The Market Outlook for the Week Ahead, or Why the Crash Will Start on November 5

Perhaps the most intelligent thing said about markets last week came from my old friend and trading adversary, David Tepper, who said he was “long and hated it.”

With valuations at historic highs and the economy deteriorating, the market was begging for trouble. “The higher you climb the mountain, the greater the fall on the other side,” he opined, as happened in 2000 and 2008.

He had no idea when this would happen again.

The choices for the professional manager are grim indeed. He has to stay out of the market now, look like an idiot, and have your clients hate you. Or, he has to stay in the markets now, look like an idiot later, and have your clients hate you then.

There has to be a better way to earn a living than this.

My solution to this conundrum has been to keep my size small. Instead of the hyper-aggressive 100% fully invested portfolios I ran in the Spring, I capped my positions at only 20%. Then I focused on interest-sensitive stocks, which seem guaranteed to be profitable in front of the first Fed rate cut in a year. That way, any mistakes I make are small ones, and any holes I fall into I can dig out of.

We all know we are trading against a coming known crash in the future. The only thing missing is the date and time.

Well, let me help you out with that.

My first choice for a market shakeout is Wednesday, November 5, 2025. For that is the day the Supreme Court hears oral arguments on the legality of the president’s sweeping and unilaterally imposed tariffs, which have been challenged from day one. If it becomes obvious the administration is losing the argument, markets will catch a cold, and your portfolio will catch the flu.

An adverse ruling will mean that all presidential power abroad will cease. Worse, the US Treasury will have to refund the $500 billion in illegal tariffs it has collected so far. The National Debt would rocket by another $2 trillion to $44 trillion. Government spending plans are heavily reliant on tariff revenues. The entire administration’s economic plan would be in tatters. Stock markets would drop by 10%-20% almost immediately. In other words, we could get another February to April meltdown.

If the Supreme Court is muddled, opaque, and contradictory about its possible decision, we may have to wait weeks or months for a final decision, and the crash will be postponed until 2026.

I’ll let you decide which way this is going to go and refer you to the relevant section of the US Constitution, which is

The Constitution of the United States:
Article. I.
Section 7.

“All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.” In other words, only the House has the ability to impose tariffs.

The only time in American history that the president took control of the tariff system was during World War II from 1941-1945. They then went to near zero after that. So, unless the administration can prove the US is unquestionably now in a state of war with someone, it is going to have a very tough row to hoe.

Last week’s Fed quarter-point interest rate cut gave me an opportunity to test one of my recurring theories, that they won’t deliver concurrent falls in US Treasury bond yields. So far, so good. If that is the case, you can kiss the nascent recovery in the real estate market goodbye, bad news for all.

Ten-year US Treasury bonds (TLT) went out on Friday at a 4.13% yield, exactly where they were two weeks ago. At the same time, 90-day Treasury bill yields plunged from 4.30% to 3.90%. It appears that T-bills not only absorbed the recent 25 basis point rate cut but the next one as well.

It appears that epochal changes are taking place in the bond market that few understand. A major change is that AAA corporate bonds are now viewed as less risky than AA+ rated government bonds. Until recently, government bonds were viewed as the gold standard in safety and reliability.

I’ll give the example of the Microsoft Bonds, which mature in a year and yield 3.74%. Are Microsoft bonds the new “safe” investment? Probably so. While AAA-rated (MSFT) has virtually no debt and enormous cash flows, the lower-rated US government is running gigantic budget deficits and has a debt ceiling of $42 trillion and climbing. And while Microsoft’s management is considered rock solid, the one in Washington, DC has dissolved into utter chaos.

In fact, many top corporate credits like Apple (AAPL) and Goldman Sachs (GS) floated massive zero-coupon bonds with zero coupons back when money was free in 2020 (I was screaming at them to do so). So the number of “safe’ issuers is actually quite large. Microsoft issued bonds all the way out until 2050, even though it had no need for the money whatsoever. It was pure financial engineering.

If you are one of the many who are worried about the imminent default of the US government, this is your answer. As a result, I expect the spread between government and top-rated corporate bonds to increase.

It seems like the only really safe thing to own these days is gold (GLD), (B), (NEM).

My September performance is up +2.38%. That takes us to a year-to-date profit of +56.18%. My trailing one-year return rose to +92.91%. That takes my average annualized return to +51.32%, and my performance since inception reaches a new all-time high of +808.07%. These are all non-compounded numbers.

My falling interest rate plays in Goldman Sachs (GS) and JP Morgan (JPM) expired at max profit with the September 19 option expiration. That took me to a rare 100% cash position.

All of the low-hanging fruit has been picked. With the Volatility Index ($VIX) hugging the $14 handle, I executed no GTD trades last week and maintained a rare 80% cash position. Up 56.18% 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.

Apple Shares Go Ballistic to $246 a share on spectacular initial sales of the iPhone 17 around the world. Stores in New York, London, and Mumbai have sold out. My Apple 2026 LEAPS are up 40% in two weeks. Apple was the worst affected by tariffs and has figured out a way around them. Google’s antitrust win is also very Apple-positive because it allows unfettered access to (GOOGL)’s search engine. Buy (AAPL) on dips.

The Mad Hedge September 9-11 Summit Replays are Up. Listen to all 22 speakers opine on the best strategies, tactics, and instruments to use in these volatile markets. It is a true smorgasbord of investment strategies. Find the best one to suit your own goals. The product discounts offered during the presentations are still valid. Start, stop, and pause the videos at your leisure. Best of all, access to the videos is FREE. Access them all by clicking here. We look forward to working with you, and the next summit is scheduled for December.

Fed Cuts Interest Rates by 25 basis points, rallying all markets. Job risk has increased, taking priority over inflation concerns. The majority of governors want no more rate cuts this year. The president’s recent Fed appointment wanted five more rate cuts.

Equity Funds See Record Outflows, as investors rush to book profits. Investors pulled out a net $43.19 billion from U.S. equity funds in the week, logging their largest weekly net sales since a $50.62 billion weekly outflow in mid-December 2024. The S&P 500 forward price-to-earnings ratio, at 22.6X, is in the 99th percentile over the past 20 years.

Weekly Jobless Claims Drop Sharply, down 33,000 to 231,000. It looks like last week’s super spike was a statistical anomaly in Texas. So, where are we really?

Housing Starts Hit 2 ½ Year Low in August, with excess supply hobbling the market. The report from the Commerce Department on Wednesday also showed permits for future single-family home construction dropped last month to the lowest level in more than two years. Some economists said the decline was necessary to manage new housing inventory, currently near levels last seen in late 2007.

Mortgage Rates Hit One-Year Low. The interest rate on the most popular U.S. home loan dropped last week to its lowest in a year, sending homeowners racing to lock in cheaper borrowing costs as slowing jobs growth and expectations for a Federal Reserve interest-rate cut drive down yields on benchmark Treasuries. The Mortgage Bankers Association on Wednesday said the contract rate on a 30-year, fixed-rate mortgage dropped 10 basis points in the week ended September 12 to 6.39%.

Gold is Getting Ready to Surge Again, as it always does during every Fed easing cycle. The Fed is poised to lower the cost of money even though inflation stayed stubbornly high at an annual rate of 2.9% in August. In the past quarter century, gold has never declined in price when the central bank eases monetary policy at the same time as inflation remains above the central bank’s 2% target. Even if we disregard the Global Financial Crisis, gold has returned around 13% annually during inflationary easing.

US Business Inventories Rise in July, up 0.2%. Rising inventories mean slowing sales and a shrinking economy.

Netflix has a Challenger in the form of David Ellison’s Skydance takeover of Paramount and now Warner Bros. Discovery (WBD). The combination aggregates 200 million new subscribers to pit against (NFLX). Normally, challengers to Netflix are dismissed, but this time it is backed by Larry Ellison, who made the richest man in the world this week by the 30% jump in Oracle (ORCL) shares.

Elon Musk Buys $1 Billion in Tesla Stock, which explains the out-of-the-blue $80, or 23% pop in the stock last week. It’s his first purchase of the stock in the open market since February 2020. Musk bought 2.57 million shares at various prices on Friday, which tallies up to about $1 billion, a significant insider acquisition that traders took as a vote of confidence from the outspoken CEO. I’ve seen Elon do this many times before, carry out a massive BUY at a key technical point to trigger a short squeeze. Remember that for the first decade of his career, Musk did nothing but fight off short sellers. Back then, the short interest in Tesla was 35%. Now it’s 3%.

Alphabet Tops $3 Trillion Market Cap. Alphabet is up 32% YTD, leading gains among “Magnificent 7” stocks. Stock trades at 23x earnings vs 5-year average of 22. Alphabet joined other tech giants Apple (AAPL) and Microsoft (MSFT) in hitting a $3 trillion valuation, while AI chipmaker Nvidia (NVDA), the world’s most valuable company, boasts a market cap of $4.25 trillion.

 

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 22, there are a number of Fed Speakers now that the interest rate decision is out.

On Tuesday, September 23, at 8:30 AM EST, the S&P 500 Manufacturing Flash PMI is announced.

On Wednesday, September 24, at 7:00 AM, we get New Home Sales.

On Thursday, September 25, we get Weekly Jobless Claims.  We also get the final read on Q2 GDP.

On Friday, September 26, at 5:30 AM, we get Core PCE, a key inflation indicator.  At 10:00 AM EST, we obtain the Baker Hughes Rig Count.

As for me, occasionally I tell close friends that I hitchhiked across the Sahara Desert alone when I was 16 and am met with looks that are amazed, befuddled, and disbelieving. But I actually did it in the summer of 1968.

I had spent two months hitchhiking from a hospital in Sweden all the way to my ancestral roots in Monreale, Sicily, the home of my Italian grandfather. My next goal was to visit my Uncle Charles, who was stationed at the Torreon Air Force base outside of Madrid, Spain.

I looked at my Michelin map of the Mediterranean and quickly realized that it would be much quicker to cut across North Africa than to hitchhike all the way back up the length of Italy, cutting across the Côte d’Azur, where no one ever picked up hitchhikers, then all the way down to Madrid, where the people were too poor to own cars.

So one fine morning, I found myself booking a deck passage on a cargo ship from Palermo to Tunis. We carried a shipment of olive oil, which had been traveling this route from time immemorial. From here on, my memory is hazy, and I remember only a few flashbacks.

Ever the historian, even at age 16, I made straight for the Carthaginian ruins. The Romans sacked the city in the Third Punic War and salted the earth so thoroughly that plants could never grow again to prevent any recovery of the country. Some 2,168 years later, it was still working as there was nothing left but an endless sea of scattered rocks on barren sand.

At night, I lay out my sleeping bag to catch some shut-eye. But around in the middle of the night, someone tried to bash my head in with a large stone. I scared them off, but haven’t had a decent night of sleep since.

The next day, I made for the spectacular Roman ruins at Leptis Magna on the Libyan coast. But Muamar Khadafi led a coup d’état earlier and closed the border to all Americans. My visa obtained in Rome from King Idris was useless.

I used that setback to hitchhike over Kasserine Pass into Algeria, where my Uncle Al served under General Patton in WWII. US forces suffered an ignominious defeat until Patton took over the army in 1943. Some 25 years later, the scenery was still littered with blown-up tanks, destroyed trucks, and abandoned uniforms.

Approaching the coastal road, I started jumping trains headed west. While officially the Algerian Civil War ended in 1962, in fact, it was still going on in 1968. We passed derailed trains and smashed bridges. The cattle were starving. There was no food anywhere.

At night, Arab families invited me to stay over in their mud brick homes, as I always traveled with a big American Flag on my pack. Their hospitality was endless, and they shared what little food they had. Suddenly, dried pita bread with hummus was delicious.

As the train pulled into Algiers, a conductor caught me without a ticket. So, the railway police arrested me and, on arrival, took me to the central Algiers prison, not a very nice place. After the police left, the head of the prison took me to a back door, opened it, smiled, and said “si vous plaît”. That was all the French I ever needed to know. I quickly vacated the jail and disappeared into the Algiers Souk.

As we approached the Moroccan border, I saw trains of camels 1,000 long, rhythmically swaying back and forth with their heavy cargoes of spices from central Africa. These don’t exist anymore, replaced by modern trucks.

Out in the middle of nowhere, bullets started flying through the passenger car, splintering wood. I poked my Kodak Instamatic out the window in between volleys of shots and snapped a few pictures.

The train screeched to a halt, and Bedouin laughing bandits boarded, wearing long flowing robes. I looked at their rifles carefully and noticed that they were flintlocks left over from the Napoleonic Wars. They shook down the passengers, seizing whatever silver jewelry and bolts of cloth they could find.

When they came to me, they just laughed and moved on. As a ragged backpacker, I had nothing of interest for them.

The train ended up in Marrakesh on the edge of the Sahara, the final destination of the camel trains. It was like visiting the Arabian Nights. The main Jemaa el-Fna square was amazing, with masses of crafts for sale, magicians, snake charmers, and men breathing fire. In those days, the town was occupied by hippies and rock stars living in an endless warren of mud huts to escape the desert heat. Warning: Never visit Marrakesh in August.

Of course, from there I had to take a steam-powered Marrakesh Express to Casablanca and then on to Tangiers, again sans tickets. The most expensive cars were at the end of the train, away from billowing black clouds of smoke and cinders.

Tangiers was the site of the oldest foreign American embassy, which is now open to tourists. For 25 cents a night, you could sleep on a rooftop under the stars and pass the pipe with fellow travelers, which contained something called hashish.

One more ferry ride and I was at the British naval base at the Rock of Gibraltar, and then on a train for Madrid. I made it to the Torreon base main gate, where a very surprised master sergeant picked up half-starved, rail-thin, filthy nephew and took me home. Later, Uncle Charles said I slept for three days straight. Since I had lice, Charles shaved my head when I was asleep. I fit right in with the other airmen.

I woke up with a fever, so Charles took me to the base clinic. They never figured out what I had. Maybe it was exhaustion, maybe it was prolonged starvation. Perhaps it was something African. Possibly, it was all one long dream.

Afterwards, my Uncle Charles took me to the base commissary, where I enjoyed my first cheeseburger, French fries, and chocolate shake in many months. It was the best meal of my life and the only cure I really needed.

I have pictures of all this, which are sitting in a box somewhere in my basement. The Michelin map sits in a giant case of old, used maps that I have been collecting for 60 years. It was all quite the adventure for a 16-year-old.

 

Mediterranean in 1968

 

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