Re-Posted Oct 15, 2019 by Martin Armstrong
QUESTION: I have a question, you wrote :
“Those in Europe who have a position in cash, it may be better to have shares or a private sector bond or US Treasury. Given the policy in Europe of no bailouts, leaving cash sitting in your account could expose you to risk in the months ahead.”
For example, if one has a trading account with a bank, is leaving cash in the bank’s trading account immune to potential seizure indicated in your comment?
Appreciate your clarification,
ANSWER: The risk in Europe is that there is no true rule of law. On the one hand, there is this policy of no bailouts for that would mean money could cross borders. Then there is the rising socialism which is turning into real hatred of the rich.
There is no definitive answer. Europe will do whatever it has to do when the time comes shy of doing the right thing. I have written before when Italy could not meet its debts on short-term paper, they simply decreed that your 90-day paper was now a 10-year paper.
Governments can do whatever they desire. We have no recourse against governments. No private company could act in such a manner. This is one primary reason why I believe governments should be prohibited from borrowing. People are fools for buying their paper and always expecting that this time will be different.
Armstrong Economics Blog/Foreign Exchange
Re-Posted Oct 14, 2019 by Martin Armstrong
QUESTION: Hi Martin,
I have been following you for about 5 years now and have been to 2 WECs. At the beginning of last year, I ventured into the forex markets with limited experience and some speculative money. I’ve have been adding money to my forex accounts over this time and thanks to you and Socrates I have just about doubled my money over this time frame. Now my forex accounts have become more than speculative money for me. I have been really looking forward to riding this dollar rally wave into the monetary crisis cycle into 2021/22 but some for your recent posts regarding the liquidity and European banking crisis brewing has given me pause. I have been planning on taking money out of my forex accounts gradually to at least withdraw all my seed money but naturally, my concern is the safety of the forex markets or brokers in regards to the crises ahead. Do forex brokers have any particular risk in the liquidity and European banking crises?
Thank you for all you do!
ANSWER: That is hard to answer. It all depends on the broker and where are they — Europe or America. I suspect you are talking about America. It depends upon the firm.
We are in a position where there is a crisis on the horizon and we will see a hard landing outside the USA. The impact of a European banking crisis can send the dollar significantly higher. The risks for accounts will be in Europe, for there are no bailout policies and others will claim that these policies would only bailout out the rich. So politically, Europe would present the far greater risk into 2021.
Armstrong Economics Blog/Central Banks
Re-Posted Oct 14, 2019 by Martin Armstrong
QUESTION: Hi Martin,
I can understand how JP and EU backed themselves into a corner with negative rates. Happy to give them the benefit of the doubt when this all started 3-4 years ago even though it was obvious this was not going to end well.
However, what I don’t understand is the thought process that reserve banks today need to perpetuate eternal growth when I would think their role should be to smooth out extremes (debatable this is even possible).
RBA is a case in point as while the Australian economy is slowing, it is nowhere near terrible. There is talk that they will now also look to lower rates to near zero and start QE. I get that all reserve banks are looking to maintain lower exchange rates and so they need to keep pace with the rest of the world but one would think they would learn better from mistakes of EU and JP.
My question is, is this a global conspiracy or just plain stupidity?
Thanks for all ….
ANSWER: The original theory was to smooth out the business cycle. The political governments turned to the central banks and argued that they were responsible for the money supply. Therefore, it was allegedly their duty to control inflation irrespective of the spending of politicians. This was an inconvenient economic truth.
The problem is that the ONLY theory they have is the Keynesian Model. They really have no other theory to rely on. So they keep lowering rates, hoping to stimulate demand, and are oblivious to the economic reality that the political side is hunting taxes and becoming more aggressive in tax enforcement. The two sides are clashing and the central banks are now TRAPPED with no alternative. They are afraid to raise interest rates for they assume the economy may plunge. Yet, they are also looking at the national debts that governments never pay off. Raise the rates and the government budgets explode and that comes back as a political disaster.
A lot of people have asked me if I would step in and restructure this mess. To even do that you have to have the crisis first. There is no way they will allow anyone to come in and avoid this crisis. They will pray at the foot of their bed before each night that their theory will somehow work. That is not going to happen or prevent anything. We must experience the pain before they would EVER consider any reform.
This is sublime ignorance rather than a conspiracy. It brings the mind those famous last words: Father, forgive them for they know not what they do!
Armstrong Economics Blog/Sovereign Debt Crisis
Re-Posted Oct 13, 2019 by Martin Armstrong
We must understand that municipalities are going broker everywhere in the West. More than 50% of the municipalities in Germany are in trouble. We see the same trend everywhere. The Swedish Kommunivest movement where municipalities banned together to sell their debt which they cannot pay off only illustrates the problem.
We then have states/provinces facing a fiscal crisis. The primary driving force has been the pensions they have been paying themselves. Quebec has been escalating into a fiscal crisis ever since 2007.
This is all coming to a head in the next Monetary Crisis Cycle. This will be a very interesting WEC this year. We tried to make this one a smaller event given we had a large session in Rome. Given the degree of this crisis and the overwhelming requests to attend, we were able to get more space to accommodate more than the 500 limit we had set.
Attendees will receive this special report on the Monetary Crisis Cycle. So buckle-up. Keep your hands and feet inside the vehicle. This will be a rise prone to volatility with a lot of ups and downs.
Armstrong Economics Blog/Pension Crisis
Re-Posted Oct 10, 2019 by Martin Armstrong
General Electric Co announced it was freezing its pension fund for about 20,000 U.S. employees with salaried benefits as the Pension Crisis continues to build. Its pension deficit is up to $8 billion. GE’s pension plan has been closed to new entrants since 2012. This is the cost of Quantitative Easing and lowering interest rates to artificially low levels. This is the collapse of socialism. All the promises are collapsing. The sad part, you can rest assured the Democrats will blame Trump in the 2020 election adding this to the Climate Change argument to raise taxes drastically and to impose more central control on the economy – the Marxist agenda which is using Climate as the new justification to impose their dream of Socialism despite the fact it has always failed.
Armstrong Economics Blog/Opinion
Re-Posted Oct 8, 2019 by Martin Armstrong
QUESTION: Mr. Armstrong; You had said you retired from market-making in the precious metals when in the early ’80s people were claiming to sell Krugerrands for spot with delayed delivery. I think they went bust and went to jail if I recall you said back in 1985. Is this the same thing happening in online brokerage with this no commission scheme? How are they making money?
ANSWER: No, it’s not the same. If I remember correctly, it was a firm delaying the delivery of the gold coins by 90 days. They were playing the bear market, assuming gold prices would always be lower based on the fact that the Fed raised interest rates to 14% in 1981. Back then, I was making more money on the float in my account than I was on the gold. The cost on the Krugerrands was spot +4%, so they were making +15% using the money in overnight markets, plus delaying delivery, and they would not buy the coins until the price declined from where they sold them to you. That was pure speculation and I decided I would retire rather than play that game. If I had to speculate to pay salaries it made no sense. They went bust in 1985 and ended up in jail, if I recall, when gold rallied out of the 1985 low and they could not cover all the promises they had made on the coins.
Here we have a similar issue with making money indirectly. Stockbrokers get kickbacks or rebates from the market-makers for steering the business and they make money on the spread between bid and ask. So the retail brokers are still making money that way. But then they also get to use your funds to earn interest. In place of commissions, they make money from charging traders who buy stocks on margin.
Therefore, you have:
- Interest they earn on your money
- Rebates from market-makers
- Interest they charge on margin
This is more legitimate than the gold brokers who were speculating with other people’s money back in the ’80s
Armstrong Economics Blog/Economics
Re-Posted Oct 8, 2019 by Martin Armstrong
QUESTION: Martin, I appreciate all the information that you provide and just got done reading about money shortage and hoarding. Would it be good for US citizens to hoard also? Is there any difference in hoarding dollars or gold and silver coins? Thanks for your comments.
ANSWER: In order for gold and silver to be a medium of exchange, it requires the general population to accept that. The older generations know what a silver quarter or a $20 gold coin might be. However, the younger generation does not. Paper dollars will still be best to hoard for every day use until about 2022. At that time, we will have to reassess the climate of the monetary system. There are those videos where people were offered a 10 oz bar of silver of a chocolate bar. They took the chocolate.
Gold and silver should be in coin form. Bars will not be easily used among the average person.
Armstrong Economics Blog/Banking Crisis
Re-Posted Oct 7, 2019 by Martin Armstrong
QUESTION: Dear Martin Armstrong,
In your blog post “Liquidity Crisis & the Pending European Banking Crisis” Posted Oct 2, 2019 ” you write
‘Those in Europe who have a position in cash, it may be better to have shares or a private sector bond or US Treasury. Given the policy in Europe of no bailouts, leaving cash sitting in your account could expose you to risk in the months ahead.”
I am in England/Uk and I am lucky to be in the position of trying to buy an ‘average priced’ house with cash, therefore, I have money spread across a few UK banks. Should a person like myself be worried? You are the only person out there who I trust to have an impartial assessment because of the amazing work you have done with your computer Socrates. With the highest regard and many thanks from a concerned UK citizen.
ANSWER: As far as bank bailouts are concerned — no, they are separate as they will fall under separate central banks. However, prior to the crisis, structured trades were signed separately using negotiated ISDAs. Once they started trading through an exchange, it was London that won that mantle. So today, most derivatives are cleared in London and that is where the problem could ultimately lie.
In February, the BOE and the EU announced that European counterparties could trade in London and that ESMA (European Securities and Markets Authority) would immediately recognize the three London clearers (LCH, LME, and ICE). This is where London really lost its chance of separating itself from the mess. Because of this action, the market has maintained trade, but at what cost?
There is a huge gap between the board of directors of banks and those who are actually trading. Consequently, even the big banks are clueless with respect to the hidden risks in the financial markets because of the interference of politicians.
The banks are not aware of the problem because their management are not traders. It was this action that relieves the bank’s board or clearers from running the risk that they run. Very few people will see this risk coming as ‘no-one’ looks at the amount of money that is proportioned to clearinghouses. The burden is expected to be borne by the clearers, but what happens if half the clearers all go at the same time?
The REPO market is where 2008 began. However, very few people even on a trading floor will see that as a risk and definitely no one on the board! It will not be until the NIM (Net Interest Margin) starts to underperform that questions will be asked at the board level. And as we know, by that time it is way too late.
Some do not understand why we even get called in because there is the presumption that bankers know what is going on. That is so far from the truth. Congress will call heads of banks to explain and testify, but they are only relaying what they have been told by others.
The trading desks in banks have to sell trades to management using fundamental explanations. It is akin to trying to explain a trade to freshman students in high school with no experience. There is just a major gap between the levels even within major banks.
One of the top 10 banks was having an international internal meeting about the problems in markets. Two offices insisted we be there to address the meeting. They paid our fees and everything, but at the last minute the senior board said no, they did not want to air the problems in front of an outside firm. That’s what I mean when I say we never get called in to avoid a crisis, only when the crisis hits. Then the trading side of the banks wants us to come in because then they hope the boards will listen to us rather than them who they want to blame for everything.