US Share Market

 

Posted on April 30, 2014 by Martin Armstrong

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We can see from the daily chart in the Dow Jones Industrial Index that there is a rather flat topping pattern. This suggests that we should see new highs and that in no way has this been a nice clean isolated high that would signal the collapse of the markets as so many keep saying.


No matter what market we look at, there MUST be a Phase Transition that forms the top. You do not get three opportunities to sell the all-time record high. The US market is still poised for a blast to the upside sparked by capital inflows.

European Banks & Massive Exposure to Russia – Oops!

 

Posted on April 29, 2014 by Martin Armstrong

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Just as the American banks ran with open-arms into South America during the 1970s and ended up with loans defaulting, we may see the economic war against Russia backfire as lawyer-politicians never seem to comprehend this is a global economy with all sorts of intricate entanglements. We may see that the European banking crisis simply implode even far worse than anyone could possibly imagine. Not only are European banks “zombies” from the perspective of European debt, but then whatever they could have done wrong, they did in grand style.


The future looks especially dangerous for Europe’s banks because they also ran into Russia with open-arms expecting a boom in emerging markets to last forever as took place in China. This was the same development of lending in the South Sea Bubble and the Mississippi Bubble that both burst in 1720. Just for the record, 309.6 years from that crisis year will be 2029-2030 taking us into the conclusion of this wave. The first financial bubble after the Dark Age was the Tulip Bubble of 1637. The 309.6 year anniversary of that curiously was the whole start of this current economic nightmare – 1946 and the start of Bretton Woods. This was the beginning of spending and never paying anything off – the Ponzi Scheme of national debts.
European Banks have massive loan exposure to Russian companies. The systemic risk that they cannot be bailed out if there is a continuation of the Russia v West confrontation is rising into plain view. We may see the complete meltdown of European banks and their debt markets unfold as this European banking crisis continues in full motion. This is the blood that Putin can smell. Go ahead – put sanctions on Russia that will never work anyhow and watch Europe implode from a banking crisis and a further drop in GDP. This will send unemployment even higher. Of course, the lawyer-politicians will target only defense while trying to continue to provide it food. They think they can target their sanctions and this will allow them to collect debts and sell food – having your cake and eating it too.


This is the downside of lawyer-politicians. They are ignorant of what makes the world economy function and believe they are demigods armed with pens to degree by absolute command what the economy should and should not do next. Good luck. These people are crazy BECAUSE voters are stupid. Hence, they are like 2-year olds just testing to see how much they can keep getting away with

USD

Capital Flows

Posted on April 28, 2014 by Martin Armstrong

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Real Estate is the choice at this time to get capital off the grid. We are seeing Chinese still buying Australian Property for now and wealthy Russians are looking at Putin raising taxes and the rubble of the ruble as a justification to get capital out of banks and into property. Even the wealthy Ukrainians are trying to shift more cash into London property. London is seen as a bit safer than Europe and the eastern European oligarchs are right behind. This should help the euro press a bit higher and provide support for the pound near-term. The rates are collapsing in Europe as capital flows to the center fearing war. This trend should begin to shift again and the dollar will rise AFTER 2015.75 with the ECM as it has always done.

We can see the 13 year high following the 1995 low in 2008 that was precisely on target. This should turn back to new highs starting in 2016. You can see the pattern is by no means a Phase Transition or a spike high. The dollar rally into 2008 came way too close to the 1985 high that sparked the birth of the G5 at the Plaza Accord. 

Economic Confidence Model - ECM

Deflation and currency rise

Why Does Deflation Cause the Currency to Rise?

Posted on April 11, 2014 by Martin Armstrong

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It has often been a paradox that the worse an economy turns down, the higher the currency rises. Cheer up – it is a bell curve. If the currency goes TOO FAR and the economy has no hope of survival, then it reverses and collapses into dust through the process of a Phase Transition. This is the Paradox of Fundamental Analysis where people try to craft these single one dimensional explanations of the world. It does not matter what we are talking about interest rates, currency values, inflation, or deflation – it is all the same type of movement.

Part of the RISE IN A CURRENCY during a decline is the rise in the currency value is the shift from PRIVATE to PUBLIC confidence during a decline in the ECM even on the short 8.6 year business cycle waves. This is called often the FLIGHT TO QUALITY where people want cash and dump assets. This is why the stock market crashes or whatever the sector is that absorbed the cash.

No matter what economy we look at, the currency will RISE during the economic decline driven domestically by this flight to quality. The US dollar rose to record highs during the Great Depression. This helps to turn the economy down as exports collapse as well. During the 1930s, this sparked the Age of Protectionism.

The dollar rose sharply into 1985 from its low going into 1980. The steep deflationary recession drove the dollar to its highest point and as you can see our index demonstrates that the trend is not complete. Keep in mind that the coming dollar rally will unfold mostly after 2015.75 and the US economy turns down.


The collapse in the dollar against the Japanese yen came as part of the burst in the Japanese bubble that began from the December 1989 high. The rise in the yen was consistent with what I am describing, albeit people find this a paradox and expect the currency to decline with the economy.

That portion of the trend unfolds when you cross the bell curve and head down. The British pound was the reserve currency of the world up until 1914. Thereafter, Britain entered the downside of the Bell Curve and this was driven by debt expansion.


When Britain entered World War I, its debt ration exploded and Britain began the collapse of its currency at that point on a sustained basis.


We can see the decline in interest rates into the 1900 period. Thereafter, we see a trend with rising rates.
This is what we will see with the Euro as it completes its deflationary rally that will push Europe over the edge. Their exports will drop and tax rates will rise further.

The early stages of the deflation are marked by the flight to quality and this will give way when the economy becomes unsustainable due to the high value of the currency. Once the euro peaks, then the foreign capital will sell aggressively. It is just a matter of time.

The Thailand Revolution - 3 cycles

Posted on April 6, 2014 by Martin Armstrong

The movement in Thailand is interesting for the rally is called the People’s Committee for Absolute Democracy With the King As Head of State (PCAD). The rally gathered in Bangkok’s Lumpini Park. This is the trend that is going global. People are fed up with corrupt politicians. I have stated at the conference this is the first time our Cycle of Civil Unrest, Cycle of War, and the Economic Confidence Model have all converged since the 1700s. Where the trend was against monarchy back then with the American and French Revolutions, here we are seeing the very point of cyclical movement – the pendulum swings back to the other side. In Thailand, they are seeking to return to monarchy and away from pretend republics masquerading as democracies. In Thailand they understand the difference.

Lagarde’s Low-Flation

Posted on April 5, 2014 by Martin Armstrong

QUESTION: Mr. Armstrong; Christine Lagarde of the IMF has stated that the problem with Europe and Japan is that they have no appreciable inflation. She calls it “low-flation.”  You have stated that the U.S. and Germany are always fighting their last economic war so the U.S. inflates and Germany deflates. So is Lagarde correct this time? Is there a difference between technology deflation and economic deflation?

ANSWER: As with everything, there are always two sides to every coin. It is never just black and white because the economy is highly complex.  Lagarde is correct from the standpoint that economies never reverse until inflation appears. Just look at the Great Depression. Each country reversed only when it abandoned the gold standard or devalued. As long as money is more desirable than assets, people will hoard cash and not spend concerned about the future. You can see the dollar devaluation created inflation and only then will the economy reverse. If money rises in value, that means assets must fall along with wages = economic deflation.

You cannot confuse new technology that starts out as expensive and then declines with overall economic deflation. They are two distinct trends. Technology deflation always takes place during the Schumpeter Waves of Creative Destruction. Yes, this is unfolding right now in computers and the internet area. Prices decline so you have Technology deflation, but it also displaces jobs from the old technology contributing to economic deflation.

This took place with the railroads bringing mail order and competition to Main Street. Then there was the automobile and Henry Ford’s invention of the assembly line that caused prices to plummet and $240 made the automobile affordable for the middle-class that changed everything economically. However, those in the old technology (horse & buggies) lose their jobs while generally the younger generation takes up the new technology. This is taking place right now as the internet wipes out newspapers, magazine and internet shopping like at Amazon wipe out book stores.

The combustion engine brought tractors to the farm and that wiped out jobs where in 1900 41% of Americans were farmers and by 1980 that was 3%. This is simply the waves of Creative Destruction and is not indicative to the entire overall economy. It is simultaneously inflationary on the one hand a deflationary costing others their jobs.

This introduces the issue of wages over the generational gap as well often referred to as the Inter-generational Earnings Elasticity. Unions have fought against such trends in wages losing entire industries in the process. New York use to be the largest US port where today nobody shows up at all. Unions basically gutted Detroit. Unions only look at wages for the worker at the expense of the consumer failing to grasp that the consumer is free to buy what they want. Every action has its opposite reaction. You cannot impose high tariffs on steel to protect steel workers that reduce car sales and cost auto jobs. Everything has implications that ripple through the economy as a total societal economic system. There are always the plus and the minus. They lower interest rates to try to “stimulate” demand to borrow and wipe out pension funds and the elderly who relied upon high interest rates. You cannot intervene to help one segment without destroying another.

The economic deflation is when the economy as a whole is declining and in that context she is correct. The value of money rises in purchasing power as assets decline. In the very early stage you get the traditional flight to quality. However, prolonged deflation is indeed a serious problem for people will not borrow if they do not see an opportunity to make a profit. That is the key. This is what Japan created with its low-interest rates. Merely increasing the money supply will not cause inflation. It requires people to stop hoarding cash and have confidence that there is a profit to be made.

This is where most people go seriously wrong in ASSUMING that a mere increase in the supply of money must be inflationary. That statement is fundamentally wrong because it PRESUMES people will stop hoarding if you simply increase the supply of money. All the evidence demonstrates this imaginary relationship. Inflation will erupt even when the supply of money does NOT increase – it depends upon DEMAND. If the people decide to hoard toilet paper because of a coming storm, the price will rise with demand. It has nothing to do with the supply of money. Hence, central banks, including the ECB, have been increasing the supply of money steadily to no avail, Only when people have confidence in the future economy or a collapse of confidence in government will they no longer hoard cash. It can never be reduced to a single cause-effect relationship.

Lagarde is correct in the prolonged deflation is highly destructive to the economy for money supply must grow with population at the very minimum or you will have massive economic revolts and civil unrest. If there is only $10 and 10 people than everyone can have $1. But if population doubles to 20 and you still have only $10, then each can have 50 cents. Money supply MUST increase with population or you unleash deflation. This was the problem with the gold standard. Inflation was created by discovery, not planning. There was California, Australia, Alaska, and South Africa. Each sparked waves of inflation as gold declined in purchasing power with the rise in supply. The Spanish discovery of silver and gold in the New World ruined their economy and sent waves of inflation throughout Europe.

This is what we are faced with right now. The technology deflation is contributing to the overall economic deflation from the standpoint of job destruction as prices decline making it easier to replace workers. There are always going to be undercurrents that prevent simple statements in a one-dimensional world of cause and effect. It is called simply – complexity.

Where Lagarde is incorrect is that keeping interest rates low does not stimulate the economy as long as people see no opportunity to invest for simultaneously they wipe out the ability of retired people to live off the income of their savings. This creates more deflation and stimulates nothing. Larry Summers is of the same one-way thought process suggesting interest rates have to go negative to force people to spend. Just raise interest rates and watch the action cascade.

Those that keep harping that inflation is evil because it diminishes the value of savings are only looking at savers – not investors. That is only one slice of the economic pie. To the homeowner, his house is declining in value as the purchasing power of money rises. So there is no escape. You cannot insist upon no inflation and a return to a gold standard yet simultaneously want higher wages and rising values of real estate and investment. You cannot have your piece of the pie and eat the rest too. Those who espouse such statements never really think clearly about what they are truly saying.

You cannot reduce this to a single cause and effect relationship for it is far more complex that meets the eye. This is our problem. People fail to see there are two sides to every action – never just one.

Debt- Deflation- Europe

Inflation is not Always Caused by Change in Money Supply – Deflation is Engulfing Europe

Posted on April 6, 2014 by Martin Armstrong

COMMENT: Marty; I have to say this was the best conference you have done since 2011. It was the most organized and the live demo of talking to the website was unbelievable. The film clip you showed on cycles was amazing illustrating the hidden order within the nature of all things. However, I do not think even you appreciate just how far advanced your groundbreaking technology and concepts really are. As you know, I work for one of the big money center banks, …., and the simple statement you just so casually write is truly revolutionary.

“Inflation will erupt even when the supply of money does NOT increase – it depends upon DEMAND. If the people decide to hoard toilet paper because of a coming storm, the price will rise with demand.”

It has caused a discussion in the bank that you seem to have hit the nail on the head. The topic inside is the deep concern for deflation engulfing Europe as you warned at the conference. If there was ever any question between influence and discovery this settled it. Your statement explained why gold failed and everyone has been so confused about QE1-3. It is becoming painstakingly obvious people just do not understand how markets and the economy move. China’s confirmation that they use your capital flow analysis confirmed much and whenever you say something they immediately follow. You stated they should buy directly from the Treasury and in less than a month that is precisely what they did. This fuels the argument about your influence I must say because there are still those who cling to their old theories like a life-preserver as the Titanic sank.

You were the only one to say the Fed’s monetization would fail and Europe would go into a deflationary debt spiral raising the cost of their national debts. You pointed out the debts of Greece and southern Europe actually rose in real terms destroying their economies thanks to the euro. The classic assumption that increasing the money supply causes an increase in the general price level on some direct basis is obviously wrong. Your ideas are being discussed at high levels. Your observation that taxes offset and are deflationary negating any gain whatsoever in purchasing power is smashingly brilliant. Your talent for observation and explanation are truly unmatched. You really need to get this out in a book. You are the next mover and shaker.

Thanks so much for everything you do. You have shown that economists need to first be traders. Experience is the key.

Good on ya

KM

REPLY: Thank you so much. Sometimes it is hard to remember how different our clients are from the herd, I am glad the organization came off better for the conference. At first I assumed it would be a one-time thing and I would go off into the sunset. Even a guy at Bloomberg News asked me how did I come back so strong? He said nobody has ever come back. I can only attribute this to our clients who are also in search of the truth – not opinions.

Breaking the conference into three parts with a day between each allowed everyone to network better than ever before, but it limited my ability to mingle. It was good to see so many from Asia, Australia, Europe, Mid East, South America, and USA. These events are what taught me and I am glad everyone has found it an enlightening experience meeting people from around the globe. The global diversity opened my eyes over the years and I saw the capital flows right then and there. This is the only such gathering on a global scale at this level.

Yes, you are probably right. Sometimes I do not appreciate that the way I have discovered things was by observation that is maybe unique and so different from the general view. I was never concerned about creating a theory to bash someone else over the head with. This was always just trying to trade. There are people who just disagree stating their opinion but offer no evidence to support what they want to believe. As you say, they are indeed just clinging to old theories desperately refusing to consider they might be wrong and try to argue their belief with opinion – not fact.

The austerity tax increases in Europe are putting the Eurozone at total risk of a deflationary massive depression after 2015.75 far worse than what followed 2007. Funding costs for Eurozone countries haven’t been this cheap in years, but this is part of the deflationary spiral where the fixed income collapses. Prices in Europe have been falling at an alarming rate of 5.6% in Italy, 4.7% in Spain, 4% in Portugal and 2% in Holland since September alone. The rise of the euro against the dollar, yen, and yuan, accounts for some of this as the rise in the currency reduces the cost of imports. Nonetheless, demand is also declining not rising thanks to the rise in taxation. The Eurozone’s trade-weighted index has risen 6% in a year reflecting the deflationary crisis engulfing the EU.

What Lagarde is saying about “lowflation” is correct, but increasing the supply of money will fail by itself because there is a decline in DEMAND she does not understand. The rise in the euro is also causing the deflationary trend that results in the debt ratios jumping as in France by 10% to 105% of GDP. Italy has seen a 15% rise to 148% of GDP and Spain suffered a 24% jump to 118% of GDP. What they think they are achieving through austerity is actually being overshadowed by the destructive force of Debt-Deflation. The higher the currency rises, this actually make all previous debt more expensive to redeem costing them national wealth. Debt-Deflation is the opposite side of the coin that people assume where Debt-Inflation reflects what you get back at redemption has less purchasing power. The actual burden of the debt is rising in real international terms under Debt-Deflation that is the opposite assumption with Debt-Inflation, which results from just printing money. Anyone cashing in euro bonds from overseas is making more today in international terms thanks to the rise in the euro.

The debt burden in Debt-Deflation actually rises faster than nominal GDP engulfing the private sector as well reducing the ability of European industry to compete and pay their previous debts lacking the ability to just create money. This is reaching chronic levels in Spain, Portugal as well as Ireland not to forget Greece and Italy. These nations did not benefit from joining the euro for their previous debts stopped being automatically depreciated in real terms by inflation. Instead, their debts rose in real international terms and that became unbearable in Greece as will be the case throughout Europe. This is what happened to the USA during the Great Depression for the dollar rose in value increasing the Debt-Deflation, that also bankrupted companies.

Consequently, this so-called “lowflation” only increases the concerns among “smart” money that we have a classic debt crisis in Europe calling into question the overall sustainability of debt and WHEN will the euro sink – not IF. This is impacting the municipal level that cannot simply print euros (inflate) as private debt and Lagarde’s call to increase the money supply will do nothing to little to avert this debt crisis. This tightening of the debt-vice on government and industry is also impacting the consumer with fixed-rate debts and eroding bank assets. The combination of low growth and low inflation has significant implications for all sectors of the economy, no less sustaining the high unemployment over 60% among the youth with zero hope of job creation. There is no traditional classic way out of this mess. The only solution lies outside the box.

I have written about the overlooked printing of local money by municipal governments in the USA during the Great Depression. This was further evidenced of the Debt-Deflation spiral, yet it also demonstrates that an increase in money supply when DEMAND is collapsing due to the lack of CONFIDENCE will have no appreciable influence upon inflation. You cannot simply print your way out of a Debt-Deflation.

I published these drawings back in 1985 to explain the end of deflation and the beginning of inflation with the shift in PUBLIC to PRIVATE in the ECM. These flat-world ideas of one-dimensional relationships have got to stop. This is how the gold promoters ruined so many people buying into this idea of hyperinflation all based on the flat-world one-dimensional concepts of an increase in the money supply MUST cause inflation that they have been waiting for since 1980. They will still argue I am wrong yet offer not a single study to demonstrate their proposition – because they cannot.

Silver declined from 1919 into 1932 during a huge inflationary boom. So where is the beef? I deal in facts – not opinions. Prove to me there is some one-to-one relationship between the supply of money and inflation – PLEASE!. There is no such relationship and I have the largest database in the world tracking money supply even into ancient Roman times.

The truth always remains a  there is a complex societal economic system with numerous variables all interacting and therefore, some relationship will appear and then vanish the next time because this is complexity.OPINION is not going to save the day. Where is the correlation?

These flat-world ideas of one-dimensional relationships always also ignore complexity. Taxes are a key factor because government only CONSUMES the national wealth – they do not create it. Taxes that are raised outright, changing definitions of the rich (progress rising tax rates not tied to inflation), or currently hunting the rich around the globe that causes money to contract and hoard, offset any growth in the supply of money.

The velocity of money peaked with the 1998.20 peak in the Economic Confidence Model. As taxes have been rising, tax enforcement has risen, and the insane changes to capital gains taxation where you pay now on gains, but losses you can only write off $3,000. The greed of government has all combined to reduce long-term investment. Then add the 2011 hunt for American worldwide and you have a classic trend of collapsing velocity in money that negates inflation and increases cash as liquidity declines further. Corporate cash is at a record high $1.64 trillion demonstrating how the velocity of money is also critical. If the velocity increases yet the supply of money remains unchanged, this will be inflationary. However, increase the money supply, as the Fed has done, but raise taxes, tax enforcement, and the collapse in the velocity of money will offset any increase.

You cannot make statements that inflation will rise if money supply rises. That is so old school it is unbelievable. The people harping on this concept have NOT investigated anything and remain blind to the complexity of the global societal economic system. There is a lot more to this entire issue than most people ever think about.

The 1987 Crash was the anticipation of a 40% decline in the value of the dollar. The capital flight and the drop in the dollar created Currency Inflation where the supply of money does not increase but the drop in purchasing value of the currency results in the rise in the price of imports. Yes, the G5 in theory lowered the cost of American goods, but it increase the cost of everything imported including oil. They increased the cost of production that relied upon energy and foreign components. You cannot isolate just one aspect within the economy.

Raise taxes on the “rich” to help the poor, sends capital fleeing from an economy and all you have left are the poor. Just look at Detroit and fast-forward to all the cities. There is no such thing as creating “social justice” through taxation. It is no different from saying everyone in school will be given the same grade so there is “educational justice”. The smart will stop studying (producing) because they will get nothing in return for their effort.

We are only equal in rights – not ability or talent. I have no dreams of being a rock star because I cannot sing. Nor did I dream of being a football player or a movie star, and certainly not President of the United States even though I too shook hands with JFK as did Bill Clinton.

We all have our talents and that is David Ricardo’s theory of Comparative Advantage that he saw among nations where they should not try to grow lettuce in a desert that will cost $100 a head when you can buy it from another country for 50 cents. People are no different from nations. Individuals also have their comparative advantages just as women can give birth and men are typically stronger to take out the trash.

Just as the debate about guns. This 106 year-old woman in Armenia had a right to defend herself in the middle of civil unrest. Guns do not kill – people do. Outlawing guns will only arm the criminals. If you really want to stop the violence, legalize drugs, tax them, and regulate them as they did with booze. That defunded the Mafia more than anything and the gun battles in Chicago ceased (like the song the night Chicago Died). As long as there is a tax-free profit to be made, you will never stop the violence. Do the correlation and you will see – opinions do not matter.

The computer design you saw at the conference speaking to me and how to create your own portfolio that it correlates to the world is reality. Everything is connected. It is never this one-dimensional cause and effect. You are right. But being a trader is only one aspect of what I learned. The other blends with being into computer science that forced me into analyzing how to think, reason, and analyze. Understanding how to program AI requires you to break down every tiny aspect of how to think and reason in order to recreate the thinking process of humankind.

So I believe the programming taught me that every single aspect must be investigated and plugged-in because the global economy is like the gears of a watch. Turn one, and everything moves, some to the left and others to the right. This is why you cannot forecast anything in isolation. It is all connected. This is why there is no relationship that is ever constant i.e. silver/gold ratio (never constant).

Trend and high-frequency trading

US Share Market & high-frequency trading

Posted on April 1, 2014 by Martin Armstrong

The US Share Market is like that Pink Energizer Bunny – it just keeps going. The talking heads keep talking to themselves and remain clueless since this is not economically driven from the standpoint of a booming economy. Rather. the economy remains the strongest in the world and we are simply the prettiest of the ugly twins.

Of course there is the promotion of Michael Lewis’s new book where he claims the market is rigged by the high-frequency trading. This sounds great. but in truth there is no substance to this regarding the trend. Yes, a computer can out-trade any individual with ins and outs rapidly. However, during an increase in volatility, these programs shut down. They withdraw from the markets and therein you get the flash crashes because they do provide the illusion of deeper markets.

The high-frequency trading deepens the market but it does not alter the trend. The computers trade within the trend and the market still peaks and bottoms on schedule with our model. Even in computers, if you try to create a random number generator, it will fall back to a pattern and cycle. Attempts to seed it from the time clock produce the same end result beginning from the same tick on a clock. Therefore, high-frequency trading displays also cycles.

Those claiming markets are rigged do not really understand how they function if they claim the trend can be altered. You can rig something within the trend, but that is it. You cannot make the US share market rise or fall based upon your desire for the long-term. If the entire world is trading against you, you are done. Here is the S&P in Euros. Now lets look at it in C$, BP and Swiss.

If high-frequency trading actually manipulated the market, then it would be rising only in dollars. The fact that the US share market is rising in most currencies even when the currencies are rising against the dollar, demonstrates this is a real bull market on a global scale.

We will see a temp high form near-term. However, the S&P is headed to test the 2000-2045 level. All the high-frequency trading in the world will NOT prevent the crash that will be on the horizon. Nobody can manipulate the trend. The best they can do is fuel the trend but never trade against it – the old saying remains true – the Trend is your Friend.