QUESTION: Dear Mr. Armstrong
As a long time reader I rarely see you mention the possible long term benefits of also holding corporate bonds. I understand the obvious down side to government bonds and the reason for stocks to move higher, but since bond holders get paid before stock holders when things go bad would corporate bonds not be a lower risk investment.
Thanks for sharing your work.
TG

ANSWER: Corporate bonds of blue-chip companies will eventually move to a premium over government. We can easily see that when government was the place to run, the premium shifted to governments and then declined after 1932. If you are looking at high grade corporate bonds, towards the end of this bull market in shares, you would shift to corporate bonds – not government.

We can see historically, no relationship is ever solid or fixed. You can see that 90-day commercial paper was at a huge premium during the 1840s when banks were collapsing during the State Sovereign Debt Defaults.  Then during 1930s you see 90-day commercial paper drop below government. This particular cycle you want to avoid municipal, state, and federal debt issues.

QUESTION: Dear Mr. Armstrong: I have been to the Orlando conference and probably read every single one of your blogs since about a year ago and now wanted to ask you about Bitcoin and/or other alternative currencies. If I am not mistaken, this topic is not something that you have really touched upon. Recent spike in the price of Bitcoin appears to be, at least in part, to be driven by certain countries such as China and Venezuela where people use it to bypass their country’s currency restrictions. Would be it fair to say the more restrictions that we will see by various countries and governments the more Bitcoin or other alternative currencies will be poised to increase in price? Would it also be reasonable to expect this same result if, as you alluded to, governments around the world continue to limit and/or eliminate cash, similar to what we see in India? Your thoughts would be greatly appreciated!

I personally thank you for everything that you are doing!

ANSWER: We must be realistic. Governments are fighting for their very existence. The BREXIT and Trump elections are direct attacked upon government that are rising among the ranks of the silent majority. I do not believe that Bitcoin can survive against governments trying to shut down the flight of capital. Countries like Venezuela are in a state of chaos. China is something different. The flight of cap[ital out of China threatens the continued weakness of the yuan and Trump will misread that as a trade war.

Long-term, the safe haven may become stocks as was the case in Germany during the 1920s. Yes there were people who used the gold coins of foreign countries just as the Japanese turned to Chinese coins when they did not trust their government. But gold you cannot ship between countries without a trace and you cannot hop on a plane with a suitcase full of gold. What did survive were  things such as blue-chip shares and real estate. But the real estate is not movable.

As far as gold is concerned, I have recommended old common date coins rather than bars and bullion. I have recommended that because you can then claim it is a collection and historical rather than bullion that can be remelted. That worked before, but it may not in the future. You can mail it around with the country, but trying to send it to a foreign land is not so easy anymore.

The higher the price, the more likely government will look at Bitcoin. It is a very sharp doubled-edge sword. We have to be concerned that the government simple do not declare it illegal and all guilty of money-laundering. Then it could become worthless overnight. The whole reason for Bitcoin is the distrust of government. Why would you trust them to also turn a blind-eye to Bitcoin?

QUESTION: Marty; I invested in your Deutsche Bank hedge fund and the performance was about 3 times that of even the Renaissance’s Medallion fund. Your employees said for the public fund you closed positions early because you were making too much in 1998. Yet that was still about 3 times what Medallion produced in 1998. Medallion is closed since 2005 and nobody has been able to duplicate their returns no less your’s. You said at the WEC you had no interest in returning to managing funds. Why is it that the only two quantitative funds to be successful, you and Renaissance, do not take on more clients?

Thanks for a great conference. Will see you in Hong Kong

HS

ANSWER: To set the record straight, yes I had to close out positions early in 1998 in the public fund because we made way too much money. That may sound nuts, but in a public open fund you cannot post gains in the hundreds or percent for a two months. It would upset the entire industry cause all sorts of problems even with regulators. The model correctly forecast the Long-Term Capital Management Crash. I sold $1 billion worth of Japanese yen at 147 against the Yearly Bullish Reversal in addition to numerous other markets. They began calling me Mr. Yen for that trade.

In the share markets, I had even sold the S&P500 on the very day of the Economic Confidence Model peak – July 20th, 1998, which was the precise high in that market. Getting so many markets precisely correct presents a problem because most people do not comprehend that markets are (1) interlinked, and (2) precise. They immediately want to say you manipulate markets since the vast majority do not understand how the world economy functions and go back to instantly assuming manipulation. I was accused of manipulating the world economy because that is easier to assume than perhaps things do not work the way people believed.

Add to all of the markets we traded precisely for that move, the fact that the London Financial Times put on the front page of the second section the story that we had forecast the Russia was about to collapse at our London World Economic Conference that summer brought in even the CIA. When they called, it was in the middle of the panic and wanted me to go to Washington to build this model for them.

The Case-Shiller real estate index peaked precisely to the day of the Economic Confidence Model in 2007. With the Economic Confidence Model peak in 2007.15 (February 26th, 2007), that turning point marked the very day of the high in the Case-Shiller Real Estate Index. However, it also marked the precise day of the infamous sale at the top of Goldman Sachs’ notorious ABACUS 2007-AC1 $2 billion Synthetic CDO, for which they were charged with fraud. How many times does this model have to pinpoint turns precisely to the day (even 1987 Crash), before people concede perhaps its works and it is not me waking up with a premonition. There are people who pour over everything I write desperately trying to prove me personally wrong rather than looking at the reality that maybe there is something very important lurking behind the appearance of randomness.

You have to understand that performance will decline with any fund the larger the fund grows. Yes our track record with Deutsche Bank outperformed the Medallion Fund back then. However, to be fair, the Medallion Fund began only in 1988 where as our model was already being used for more than 15 years before that so we had much more experience. Comparing one to another may be interesting, on the surface, but it really comes down to the scope of the trading. We used the entire world even during the 1980s. This is why we have created the Global Market Watch to reveal how everything is connected to help take that giant leap forward for humanity.

Strategy is very important in trading. This is the core purpose of the World Economic Conferences. It is not that you trade every specific market we cover. They key is you can see how the world is unfolding and then focus your attention on the market sector you prefer, yet draw confidence from watching the strategy from the whole. It is not that the strategy fails, but you cannot execute an unlimited amount of trades of the same position.

Performance will not remain the same by simply throwing limitless amounts of money at the same market. There is not enough depth to any market whereby it can absorb an endless supply of positions or even if it were confined to a limited group of markets. This is why Medallion is a closed fund. If they accepted more money, their performance would decline. It is not a one for one relationship. Yet it is also why I developed the Global Market Watch to expand the strategy to the entire world without limitations. This is also why we have had the largest and most diverse client base from around the entire world. We are not just forecasting the United States or a single market. Those who focus on just forecasting a single market, like gold, typically hate us and only try to disprove whatever we do because they have nothing else to offer.

The Medallion Fund is the ultimate black box. They really do not report what they made money on and they are also renown for having just quants and not fund managers from Wall Street. Why? Once you interject human reasoning, performance declines. Some will claim to be managing money based upon our model, but in reality they will fail because it is simply their interpretation and human emotion will intervene.

Funds have long tried to mimic myself as well as Medallion. They have never been able to because they are not really quantitative and human decisions, including emotions, override things. The Brady Commission investigated the 1987 Crash. They assumed at first it was computer trading. What surfaced was that most computer models said sell when our Double Weekly Bearish Reversals were elected. However, the fund managers did not sell because they did not believe their systems. When the market gaped down, panic set in and people sold BECAUSE they had no idea what was going on.

Personally, I have learned over the years that the very best trades are when the computer projects the outcome and it makes me feel like this has to be wrong. For example, BREXIT and Trump are examples of that situation. The computer will beat anyone – including me. We are all infected with emotions. They are the hardest thing to overcome.

The comparison is not whether Socrates would beat Renaissance Medallion, but why is it that the only two systems that are not based upon human decisions are at the top of the heap? How many times does the ECM alone have to work for decades before it is no longer a coincidence?