Thursday, May 29, 2014
Sunday, May 25, 2014
QUESTION: Hello Mr. Armstrong,
I have been reading almost all of your writings in the past 4-5 years. I just wanted to clarify or dig a little bit deeper on your blog post today for the Dow and the ECM. You noted that we must wait until the bottom of the ECM in September this year before we have a better idea of when the phase transition in the Dow might occur. I know that the 1987 crash occurred on the “minor” top or turning point in the ECM. However, as you noted that was not the final top and the market rallied significantly into 1989. However, I don’t know of any major markets that may have topped at the last peak (2013.6). Is this indicative of the markets starting an inversion process? If so, are you looking to see if the DOW continues to meander higher into September this year and then put a short-term top in place and declines into 2015.75. This would mark an important bottom and confirm the cycle inversion, correct? The other option, would be a correction now into September 3/4th and then see the phase transition top into 2015.75. It seems that there is not enough time for Europe, Russia, and other capital to panic into the US in the next 1.5 years.
ANSWER: August 7th was critical from a global perspective. It marked a shift in trend internationally. For example, in gold we have a double bottom in dollars June and December 2013. However, when plotted in a basket of currencies, that is only a dollar illusion. Like the 1987 Crash, dollar based investors were confused as foreign investors sold.
There were numerous shifts that took place. The week of August 5th started the correction. The high formed the week before (07/29) and that target week (08/05) started with a Directional Change. However, that was more important than meets the eye. I noted there was a shift where the S&P 500 took the lead displacing the Dow as the leader after August 7th. This was rather significant because it illustrated the rally was then taking on a broader context. August 7th would not be a Phase Transition high as in 1987 for the currencies were moving opposite to that event providing the underlying support for a continued rally. The S&P 500 cash took out the high made the week of 07/29 the week of 10/14. The Dow closed above that high of the week of 07/29 on a weekly basis the week of 11/04. This demonstrates that how the S&P began to shift and take the lead after August 7th whereas it was the follower all the way up out of 2011.
The oscillators are at the upper end over 90. This is warning that we are getting close to a correction where the talking heads will all come out and proclaim they were right. This does warn that we can get a June high with a low in the fall and then a rally into 2016. As long as the market does not go into a Phase Transition and peaks by October 1st, 2015, then we should be in good shape for a broader continued rally.
With the yearly model on the US share market NOT lining up with 2015.75, it appears at this time that we are more likely going to deal with a major long-term advance. The 2016 target will be 31.4 years from the start of the breakout with this new Private Wave – 1985. Therefore, we do have the potential for that Phase Transition. If we then back off into a low for 2020, then a full-blown 13 year rally may unfold and that will take us into the final high in 2032.95.
It does not appear at this time that we are headed into an all-time high for 2016. The primary crisis we must face is the Sovereign Debt Crisis and that alone will cause a massive capital flight into the private sector. That came at the end of the last Private Wave that peaked in 1929.75 and unfolded in 1931. However, the capital flows anticipating that default began to shift in 1927. That is what set in motion the first attempt by central banks to deflect the capital inflows by lowering interest rates in the USA. Domestically, people blamed the Fed for creating that bubble. This was not fair because the capital flows were pouring into the USA in any event. Nevertheless, the typical interpretation was only domestic and they argued the Fed was deliberately trying to create inflation, which was rather absurd. The boom into 1929 was caused by capital inflows, not lower interest rates since rates collapsed after 1929 from 6% to 1% with no impact upon saving the market. From this event it was 4.3 years until the Sovereign Debt Crisis of 1931. That was precisely half a 8.6 years cycle.
There are always trends within trends. The world economy is very much like an onion. Layer upon layer of activity comes together to form the whole onion. It is never just a single event.
Thursday, May 22, 2014
Tuesday, May 20, 2014
QUESTION: Mr Armstrong, first let me thank you for the wonderful service you are performing to common people like me. I used to be strong believer of conspiracy theories and a gold bug but something did feel right until you came along and explained how things really worked.
I’m an Indian software professional working for one of the conservative NY banks. I can see that the bank is laying off a lot of people quietly and I can see your many observations about the market and the investment banks are indeed true.
My question is on the Indian elections which happened recently. Mr Narendra Modi has won by a landslide and this is kind of victory margin was only possible due to the unfettered corruption of the previous government.I can clearly observe your theory of people raising against corruption everywhere, in this election verdict.
India is expecting Mr Narendra Modi to work economic miracles. But as you had mentioned Emerging markets are going to slide further into economic depression so has India already turned the corner, or are is it going to slide further. What are the options for investment in India for the next 5 years.
ANSWER: India is following the forecast we made 2 years ago in Bangkok. I pointed out that there was a double top and that India would breakout to the upside. The government has been way too corrupt and the central bank has been following the traditional nonsense misreading the capital flows and trying to stem the tide. As a nation begins to prosper, it ALWAYS begins to import goods and it also invests its income outside the home country. This causes the current account to decline into negative territory yet it is reflective of a boom, not a bust. The same mistakes were made by Australia in the 1980s. They expected the currency to decline because of a current account deficit yet it rallied. They were totally confused by this development. The Australian Associated Press did an article on me at that time bluntly stating that I was teaching Australia about its current account and how it really functioned.
We distinguished India from the rest of Asia including China. This market should have risen and it has done so. We may yet see the major high form in 2017. I will actually be speaking there in Mumbai come this September 2014. BTW – Indian is my favorite food.
Thursday, May 15, 2014
There is growing evidence that the Chinese property market will crack after 2015.75 when public confidence drops sharply worldwide. The first signs of deterioration are evident today. China has been the envy of developed nations with real GDP growth averaging almost 10% for the last quarter century, only dipping below 5% briefly with the Japanese crisis in 1989-90. Developed countries would rejoice with what the Chinese classify as a “hard landing”.
While the market appeared to shrug off China’s first corporate default by Shanghai Chaori Solar, defaults among Chinese property development and trust companies could reverberate throughout the economy. Given capital controls, the Chinese have limited investment opportunities thus citizens have invested savings in real estate and high yielding trust products. Generally, real estate accounts for about 33% of fixed investment and 16% of GDP growth. Trust companies have provided financing to companies unable to obtain loans from the banks: real estate development and coal miners.
As in any market, prices are dependent upon investor confidence. Nothing will cause the housing market to crash faster than investor losses that fuel the human reaction of a decline in confidence. Sales dropped 5.2% yoy during the first quarter according to the National Bureau of Statistics. Residential housing sales dropped 18.4% month on month in April, down 18.1% yoy according to Homeline, one of China’s largest real estate agencies.
There is a widespread pessimism starting to surface in China about the housing industry because of weak sales. The Guang Real Estate Group, based in Shenzhen City, Guangdong Province, has admitted that the company failed to deliver some projects to homebuyers on time due to financial pressures.
Trust product maturities accelerate this year. Over the past years, trust assets have risen 50% annually, to an estimated $6 trillion. Chinese trust companies have supplied credit outside of the banking system largely to coal miners and solar developers. Many coal miners have debt ratios exceeding 100%, and weak coal prices have hurt profitability. A couple of miners have already experienced financial difficulties meeting maturities. China Cinda Asset Management, an SOE established to buy back bad loans from big banks, warns trust defaults could “explode.” The mainland’s bad debt is on the rise. China Cinda Asset Management is warning that a default peak season for its gigantic trust products sector is approaching after years of rapid yet questionable growth.
Tightening credit costs are raising debt costs for companies. SOEs formerly able to obtain financing at a discount are now a premium to the PBOC rate. Small rate rises could have significant impact given high leverage and short duration of Chinese companies. The Chinese renminbi has depreciated almost 3% since the first of the year.
At the same time corruption allegations of executives have risen, some related to the bad loans. With every downturn, the borderline deals go bad and this creates the image of fraud even when it is not, which in turn fuels the crisis even more causing capital to decline.