QUESTION: Hi Martin,

thank you for your great work with Socrates and especially for presenting the Indicators for us whom are still outside of the Trader Level.

I have some question about the recent sell off in the DOW. True, it was really time for a correction/drop. But the retail investors are still on the side-lines and the interest rates are lowest ever in history. To sell off the DOW on fears of increased rates and slower GDP growth is one thing, but then what? Where to run? Interest rates are close to zero. Bonds will loose much of their value when interest rates go up. Gold does not yield. Real Estate has already topped.

You are so right that the hunt for yield will soon be transformed into the hunt for preservation of value.

So we are back to the DOW anyway, right?

Do you see in Socrates Indicators that this Phase Transition may emerge already in the end of 2016?

Kind regards,

ANSWER: You are correct. There will be no choice but to run into equities. With the European banking crisis looming on the horizon, real estate on the high-end has been targeted by governments around the world passing various laws against foreign ownership from making it criminal in Australia to demanding 15% of the sales by a foreigner in the USA is seized by the IRS, this does not leave a lot of room for big money to get off the grid.

Then there are the mandates by countries that pension funds MUST be invested in government bonds. This negative interest rate is creating the next major crisis. As a matter of law, these funds cannot even divest all government bonds in many countries. We are looking at a crisis far worse than any derivative or banking crisis. It is the Pension Crisis that nobody talks about. This is the political crisis that is bringing socialism to an end.

You are correct, gold offers no yield for income, only capital appreciation. That does not provide a base for institutional money to park, besides storage problems. But here to, government are tracking all buying and selling of gold. Only the institutions had to turnover their gold in 1934. Individuals could hold their gold at home in a sock drawer. So this distinction has always existed between big money and individual investors. Gold is for the individual. It cannot satisfy institutional money on a yield perspective and it cannot be protected by an institution. Consequently, gold is eliminated from a major institutional portfolio, which limits that type of investment into directing it into gold stocks for some yield.

All of that said, you are also correct about retail participation. That remains at historic lows for a bull market. So many people were hurt in 2007 to 2009, that they are reluctant to step back in. There can be ABSOLUTELY no major crash of 1929 proportion despite the choir of analysts all claiming “SELL” for it will go to anywhere from 50% to 10% of current value. Such a move just does not seem plausible.

Nonetheless, our accumulative Energy Models reached the overbought stage that nearly matched our next target objective. That warned that we were getting toppy and a brief correction was likely. Likewise, the accumulative energy in 2009 at the low went seriously negative also warning this was overdone on the downside.

We will be issuing a special report because 2016 is 7 years up and that warned we could indeed see even a slingshot type of move. That means you have excessive bearishness and the pros will short the market. They are typically trapped and will then panic to get out.

Despite the claims that the bankers are too big to fail, too big to jail, and too politically controlling in Washington, keep in mind if Trump wins, we may see reality hit the bankers in the face. Without Hillary, they are in big trouble for the next loss may be their’s to keep. The “pros” are not the star traders, they are the political manipulators. The entire Glass Steagall Act was proposed BECAUSE of Goldman Sachs.

Goldman Sachs got caught up in the whole bull market just like everyone else. Under the leadership of Waddill Catchings who led the firm into joining the hot market by now creating an “investment trust” where he saw that a giant fund could maximize profits by buying and selling stocks. He promoted this as a business that was professional and the profession was investing.

The “investment trust” was sort of the domestic “hedge fund” of its day. Everyone was jumping into the game. Catchings just got caught-up in the whole thing and was very bullish going into the high of 1929. He gave this new entity the name: Goldman Sachs Trading Corporation. The deal was that Goldman Sachs would be paid 20% of the profit and the stock was offered at $104 per share. It jumped to $226 per share, that was twice its book value. This would be the very same mistake that became exposed in the Crash of 1966 when shares in mutual funds were then traded on the exchange allowing them to be bid up well beyond their asset value.

The whole bullish atmosphere was very intoxicating. Just three months into the fund, Goldman Sachs arranged for a merger of the trust fund with Financial & Industrial Corporation that controlled Manufacturers Trust Company that was a giant group of insurance companies. This doubled the assets of Goldman Sachs Trading Corporation taking it up to a staggering near $245 million. This was huge money in those days. The trust now, exploded and the assets under control are said to have exceeded $1 billion back then. Goldman Sachs expanded the leverage going right into the eye of the storm that was about to hit starting on September 3rd, 1929. In the summer of 1929, Goldman Sachs launched two more trusts Shenandoah and the memorable Blue Ridge. The shares were over­subscribed and Shenandoah was offered at just $17.80 and it closed on the first trading day at $36 per share. Blue Ridge was even more leveraged and the partners at Goldman Sachs put pressure on everyone to buy as a sign of support. The leverage was astonishing for with just about $25 million in capital, now there was more than $500 million at stake.

The disaster was monumental to say the least. Goldman Sachs Trading Company, whose shares had stood at $326 at their peak, fell during the Great Depression to $1.75. They fell to less than 1 % of their high value. The loss suffered at Goldman Sachs on a percentage basis was far worse than at any other trust. In fact, of the top trusts, Goldman Sachs had lost about 70% of everyone else’s losses combined.

So sometimes the bigger they are, the harder they fall.

QUESTION:

Is there a correlation between the GDP rate and interest rate ?
Best regards,

BL

ANSWER: No. What central bankers fail to take into consideration is that the interest rate is the OPPORTUNITY COST of money as reflected into the future. This is why interest rates naturally decline during a recession because of the future expectation of what money will buy when it returns. If inflation is say 10%, then lenders demand at least that much back plus a profit. Interest rates reflect the inflation rate (opportunity cost of money) plus a profit.

Deflation is when the purchasing value of money rises and tangible assets fall in value. This is also reflected in the drop of interest rates. Often, rates have gone negative for brief periods when people are parking money while expecting it to buy more. They are willing to pay to park their money just to know it will buy more tomorrow.

COMMENT: You are wrong. The SDR will destroy the dollar as of October 1st when they include China. You will see. China will sell all its US Treasurys and buy SDRs.

REPLY: Your very statement is totally absurd. The SDR is calculated simply by a basket of currencies including the dollar, yen, pound, and euro (see IMF calculation). So please explain to me, when the SDR is just a basket of currencies that have all declined against the dollar, just how the SDR could destroy the dollar when it is its largest component?

Here is a chart of the SDR against the dollar. It too has declined like the components of the yen, euro, and pound. Now let’s look at the Chinese yuan. This too has declined against the dollar. So I fail to see how the SDR will destroy the dollar without a magical recovery in Japan, China, Britain, and Brussels. The dollar has been rising against the yuan since 2013. So why would you sell all treasury bonds when they have made a fortune on the currency and swap into something that depreciates?

We should see a new low this week in the share markets as concern over a rate hike hits the markets globally coming from the Fed and Hillary they have finally said on Sunday has pneumonia.

We will provide the timing arrays for this week on the Private Blog for client eyes only.

The Telegraph has come out stating bluntly “ECB’s Mario Draghi has run out of magic as deflation closes in.” The confidence level in central banks I have been warning will decline. This is the prerequisite for the Phase Transition that lies ahead. At  the very core of this entire collapse in confidence in all levels of government lies in the socialist philosophy of Marxist-Keynesianism blended with monetary theory.

All the gold promoters who hate my guts and have been insisting I am wrong, actually share the very same theory with Mario Draghi which has proven to be utterly disastrous. They have both assumed that increasing the money supply will produce inflation. On the surface, it sounds logical under the theory of supply and demand. It completely fails because supply may be definable, but demand is dependent upon human emotion. What happened to the hyperinflation that was supposed to engulf the world with quantitative easing? What both camps of gold promoters and central bankers have assumed using this theory, has only exposed their lack of understanding of both history and how the economy functions.

The only thing that matters is CONFIDENCE for that is what controls demand. You can increase the money supply, but it depends upon public confidence whether or not that will produce any inflation whatsoever. The 3rd century is the chaotic period of Rome when the money supply is dramatically debased. Yet strangely, this is also the same period that we find tremendous hoards of these debased coins being buried as as the British hoard discovered in 2007 with some 52,000 coins. So why hoard debased money if it is worthless? It seems to be a paradox indeed.

Between 235 and 268AD, there were 26 emperors. The political instability was pervasive. The collapse in confidence that sets off hoarding was the emperor Maximinus I who declares all wealth belongs to the state becoming one of the earliest Marxists if you will. He pays rewards to reveal anyone hiding wealth just as the IRS pays rewards today for reporting rich who also have money they are not revealing. This set in motion hoarding on a grand scale. This is stage one that destroys an economy. The hunt for money today is falling this precise course of action.

Once money begins to hoard hiding from government, the process is never easily reversed. The trust and confidence in being able to freely conduct business collapses. As government cannot pay the pensions it promises, the government employees become aggressive.  Today we have unions in New York and Chicago demanding the government tax the exchanges to pay their pensions as teachers and nurses having nothing to do with the exchange. During the 3rd century, trrops began hailing generals to be emperor so they would get paid. Then cities who supported a rival are sacked to pay the troops.

We see at this time Rome splits into three. So we have separatist movements as well. Here is a coin issued by Postumus, the first Gallic Emperor. Britain, France, and Spain separated from Rome as taxes rose. The reverse shows Postumus extending a hand promising restoration of order and prosperity. So we then have separatist movements as we are also witnessing today.

During this part of the economic decline, people hoard. They lose confidence in government so they hoard whatever money they have even debased currency. This gives way to inflation ONLY when they lose all confidence in government. Then they spend the money for the tangible assets. Before that point, DEFLATION prevails because they do not know what form of government will survive.

All the increase in money supply will not stimulate demand. We are in the throes of deflation as people just worry about tomorrow. When they reach the point and question the existence of government, then they will spend the debased money to convert it into tangible assets.

Over the past 3 years, Vancouver has seized at its airport $18.7 million in undeclared cash of which 70% has been from Chinese. The hunt for money is really outrageous that it is all about taxes and our property rights have been lost. All governments are acting like common criminals robbing people of their property claiming they have no right to travel with their own money. There is no crime just failing to tell them you have money on you.

The hunt for money knows no bounds. All countries are now engaging in the practice of just confiscating your money saying you have no right to move with your money whatsoever. This trend is very disturbing for where is the crime? If you made money in one country and didn’t pay taxes to them but left, why is it a crime to take your money to another country to spend it? Any excuse will now serve as the reason to justify being a common criminal. It is a shame, but this is how governments are degenerating into the dominant totalitarian states eliminating the most basic element of freedom, property rights. That is the major component that distinguish communist states from capitalism – the right to property ownership in the latter which is denied in the former. So we are supposed to be a free society, yet we are nothing remotely free. Government are trying to be just a little pregnant with communism enough to justify robbing people in the name of justice (just us).