Friday, October 31, 2014

Deflation – What is the Cause? PUBLIC or PRIVATE?

QUESTION: Hi Martin,

You talk quite a bit about deflation in your comments, especially in Europe.  Can I assume you’re referring to monetary deflation arising from a slowdown in the velocity of money?  Which I’m guessing stems from banks using the plentiful money that’s available to them to purchase government bonds, using 30-1 leverage (as instructed by the central banks) and trading with most of the rest.  

I ask about the type of deflation to which you refer because surely you’re not talking about their cost of living going down, as it’s rising in Europe, the UK and the US.  

If you agree, why the disconnect?  Why does monetary deflation still result in a higher cost of living?

Appreciate all your great work over the years.

All the best, CB
3FACESn of Deflation
ANSWER: There are always different flavors of inflation and deflation. There can be currency inflation where the price of everything rises because the currency declines in international purchasing value, which has nothing to do with supply and demand per se other than a sharp decline in currency valye corresponds to a rise in price that will impact demand eventually.
Here the type of deflation that exists to some extent is in prices, but this is really a side effect. Some prices are declining marginally as people cut profits to try to do some business. This accounts for the decline in cost of living in some areas that are marginal like 0.4% for a quarter that is unnoticeable as a whole. It is the decline in the VELOCITY of money as banks lend less to the private sector without 110% security and but more bonds.
The disconnect has to do with the source of the cause – PUBLIC v PRIVATE. You also get DEFLATION when the rise in the cost of living is not from the private sector but from the public sector. Government consumes more and more of the disposable income and therefore people have less to spend and that will also cause prices to decline to try to stimulate business – albeit marginally. This also results in higher unemployment, decline in job creation, and a rise in business closures as well as bankruptcies.
When the cause emerges from government with rising taxes, people experience a DECLINE in their standard of living. So even if prices rise because costs are rising, it is still DEFLATIONARY for the growth is absent and the VELOCITY declines. Inflation results when there is a rise in DEMAND because people are buying rather than just surviving.
DEFLATION that comes from a cut back in spending that results in hoarding of cash unfolds when CONFIDENCE in the future crashes. The money is there – people just do not spend. This is the presumption that is the single-minded cause in central banks. They constantly fight ONLY this type of DEFLATION and never consider that the cause is something other than a mere collapse in CONFIDENCE – it is a rise in the cost of living coming from taxes that causing a drop in disposable income as distinguished from hoarding. Central Banks never look at the other-side of the DEFLATIONARY coin.

Wednesday, October 29, 2014

Best Form of Government – Will Anything Ever Work?

Hi Martin,
I understand you negative opinion on Socialism & Communism, but I’m confused by you opinion on a Republic. On paper a Republic looks like an ideal form of freedom, where-as a democracy dictates majority rules and 50.01% can do a lot of damage to the remaining citizens.
I understand that through history Republics have failed just like every other form of government, but are you suggesting that a democracy will not succumb to human failings and turn on it’s people like this Republic of the United States has?
Best regards,
ANSWER: There is no single form of government that will ever be perfect. Whatever its form, government will self-corrupt and both sides will fight eternally between the people and government perhaps eternally. The best form of government for brief periods of time are benevolent dictators, monarchs, or emperors, such as Julian II, who even decreed that whatever laws he passed must also apply to himself. Such individuals are rare indeed and once they are gone, the system will revert back to its corrupt state.
Another system that actually worked very well was Genoa. There the “Doge” (head of state) was selected each year from the head of a prominent family. The rich families ruled on a rotating basis annually. What made it work well was the short-term period. No family would ever pass something Draconian because it would apply to themselves the next year. The system was not one of rich v poor, but Genoa v Venice and Florence. The interests were furthered collectively rather than this philosophy of party politics. Therefore, each class benefited. It also lasted longer without corruption than Florence or Venice.
The best we can hope for is a hybrid between Democracy and a Republic that is restrained by a Positive Constitution rather than a Negative one as we have in the United States. In other words, if we have an everyday bureaucracy to run things that is subject to review by the people who rotate annually, there is some hope that it might last longer before it collapses. Much of the bureaucracy should be privatized where management will be proper and employee pensions will actually have to be there. When government is in charge, those in power just exempt themselves from the laws that apply to others – the first step in the corruption process.
With technology, each and every measure must be voted on by the people. There should be no Clean Water Act that has hidden some study on traffic flow in a city nobody ever heard of to line the pockets of someone’s family member. Voting can be done via your laptop and if each and every bill must be presented individually, that will stop the nonsense.
Judges CANNOT be appointed by anyone in government. They must be as Ben Franklin argued, nominated by the guild of lawyers. That way the best will rise to the top – not the most corrupt. Prosecution must also be independent and the people MUST actually indict meaning that they hear both sides in a grand jury. Plea bargaining must end andCONSPIRACY must end. Only those who are involved in a crime may be charged – no one else. No one charged with a crime may testify against another. Self-interest in prosecution must end.
While legal scholars tend to look at Article III of the US Constitution as based upon the English legal system modeled on Blackstone’s famous Commentaries on the Laws of England, Franklin argued for the Scottish System that was far superior. Indeed, the Scottish judicial system provided an important, but overlooked, model for the framing of Article III. Unlike the English system of overlapping original jurisdiction, the Scottish judiciary featured a hierarchical, appellate-style judiciary, with one supreme court sitting at the top and an array of inferior courts of original jurisdiction down below. What’s more, the Scottish judiciary operated within a constitutional framework — the so-called Acts of Union that combined England and Scotland into Great Britain in 1707 retained the independent legal structure of Scotland and prohibited the English courts from interfering with those of Scotland. The influence of the Scottish judiciary on the language and structure of the US Article III legal framework is clear where there is a Supreme Court with multiple inferior courts that are subordinate to, and subject to the supervisory oversight of, the sole supreme court. The Scottish model thus provides important historical support for the supremacy of the Supreme Court, however, the blending of this with the English system rendered the inferiority in Article III to operate as textual and structural limits on Congress’s jurisdiction-stripping authority from the courts. But the most dangerous flaw appears to be intentional – Congress appoints judges not lawyers. This allowed the English legal system to be politically manipulated whereas the Scottish System was really independent. This MUST be corrected to restore the rule of law.
Career politicians get bored and pass laws just to have something to do like in Utah you cannot drink before ordering dinner or in Europe regulating cow farting. This is why a representative form of government with career representatives is doomed to always fail. They can be bribed to enact particular laws to benefit some party. The only check and balance would be to rotate, as in Genoa, and to allow the people to vote online.
A raw unrestrained Democracy would devolve into mob rule. That we cannot tolerate either. There should be something that rotates as a Constitutional court as in France where each law passed MUST firs be ruled on as being Constitutional by a body of lawyers that rotates and MUST be trained in constitutional law which is significantly different from following statutory law. The former is structural design while the latter is following the letter of the law. This is a Positive Constitution that restrains government and is a real Bill of Rights. We have the negative form where government gets to do whatever it likes and we must prove we have any rights – very bad.
Debtor Prison
Prison should be outlawed for non-violent crimes. The ONLY reason a government has the right to restrain the liberty of an individual is to protect others from bodily harm – that is it. Every law passed by Congress states – “fine or imprisonment or both”. That must stop.Debtor’s Prison must end. The USA imprisons more people than the rest of the civilized world combined. Why are we so imprison happy when only about 4% of the people in prison are there for a violent crime? A woman was arrested and taken to jail for violating some statute that did not allow for imprisonment. A woman with children was taken to jail for not wearing a seat belt and the Supreme Court, being pro-government appointed by politicians, voted 5-4 that the police can imprison you for anything even if the crime does not call for jail time. We have a virtual 99% conviction rate because there is no way to win against pro-government judges.
Learning from the Past
There seems to be the potential to at least learn from the various political types of governments, how they functioned, how long did they last, and what was the impact upon the people. The advantages of Genoa was that the short terms restrained the Doge compared to Venice where the Doge was for life. Venice froze the estate upon the Doge’s death and only THEN reviewed all his actions to see if anything was gained illegally. Then the state would reclaim the “illegal” gains. That was closing the barn door after the horse ran away.
Government is corrupt and rotten to the core – it is honorable only for brief shinning moments when the dark clouds leave a crack. One Pope Formosus (c. 816 – 4 April 896)  ruled against a Lord so the Lord rigged the game to become Pope and then put Formosus’ dead corpse on trial, had a friend answer for the dead Pope. Naturally, Formosus incriminated himself, who wouldn’t in such circumstances, and he was promptly found guilty, nullified all his decrees, and then claimed his property back. They will do anything – absolutely anything.
Julius Caesar (100-44BC) had to assume the role of high priest to create a calendar because the politicians were bribing the high priests to add days into the calendar to avoid elections. There is absolutely NOTHING those in power will not do to society for their own self-interest. Finding someone ethical who really cares is one in a billion.
The key is to review each form of government and take what worked and avoid what did not. We have to understand that no system will ever last forever. So the best we can do is design a system that has the best features and some internal mechanism of checks and balances. Nevertheless, whatever we can think of, will merely create the challenge for others to figure ways around. If we eliminate taxation and restrain government expenditure to what is required for natural expansion of the money supply to facilitate economic growth, then the majority of the lobbying will cease and therein lies the deepest cracks for corruption.

Friday, October 24, 2014

Rally for stocks seems to be pushed off into the 2017-2018 period for it looks like this 8.6 year

Dow Jones Industrials 10-24-2014

DJIND-D 10-24-2014

We rallied right up into Wednesday testing the convergence of overhead resistance and will now most likely return to retest support into Friday. The bulk of resistance stands at the 17000 level and support at 15960. This is the closing range of resistance and support. If this week proves to be the reaction high, then we should see one more new low ahead.
This is the timing that seems to be emerging. The rally for stocks seems to be pushed off into the 2017-2018 period for it looks like this 8.6 year wave will be the peak in the bond bubble. After that, interest rates will escalate and we will see a greater number of defaults in various governments. Keep in mind that the amount of capital invested in bonds v equity is about 3:1. Despite all the prognostications of a Great Depression based upon a bubble in stocks, sorry – we ain’t there yet.

Wednesday, October 15, 2014

17.2 days down raises the possibility for a temp low

The Dow Today in a Nutshell 10-15-2014


We seem to be in a race to see who can ask government to hold their money. This is the classic flight to quality (i use that word loosely). The talk on the street is always trying to find a fundamental to fit to the price action. Plunging oil prices are signs to economic slowdown, the potential impact of global economic weakness on U.S. earnings is another issue thrown into the pit, and the spread of Ebola will be devastating wiping out chocolate lovers as well. The Swiss, after handing over anyone with money to foreign governments were reduced to chocolate and watches. Well now the chocolate may vanish.
We elected the Daily Bearish Reversal in the Dow yesterday and we have fallen out of bed from 16313 to 15945 in the first 15 minutes. The next support lies at 16131 for the close so if that holds we may have a low today temporarily. The weekly support lies at 16170 and a weekly closing beneath this level warns we should certainly move into that 14470-15560 area. A weekly closing below 15960 will warn of a move down to 15284.
DJIND-D 10-15-2014
Nevertheless, today is 17.2 days down  This raises the possibility for a temp low if the Dow closes back above yesterday’s closing at 16315.19 but at the very least 16170. The technical support lies at 15934 today and the resistance is up at 16723. We need to see a closing above this area to relieve the selling pressure.
DJFOR-D 10-15-2014
Our timing array shows today as a turning point with the next coming in two days. We see this week still as a target for a turning point and thus we may have a temporary low this week. Only a daily closing below 16131 would warn of a further drop for the next two days is possible whereas a daily closing below 15970 will be the next sell signal.
DJTRD-D 10-15-2014

So far the market has been electing the Daily Bearish Reversals including last night. Much of the panic selling is done right now, but this remains to be seen. This is the first day the few retail players in the market have gotten scared.
DJIND-D 10-15-2014 Trading Channel

The bottom of the broad trading channel lies at 16080 today. Holding that level on a closing basis is rather important for the panic selling to subside.
All – in All, this appears to be the bubble in government confidence. Why anyone would rush to buy government debt when it is obvious governments are in trouble – well who knows. This certainly appears to the end of the flight to quality underway. This is what we need to set the stage for 2015.75. You have to have the bubble form and it appears to be in government. Thereafter, look for the crash and burn and such a pattern would then push the phase transition in private assets into the declining wave of the ECM as confidence in government collapses.

Tuesday, October 14, 2014

2015-Q3- Holding the 14700 level on a quarterly closing basis would keep the market tone very bullish.

Dow  2015.75

DJIND-Q 10-14-2014
QUESTION: Many thanks again for the stream of clarifying observations posted daily — hugely appreciated.
I was struck when reading that 2015.75 could be a low.Would this not permit a drop to cross 11,750? And would such a resulting chart pattern not be remarkably bullish?
In effect might not the drop be an amplified echo of that into the Oct 2011 low of 10404 ?
Continued strength to your elbow !
Best Rgrds
ANSWER: Typically the level of the market that defines the bull and bear market distinction is the Quarterly level in time. The Dow NEVER elected a single Quarterly Bearish Reversal from the 2000 high despite the 11 quarter decline into 2002. When we look at the 2007 high, we did elect the first Quarterly Bearish by the 3rd quarter 2008 at 10850. That resulted in the crash for the next two quarters signalling that would be a serious meltdown. We elected the first Quarterly Bullish just 2 quarters later – 3rd quarter 2009 at 9712. The low in 2002 during the 4th quarter elected the first Bullish Reversal right there at the low.
This potential correct could be the cycle inversion for the decline would be the shortest being just 3 quarters placing us in the 2nd quarter 2015. That does not line up perfectly with the ECM. However, that might produce the lowest closing with the 3rd quarter producing the intra-day low. If we were to see such a low, then holding the 14470-15560 area at that time would be exceptionally bullish. Therefore, holding the 14700 level on a quarterly closing basis would keep the market tone very bullish.
Only a Yearly Closing beneath 10600 would reverse the bull market. Therefore, even a decline into 2015.75 without a Quarterly Closing beneath 14700 would confirm the extension. We MUST realize that a collapse in confidence with government that is clearly underway in Europe, is the requirement for a cycle inversion. Under this scenario, everything will rise but government debt – that is corporate debt, shares, gold, and commodities as well as real estate. This is what happens in a meltdown of confidence that is brewing everywhere from Hong Kong to Italy.

We are looking at a rally into 2017-2018 with the Dow reaching the 25,000-28,000 level. Gold rally with the ECM downturn.

So When Will We Know?

All year we have been warning that a Phase Transition is coming, but when could not be ascertained until after September 2014. At some point everything must flip. Why?Because this is a Sovereign Debt Crisis not the normal plain vanilla decline. This is why retail participation is at historic lows and liquidity is at historic lows. We have a Phase Transition coming largely because when the majority of people begin to figure out the problem is government at all levels, then capital will panic and flee to the private sector.
 Such panic shift from Public to Private vary in degree historically. This is actually what takes place in a hyperinflation where people move to private assets and dump the currency. But that is only one version for revolutionary type affairs following the overthrow of a government. This was the Communist Revolution in Germany during 1918, the French Revolution, and the American Revolution. Each experienced varying degrees of hyperinflation with either a default on the previous government debts or the currency. Today, we have governments with outstanding debt that did not exist in Germany or France since the new government defaulted on the previous government debt leaving only currency. The American colonies also assumed no portion of the English national debt.
This shift from Public to Private assets is WHY we could see the US share market extend into 2017-2018. The traditional business cycle decline you have the flight to quality with capital fleeing back to government bonds selling stocks. But what happens when it is government bonds that crash and burn? This is when the capital flows reverse and will shift back into private assets. For this immediate correction, cash is fleeing back to government bonds. This may be the last rally in bonds setting the stage for the extension.
So far we have the peak with the ECM in September right on target. In theory, if the market were to invert all the way into a low for 2015.75 next year, then we would be looking at a full blown cycle inversion with stocks moving up with the drop in the ECM. This would be a tremendous rally, but it would come at the cost of a real serious collapse in the confidence of government. This may be what we are facing. Instead of a Phase Transition that doubles the Dow Jones from the 2009 low of 6,440 (12,000), which we have already achieved, we are looking at a rally into 2017-2018 with the Dow reaching the 25,000-28,000 level. That would be the minimum target objective. To match the rally between 1921 and 1929, the Dow would need to reach 39,482. We have been looking at a 4.3 rally (430%) which is half the 8.6 year frequency.
This inversion pattern we have begun to see in the metals. Gold rallied in a sharp advance ONLY when the ECM turned down 2007 and it peaked in 2011. Gold appears to have made that transition and it should rally with the downturn in the ECM.
Completing this inversion process in stocks now will be interesting indeed. However, it also means we are about to face some very, very, very wild times ahead. Yes there will be money to be made – but we also have to be worried about the results.
We must pay close attention here. If this week closes higher in the Dow above 16544, then we may see a reaction into early November during the first week. However, we have another key turning point shaping up for the week of November 17 targeting the days of the 19th/20th.
We will let you know when is the best time to go back in. So far the September high with the ECM to be followed by a November low appears on target.

Fall to test the 16K this week, then a rally back into November 3rd week is possible, with a turn back down into January

Dow for 10-14-2014

Posted on  by 

DJIND-D 10-14-2014
The Dow held the Daily Bearish at 16319. Therefore, if the low of 10/13 holds, we should bounce back into Thursday-Friday. But this would be just a bounce. We can see from the technical chart that once that uptrend line was broken, there was just the collapse. Typically, we would rally back and bounce off of that and then turn back down to test the 15900 area. A rally into the end of the week would still warn we may see the low the first week of November. If we were to make new lows and fall to test the 15900-16000 level this week, then a rally back into November 3rd week is possible with a turn back down into January. That would be the shifting of the cycle warning we are dealing with a cycle inversion that would extend the high into 2017-2018. That would be VERY VERY VERY bearish for government.
We would most likely see a strong dollar rally breaking most other currencies. The high dollar would set off another round of sovereign defaults since everyone issued debt in dollars and are thus short. That would push the talk of moving toward some one world reserve currency and then we may see gold come into its own at last.
Obama’s former chief economist has already suggested the US should abandon making the dollar the reserve currency. That is nice to say, but there is no alternative until the dollar rises and bankrupts many. The US national debt will then rise in real terms and that will turn the economy down even harder as the high euro wiped out Greece.

Saturday, October 11, 2014

We could set the stage for a strong rally after February

US Share Market for Next Week Oct 13, 2014

DJIND-D 10-13-2014
We have elected a Weekly sell signal in the Dow and this is warning that we may yet see that November low during the week of November 3rd. The critical support now lies at 15961 and a weekly closing beneath this area will warn of a sharp correction that will make people’s nose bleed. Nevertheless, our models show next week as a turning point with Directional Changes back-to-back for the next 2 weeks and high volatility for the week of 11/03. Critical support also lies at 15555/ Only a monthly closing below this area would warn of a sustained correction.
CSP500-W 10-13-2014
When we look at the cash S&P 500, the market is stronger than the Dow reflecting the shift is still in place for the broader market leading. Our energy models are still bullish for the broad-term. Here we do see support lies at 1814 and 1766. We would need to see a monthly closing below 1814 to signal a sustained correction is possible. Where the Dow tends to target November, the S&P 500 targets December for a turning point with high volatility in November. The weekly turning points still show choppiness 10/13, 10/27, and 11/10. Key days next week will be Monday and Friday. This is the same targets in the Dow on a daily level.
NASDAC-W 10-13-2014
In the NASDAQ composite we see 10/13, 10/15, and 10/17 as daily targets with Wed showing high volatility. Here the key weekly targets are 10/13 and 10/27 followed by 11/10. Key support beings at 4239 and 4207. A monthly closing BELOW 4020 will signal a sustained correction. Keep in mind that November will be 72 months from the 2008 low in the NASDAQ. A low at that time on our long-range volatility models would imply we could set the stage for a strong rally after February.

Friday, October 3, 2014

France- the OMG moment for Euro by 2016

Hollande Single-Handedly Destroys France


France is bankrupt and part of the Sovereign Debt Crisis comes when a government has to roll its debt and there is no bid. Next year, France’s President Francois Hollande must face a budget deficit along with the country’s biggest-ever rollover of existing debt in history. If there is no bid, we are looking at a crash in the Euro to perhaps par to 103 by 2016. I have stated at conferences the city of Mainz was in debt and each new issue paid off the last. When they could not sell the debt any more, they defaulted. Mainz was the boom town because that is where the Johannes Gutenberg (c. 1398–1468) started the printing revolution. The city boomed and with that boom the politicians started to borrow against what they thought would be an endless stream of revenue from taxes. The higher the pushed taxes, the more the rich fled precisely the same human reaction Hollande has set in motion. When they chase the rich out, tax revenues collapsed, no one would buy their debt and they defaulted. The creditors eventually sacked the city and burned it to the ground and the Pope excommunicated the politicians for greed.
We never learn from history because nobody bothers to ask – has anyone done this before? How did it end? Today, French Sales of medium- and long-term bonds will jump to €188 billion euros ($237 billion) in 2015 from €173 billion euros this year. The problem we have with ALL governments is they only borrow with no intention of ever paying anything back. It is one giant Ponzi scheme then imprison people in the private sector all the time for following the very same path by which government manages the affairs of society.
The French economy has stalled and inflation has collapsed to virtually record lows. France has moved beyond all hope of reversing the trend. The French budget deficit will widen in 2014 for the first time in five years and barely change in 2015. Austerity is dead, but these people cannot create jobs by chasing capital out of France. No matter what evidence I could present, Hollande will never back-off and he will not resign to save the country. He intends to go full term into 2017.
France is the second largest economy in the EU. Germany cannot bailout France. This is the fate of Europe and this same debt disease will migrate to Japan and then America. We are staring into the eyes of how the west will fall – the same way Communism fell – with a sudden OMG event. Germany has no army thanks to its Constitution. The US cannot afford to defend Europe and Europe can’t afford to defend itself. Putin is not stupid. We are reaching the very same moment when Rome fell because it could no longer pay the pensions of the military and the barbarians were then free to enter. Hello – history does repeat because of the stupidity of mankind knows no bounds. If I keep saying this – will government ever listen? A popular question. My view – perhaps but only when the collapse becomes obvious to them when there is no time left to reverse the trend. Hence – the crash and burn.

Wednesday, October 1, 2014

The First Ebola case Appears in the US


The first case of the lethal Ebola virus has been diagnosed in Dallas, Texas. It appears the man is believed to have contracted the virus in Liberia before travelling to the US nearly two weeks ago. Health officials say he is being kept in isolation. However, you can bet everyone on that plane was at least exposed. It does not appear that flying to Africa is a very good idea.
Cyclically, we are due for another plague. The Romans were great secretaries and tended to record events of this nature. When we analyzed the history of plagues, we found a strong correlation to Pi (π). The span of just the major plagues recorded by the Romans was 474 years divided by 6 events produces 79 and dividing that by Pi 3.14 gives us 25.15 years.
This is very close to the 8.6 frequency (3 x 8.6 = 25.8). Testing this frequency brought us to the Black Death/Plague of the 14th Century, the Great Influenza of the mid-19th Century that killed many of my own family, the influenza of World War I, the Malaria epidemic of 1940, and the next target being 2019. Economically, the Black Death killed about 50% of the European population and created a shortage in labor. This resulted in altering the economy creating wages as landlords now competed for labor and serfdom came to an end in Western Europe (Russia continued into the 19th century).
It appears we have whatever can go wrong for civilization is going wrong. I always wanted to do one of those photo safari trips in Africa. It looks like that is not going to happen for a very long time.