US & UK Central Banks Look to Rates Rising in Autumn

Posted on June 24, 2014 by Martin Armstrong

Part of the real financial crisis from the central bank perspective is that they have been trapped by the excessively low-interest rates that in reality has disarmed them from even trying to steer the economy. The bid on long-term rates has been strong over the last decade thanks to retirement plans. People have been just trying to lock in guaranteed rates of return even when under 3%. Just as Volcker went crazy pushing rates to nearly 20% in 1981, the banks scared the hell out of the central bankers and they pushed rates excessively to the downside. That has relieved the central banks of any leverage to try to manipulate the economy during the next downturn. They KNOW that and are frightened to death about what comes next – hence negative interest rates theory.

We must also realize that the trend toward rising taxation has historically also had a major impact upon interest rates. Politicians have NEVER taken taxation into account. They see taxes as their divine right. Britain is hiring judges as they expect greater legal challenges to their new offensive on tax collection. The battle cry is get the tax avoiders at all costs. They fail to grasp that this will also have an impact upon long-term rates. The yield-curve has been altered several times between taxation and war. When short-term interest rates became taxed in 1918, they rose sharply and that contributed to the Crash of 1919.

Consequently, the Fed’s intention to eliminate its long-term debt buying in the autumn has too many central bankers anticipating that long-term rates will then start to rise sharply when the Fed’s buying has been really minimal – a drop in the bucket within the global economy. As a direct result, many central banks are starting to sell their long-end expecting rates to rise both in US and UK. This will no doubt contribute to a modest rate rise into the end of next year on the long-end given the bid for mortgages as well. However, the bid from the pension side will cap rates more so than it has in the past. Nonetheless, this toxic cocktail that is starting to unfold is more likely than not going to produce a serious crisis in government debt between 2016 and 2020 where they will be unable to sell long-term as more and more pension funds are driven into insolvency. The bid from the long-term buyers is going to reverse and with it, government debt will become highly volatile on the short-end.

As taxation rises, capital invests based entirely upon NET RETURN. The greater the tax increase the higher the gross interest rates will rise. The pension funds tend to be more conservative and as a result they will be the next great crisis as insolvency starts to rise as they have been unable to meet their obligations. Governments are going to find the traditional flight to quality reverse as more and more capital shifts to the private sector fearing even the economic data published by governments is not trustworthy for they will play with the numbers to support their position of control.

Gold & Seasons? - Annual June 2nd lows !!!

Posted on June 23, 2014 by Martin Armstrong

QUESTION:  Martin,

In your June 23rd post, you stated: “The [June] bounce is really seasonal, yet it is being explained as everything but.”

What Does this mean? There is a season to gold?

ANSWER: Yes. May/June often produces the low in gold. That is what we were saying a June low with a bounce. The other key months tend to be January/February. So the “bounce” from a June low on June 2nd is rather common.

Central Banks Buying Shares & Selling Gold?

Posted on April 26, 2013 by Martin Armstrong

What is interesting is that those who manage the more than $11 trillion in reserves for central banks know more than what they are revealing. Previously, on April 4th we reported that China’s debt holding in Euros fell to BELOW 7%.

We have been collecting the raw data on the reserve holdings and will report shortly on that breakdown. However, what has been going on is nothing but shocking. While the gold promoters are touting hyperinflation, the central bank reserves have been diversifying and moving into TOP BLUE CHIP STOCK!!!!!!! Yes – you read correctly.

Even when the Federal Reserve was originally formed in 1913, to “stimulate” the economy it once upon a time bought corporate paper. When World War I came, the politicians told the Fed it had to buy only US government paper – not corporate. During World War II, the Fed was ordered to support US government bonds at PAR until 1950.They thereafter began a crash and burn nosedive for 31 years into 1981.

Some central banks appear poised to sell gold to raise money given they have no intent to return to a gold standard. This is the shadow behind the advice to Cyprus to dump gold. Meanwhile, Switzerland had recalled its gold because the US was going after them for helping Americans avoid taxes. The Swiss hold 70% of their gold reserves at home, 20% is held by the Bank of England, and 10% by Canada. They removed all gold from the USA. Thus, those who said Germany would find the US vaults empty, have been proven wrong by the Swiss who preceded the Germans on that score.

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Bubble in Stocks? - Phase transition required

Posted on December 11, 2013 by Martin Armstrong

The amazing thing is people are already talking about this is a BUBBLE that is unsustainable. They are now claiming household income is down 4% yet the S&P 500 is up 70%. They are incapable of any real analysis. The RETAIL investor is NOT involved in this market. There is no wild speculative fever. They are obsessed with this being a bubble purely based on new highs with no regard for the pattern.

There has to be a Phase Transition for a Bubble. That requires a near doubling in the value within often the last year. We have new highs in the DAX as well. Why? Is the European economy doing well? No way!

Capital is fleeing from PUBLIC to PRIVATE. This is capital preservation – not wild speculation. Pension funds are moving into equities. Central banks are even putting out their reserves to be privately managed. The IMF is proposing taking 10% of all accounts in a bank in Europe. They are arguing for a SuperBank in Europe that will have the power to directly tax people in Europe and no nation can stop them.

HELLO! Just where is the wild speculation these people are yelling about that make up a bubble?

Interest rates and stock markets

So Smart – They Always Get it Wrong

Posted on June 10, 2014 by Martin Armstrong

Reply

    

QUESTION: Marty; Virtually every so called analyst on TV has missed the US stock rally. When they asked … how does it feel that he missed the rally, he said he didn’t miss it because he was in foreign market not US. Then he said once the Fed cuts off all of its QE stimulus the market will fall. I can see what you are talking about. These people all analyze everything based upon the Fed and domestic theory looking at markets through domestic colored glasses. Why are companies buying back their own shares?

ANSWER: Yes. Your eyes are opening. The Fed is in serious trouble. It realizes there is a problem with capital inflows headed into real estate from Europe and into the US market. This is why the domestic press and analyst have missed the rally. They keep analyzing this from a domestic viewpoint blind to the global trends.

Insofar as the buybacks, the biggest are taking place in the tech field. They are also under the attack for taxes from everywhere. It makes sense to use overseas cash to buy back shares as much as possible. This also has the benefit of reducing charges for taxes and increases profits per share.

I reported that the Fed was going around to the NY banks warning them that their models are
incorrect and that the Fed does NOT BELIEVE that there will be a flight to quality next time to the long-end. They have also informed the banks that they will NOT bailout their proprietary trading again. This is info DIRECTLY from the banks who are friendly toward us and are not part of the proprietary trading against the world. Based upon their comments, they were presuming the Fed was starting to listen to our models. Perhaps. I have no formal arrangement with them. Nonetheless, other central banks are more open about it and have attended our WEC conferences some incognito and others opened stated who they were.

The whole NEGATIVE interest rate thing is part of this problem. Rates were lowered by the strong big for fixed income from pensions. With all the baby-boomers, pensions just needed to lock in their guarantees. This is why long-term rates are still declining for now they fear negative rates and even 2.5% for 10 years will look good.


Look closely at this theory that these so called analysts espouse that that raising interest rates will cause the stock market to collapse. SORRY! Just run a correlation and you will see these people are simply delusional. The theory in their mind is rates up and people will buy less so the market will collapse. When you correlate the world, you see that the market has NEVER peaked with the same rates twice in history and that the market rises with higher rates for that is the indication that people are bullish and even willing to buy. Japan rates fell for 23 years and virtual zero rates produced nothing bullish. The theory is just complete nonsense and anyone who states this theory is a parrot merely repeating the words without ever investigating they are true or false.

Lower interest rates do not stimulate economy

The Theory Behind NEGATIVE Interest Rates

Posted on June 8, 2014 by Martin Armstrong

QUESTION:

Not sure if this is even possible.

Can the consumer savings interest rates go to a level at or below Zero that will drag down the lending interest rate lower?

Thus making borrowing even cheaper to stimulate the economy with more cheaper debt and punish savers.

Will our designed economic system sustain this thinking or will the system implode because people must save for banks to lend?

Even Japan had low interest rates but not zero.
Is that taboo?

Cheers,

R

ANSWER: The whole idea of moving to negative interest rates is seriously flawed and grossly misunderstood. The idea stems from the whole Keynesian concept that you lower interest rates to stimulate borrowing. That notion of stimulation not only completely failed in Japan, but as with everything else government reasons and unfortunately the talking heads just repeat, it is one-dimensional and fails to grasp that everything is connected. Lowering rates to try to “stimulate” fails for simultaneously you are destroying the fixed income of the elderly and pension funds based upon a theory that is bogus.

We have the largest database in the world. That has come in handy in combination with the Adam Smith approach of staying unbiased and letting the data speak instead of the Marx-Keynesian approach of trying to force the free markets to do as you think best. When we step back and try to just figure out HOW THE ECONOMY works as did Smith, what emerges from the data is quite interesting.

The business cycle has NEVER peaked twice with the same level of interest rates. Just look at the call money rates from the NYSE from 1880 to 1932. Likewise, interest rates collapse with the business cycle NOT because you will stimulate demand, but because demand collapses. That demand will return ONLY when the expectation of future gain reappears regardless of the level of interest rates. Consequently, the real formula is:

Economy Turns Up = (Expectation of Gain > Rate of Interest)

Therefore, lowering the rate of interest alone will not stimulate the economy. We have to take in account the entire picture. If you are raising taxes diminishing the disposable income, then you are creating more damage without any hope of stimulating spending that is not available.

I have explained that government’s approach is not only seriously flawed in thinking that rates alone will do anything, but then they fail completely to actually implement a policy. During the TARP bailout, all they did was hand the banks money and HOPE it will lead to lending. It never does. NOT EVEN ONCE!

Right now, deposit rates collapse because that is controlled by the central bank, but they then do not regulate the lending rates – DAH! We have ended up with the historical high in the spread between what banks pay depositors and what they charge. Therefore, going negative will still not stimulate, but it may at last force people to invest without borrowing shrinking the bank deposit base and ONLY then will banks start acting like banks. The money center banks have been trading to make profits NOT lending. Why lend when you can trade for less risk? This is why I am against banks being traders. That is a hedge fund – not a bank.

Buyback trend combined with declining rates lead to an investment rally

Stock Market – Has the Bull Been Replace with the Pink Bunny?

Posted on June 8, 2014 by Martin Armstrong

The market keeps churning higher ironically because people keep shorting listening to this nonsense. These constant short positions are the fuel that makes the market rise on a gradual basis. Keep in mind, people are running into the 10 year at 2.6% because they fear even lower rates coming. This is a different crowd. Many do not invest in stocks or do so with one-eye open all the time. This is the attitude behind Andrew Melon’s famous quote at the beginning of the Crash in 1929 – Gentlemen Buy Bonds.

Nevertheless, while the market then crashed in a normal fashion and started to recover, then the second shoe fell in 1931 that began with the sovereign default in Austria. That turned into a collapse in confidence and people ran from government debt in Europe and elsewhere pouring into the USA driving our rates to barely 1%. That proved that gentlemen also lose money.

Part of that trend was also the buybacks. We are seeing that again this time but into the rally. The first target for the high on this trend lines up with the ECM turning point on 2015.75. That will be 26 quarters from the low in 2009.

This buyback trend combined with declining rates attempting to stimulate spending, is more likely to lead to an investment rally and the mainstream media (including internet) who constantly preach the end of the world, will be wrong and stubborn. When the Wall Street Journal  accused Jesse Livermore of trying to influence the Presidential Election and they were proved dead wrong, Even when the market rallied during the summer of 1926, Time magazine, the New York Times and the Wall Street Journal all reported the rally skeptically and they doubted how much it truly reflected business conditions. They were predominately bearish back then during the rally as they are today. In the February 25th, 1924 edition of Time Magazine, they reported the prejudice of the Wall Street Journal who after falsely accusing Livermore, simply refused to ever quote him again.

“At this stage enters Mr. Livermore, the noted operator. His last two main prophecies on the stock market had been sufficiently fulfilled so that he had attracted considerable speculative following.  From his vantage point in Miami, he sent a statement to the press which was widely published, although  the Wall Street Journal refused to include it in its columns.”

Unfortunately, this is reality. They press will NEVER quote what I have forecast because it does not fit their agenda. You can tell easily who is biased and who is not. When they give only one-side of a story, beware, there is something rotten in the core. Refusing to be balanced is not journalism – it is propaganda.

Here is a chart showing the rally the WSJ did not believe back then. Look at the oscillator. It remained high into 1929.