US Durable Goods is published.

On Thursday, September 28 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the final print for Q2 GDP.

On Friday, September 29 at 2:30 PM, the Personal Income & Spending is published. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, this is not my first Russian invasion.

Early in the morning of August 20, 1968, I was dead asleep at my budget hotel off of Prague’s Wenceslas Square when I was suddenly awoken by a burst of machine gun fire. I looked out the window and found the square filled with T-54 Russian tanks, trucks, and troops.

The Soviet Union was not happy with the liberal, pro-western leaning of the Alexander Dubcek government so they invaded Czechoslovakia with 500,000 troops and overthrew the government.

I ran downstairs and joined a protest demonstration that was rapidly forming in front of Radio Prague trying to prevent the Russians from seizing the national broadcast radio station. At one point, I was interviewed by a reporter from the BBC carrying this hulking great tape recorder over his shoulder, as I was the only one who spoke English.

It seemed wise to hightail it out of the country, post haste, as it was just a matter of time before I would be arrested. The US ambassador to Czechoslovakia, Shirley Temple Black (yes, THE Shirley Temple), organized a train to get all of the Americans out of the country.

I heard about it too late and missed the train.

All borders with the west were closed and domestic trains shut down, so the only way to get out of the country was to hitchhike to Hungary where the border was still open.

This proved amazingly easy as I placed a small American flag on my backpack. I was in Bratislava just across the Danube from Austria in no time. I figured worst case, I could always swim it, as I had earned both, the Boy Scout Swimming, and Lifesaving merit badges.

Then I was picked up by a guy driving a 1949 Plymouth who loved Americans because he had a brother living in New York City. He insisted on taking me out to dinner. As we dined, he introduced me to an old Czech custom, drinking an entire bottle of vodka before an important event, like crossing an international border.

Being 16 years old, I was not used to this amount of high-octane 40-proof rocket fuel and I was shortly drunk out of my mind. After that, my memory is somewhat hazy.

My driver, also wildly drunk, raced up to the border and screeched to a halt. I staggered through Czech passport control which duly stamped my passport. I then lurched another 50 yards to Hungary, which amazingly, let me in. Apparently, there is no restriction on entering the country drunk out of your mind. Such is Eastern Europe.

I walked another 100 yards into Hungary and started to feel woozy. So, I stumbled into a wheat field and passed out.

Sometime in the middle of the night, I felt someone kicking me. Two Hungarian border guards had discovered me. They demanded my documents. I said I had no idea what they were talking about. Finally, after their third demand, they loaded their machine guns, pointed them at my forehead, and demanded my documents for the third time.

I said, “Oh, you want my documents!”

I produced my passport, and when they got to the page that showed my age, they both started laughing.

They picked me and my backpack up and dragged me back to the road. While crossing some railroad tracks, they dropped me, and my knee hit a rail. But since I was numb, I didn’t feel a thing.

When we got to the road, I saw an endless stream of Russian army trucks pouring into Czechoslovakia. They flagged down one of them. I was grabbed by two Russian soldiers and hauled into the truck with my pack thrown on top of me. The truck made a U-turn and drove back into Hungary.

I contemplated my surroundings. There were 16 Russian Army soldiers in full battle dress holding AK-47s between their legs and two German Shepherds all looking at me quizzically. Then I suddenly felt the urge to throw up. As I assessed that this was a life-and-death situation, I made every effort to restrain myself.

We drove five miles into the country and stopped at a small church. They carried me out of the truck and dumped me and my pack behind the building. Then they drove off. 

The next morning, I woke up with the worst headache of my life. My knee bled throughout the night and hurt like hell. I still have the scar. Even so, in my enfeebled condition, I realized that I just had one close call.

I hitchhiked on to Budapest, then to Romania, where I heard that the beaches were filled with beautiful women. My Italian let me get by passably in the local language.

It all turned out to be true.

Stay Healthy,

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