Inflation will appear when it becomes obvious we have a runaway train and central banks can do NOTHING.

Impact of Higher Rates

Posted on March 31, 2015 by Martin Armstrong

QUESTION: It seems much of the growth in private companies is being fuelled by debt. What is the affect after the Big Bang on these companies that are relying on borrowing to grow and expand?

Thanks

Bill

ANSWER: We have been advising corporates to borrow as much as they can now and lock it in for rates will rise. Those companies that have fixed debt will do well. Floating rate debt or short-term will be the problem.

If our proposal would be implemented, the rates would be more stable getting the Feds out of the picture. The problem is the Feds have lowered rates to “stimulate” but this has lowered their interest expenditures of government. Any uptick in rates will have a profound impact upon national debts.

Government deficits will expand exponentially so we will have a real screwed up world with deflation and inflation combining from different sources. This is like that crazy line from Blazing Saddles – no body move or the black guys gets it! Central banks have totally lost control because government is the biggest borrower. The idea of raising rates to curb inflation sends their own debt up because the politicians exempt themselves from fiscal management. This is totally out of control and as soon as they raise rates, it is all over.That is when inflation will appear when this become obvious we have a runaway train and central banks can do NOTHING.

Higher rates will now cause deeper deficits exactly opposite of a typical recession. This is getting wild.

Debt-Equity Swaps

Posted on March 29, 2015 by Martin Armstrong

Debt-equity swaps were used in the former Soviet satellites in Eastern Europe. This was the chief method of making the transition from communism to capitalism. Poland implemented an extensive privatization program back in 1990 and had privatized half of all state-owned enterprises by the end of 1994. Indeed, debt-equity swaps were introduced into the Polish process in 1994, primarily for use by Polish banks in converting their non-performing loans into equity stakes in the debtor companies. Nevertheless, foreign debt was not eligible for use in these Polish debt-equity swaps, although there were suggestions in 1995 and 1996 that external foreign debt should be.

Other Eastern European countries, such as Croatia, the Czech Republic, and Hungary, have used debt-equity swaps to enable banks to exchange debt for equity in highly indebted local companies so that the local banks become shareholders in the companies. Bulgaria  has likewise made extensive use of debt-equity  conversions, primarily of external debt in the form of Brady bonds.

The debt-equity swap that we are proposing would be open to both domestic and foreign holders of debt through a series of tranches being swapped into coupons that could then be used to invest in domestic private shares, not the privatization of inefficient state run entities.

The coupons would then be free to trade on the open market. Foreign investors could sell them at current market prices to whomever wanted to invest domestically in shares. The central bank would then return to its original design free from being compelled to buy exclusively government bonds. Stimulation would be direct rather than indirect whereby they would buy corporate paper during times of recession that would soften the hard-landing and reduce swings in unemployment. Currently, relying on the banks to lend defeats the purpose of stimulation for they lack the confidence to lend and will stockpile cash during economic declines.

There are more layers to this proposal than meet the eye at first glance. It would be a step in reclaiming the free markets and bringing a final end to the Marxist era of state manipulation.

Breakdown of Debt

Posted on March 30, 2015 by Martin Armstrong

QUESTION: 

Mr. Armstrong, I have been eagerly awaiting your Solution and am trying to wrap my head around it. Can you explain more about the debt to equity swaps? What exactly would the debt be swapped for? PS: In your latest blog, you mentioned repealing the “13th” amendment. That gave me quite a shock until I realized you meant the “16th”!!

RF

ANSWER: Well yes I meant the 16th, but ironically we are all economic slaves from their view anyway so it would abolish our slavery as well under the 13th.

A debt-equity swap is what you do to make a transition. In the case of Mexico, it was a swap of debt types. In Eastern Europe, it was a swap for state owned assets. Poland implemented an extensive privatization program in 1990 and had privatized half of all state-owned enterprises by the end of 1994.Debt-equity swaps were introduced into the Polish process in 1994, primarily for use by Polish banks in converting their non-performing loans into equity stakes in the debtor companies. Foreign debt was not eligible for use in these Polish debt-equity swaps.

In this case, we would swap out the federal debt of $18 trillion into coupons that are redeemable for the purchase of private equity. You would then take the coupons and invest in stock. Since large corps are buying back their shares now, they do not need the money. This will go to entrepreneurship starting up businesses or expanding small business. It would provide a stake in the nation for all for the lower class would actually become investors. The “rich” make money from investment, not wages.

Of course there will be people who criticize this idea. They have no practical solution for there is no other choice. You reach the point of no return. Governments are causing DEFLATION and destroying everything as they hunt money. That will collapse the world economy and they are TOO STUPID to comprehend what they are doing until it is too late. The hard money guys have already sent nasty emails, but their world is precisely what Germany is imposing in Europe. They are handing the people over to the bankers for go ahead, back bonds with gold and how do you pay your mortgage.

There is no practical solution and EVERY debt crisis has involved either a DEFAULT or some sort of haircut. Any way we slice it, the next downturn will present solutions that hand more money to the bankers and you will see revolution next time. We either seriously look at how to end this cycle of perpetual borrowing, or go build a cabin in the woods far from everything. We are rapidly reaching the point of no return.

The city of Mainz was where the Gutenberg Press was invented. That created a economic boom like the internet today. The politicians spend wildly assuming taxes would never end. So they borrowed heavily against expected future revenue. As taxes rose, people left town. Their debt kept rolling as new issues were sold to pay off the last one. When nobody showed up for the next issue, they could not pay. They collapsed and eventually the creditors sacked the city and burned it to the ground. I sup[pose that is a solution.

Euro resistance stands at the 1.1360 and 1.1500 level.Dow has support at the 170004 level.

Markets in Review

Posted on March 27, 2015 by Martin Armstrong

The reaction rally in the markets appears to be unfolding on schedule. From the broader perspective, a corrective process in equities will send the residual cash into bonds and this may help create the final bubble top in interest rate markets. This should materialize with a correction in the dollar and that pop in the Euro. While we are looking for a break of the 80 level in the Euro against the dollar, that should not be right now.

In the cash Euro, the resistance stands at the 11360 and 11500 level. This is where we need a closing above that level to signal a sustainable pause in trend. We need a weekly closing above 11540 in the Euro to signal a sustainable reaction rally. We need a monthly closing above 12575 to confirm a pause in the downtrend.

Even gold has become a bit oversold so a reaction rally is warranted there as well. In gold, we would need a weekly closing above 1240 to create any sustainable pause at this time. We can see that our Energy Models did rather nicely in highlighting the pop and the decline. Now we can see a reaction rally is likely as we churn waiting for alignment with the global economy. We need to see a month end closing above 1256 to produce a June high.

The Dow has support at the 170004 level. A weekly closing beneath this level will confirm a retest of support. A closing below that level for month-end would then point to at least a April/May low. We still see July and October as key targets in time.

The DAX shows a daily closing below 114600 will produce a retest of support. However, a weekly closing below 117800 will warn of a retest of support on a broader level. A monthly closing below 1059000 is required to warn of a sustainable correction.

In Crude Oil a daily and weekly close above 5425 will signal a reaction rally is unfolding. Monthly closing resistance begins at 5525 with major resistance at the 8900-9000 level. June and August remain key targets in time.

The Cowards In Charge – Here We Go Again

Posted on March 27, 2015 by Martin Armstrong

It comes as no surprise that those in charge of government NEVER learn from the past. They actually once again admit they always want to go to war, but never have any exit strategy. Just wage constant war and at the expense of so much blood exactly for what.

Even in trading, you must define where you are wrong and you must have an exit strategy before you enter a trade. If you do not know these basic parameters, you will lose money all the time. This is why people will hold on to a losing trade because they have no exit strategy.

The morons who wage war are really brain-dead and those who authorize them to wage endless war should be the first wave in the front line. It is easy to send other people to death. That is the mark of a coward. It is another thing to fight along side them. Julius Caesar was a leader his troops admired because he fought along side them and wore a red cloak so everyone knew where he was. That was guts. Shame we have no such leaders today.

ISIS will fizzle out for their own people will grow tired of the rules. Engage them and you will make them stronger. Observe and contain – do not attack. And as for the cowards who say they should bomb them out of existence, what about all the women and children trapped behind the lines that would not be there but for force? Communism failed all on its own. So will ISIS unless attacked.

Copper - weekly close above 290, key will be 312 for the closing of the month.

Copper

Posted on March 25, 2015 by Martin Armstrong

The Rally in Copper is coming on schedule. A weekly close above 290 will suggest a further rally into next week. But the key will be 312 for the closing of the month. If Copper can do that much, then a sustained rally become possible. Otherwise, a retest of support will be more likely for now.

Six Dimensions - TIME v PRICE

TIME v PRICE

Posted on March 26, 2015 by Martin Armstrong

QUESTION: 

Dear Mr. Armstrong:

 

I hope you are doing well and congratulations for your successful work, research and forecasts!. I don´t understand, Why TIME is more important than PRICE?. For example, Why the PRICE of gold is not important?.

I look forward to hearing from you as soon as possible.

Sincerely,

 

J.E.M.V.

ANSWER: TIME governs everything for everything is connected in the Sixth Dimension by this complex element. Yet each and everything also has its TIME and PLACE which are the Fourth and Second Dimensions. Where gold bottoms in price is really irrelevant for no uptrend is possible until everything is aligned. Once the markets are all in alignment, then the trend changes for everything. The price of anything is secondary to the trend alignment and that is all about TIME.

Consequently, like in the Dow, we had three targets, 18,500, 23,000, and then the 37,000-40,000 level. PRICE is the second dimension only. But the TIME is unchangable for it is a unique property of everything. COMPLEX TIME is the sixth dimension – an alignment that requires everything to be in place where the world correlates. This is revealed through our tracking of global capital flows. It is also why you can try to create a model on a single market even with cycles, only to find that your best efforts will fail because all cycles must converge and distort to create the major alignments.

Interest rates- under all scenarios. Other dimensions.

Interest Rates – Dollars – October

Posted on March 26, 2015 by Martin Armstrong

Some have asked will the dollar has previously fallen with higher interest rates so why will the opposite unfold now? The answer to that question is rather important to grasp – YES and NO. Sometimes YES and sometimes higher interest rates reflects a weak currency but NO for higher interest can reflect also a strong currency. Now the perpetual critics will say oh you are zig-zagging so you can have it both ways.

What you have to understand is there is ABSOLUTELY no relationship that is EVER fixed. There will be times rising interest rates will support a currency and at other times they will rise because of capital flight as we have seen in Russia, Greece, Argentina, Brazil etc. This is a contango within a complex system – not some linear one-dimensional world where people expect a concrete relationship that never changes.

It does not matter what it is, there will NEVER be a constant. Look at the Silver/Gold Ratio. That has been a good one. The promoters always suck people in claiming it should be 16:1 so buy it now and make a fortune. Such nonsense cannot be supported ever for the fact expose it is fictional sales-bullshit. That ratio has been everywhere from 120:1 to 15:1 since 1560. Obviously, there is no constant.

When it comes to currency, we are dealing with a sort of share price based upon the performance of a nation. It becomes a matter of CONFIDENCE which is key. When CONFIDENCE is strong in one country, capital will flee to that currency causing a bubble in assets that a central bank will misunderstand and be compelled to raise rates to try to stop the bubble it thinks is domestic oriented. This will only subsidize foreign investment further. This is how real BUBBLES are produced. On the contrary, rates will also rise when CONFIDENCE collapses as the central bank is trying to support a currency. This will typically fail for they fear lower values and rates must rise enough to exceed the expectations of any decline  We saw this recently with rising rates also in Russia as the Ruble fell.

This is where our capital flow models come into play. They provide aconf view as to if the capital is moving in with rising rates or running for the hills. This is that fifth dimension of CONFIDENCE, which is the next dimension after the fourth – TIME. What you expect with fixed relationships is just an illusion. There are more dimension than just a flat model where Marx-Keynes assumed the power to eliminate the business cycle. The second dimension is realizing that there is height to market moves and thus there are peaks and lows in a boom and bust cycle wave. The third dimension is depth, understanding the flash crash unfolds based upon market depth.

Look at the performance of the dollar at the peak in rates during 1981. The peak in rates came at the 2nd quarter 1981. Note that the dollar declined and bottom two quarters before.  This marked the warning that a shift was coming. Indeed, gold peaked 5 quarters prior. The dollar rose as rates declined. Why? Because people realized that when rates started to fall, the trend shifted and it was time to lock in as much as you could.

I was giving lectures around Europe at the time. The number one question I use to get was would the USA move to a two-tier currency? The Eurodollar market was $1 trillion and so was the national debt. Europeans believed the US would create red dollars for external and these would be worth less than the domestic green dollar. So capital moved into domestic deposits causing the dollar to rise. The Eurodollar market crashed and the domestic dollar soared. Even domestically my Mother and her sister bought CDs at banks paying over 20% for 10 years and did not think twice.

Here we see a totally different pattern. The dollar rose with higher rates because this was World War I. Capital flees from the risk of geopolitical events regardless of interest rates. Again, the Fed was raising rates trying to stop the commodity bubble.

Then the dollar rose sharply during the 1931 Sovereign Debt Crisis. We are seeing this right now internally as well within Europe. As fear rises that the Euro will collapse, capital is shifting to Germany driving the bunds to historic highs and the DAX to highs.

So it is always a matter of CONFIDENCE which determines the capital flows. So will the dollar rise because of higher interest rates or fall? This time it will rise ONLY when the realization of a Sovereign Debt Crisis is unfolding and then if we end up with an escalating war in Ukraine. Both such events will send capital to the dollar. This is not about interest rates. This is about capital movement. Higher rates are immaterial at this moment in time. It is higher rates from the USA which will help to set in motion Sovereign Debt Crisis among nations that borrowed dollars since 2007. That is post-2015.75 – not now.

Choppy markets here for April and May.

Dow To Be or Not To Be – Correction Time?

Posted on March 18, 2015 by Martin Armstrong

 

We warned that the Dow was not going to blast out to the upside and we saw a sideways to consolidating trend into May. Nothing has really changed and as you can see from our Energy Models, we have indeed been in a declining phase. Technically, the Dow is coming back to key support. With everyone screaming the stocks are overvalued and will crash, it certainly appears we will get this correction and that we may indeed need it to finish off this cycle in bonds.
What do I mean by that? A scare in stocks now will send capital into the bond market to make that final bubble high with a concentration of capital. Stocks are by no means overvalued. Retail participation is at historic lows. So there is no bubble and indeed we do not see a phase transition type of top that marks such major highs. What we do need is to scare the capital to send it running into the bond market to make it complete that high in bonds (low in rates).



Now look at the Dow in Euros. Here we do have the spike in our Energy models. This is implying we should also see the Euro bounce one time. Everyone and their corrupt politician representative is short the Euro. Thus, we have the fuel for a Euro rally soon as well. This will help bring the US market back down in terms of Euro and cut off the foreign inflows temporarily.


 
We have a Directional Change next week and both April and May are Directional Changes on the Monthly Model level. We still see May as the end of this critical period. So pay attention. We should have some choppy markets here for April and May.

Euro- A closing back below 10690 should see the Euro retest support once again. We are headed to 80 cent level

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ECB Riots Trash Frankfurt Turning into War Zone

Posted on March 19, 2015 by Martin Armstrong

Reply

The violent protests downtown Frankfurt simply paralyzed the city. Barricades were burning everywhere and at least 90 policemen were injured. The city of Frankfurt, normally the obedient Germans would never act in such a manner, yet the city was reduced to a war zone. No doubt they will be looking at further restrrictions now on the free movement of people for protests within Europe. This has been talked about quietly and the mere fact this subject has already come up shows that the Euro idea is a total failure This would be akin to preventing Americans from march to Washington, DC.

The riots overshadowed the inauguration of the new ECB headquarters and clearly illustrate the European discontent. Nevertheless, the bankers were secure behind the blood of the police to protect them. So the ribbon cutting went on as planned and the smiles ignored the reality of their actions. The bankers remain detached from the people.

This may appear as a revival of the Occupy Wall Street and they were calling it Blockupy.  Draghi, referring to the protests outside, said it was a “very difficult situation” and offered “truly special and warmest thanks to the police and the security forces”. Firefighters also came under attack and were called out 47 times to douse the flames of burning automobiles and barricades made from toppled garbage bins. The austerity protest has at least got it right. They idea of austerity is to support bondholders, not the people, as it attempts to paper-over fiscal mismanagement of a system that not even an idiot could justify. How can anyone in their right mind propose a system of perpetual borrowing with no intention of paying anything off?



The Euro rally was actually on target. A closing back below 10690 should see the Euro retest support once again. Keep in mind that while we are headed to 80 cent level, we should not do that in a straight line.
At the Solution Conference we will review the update for the Cycle of War. The civil unrest is now obvious. Even the rumbling of war began on target in 2014. Our concern here will rise after the ECM turns for nobody goes to war when they are still fat and happy

The Fed CANNOT CONTROL the Money Supply. The Bulk of money is created by the VELOCITY

Who Controls the Money Supply – Fed or We the People?

Posted on March 15, 2015 by Martin Armstrong

COMMENT:

Hello Mr. Armstrong,

Laugh you may. How about we just exchange with each other with love and compassion?

All the best,

m

ANSWER: Ironically you hit it on the head. You will deal with someone you TRUST and you will not deal with someone you do not TRUST. This is the very essence of everything – CONFIDENCE. J.P. Morgan explained it best to someone else who did not understand money or banking. So don’t laugh – you are absolutely correct and in that comment lies the fate of the entire financial system.

Other emails have come in saying Bitcoin is controlled by “We the People” rather than 12 guys at the Fed. OMG! How many times do I have to explain that the Fed CANNOT CONTROL the Money Supply. The Bulk of money is created by the VELOCITY of money through lending at the banks called LEVERAGE (Fractional Banking). This is when markets crash and the dollar is rising because the two are never equal. Assets become over-valued in a Bubble and they crash because there is not enough actual money to represent those valuations. The ” REAL money supply” is often a multiple of the actual money on the books and is known as the VELOCITY. Then the bulk of the actual money created by government is NOT by the Fed, it is by Congress through debt. I have shown this chart many times. It shows that 70% of the national debt is actually accumulative interest payments. Had the Fed actually been in charge of the money supply, it would have been one-third of its current size (WITHOUT DEBT). Yes, had we just printed what we need the money supply would be far less. That is 70% which went to interest not the poor, schools, or roads. Changing money to gold or bitcoin or whatever, will not address the real problem

Why was there no inflation with QE1-3? Because the bond holders were not exclusively domestic. The economy is porous and the dollar is used globally. The Fed cannot control even long-term interest rates nor can they dictate to the banks. They handed the banks TARP, but they did not lend the money. Everything is indirect – not direct control and that is much of the problem.

It is these simplistic labels attached on the Fed as the greatest evil that prevents people from (1) understanding the VELOCITY of money through banking, and (2) Congress’ convenient pointing-fingers at the Fed to deflect blame from themselves. I’m sorry, but I think you need to understand economics 101. Not everything can be blamed on the Fed. The vast majority of the money is created between debt and lending the same $100 several times.

And as for this nonsense that Bitcoin is controlled by “We the People” – give me a break. The people control the money supply right now. We either hoard and save not borrowing, which reduces the VELOCITY of money and why the ECB is going negative to try to force people to spend, or we spend and leverage the whole system up. We are our own masters and do not even understand who is driving this car.

Politicians spend more to buy votes from whom? The People. Anyone on Capitol Hill will tell you even the CONSERVATIVE Republicans during the 2007-2009 Crash lobbied on the Hill saying Congress had to reduce spending, just not theirs. The money supply is controlled by “We the People” and if you think creating some independent board will eliminate corruption, you might be interested in buying the Brooklyn Bridge while your at it for your retirement. Communism failed because human nature took over. It does not matter who is in control, once control is given, they will put their hand in the cookie jar.

There is a lot more to all this nonsense than one-dimensional ideas that try to pin-blame on just one entity for then all solutions will only create chaos as Andrew Jackson unleashed.