The Market Outlook for the Week Ahead, or Watching History Rhyme

I have been predicting all year that the government’s new and untested economic policies would produce stagflation. Well, we certainly got the “Stag” on Friday with the most disastrous jobs report since the Pandemic. Will the “flation” follow with the Consumer Price Index this coming Thursday?

Nonfarm Payroll certainly broke all recent records, proving how weak the economy is. In August, only 22,000 joined the workforce, far below the 75,000 estimate and the 353,000 from the beginning of 2024. The headline Unemployment Rate rose to 4.3%, a four-year high.

The stagflationary economy marches on. Every jobs report from here on may be a disappointment with the government firing over 300,000, hitting the numbers, and AI destroying jobs at an epic pace. As a result, economic growth is probably well under 1% by now compared to 3% a year ago. The stock market is fine with irresponsible policy, even though it says it doesn’t. Stocks really only care when the bond market forces its hand by taking rates up big, as it has already done several times this year.

Which leads us to the most important question of the day. What will happen when the president gets absolute control of the Federal Reserve, which he is expected to achieve by next May at the latest? Fortunately, I already know the answer because I was trading the markets when this last happened in 1972, after President Richard Nixon appointed Federal Reserve governor Arthur Burns.

Back then, Nixon thought it would be a great idea to have a red-hot economy going into the 1974 presidential election (this seems to be a recurring goal). He also needed a distraction from the unfolding Watergate scandal. So he pressured Burns to cut interest rates dramatically in the face of severely rising inflation, against all other advice. Burns dutifully chopped the Fed funds rate from 12.9% to 5.5%. Yes, this really took place.

What happened next?

The Nifty Fifty stock market boom abruptly ended, and the Dow average tanked by 44%. The bond market crashed, with ten-year US Treasury yields surging 130 basis points to 7.83%. The US Dollar collapsed by a stunning 18%. And inflation eventually rocketed to 14.8%. Back then, people rushed to cash their paychecks before prices went up more. And Arthur Burns became famous as the worst Fed governor in history.

Are you ready for a repeat?

Of course, comparisons like this are always dangerous. History doesn’t repeat, but it certainly rhymes. Artificially low interest rates weren’t the only thing going on in 1972. The US went off the gold standard, breaking the 40-year, $34-an-ounce link. In 1973, OPEC raised the price of oil from $3 a barrel to a catastrophic $12 a barrel. Back then, the US imported 33% of its 16 million barrels a day of oil consumption from the Middle East. And we were all wondering, oil rises by 400% so the Fed cut interest rates by half?

In 1974, the president resigned because of Watergate, and Gerald Ford briefly took over (Too much football without a helmet). The headline Unemployment Rate soared to a post-WWII high of 8.2%. The American recession that followed was so severe that I had to go all the way to Japan to find a job, even though I didn’t speak a word of Japanese and had never eaten sushi.

If you wonder why I have been so cautious this summer, these are the reasons. It is not because I am politically biased; it is because we are following the 1972 script to the letter. It is also seasonal. I can’t remember the last time I was happy buying in August, only to be followed by grim Septembers and Octobers.

Inflation is now rising at a rapid pace, scandals abound, and the president is clearly shopping for the greatest dove out there as the next Fed governor whom he can control like a marionette. He is in effect looking for another Arthur Burns, who retired in disgrace in 1977 and passed away in 1987. At some point, somebody besides me will realize all of this.

One reason that the Friday jobs report was a disappointment is that AI is starting to destroy jobs at a prodigious rate. Look no further than Health Care, one of the largest employers in the country, and once considered recession-proof. Last month it gained 55,000 jobs. This month, that figure dropped by 9%, and 32% YOY.

More proof of this can be found in the recent stock price action of Salesforce (CRM), once a star performer. Salesforce has cut its own employment numbers dramatically this year. But so have thousands of its own customers, dramatically cutting demand for its own products. AI has become a double-edged sword. Its shares are down 40% this year.

Another of the big questions of the day is whether the SaaS (Software as a Service) disease will spill over into cybersecurity shares, which are also effectively SaaS stock. SaaS stocks have been hemorrhaging of late over fears that they will soon be replaced by much cheaper Artificial Intelligence.

While cyber stocks have been selling off since peaking on July 28, I believe this is a dip you should buy into. While AI is demolishing the SaaS stocks, it is creating an arms race for cyber stocks that is only accelerating. The more sophisticated and faster AI gets, the more sophisticated and faster hackers become, the greater the need for cyber services. It is in effect becoming an exponentially growing hockey stick in demand for cybersecurity services, which has really been going on for a decade.

That means you should be buying Palo Alto Networks (PANW), CrowdStrike (CRWD), Fortinet (FTNT), and Zscaler (ZS) on dips, like right now. Whatever weakness they are seeing now is seasonal rather than fundamental.

My September performance is up +0.33%. That takes us to a year-to-date profit of +54.13%. My trailing one-year return rose to +96.14%. That takes my average annualized return to +51.18%, and my performance since inception reaches a new all-time high of +806.02%. These are all non-compounded numbers.

I am holding on to just two longs going into the September 19 options expiration, which is just a perilous two days after the Fed’s interest rate decision. Those are in falling interest rate plays, Goldman Sachs (GS) and JPMorgan (JPM).

All of the low-hanging fruit has been picked. With the Volatility Index ($VIX) hugging the $15 handle, I executed no GTD trades last week and maintained a rare 80% cash position. Up 54.13% on the year, I have a lot of hard-earned performance to protect, and it’s not worth sticking my neck out on a high-risk marginal trade.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns over the next four years. 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, September 8, at 8:30 AM EST, Used Car Prices are out.

On Tuesday, September 9, at 7:30 AM, Nonfarm Payroll Revisions are announced.

On Wednesday, September 10, at 7:00 AM, we get the Producer Price Index

On Thursday, September 11, we get Weekly Jobless Claims. We also learned the all-important Consumer Price Index and Inflation Rate.

On Friday, September 12, at 10:00 AM, we will obtain the University of Michigan Consumer Sentiment and the Baker Hughes Rig Count.

As for me, I’ve found a new series on Amazon Prime called 1883. It is definitely NOT PG-rated, nor for the faint of heart. But it does remind me of my own cowboy days.

When General Custer was slaughtered during his last stand at the Little Bighorn in 1876 in Montana, my ancestors spotted a great buying opportunity. They used the ensuing panic to pick up 50,000 acres near the Wyoming border for ten cents an acre.

Growing up as the oldest of seven kids, my parents never missed an opportunity to farm me out with relatives. That’s how I ended up with my cousins near Broadus, Montana, for the summer of 1966.

When I got off the Greyhound bus in nearby Sheridan, I went into a bar to call my uncle. The bartender asked his name, and when I told him “Carlat,”  he gave me a strange look.

It turned out that my uncle had killed someone in a gunfight in the street out front a few months earlier, which was later ruled self-defense. It was the last public gunfight seen in the state, and my uncle hasn’t been seen in town since.

I was later picked up in a beat-up Ford truck and driven for two hours down a dirt road to a log cabin. There was no electricity, just kerosene lanterns and a propane-powered refrigerator.

Welcome to the 19^th century!

I was hired as a cowboy, lived in a bunk house with the rest of the ranch hands, and was paid the princely sum of a dollar an hour. I became popular by reading the other cowboys’ newspapers and their mail, since they were all illiterate. Every three days, we slaughtered a cow to feed everyone on the ranch. I ate steak for breakfast, lunch, and dinner.

On weekends, my cousins and I searched for Indian arrowheads on horseback, which we found by the shoe box full. Occasionally, we got lucky finding an old rusted Winchester or Colt revolver just lying out on the range, a remnant of the famous battle 90 years before. I carried my own six-shooter to help reduce the local rattlesnake population.

I really learned the meaning of work and developed calluses on my hands in no time. I had to rescue cows trapped in the mud (stick a burr under their tail and make them mad), round up lost ones, and saw miles of fence posts. When it came time to artificially inseminate the cows with superior semen imported from Scotland, it was my job to hold them still. It was all heady stuff for a 15-year-old.

The highlight of the summer was participating in the Sheridan Rodeo. With my uncle being one of the largest cattle owners in the area, I had my pick of events. So, I ended up racing a chariot made from an old oil drum, team roping (I had to pull the cow down to the ground), and riding a Brahman bull. I still have a scar on my left elbow from where a bull slashed me, the horn pigment clearly visible.

I hated to leave when I had to go home and back to school. But I did hear that the winters in Montana are pretty tough.

It was later discovered that the entire 50,000 acres was sitting on a giant coal seam 50 feet thick. You just knocked off the topsoil and backed up the truck. My cousins became millionaires. They built a modern four-bedroom house closer to town with every amenity, even a big screen TV. My cousin also built a massive vintage car collection.

During the 2000s, their well water was poisoned by a neighbor’s fracking for natural gas, and water had to be hauled in by truck at great expense. In the end, my cousin was killed when the engine of the classic car he was restoring fell on top of him when the rafter above him snapped.

It all gave me a window into a lifestyle that was then fading fast. It’s an experience I’ll never forget.

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