New European Monetary Fund to replace the IMF

Does Schäuble want Draghi to Exit the Stage Once & For All?

Posted Apr 26, 2017 by Martin Armstrong

has expressed

Federal Minister of Finance Wolfgang Schäuble of Germany is starting to show signs of rebellion against the elite in Brussels. With the event of BREXIT, the EU is more concerned about trying to punish Britain than they are is reflecting upon what is going so terribly wrong. They will throw their support behind Macron in France fearing that a Le Pen win may be the end of Brussels. Consequently, the EU Commission is trying to punish Britain, is actually dividing Europe once again. There will be the EU membership, and then there will be the Eurozone within limited to those countries who surrender their sovereignty to Brussels relinquishing their currency, but not their debt.

Schäuble is clearly attempting to save the Eurozone and make it operational at the same time to protect German exports within Europe. The driving force behin the Euro was to eliminate foreign exchange risk so German manufacturers could sell to all of Europe on a regular basis without currency fluctuation disturbing their sales.

Yet Schäuble is actually looking at reducing the power of the EU for reading between the lines, he has no confidence in the abilities of the EU Commission to manage Europe. Obviously, BREXIT is restructuring the EU only insofar as they seek to punish Britain rather than reform the problems that caused it. That means the Euro zone will be restructured as a block within the EU leaving the institutions, such as the ECB, applicable to the EU. The rules within the Eurozone are by no means clearly defined. This is how Markel opened the gates to refugees without ever going to a vote first in the EU. Thus, the unilateral decisions of Germany have then been applied to all of Europe without any democratic process whatsoever.

Schäuble is look at the distinction between the EU and the Eurozone and thus reducing the power of the EU Commission to save the Eurozone – the second Europe within Europe, of which Britain was never a member. Schäuble attacked the ECB and Mario Draghi saying: “The ultralock money policy that exists in many regions is not helpful.”  Schäuble said this opening on his trip to Washington. The ECB, Schäuble argues, is creating risks such as asset price bubbles with its negative interest rate policy. This is the clash of philosophies with Schäuble’s view on AUSTERITY.

Schäuble demanded a change of direction from Mario Draghi. He warned that Draghi was increasing the risk of creating a whole new crisis rather than lessen it. The Federal Reserve reverse course right after 2015.75 on the ECM that targeted October 1st, 2015 with the first rate hike in December 2015. Schäuble remarked that it “would not be a bad idea if the European Central Bank and other central banks followed” the course of the Fed. Schäuble has clashed with Draghi who still considers his stimulus quantitative easing policy of the ECB still necessary. Draghi said on this trip to Washington that a “very significant amount of monetary easing is still needed.”

Schäuble also has proposed that the basic structure of the Eurozone in the form of budgetary policy must be change. Schäuble remains rightly concerned what happens when Draghi changes course and raises rates. Schäuble is deeply concerned that national debts will then explode with higher interest rates. For this reason, Schäuble wants the euro rescue umbrella ESM in the near future converted to a European Monetary Fund. Schäuble sees this as a European version of the International Monetary Fund (IMF). If a new aid program for a crisis country were to run without the IMF because the IMF has disagreed with the draconian measures imposed upon Greece. Schäuble wants to replace the to impose austerity. Apparently, Schäuble has also convinced Chancellor Angela Merkel of this proposal since the IMF disagrees with the austerity ideas of Schäuble.

This new European Monetary Fund to replace the IMF, which is a member of the Troika, will then be given the task of budgetary monitoring of Eurozeone countries. Therefore, we will have the EU, but a separate system within the EU for the Eurozone all based upon extending austerity. This is obviously a disempowerment of the EU Commission.

Greece is still an unsolved problem – and Schäuble also sees this. Greece, Schäuble said, should exit the Eurozone. Schäuble also sees a batter partnership with Russia and an emancipation from the USA. This was really based upon German manufacture having a new market to sell into given the rise of Donald Trump. Then Schäuble wanted a nuclear Europe to stand against America and Russia. Schäuble’s view is that the core of Europe is Germany, France, Belgium, Luxembourg and the Netherlands. It never included Britain. The Franco-German axis was to become the economic engine of the future. To Schäuble, the core is simply the Euro for that evens the playing field for Germany to sell products into Europe. He has embraced the Euro, but never accepting a federal debt for Europe. This is why he has never seen Italy, Spain or Greece as the core of the EU – just vassal states to sell products to.

Collapse in confidence in government - Cycle should intensify starting in 2018 running head long into 2020

If US Election Were Held today – Trump Would Get More Votes Polls Show

Posted Apr 25, 2017 by Martin Armstrong

The latest polls show that most people who voted for Trump are satisfied. When the same questions have been asking about Hillary, the opposite response appears. The polls are actually showing that Trump would win a greater margin today than last year. This is interesting for it is confirming the collapse in government with Big Bang that began on October 1st, 2015.

Big Bang was the start of the collapse in confidence in government. This cycle should intensify starting in 2018 running head long into 2020. This is all good for the volatility in markets we see ahead. This is the same trend that produced BREXIT and just wiped out all mainstream parties in France

The government will be competing for cash in an ever growing tighter economy.

The End of Quantitative Easing – Perhaps Now It Will Be Inflationary?

Posted Apr 20, 2017 by Martin Armstrong

One of the greatest monetary experiment in financial history has been the global central bank buying of government debt. This has been touted as a form of “money printing” that was supposed to produce hyperinflation. That never materialized as predicted by the perpetual pessimists. Nevertheless, the total amount of Quantitative Easing (QE) adding up the balance sheets of the Fed, the ECB and BOJ is now around $13.5 trillion dollars, which by itself is a sum greater than that of China’s economy or the entire Eurozone.

If QE failed to produce inflation, then ending QE may actually produce the inflation people previously expected. Where’s the strange logic in that one? Well you see, it really does not matter how much money you print, if it never makes it into the economy, it will not be inflationary.

The craziest think the Fed did was create excess reserves. The bankers complained that the Fed was buying the government debt so they would have no place to park their money. The Fed then accommodated them creating the excess reserves and paid them interest for absolutely no reason whatsoever.  Almost $3 trill was parked at the Fed collecting interest so that $4.5 trillion of “printing” money never made it out the door. Hence, there was no inflation to speak of (outside of healthcare which always rises no matter what).

So how does stopping QE actually create inflation? The withdrawal of the Federal Reserve (Fed), the European Central Bank (ECB) and the Japanese central bank from the QE programs will lead to an increase in yields on the bond markets sending the financing costs for the states higher. This is predicated upon the notion that people will continue to buy government debt. Governments have increased their spending sharply because interest rates were effectively zero and the central banks were buyers. Now comes the moment of truth. Has QE undermined the bond market to such an extent that only a blind fool will buy government debt in an atmosphere of rising rates?

Moreover, other sectors of the global financial system have been seriously disrupted. For one, European banks were shipping cash to their US branches and also parking it at the Fed whereas the ECB was charging negative rates. Furthermore, of the $13.5 trillion on the balance sheets in central banks, they are now trapped and cannot sell that debt. This means they are themselves screwed and they have to wait for that debt to mature in order to reduce their balance sheets. They have no way out.

The Fed had a balance sheet of about $900 billion in 2008, whereas it currently stands at about $ 4.5 trillion. The Bank of Japan recorded an increase of 107 trillion yen in the same period of time to about 490 trillion yen or also about $4.5 trillion. Then we have the ECB which has more than doubled its balance sheet from EUR 2 trillion to EUR 4.1 trillion or also about $4.5 trillion.

The central banks bought the government bonds from the commercial banks and paid them money created out of nothing which is how the pessimist put it. In theory, that is elastic and if the government debt matures, it then evaporates from the balance sheet. Here comes the problem. The governments continue to borrow. With the central banks no longer buyers, then interest rates can rise faster than anyone expects because they will have to entice fresh buyers. If that fails to materialize, then we come to the Sovereign Debt Default crisis.

The Federal Reserve had recently announced that it would no longer reinvest its gains on government bonds that had matured into new US securities, resulting in a shortening of the balance sheet. Bills of $426 billion will be due at the Fed in 2018, and again about $357 billion a year later. So if the Fed will not repurchase that debt, then the amount of new debt coming to the market will DOUBLE.

The Treasury will be forced to find ways to absorb the additional supply if the Fed wants it’s cash back so the Treasury must find a lot more private buyers. The shrinking of the balance sheets represents the continued deflationary trend from a real economic expansion trend. The government will be competing for cash in an ever growing tighter economy.

The balance sheet of the Japanese central bank is likely to be expanded for a while as long as the targeted inflation target of 2 percent is not reached. The ECB’s balance sheet will continue to grow at least until the end of the year, as the borrowing program has been running until then. However, the negative effects of the balance sheet shortening of several central banks will mutually reinforce each other in 2018 and help to bring the financial crisis to a head for 2018-2020.

The withdrawal of the ECB’s purchases of securities that also included European corporate paper will lead to secondary effects even outside Europe and help to further maintain the deflationary aspects with respect to economic growth. This will serve to demonstrate the unintentional impact of this entire unorthodox monetary policy experiment.

Therefore, at this year’s WEC, we will be looking at this complex crisis. The inflation will be asset inflation – not demand inflation. So hold on – this is going to be the craziest ride in monetary history of human kind.

Turkey - war cycle seems to be working on time as this is lining up with that model pinpointing 2020

Erdogan Seizes Total Control of Turkey

Posted Apr 19, 2017 by Martin Armstrong

Turkish President Recep Tayyip Erdogan has achieved his dictator status which was his long-held ambition to expand his powers after the referendum handed him the reins of supreme power. However, the integrity of the vote is seriously questioned and the slim victory of just 51.4% approving a series of constitutional changes converting Turkey’s political system from a parliamentary to a presidential one, means there is going to be tension in Turkey looking forward. There will be no real checks and balances in place.

The opposition parties naturally called for the vote to be annulled because of a series of irregularities, The electoral board decision to accept ballots that did not bear official stamps has really called into question did the people really vote for this dramatic change.

The press in Turkey, like in Europe and America, seems to be just political propaganda always supporting whatever the government wants. Erdogan used his full powers of the state and government to dominate the airwaves and billboards while the opponents complained of intimidation, detentions and beatings. His response to the critics tyook the position that Turkey’s referendum was “the most democratic election … ever seen in any Western country.”

In Istanbul, there were protests chanting “thief, murderer, Erdogan” while banging pots and pans. The opposition, which is nearly 50% of the country, do not believe the votes were even real. Of course, Erdogan rejected all criticism as he spoke to flag-waving supporters in the Turkish capital, Ankara that were arranged and staged giving the airs of North Korea.

You can see Erdogan ‘s vision of resurrecting the Ottoman Empire hidden in his words. “The crusader mentality attacked us abroad. … We did not succumb. As a nation, we stood strong.”

The  Ottoman Empire lasted for two cycle intervals of 309.6 years beginning about 1302 and its fall was 1922/1923. This attempt to resurrect it has come right on target – two intervals of Pi 31.4 years or 2016/2017. The next target is 2018/2019, which will be 18 intervals of Pi from the fall of Constantinople in 1453 with the last Emperor – Constantine XI (1448-1453). The war cycle seems to be working on time as this is lining up with that model pinpointing 2020.

The problem with Erdogan is he still lives in the past and believes in the battle of Conquest for power to him is defined by territory possessed. This was his objective to removing Parliament and seeking full dictatorial power

The Cycle of Music

Posted Apr 18, 2017 by Martin Armstrong

QUESTION: Mr. Armstrong, isn’t music also cycles with the same structure that repeats?

ANSWER: Absolutely. Cycle has specific meanings in the field of music. Of course, acoustically, it refers to one complete vibration, the base unit of Hertz being one cycle per second. Then you have a cycle interval cycle which is a collection of pitch classes that are created by a producing a sequence of identical intervals. Harmonic cycles, which are repeated sequences of a harmonic progression, are at the root of many musical genres as in the video. The chord progression may be repeated indefinitely, with melodic and lyrical variation forming the musical interest. So yes, this can be reduced to a cycle of cords.

Real Estate Speculation – Boom – Bust – Just Insanity

Posted Apr 18, 2017 by Martin Armstrong

QUESTION: Hi Marty, Thank you for this blog post. I understand your position but what if you find yourself as I do with real estate being the MAJORITY of your portfolio? What then? I follow your blog and I learned that mortgages in Canada are only 10 year mortgages and the exchange rate is favorable right now, so am considering 1031X purchasing investment property there, however – then I read your blog post also that their government system is not the same model as ours and defaults are not localized to municipalities but provinces must address them. So that seems a bit risky. Then I was thinking Tahoe/Donner which has a lot of cash buyers doing 1031X …however – then I read your blog post on vacation property being the worst investment in a downturn as people do not spend discretionary income… I’d guess discretionary income disappears with job loss etc. So now that is out. Then I’m thinking go small, student housing, or starter houses in the Midwest where I grew up… – however – I read your blog post that this type of housing is dependent on mortgages which could go away and so the price could crash whereas higher end properties are cash purchases… so my guess is their price might hold up better? (but the blog post does not state that I’m only guessing) At the end of the day I see risk EVERYWHERE … maybe I should just go live in a tent with my gold coins?

Question: Should we just cash out and not own investment real estate? Should we just own our home and no other investment property (e.g. that must generate rents)? It seems like that is what you have been saying by eliminating most of the options … and mentioning that people “park” money in properties they intentionally do not rent out. It will be interesting to see what happens.. because into the market I go very soon to sell here in San Francisco. Prices are going up monthly here… you can see it happening now… like some sort of quickening… most don’t notice the difference yet, but I do as I am active about to transact in this market… here it comes. Time to decide. Its a nail biter.

A

ANSWER: Real estate depends on how far down the rabbit hole we go. If government does not blink and it just keeps raising taxes trying to support a system that is unsustainable, then we end up in the full crash and burn and you are compelled to walk away from real estate. Hopefully, with education understanding the past, we can for once avoid the same outcome and advance in this learning curve of civilization.

Vacation properties are the worst to survive. I bought such a place to live in at about 50% of its 2007 high. So while high-end properties in cities were rising, vacation spots on the beach declined. I wanted beach front. So understanding the cycle helps tremendously for entry and exit points.

The risk of mortgages declining is real. As governments get in trouble, long-term confidence starts to decline. Banks will not longer be able to package mortgages. As that unfolds, the lack of the availability of mortgages means the only cash rules.

The town I grew up in, Maple Shade, New Jersey, was once the sprawling real estate speculator’s paradise. Thomas Barlow, Sr. and his son, Thomas, Jr. formed the Maple Heights Land Co. together with several other businessmen in 1908. The company purchased from John R. and Margaret W. Mason their farm which was part of the original Roberts plantation surveyed in 1682. In 1910, they formed Barlow Company and began selling 1 acre lots. The buyers were the city folks in Philadelphia for the train came right into Maple Shade and that made the area worth speculating in.

The Barlows then developed small bungalows meant to be vacation homes for people in the big city, which were called Barlow Built Bungalows (BBB). Thomas J.S. Barlow Jr., made a lot of money during the land boom into 1927. He made a lot of money also in the stock market. He built the Barlow Mansion in Maple Shade in 1916 as a wedding present to his wife. The property was then expanded containing the second 3 porch archs which were added in 1926 just before the 1927 real estate bubble burst in Florida and became a contagion in real estate around the country.

Thomas Barlow lost the house in the early 1930s after the Stock Market Crash of 1929. In March 1933, Chester Township (Maple Shade) was declared bankrupt. The Maple Shade National Bank closed was one of the banks that never opened after FDR’s bank holiday. In 1936, Maple Shade had the Highest tax rate in Burlington County because it had gone bankrupt and could not pay its bills lacking any credit facilities. It was during the 1930s that the Barlows opened up their basement for the children in town. It was one of those gatherings that my parents met.

After the bank went bust and the Barlow Mansion was lost, one of my father’s friends family had bought up most of main street for cash at 10 cents on the dollar. As state revenues declined during the Great Depression, New Jersey introduced its State Sales Tax fixed at 2% in 1935, except milk and purchases under 13 cents. The Catholic Church in Maple Shade built a shrine in 1937 to thank for a recovery. OLPH Shrine details was the showplace of the locality and stood some 40 feet in width, 36 feet high and 18 feet in depth. It was formally dedicated on Sunday August 15th, 1937.

This story can be repeated countless times for small towns that were being developed during the 1920s land boom how vacation speculation bankrupted many. Even Sarasota, Florida was developed by John Ringling in the mid-1920s. John was once one of the world’s wealthiest men in the United States, yet he died with only $311 in the bank.

I warned that the Consumer Financial Protection Bureau puts regulations on people buying real estate with a mortgage that has been highly burdensome to normal people. When friend bought a house with his girlfriend, they had to explain absolutely every check where she had written to him each month paying her half of the rent. They made them account not just once, but for every check going back 5 years.

As late as the 1920’s, someone taking out a mortgage to buy a house in the U.S. would most likely get a short-term balloon mortgage with terms of 50%, and five years to pay off the other 50%. At the end of the five years, it was common to re-finance into another five-year loan. However, when the Great Depression, the value of cash rose and banks didn’t want to refinance these balloon mortgages. Banks began to foreclose. Between 1931 and 1935, a quarter million people lost their homes each year.

Bankruptcy auctions were common and prices fell to 10% for only people with cash could buy. Farm land fell to below what it sold for in the 1850s. Here is a photo of a 1933 Virginia Land Foreclosure Auction.

The whole reason Franklin D. Roosevelt created the 30 year mortgage was to try to get people to buy on credit. Property was being auctioned off in the 1930s and it was for cash only. Prices for farmland fell to pennies on the dollar for only cash buyers could bid. Roosevelt stepped in, explaining why the government shouldn’t just sit by: “Even before I was inaugurated, I came to the conclusion that such a policy was too much to ask the American people to bear. It involved not only a further loss of homes, farms, savings and wages, but also a loss of spiritual values — the loss of that sense of security for the present and the future so necessary to the peace and contentment of the individual and of his family.”

Roosevelt created federal agencies that form the basis of the housing market the United States to this day. They provided mortgage insurance, established a secondary market for mortgage loans, and converted 1 million loans into long-term mortgages. There were truly transformational in nature. It did make housing affordable and it made housing, homeownership, sustainable. However, it effectively leveraged the entire real estate market. It was truly that then more people could afford to buy, but as demand rose, so did property values.

The crisis we face is what happens this time when the banks cannot lend money, interest rates rise, and mortgages for 30 year periods vanish? Like any market, prices will crash. The maximum length of a mortgage was extended to 30 years in the 1940’s, making home ownership even more affordable and leveraged the entire housing market. Today, Roosevelt’s economic fix became the norm. The 30-year fixed-rate mortgage accounted for nearly 90% of all new mortgages.

If the government can no longer subsidize the real estate market, the 30-year fixed-rate mortgage will become too expensive, become far too risky for a lender even if the person does not default by the rise in the cost of money, and it will simply disappear. The long-term mortgage is a bet a lot of lenders don’t want to take on their own.

This is the risk to the housing market. If you have the bulk of your assets in real estate, then one way to keep them is to run out and get a 30-year FIXED mortgage now while you can. You have sold the risk to a third party and it is now their problem. You the cash wisely for investment into other movable areas.

why I rank property in the last category for investment -it is not movable

Why Real Estate Should NEVER be the Majority of Your Portfolio

Posted Apr 13, 2017 by Martin Armstrong

COMMENT: Mr. Armstrong, I believe you may be the only person who has identified this trend in government others are just starting to see. Here in New Brunswick in Canada, they have raised everyone’s property taxes claiming you did some sort of improvement when you did not. This is just fraud. You are correct. This just has to go completely bust.

HW

REPLY: Yes, I am aware of what they did. The government is fabricating tax increases based upon renovations that never took place. One woman they simply took the money out of her account sending her into overdraft conditions when they claimed she did $79,780 in renovations to her tiny 860 square foot home when no work was ever done.

Governments are going bust everywhere. This system of government pretending to represent the people when they act more like paying the Mafia for protection. In this case, you have to pay the government or else they take your home. You have no right to simply retire and die in peace. They tax you until you are dead and then demand taxes from your estate. We have all become simply economic serfs working for the landlord and we own nothing for they have the right to take everything if we cannot afford to pay what they demand. In this case, they just pretend you did something and send you a bill.

This is why I rank property in the last category for investment. It should NEVER be everything. It is not movable. The population of Rome collapsed from 180AD because taxes kept rising and people were just forced to walk away. History does repeat so caution is advisable with real estate. We need a place to call home. It should not be 100% of your assets. It should be limited to a portion of your portfolio that you can afford to walk away from and survive.

It’s a shame government turns so aggressively against its people. They are always the great destroyer of civilization.

Old currency is still being hoarded 16 years after the introduction of the euro

Deutsche Marks Still Being Hoarded as Hedge Against Euro

osted Apr 12, 2017 by Martin Armstrong

It may sound crazy that an old currency is still being hoarded 16 years after the introduction of the euro. 

However, the Germans still have been hoarding Deutsche Marks and coins worth some 6.5 billion euros. Why? Germany never put a time limit upon when you had to swap out the old currency. 

About a third of old currency notes of the Eurozone are now totally worthless. The Portugal gave the shortest exchange period to the citizens of the country of just one year. Looking at the total amount of notes outstanding from all Eurozone members, it reaches about 15 billion euros. 

Even the French are hoarding about 1.8 billion euros worth of French francs and the Spanish are hoarding about around 1.6 billion euros worth of Spanish pesetas. Interesting how many people just held on to the old currencies just in case.

Net migration of people within the United States mirrors the same thing taking place corporately on a global scale

US Property Tax Comparison by State

Posted Apr 11, 2017 by Martin Armstrong

The latest report on tax comparisons within the USA has been released. A report from Attom Datashows just how nuts things are becoming with regard to taxes. Property taxes have become really insane in the North. The average annual property tax bill in Alabama in 2016 was $776 compared to the the highest average is New Jersey where it stands at $8,477.

Now filter in the State Income Taxes and what emerges is human nature. For all the people who complain about multinational companies moving offshore and then deny that it is tax related and try to characterize that as simply labor is cheaper, need to look more closely. The multinational companies I restructured we looked at the whole picture. Wages were a small part and only one component. What was the amount of social taxation on top of the wages, property taxes in a region, and then the corporate tax. Ger – it looks like the individual is making the same analysis.

The net migration of people within the United States mirrors the same thing taking place corporately on a global scale. They are leaving the highest taxed states and moving to the lower taxes states. Taxes are more than just what you pay, they push up the cost of living because everyone is paying a higher tax rate. I took a friend out with his family down from NJ and the bought ice cream cones. The bill was about half that of what they pay at the Jersey shore. I said see: high taxes ripple through everything within the economy raising the price of everything you buy. The net bottom line – taxes rob much more of your disposable income than anyone actually attributes to government directly.

Moment that banks will be unable to lend for 30 years, real estate leverage falls so does price

Vacation Real Estate – Always at the Bottom of the List

Posted Apr 6, 2017 by Martin Armstrong

QUESTION: I understand that when people lose confidence in government that equities, precious metals and real estate will rise in value. Looking at real estate, will vacation rental properties also rise in value?

RM

ANSWER: Generally speaking, vacation properties will not fair as well as basic properties in a reset only because people contract in their spending. The real estate boom peaked in 2007, but that was the over-leveraged  houses for the lower-end. The high-end corrected and then rallied into 2015.75. That has peaked out in REAL TERMS. The nominal values will still rise as a factor of the purchasing power of the currency, but real estate will now fall to third place in the States. Cities are still buoyant generally because of capital flight from overseas. Some places have been attacked politically, such as Australia and Vancouver. In the case of latter, the attack was just local so the foreign capital shifted to Victoria and places like Toronto.

The vacation home in a crunch will perform the worst. The big vacation home bust was 1927. That was the Florida land boom. John Ringling in the mid-1920s, entered the field of land speculation and founded Sarasota, Florida. John was once one of the world’s wealthiest men, yet he died with only $311 in the bank.

The problem with real estate on this cycle is that it has been seriously leveraged. It was FDR who came up with the 30 year mortgage to try to support real estate prices that had fallen to 10 cents on the dollar and sometimes less. If you did not have cash, you could not buy. That measure instigated to support real estate prices has now become the problem in real estate. Values depend upon borrowing. When confidence declines, people fear the future. It is at that moment that banks will be unable to lend for 30 years if there is no bid lacking the confidence long-term.

Vacation homes will be at the bottom of the list. I personally bought what was a vacation second home on the beach. I bought it for 50% of what they paid in 2007. They had a sizable mortgage on it and could no longer afford the payments on a second home. Such is life