The Morning Line
Nvidia’s Dive Is More than Merely Disappointing
There’ll be more to say about the bear market as it develops. It has taken some baby steps so far, with a 2,100-point slide in the Dow over several days, then a stunning, 1,115-point reversal to the downside after Nvidia announced strong earnings last Thursday. Talking heads and editorialists opined that quarterly numbers were not quite as sensational as investors had anticipated, but they missed the point. For just as poor earnings barely fazed stocks during the 16-year bull market, merely decent earnings are unlikely to provide more than fleeting upticks in a bear market. Get used to it, because this new dynamic will be with us until shares hit bottom years from now.
With respect to Nvidia, it didn’t help that Wall Street and every investor on earth was desperately counting on their earnings announcement to reverse the slide of the broad averages in the days preceding the report. When the Dow notched a record high on November 12, pundits paid scant attention to the failure of the usually feisty Nasdaq Index and the ‘Cubes’ (QQQ) to follow suit. Six months from now, however, this divergence will be seen as one of those bells that supposedly doesn’t ring at the top.
Making Disney a Has-Been
Although my vantage point on Nvidia is purely technical, others saw the stock’s punitive reversal as related to the questionable way they report earnings. One analyst cited the exceptionally long lag time between billings and receipts. Were the global economy to fall into recession, he notes, the manufacturer could conceivably get stiffed by strapped customers, wiping billions of dollars in profits already recorded from Nvidia’s books.
‘Fundamentals’ undoubtedly figured into NVDA’s surprising plunge, but the long-overdue deflation of AI hubris was surely a more powerful factor. I address this subject in a recent interview with Jim Goddard on This Week in Money. I also talk about how AI’s latest gift to the masses, Sora, has sounded the death knell for Hollywood studios. These days, even kids can make professional-quality movies scripted by machines and vividly realized using apps like Sora, an OpenAI product. The quality of homemade-video content on YouTube has already surpassed the wretched, vacuous bilge that Disney’s bean counters have been churning out for decades. Moreover, because 14-year-olds are unlikely to be inhibited by copyright laws, we can expect to see an online bazaar develop for their creative work that will supplant the big studios and suburban multiplexes. This cottage industry will grow in the hands of home producers and in countless streaming venues that have already made theaters obsolete. The technology is highly disruptive to the extent it has begun to dominate content on YouTube channels that reach as many as 375 million viewers.
‘Affordability’ Will Be Trump’s Waterloo
The ‘affordability’ issue percolated to the top of the news last week, but in a peculiar way. On the right, the debate was not about whether things in general are becoming less affordable for most Americans, as they unmistakably are, but whether the left has blown the issue far out of proportion to create a wave of discontent ahead of next November’s general election. The discussion was catalyzed by abysmal consumer sentiment numbers that registered lows not seen since the Great Depression. Trump courted controversy over this in an interview with Fox’s Laura Ingraham. The economy is going great guns, he declaimed, and what’s the problem? He then stepped into quicksand by owning an issue far more real than political. Although he didn’t say these words exactly, what America heard was: “I’m going to give you affordability like you won’t believe.” This is a promise he cannot possibly keep, and his stumble on this key issue eventually will be seen as the beginning of the end for boom times on Wall Street and the Everything Bubble.
In stark actuality, the Second Great Depression has already begun for half of America. As my colleague Charles Hugh-Smith notes, the rich have grown increasingly wealthy from a price bubble in real estate and financial assets while barely noticing the descent of the bottom 50% into penury. “While the top 10% busy themselves with using AI to improve work flow, obsessing over geopolitics and the decay of their perks of their Titanium credit card, other Americans are concerned with finding a second or third side-hustle as the soaring costs of utilities, rent, auto insurance and repairs, childcare and healthcare are forcing choices nobody wants to make: What [necessities to forgo.]”
The Best of Times?
Trump risks failure by amping up his spiel about how we are all living in the best of times. Although some of his MAGA ambitions are well-conceived and achievable, his agenda cannot succeed until America has paid down debts that will continue to suck the oxygen from any real or lasting recovery. The President seems to think stoking credit will enable us to grow our way out of these obligations. This is an absurdity, and the stock market appears to have caught the pungent scent of snake oil in Trump’s nostrums. Even as legacy-media hacks were loudly proclaiming the Dow Average’s climb to new record highs last week, the Nasdaq and S&P 500 were conspicuous laggards. The divergence suggests the stock market has either topped or is very close to doing so, a possibility that I headlined here a few weeks ago. Most investors will not believe it until the Dow plunges 2,000 or more points in a single day. That day is coming, probably no later than January and possibly much sooner, and it will mark only the beginning of a downturn that will be one for the ages.
If AI Is in a Bubble, It WILL Pop
[ My friend Doug Behnfield, a wealth manager and senior vice president at Morgan Stanley in Boulder, has contributed many commentaries to Rick’s Picks over the years. Below is the Q3 report he sent out to clients several weeks ago. Like many observers, he is troubled by the enormous concentration of investment capital in the AI space. Can the eventual payoff ever be big enough to justify the estimated $10 trillion that will flow into AI technology by 2030? Read why Doug thinks there are better places to park your money. With apologies to him, I have dispensed with his meticulous footnotes and several graphs to simplify typography. The Jetson’s illustration was also my idea, based on his original headline, ‘Thoughts on the Jetsons and Rope-a-Dope’. RA ]
In late 1962, CBS introduced the Hanna-Barbera evening cartoon The Jetsons. It was inspired by their hit series The Flintstones, but set in the future. It lasted for only 24 weekly episodes, but it made an indelible impression on the Baby Boom Generation. Along with flying cars and Rosie the robotic maid, George Jetson worked two days a week, one hour per day (not remotely), and all he did was go in and push a button to start and stop a machine. (the Referential Unisonic Digital Indexer Machine, at Spacely Sprockets).
I was reminded of The Jetsons when reading a Wall Street Journal article describing the rivalry between Mark Zuckerberg and Elon Musk in developing robots. In it, Elon Musk predicts that there will be “at least 10 billion humanoid robots in the world, remaking the idea of work and life” by 2040 (The Jetsons was set in 2062). Zuckerberg’s humanoid robotic aspirations are dependent on gathering data from the microphone and camera in his Artificial Intelligence (AI) Glasses. With them, he intends to create the Large Language Model (LLM) that will be used to program the machine that can do all your work for you. The glasses will eventually record what you see, gathering “vision data,” even as they make a “wearable” fashion statement.
When reading about the development of AI eyeglasses, I was impressed with the breakthrough represented by having a screen projected inside the lens, providing closed captioning (with foreign language translation) for face-to-face conversations. Next will be AI-generated conversational response recommendations literally right before your eyes! Apparently, AirPods now translate in real time too. These developments represent a leap in communication technology, beyond translators that are common on cell phones.
The irony is that there is quite a debate concerning the impact that screen time can have on mental health in general and childhood development in particular. At least people will stop walking around with their phones in their faces.
There is a wide range of opinion about how AI will impact productivity across the spectrum of human activity and the speed at which AI will be implemented. The list of potential productivity enhancements is long and broad, as are the concerns surrounding the unknown future of how AI will develop. Lacy Hunt put it this way:
“AI decreases labor demand by automating cognitive and repetitive tasks across a wide range of service sector skills. Prior automation mainly affected routine factory roles, but AI goes further. Traditionally, new graduates gained experience through tasks such as data collection and analysis. Now, AI can do these tasks quickly, sharply reducing the need for junior staff. One AI-enabled employee now replaces several people, resulting in fewer hiring needs. AI also enables firms to automate mid-skill roles, thereby pushing down salaries and shifting choices from people to software. This did not happen in prior technology waves. Reports indicate that college graduates already face lower demand because AI can handle advanced tasks. This results in slower hiring, weaker wage growth, and reduced bargaining power for workers without irreplaceable skill.” The expectation is that AI will reduce the need for capital investment and employment in entry as well as mid-level staff, including medical assistants, legal aids and customer service associates as their tasks are taken over by automation.
Next? Who Knows?
The debate is raging about how the various AI applications will impact most aspects of the human condition. Education is an excellent example of the dilemma AI can present. On one hand, AI can free up time and reduce the number of teachers needed to educate our students by taking over tasks like evaluating essays for content, including plagiarism. On the other hand, AI can create students’ essays that contain “hallucinations” (nonsensical responses) and plagiarism, hampering the learning process. One fear is that students’ relationship with their computers could supplant their human relationships. As a result, only a small percentage of educators are fully supportive of AI applications in education. In a fascinating article in the Wall Street Journal entitled “Giving Career Advice to Kids Has Never Been Harder,” the author advocates, among other things, a return to the liberal arts and away from science, technology and math. She quotes a career counselor who advises: “The most important thing we can advise kids to do is learn how to learn how to think, because the only thing we can do over computers is to be human.” Wow.
The financial press is becoming dominated by articles about AI. Opinions about its impact on the economy and financial markets range across the spectrum. It resembles the Gold Rush. However, regardless of all the frenzy, AI seems to be a much more evolutionary technological development than a revolutionary one. After all, a washing machine is a product of AI, too. (No more tubs, washboards and ringers.)
AI currently involves a significant initial investment in conventional brick-and-mortar infrastructure for data centers and the electricity to power them. The estimates of dollars and Gigawatts required seem to be growing at an extraordinary pace. It remains to be seen whether the current infrastructure being implemented to facilitate AI will survive the rapid technological development underway. Overbuilding in response to new technology is perennial. It is even conceivable that a Large Language Model will contribute to making the current business model obsolete. It is not clear whether a substantial portion of AI will be delivered by “open source” software, fee-based programming from dedicated AI modelers, or in-house machine learning hyperscale data centers that the major search and software companies are building. From an investment perspective, the most important question is: “Who will make money on AI and when?”
During the Dot-Com era, fiber optic companies were essential infrastructure providers that generally went bust. According to the “AI Overview” on a Google Search of the topic: Severe overestimation of internet traffic and demand, fueled by venture capital and market hype, left fiber optic providers with a catastrophic glut of ‘dark fiber’ after the dotcom bubble burst. This overcapacity was exacerbated by technological advances that increased network efficiency, leading to a collapse in prices and the bankruptcy of many telecom and fiber optic companies.
According to the same source, $7 trillion is projected to be spent by 2030 globally on AI Data Centers. In the Wall Street Journal this morning, the number grew to $10 trillion! The amount of revenue that must be earned to support that level of investment is almost unfathomable. Just the announcement of a circular agreement between hardware, software and hyperscale companies to collaborate can result in dramatic jumps in stock prices.
Another Bubble?
Looking back at the Dot-Com Bubble, it is easy to draw comparisons to the current frenzy. The arguments for why “this time is different” are similarly compelling, but there is no certainty about what the economic impact of AI will ultimately be. Examples of revolutionary human progress include the internal combustion engine, rural electrification, urban sanitation, telecommunication, pharmaceuticals and chemicals. While dramatically improving productivity and the “standard of living,” they all resulted in robust employment and capital spending.
In so many ways, the expectations for AI seem uniquely speculative. But calling it a bubble is a reference to public opinion and ultimately to stock prices. It is not necessarily a characterization of the legitimacy of AI as an important technological event. (The term “bubble” is used because bubbles pop.) It is therefore important to keep in mind that trying to guess when the pin will show up is equally speculative.
Stock prices in the Dot-Com Bubble peaked in mid-2000 and crashed. Personal computers and the Internet nevertheless turned out to be revolutionary technologies by most measures. Their impact on the economy proceeded uninterrupted, with little regard for the losses in the market post-bubble. However, the leading companies in those industries, having risen in price by five- to ten-fold in the four years leading up to the bubble peak, saw their stock prices crash by 65%-100% the following year (2001) , They all went down together, and the NASDAQ Index declined 80% peak-to-trough. The lesson is that stock prices are driven by fear and greed, and they can “go further than you think” in response to optimism or disappointment. The NASDAQ took 15 years to get back to its 2000 high.
Concentration Risk
Today, the price of the “Mag 7” stocks (the top AI companies), have traced out a trajectory that is practically identical to the leading companies in the dot-com era. In doing so, they have dominated the performance of the entire S&P 500 Index. The ten biggest stocks in the S&P 500 now represent over 40% of the total index value, and the Mag 7 are all in the top ten.
S&P 500 Index funds are the most widely held vehicle for equity exposure among the investing public (particularly in 401Ks) because they represent Blue Chip large-capitalization growth stocks. In addition, the S&P 500 Index is “capitalization weighted” and that is why the top ten stocks can be such a substantial percentage of the total index value. The remaining 490 companies in the Index represent only about 60% of the total (of five hundred companies). The S&P 500 Index funds have outperformed all other major stock indexes for decades and, as a result, they are also the most popular stock market holding in individual portfolios. If the AI Bubble pops, it could take the S&P 500 Index Funds with it.
The Wealth Effect
The term “wealth effect” refers to the impact that a change in household wealth has on consumer confidence. Very simply, people are more willing to make discretionary consumer purchases (like restaurant meals, cars or Florida vacations) when their net worth is appreciating than when it is declining in value. The wealth effect is a two-edged sword, and as a result, it can be positive or negative in its impact on spending. Household wealth is made up primarily of savings and home equity, so society is typically impacted together as interest rates and the value of stocks, bonds, and residential real estate ebb and flow together on a national basis. Therefore, the state of the economy in general can be driven to a large extent by the wealth effect.
Back at the turn of the century, the dot-com stock bubble had a very minor direct positive wealth effect on the consumer. Similarly, there was only a minor negative wealth effect when the bubble burst. Participation in the stock market by households was more limited than today due to demographics (Baby Boomers were in their 40s) and the fact that 401K retirement plans had begun to replace traditional Defined Benefit Pension Plans offered by employers. The recession in 2001 was very short and shallow. Whereas stock prices crashed, home prices appreciated throughout the late 1990s and early 2000s as Baby Boomers entered their peak earning years. Home prices had a much greater impact on consumer confidence, as Baby Boomers could leverage their home equity for a wide range of consumption.
It has become evident that consumer spending is skewed heavily toward the top 20% of consumers, exemplifying both income and wealth inequality. Older households in particular are benefiting from the wealth effect due to greater accumulation and access to their savings. 401K balances have a muted impact on spending when the participants are younger, and retirement is far in the future, but today, Baby Boomers have reached retirement age and remain the dominant cohort demographically. For the most part, retirement means substituting investment income for employment income, so their 401Ks and other forms of retirement savings have evolved from accumulation vehicles to income vehicles that fund their lifestyle.
Asset allocation is up to the participant in 401Ks and IRAs, and these Baby Boomer retirees have 65% of their allocation in stocks, primarily in S&P 500 Index Funds. Because of the combination of an aging population and the changes introduced 35 years ago with the 401 (k), the impact of financial asset values on the wealth effect is much greater than at any time in history. Just as the economy has avoided recession in large part due to the positive wealth effect of the current bull market, the economy is more vulnerable to a bear market in stocks than ever before.
Rope-a-Dope
On October 30, 1974, Muhammad Ali entered the ring in Kinshasa, Zaire, to fight George Foreman in a bid to regain the World Heavyweight Boxing Championship Title. It was billed as “The Rumble in the Jungle.” 60,000 people attended the fight in person and close to one billion people watched it live on pay-per-view television and closed-circuit theater TV. Ali was getting older and had lost the title to Joe Frazier in 1971. Many thought he was over the hill, and he was a 4-1 underdog. George Foreman was the defending heavyweight champion and considered indestructible, having won all 40 of his previous professional bouts, 37 by knockout.
Miraculously, Muhammad Ali pulled an upset win in the eighth round, and he did it by using a tactic that he named “rope-a-dope”. It is considered one of the most important sporting events of the 20th Century and, by far, the most important boxing match in history. By holding back defensively against the ropes and deflecting most of Foreman’s constant and powerful blows, Ali succeeded in exhausting Foreman while preserving his own strength. George Foreman was so tired by the eighth round that he could not defend himself when Ali came off the ropes. Ali brilliantly executed a series of combination blows and won the match with a knockout.
In the current market environment of unrelenting new highs in the stock market, fueled by the apparent indestructible promise of AI, it is extraordinarily challenging not to jump into the ring and participate, even though the lessons of history argue against it. It may be a better strategy to stay defensive and let this mania punch itself out.
Here is a great quote from Stan Druckenmiller, the iconic stock market investor who, in the 1970s and 1980s, was Jack Dreyfus’ top advisor and portfolio manager for the Dreyfus Funds. He gained fame by blowing out of stocks right before the 1987 Crash. Druckenmiller was running George Soros’ equity portfolio in the Quantum Fund at the peak of the Dot-Com Bubble. This is how he described what transpired:
“So like around March [2000] I could feel it coming. I just—I had to play. I couldn’t help myself. And three times the same week I pick up a — don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.”
It is not just AI stocks that reek of a speculative bubble. While bonds are signaling an economic slowdown or worse and the Fed is back to cutting rates because of labor market weakness, crypto, sports gambling, meme stocks and day-trading on phone apps are all the rage. Even the price of gold and silver has gone parabolic. Focusing on capital preservation seems more appropriate than ever. In their most recent report entitled A Fond Farewell to 10-Year Treasury Yields Above 4.00%, the interest rate strategists at Morgan Stanley are estimating that the Fed will cut short-term interest rates by an additional 1.5% to 2% over the next 12 months in response to a slowing economy and muted inflationary pressures. Historically, the yield on long-term Treasury bonds captures about 70% of Fed rate cuts, suggesting strong total return performance in the investment-grade bond market over the near term. This should provide a far better opportunity to reduce duration risk in bond portfolios.
Why the Smart Money Should Spend Some of It Now
Years ago, I received death threats after writing in the San Francisco Examiner that Apple looked like it was about to go under. That was in 1997, not long after Steve Jobs returned after a 12-year exile. Ironically, he was fired by the man he’d recruited in 1985 to run the show — cue the hisses and boos — Pepsi CEO John Sculley. Apple stock at the time was trading below $5, and the company’s share of desktops had fallen into a seeming death spiral below 5%. The iPhone was ten years distant, and it appeared that nothing could save the company. How wrong I was! My Examiner column provoked such a firestorm that I recanted its conclusions a few weeks later. Any firm that enjoyed such fanatical support was unlikely to go out of business, I concluded. If only I’d bought a thousand shares at the time.
I mention all of this because last week’s hit-piece on Apple elicited nary a response — not in the Rick’s Picks ‘comments’ section, not on websites that feature my work — not in my own chat room. For all I know, the think-piece went unremarked even in the blogosphere, where the leastmost of our concerns often devolve into bloody battles. Regardless, the premise of my commentary — that shorting APPL and buying TSLA would prove to be a great trade — is on the record and will be tested by time.
Gates Renounces His Religion
For now, let’s move on to a favorite topic, the fraudulent ‘wealth effect’ that has seized, if not the proletarian mind, then indeed the minds of the 20% who have most benefited from it. The latest faux-wealth superstars are Amazon and Microsoft. Shares of the latter jumped $23 last week on earnings news that added about $300 billion of gaseous wealth to shareholders’ accounts. Perhaps it explains why Bill Gates renounced his climate-change religion: he’s grown so rich that he can afford to take on the problem all by himself if it should threaten the millions of acres of prime U.S. farmland that he owns. (Actually, I’m being facetious. Gates changed his mind because Trump brought him to his senses, convincing him in a sit-down meeting they’d just had that there was no longer big money in the climate change racket or in pretending that the insufferable Greta Thunberg is Joan of Arc.)
Amazon shareholders, especially Jeff Bezos, had a sensational week as well. Strong but unsurprising earnings news produced a windfall of around $300 billion for them when the stock jumped $27, to $250, in mere minutes. What’s a guy to do with all that loot? Bezos already owns a 417-foot sailboat with, of course, the tallest masts in the world, and he could buy five more just like it with the $2.5 billion he made in a single day. As for everyone else who was in on the take, there was still an estimated $297 billion of instant booty to go around. To be sure, an unseemly portion of it will be spent on Lamborghinis, $400,000 Hermès handbags and other bric-a-brac of the super-rich. The merely filthy rich can take heart, though, since the remaining trickle-down will still suffice to make next summer’s rental in the Hamptons, or yachting excursion in the Mediterranean, more easily affordable. But the lucky winners should consider spending some of the lucre now, since the coming bear market will destroy wealth even more quickly than the airless gaps that are everywhere on megastock charts have created it.
A Long-Term Play: Buy TSLA, Short AAPL
Here’s a long-term trading opportunity that seems foolproof: short Apple shares and buy Tesla. Looking out over the next 10 years, this hedge position has the potential to produce outsize profits. How could Apple stumble badly enough to make it work? This is hardly inconceivable. Since Steve Jobs died 14 years ago, the company he co-founded has demonstrated again and again that it couldn’t innovate its way out of a wet paper bag. How many more iPhone versions will it take to solve the battery-drain problem? Whatever happened to the Apple car? And how about the device that was going to manage your TV and all of your home entertainment gizmos with a single remote control? Apple’s new-products division has repeatedly failed to deliver, and its idea of a technological breakthrough is an iPhone camera with a longer lens and a few million more pixels. As for the AI mania that is raging in the tech sector, the Cupertino-based firm doesn’t even have a horse in the race.
It wouldn’t be the first time an iconic company failed to keep up with the times. Here’s a partial list of shockers to remind you how often this has happened: Eastman Kodak, RCA, Intel, Radio Shack, Enron, Woolworth’s, Compaq, Digital Equipment Corp. and Polaroid. One could argue that none of these stalwarts achieved Apple’s size or market share. True enough, but that hardly guarantees unforeseeable changes in telephony will not blindside Apple.
The Pi Phone
Tesla and Elon Musk, on the other hand, have the vision not only to see the changes coming, but to bend them toward opportunity. The Pi phone, a potential category killer, is a good example. Musk has repeatedly denied that this device is even on the drawing board, and Wall Street seems to believe him. But why would a guy who has his sights set on a trillion-dollar payday pass up an opportunity to crush iPhone with an alternative that is better, cheaper, and which, using Starlink, could eliminate monthly phone bills?
Look at the sneak attack Musk just pulled off in Texas, where a relatively small fleet of driverless Robotaxis learned to navigate Austin’s streets in almost no time. Ultimately, what his engineers learned there will enable Musk to get Robotaxis safety-certified relatively quickly anywhere in the world, and to operate at a much lower cost than Waymo, Uber or Lyft. They are all dead ducks, even if Wall Street’s best and brightest cannot yet see this coming. Creative destruction seems likely to take Waymo down first. Realize that in the time it takes them to negotiate a deal with Jaguar for 1,000 more cars, Musk can produce 5,000 Robotaxis.
A ‘Comfortable’ Tim Cook
Apple CEO Tim Cook would get laughed out of the boardroom if he asked for a trillion-dollar compensation package. After all, what has he done besides protect the iPhone franchise and placate cult buyers with gratuitous improvements in each product cycle? Musk would never allow himself to grow so comfortable. The fact that his seemingly outrageous pay demand is up for debate shows how valuable he is to Tesla. He will need to grow Tesla’s market cap from $1.5 trillion to $8.5 trillion by 2035 to earn the full $1 trillion. Ambitious as that may sound, only a fool would bet against him. He stands to reap more profit from revolutionizing the trucking industry with driverless rigs than Apple does from selling 225 million iPhones a year.
Concerning the hedge trade, odds were juicier than ever when last week ended. AAPL’s canny handlers goosed the stock to new all-time highs simply because they could. TSLA, on the other hand, got pummeled because strong EV sales did not translate into higher profits. There are many ways to put on the trade, including with options, but to keep it simple for tracking purposes, I will use equity shares in a 1.65:1.00 ratio. That means shorting 165 shares of Apple for $263 apiece while buying 100 shares of TSLA for $434. Good luck! [Click here for my latest interview with Jim Goddard at This Week in Money.]
Is Deep Fear Driving Gold, or Just the Bubble
The aging bull market smells like it’s in a topping process, although it could take a vicious head-fake or two to new highs to set the hook. Last week, I raised the possibility that shares had entered a vortex similar to the one that led to the 1929 Crash. A key similarity is that investors have begun to freak out over tariff news they’d grown accustomed to shrugging off. Is it possible the reason for the stock market’s hysterical behavior lies elsewhere? The mainstream media and its vaunted experts used China’s ‘rare-earths’ threat ten days ago to explain why shares plummeted that Friday. However, when the market began to recover Sunday evening, they changed their tune with sheepish second-day stories about how rare-earth minerals turn out to be not so rare after all.
It is the breathtaking stupidity and incompetence of journalists who invent the news that has caused me to tune out their blather and focus solely on charts when I forecast market trends. As far as I’ve observed over 50 years, price movement is caused mainly by arcane cyclical forces that color our perceptions of news. Is it not, therefore, reasonable to infer that the stock market’s ups and downs create the headlines, not, as is almost universally believed, the other way around?
A Bitcoin ‘Tell’
Far more interesting to me these days than the stock market’s headless-chicken act is the spectacular bull market in gold. Prices have risen by 31% in the last two months, impaling Hidden Pivot targets as though they were as mushy as journalists’ brains. Until recently, I’d assumed quotes were rising so steeply because gold, traditionally a haven in times of uncertainty, had glimpsed some horrible economic catastrophe ahead. However, there is a second possibility — that gold is caught up in the Everything Bubble, albeit with high relative strength that factors its superiority over other investable assets on which the ever-gluttonous 20% have gorged themselves since the covid hoax. (Note: Bitcoin wackos who see it as a store of value should have noticed how the cryptos died during this latest phase of bullion’s moonshot.)
My technically derived targets for gold go no higher than 5020 (basis the December futures), but I am open to the possibility of a further doubling in price to $10,000 or so. That would be logical if the Everything Bubble is the reason for gold’s rally so far to a record 4392. But speaking as a hard-core collapsitarian who sees no possible endgame other than a deflationary bust, the $5020 target could prove to be as high as it gets. That doesn’t mean gold’s real value would stop increasing, only that its nominal value might be capped at levels far lower than estimates promoted by publicity hounds in my line of work.
A Lucrative Plateau
I have always maintained that gold would outperform all other investments in an economic collapse; however, it could do so by simply plateauing while most other investable assets plunge as they did in the 1930s. In the meantime, the bulletin I sent out to subscribers on Thursday night about gold futures and GDXJ may have caught an intermediate top. I have made both ‘touts’ publicly viewable on the Rick’s Picks home page for those who are interested in the details.
Have Stocks Entered a 1929 Vortex?
Although in recent years October has not lived up to its reputation for scaring the pants off investors, we should take Friday’s punitive reversal seriously, since it could mark the start of a bear market that is arguably years overdue. Although we have grown accustomed to ‘freaky’ Fridays producing headline events now and then, there was something especially disconcerting about this latest episode. It was driven unmistakably by news that Trump had threatened to slap a 100% tariff on Chinese goods in retaliation for restrictions they placed on so-called rare-earth exports to the U.S.
These minerals, while not actually rare, are essential to the production of powerful magnets that are used in electronic hardware, including components vital to the aerospace industry and the military. The U.S. was already focused on establishing alternative sources for rare earth minerals, but it will take time and money, since extracting ‘rare earths’ from dirt requires processing that is costly and complicated.
Downplaying China’s Threat
In any event, Western factories and computers are not going to grind to a halt simply because of China’s threat. And it is likely to be no more than that, since Trump has cards of his own to play, including access to advanced computer chips that China is presently unable to produce.
The foregoing is all secondary to the matter of why U.S. stocks plunged on the news. The broad averages were up sharply in the early going, but by day’s end the Dow had reversed by nearly 1200 points. A corresponding reversal took place in the institutionally-driven lunatic sector (aka the Magnificent Seven), wiping trillions of dollars of dubious ‘wealth effect’ lucre from the macro ledger. Clearly, this was an extreme overreaction to the news, since investors had grown used to Trump’s frequent tariff shenanigans.
Although the mainstream media will insist there was a direct link between Trump’s retaliatory threat and the stock market’s plunge, I would disagree. I have always maintained that little-understood cyclical forces cause the stock market’s swings, and that it is the swings themselves that color our perception of the news. This implies that the stock market was ready to fall hard on Friday, regardless of the news.
Unusually Powerful Whipsaw
You can take the unusually vicious whipsaw as evidence that investor psychology has finally synchronized with 1929. The Smoot-Hawley tariff laws under consideration at the time were an obsessive concern. These days, tariff news has become just background noise — Trump’s stupid little game, worthy of no more than a shrug and a yawn. This is true partly because not a single economist ensconced in the benighted world of punditry can remotely predict what changes the tariffs will bring, let alone whether the changes will be good or bad for the U.S. and global economy.
Now that the news media have elevated tariff news to our top concern, we can infer that the bull market begun in 2009 has entered an endgame that will track 1929’s ups and downs more closely. A bear market, therefore, lies just ahead, and there is nothing Wall Street’s fraudsters and hype mongers can do to prevent it. Their lies and obfuscations, even with a boost from shills in the news media, cannot mask the fatal economic problems of a middle class that is suffocating under the weight of rising unemployment; wages that will never catch up with inflation; manufacturing ‘growth’ that will occur largely without human workers, if at all; and debt we cannot possibly outgrow before it crushes what little remains of the American Dream.
A Bruegel Landscape in Amish Country
I’m still in San Francisco, avoiding the withering heat of Florida’s monsoon season. I am also taking a break from my regular commentaries, since writing about the greed and stupidity that have propped up the stock market and the economy for the last decade was growing boring and repetitive. Instead, I’ve featured paintings by friends, most recently Geoffrey Leckie and Deborah Oropallo. The photograph above was taken by Victor Riess, whom I met two decades ago in Colorado when he took my trading course. An avid bicyclist and musician, Victor is also the best photographer I know. He took the picture above near his home in Lancaster, PA. It is a wintry Pennsylvania scene that vividly recalls landscapes painted by the Dutch master Pieter Bruegel in the mid-1500s at the height of his powers. All of Victor’s photos are for sale, including the picture of the Amish girl featured here last week. The work above, a signed, original print, is priced at $32,000. It is approximately 20″ x 30″. Considering that a collector paid $68,750 for this appalling Peter Hujar photo of a dead cow at Christie’s a few years ago, Victor’s beautiful landscape, which makes the heart sing, is a great bargain for $32k. For further details, email me at Rick’s Picks.
‘Oil and Water’
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I’m in San Francisco, taking a break from Florida’s unbearable heat, but also from my weekly commentaries. Writing regularly about the impending collapse of the stock market, Trump hubris and the fatally diseased, fake economy had become drudgery, and so, at least for the time being, I am focusing on more upbeat fare. Recently, I featured paintings by my college roommate, Geoff Leckie. Now I offer the works of another friend, Deborah Oropallo. In the forty or so years I’ve known her, she has broken new artistic ground with each new evolution of her style and subject matter; then, she moved on when multitudes of imitators glutted the market. Deborah has achieved fame and commercial success, including shows at the Whitney Musuem and the Smithsonian. The work above, titled Oil and Water, was completed in 2016. It is a photomontage and acrylic on wood panel, 26 inches square. For more information about the artist, click here.
‘Guise’
I’m in San Francisco, taking a break from Florida’s insufferable summer heat, but also from my weekly commentaries. Writing regularly about the impending collapse of the stock market, Wall Street hubris and the fatally diseased economy had grown boring and depressing, and so, at least for the time being, I will be substituting more entertaining fare. Recently, I’ve featured paintings by my college roommate, Geoffrey Leckie. This week, I offer the works of another friend, Deborah Oropallo. In the forty or so years I’ve known Deborah, she has broken new artistic ground with each new evolution of her style and subject; then, she moved on when imitators glutted the market she’d created. Deborah has achieved commercial success and fame, including a show at the Whitney Museum. However, my favorite exhibit of her works was mounted by the DeYoung Museum in San Francisco. It was called ‘Guise,’ and the sly overlay above is an arresting example of the theme. If you want to know more about the artist, click here.