The US sanctions against Russia are pointless and are placing the West at risk the politicians are too stupid to even comprehend. Already, some Russian companies have asked the government for liquidity injections of up to $2 billion. Even the world’s second-largest aluminum producer Rusal has asked for help. Nevertheless, the impact of sanctions goes beyond the internal borders of Russia for they also impact the international financial markets.

For example, Rusal had previously made clear that the US sanctions are threatening their ability to even meet debt obligations. They carry $7.7 billion of debt in US dollars of which about $1 billion in debt is maturing within five years. In terms of US dollars, Rusal cannot even pay the debts because it would have to do so through US banks. That means, under the sanctions, they would have to default on their bonds. Now let’s turn to Polyus, which is Russia’s largest gold producer. Here they have also $5 billion in US debt. Those US dollar bonds maturing in 2024.  doubles as sanctions become known.

The same story applies to many Russian companies for they still have to conduct business in US dollars regardless of the sanctions. For example, let’s look closer at Rusal. Here the company conducts over 60% of all its business in US dollars. The US sanctions prohibit Americans from doing business with the affected Russian companies or individuals. This is really crazy. Any Russian state-controlled bank cannot step in as an intermediate because they could then become the target of sanctions itself.

Western investors are actually the ones who will be punished by the US sanctions if the Russian companies cannot pay their debts under the law. They cannot even go to an intermediary in Europe for they too could then be targeted by the US for violating the sanctions. The US sanctions would actually justify Russian defaults on all their debt. Will the US then bail out the Western bondholders?

This may end up simply as a 1931 event where one default starts a panic and the entire house of cards comes crashing down.

QUESTION: Thanks for the update. So it looks like the Vertical Market in the Dow will extend into the end of this cycle 2032 as you warned it could do. Correct?

EK

ANSWER: It appears to be shaping up that way. The consolidation has been shallow and nothing to get excited about. If the January high was it, then you should have made a major thrust downward by now certainly electing Monthly Bearish Reversal within the first three months. To judge the extent of a potential decline, the key is to watch HOW FAST does a market elect Monthly Bearish Reversals or Bullish for that matter. This is how to gauge the tone of a market. If we look at 1929, it elected the first TWO Monthly Bearish Reversals in just one month from the high. That was obviously a signal that this was going to be a protracted decline of MAJOR importance.

Now, let us compare 1929 to the 2007 Crash which was dramatic, but not anything close to 1929. We did elect ALL FOUR Monthly Bearish. Here we also elected the first TWO Monthly Bearish at the same time 3 months from the high. We have not elected anything on this consolidation no less even reached the Monthly Bearish. Then coming out of the low, it took 6 months to elect the first Monthly Bullish Reversal.

Now let us look at the 1987 Crash. People thought I was nuts when the very day of the low I came out and said that was it, the low was in place, and we would make new highs by 1989. Yes, this was all confirmed by the Economic Confidence Model. The low was precisely that day of the ECM and the next target was 1989.95 which was the Bubble top in the Nikkei. But this was NOT THE ONLY confirmation. We elected TWO Monthly Bullish Reversals at the close of October 1987. Hopefully, you can see that this was NOT a personal opinion call. We can see that we elected the Monthly Bullish right then and there. This is what I mean by how fast reversals are elected determines the type of trend move we get.

I love the idiots who so immediate are always trying to find something they can claim I am wrong about. They try to attack me like 99% of the analysts out there that offer just their opinion. The mere fact that they say – oh you are wrong, the Vertical Market is over, demonstrates that this type of person is INCAPABLE of every learning anything because they are desperate to prove me personally wrong. We are on a journey here to understanding how everything moves. These people are obsessed with trying to disprove something because they are not capable of understanding the free markets in the slightest. This is not about me being right or wrong. Nobody is every right personally in life all the time. We only learn from our mistakes – never our victories. So such comments simply reveal they are not really worth talking to.

The model is objective. That is the best way to approach this. The forecast was for a January high following be “consolidation” which is what you call this. We have not declined to test the Monthly Bearish and we would have to close BELOW 21600 on the Dow on a Monthly Basis to imply a short-term correction will be sustained even briefly.

What these type of people are obvious to have always been the global economy. Here too, usually major highs are highs in terms of ALL currencies. Here we have a divergence once again. The high in the Dow in Euros took place in February – not January.

Clearly, is the Vertical Market over? No way. There is no other choice for capital but to move to equities when (1) bonds crash, (2) confidence in government decline, and (3) the rise in interest rates send everyone’s budgets into high gear for automatic expansion.

Obviously, the people who are incapable of comprehending what is at stake will be the source of profits for the rest of us. That is simply the way it goes. So smile, shake their hand, say oh you are right and thank you for being there when I need to trade against someone

CLICK ON CHART

It is amazing how people have simply declared that the dollar is in a perpetual bear market as if the USA is the only nation with a debt. They judge the entire future by a few weeks of price action. That is what is so dangerous – emotional trading. I have been warning that ONLY a dollar’s resurgence would create a monetary crisis. The entire world is free to issue debt in dollars and emerging market have done so. As interest rates were manipulated to a 5,000 historic low by central banks, they never thought about what would happen to pensions. So many pensions ran into the open arms of emerging debt which doubled its issue in less than 8 years. The foolish fund managers ran headstrong into emerging markets seeking HIGH YIELD!

The dollar rally is now rippling through emerging markets, sparking steep falls in stocks, bonds, and their currencies wiping out whatever gains they thought were guaranteed.  We are looking a devastation around the globe with the Turkish lira falling almost another 6%. Argentina’s peso is also in trouble as the central bank raised the interest rate to 40% trying to support the currency.

The MSCI Emerging Markets Index, which measures stock performance, is also down 1.5%. Then there is the JPMorgan index for emerging-market government bonds in their respective local currencies has also dropped almost 4% in the past month. These declines illustrate that there is rising uncertainty about the outlook for emerging-market assets among fund managers. Many have been showing that 2018 would be a Directional Change following the surge many saw during 2017. Since January 2018, this turning point which made many call a bear market in the US shares has also marked the beginning of a shift in worldwide trends.

Complexity. You have to Love the interconnections. Keeps the brain awake.

The EU Commission is calling on Germany to pay up to €12 billion more annually into the EU’s pocket for the European budget. With Brexit, there will be a gap in their funding of some €3.5 to €4 billion euros. The EU, in reality, would have less to monitor, but there are never any savings in government. It is always more and more. 

Of course, nobody comes close to the United States on military spending. Nonetheless, India has now surpassed France bumping it from the list of the big five military spenders. Many believe this is the policy because of the rise of China. But it is also because of Pakistan. War has changed, but countries are still arming themselves for a type of war that nobody is interested in anymore – empire building. Empire Building was created by, believe it or not, the DEFINITION OF MONEY!!!!!!!!!

For you see, why did Adam Smith (1723-1790) nation his world – the An Inquiry into the Nature and Causes of Wealth of Nations? Smith visited Paris where the prevailing definition of money or the wealth of a nation was its Agriculture. These were the Physiocrats inspired by Francois Quesnay (1694-1774). It is true, before the Industrial Revolution, at least 70% of the GDP of a nation was agriculture. Even when the Great Depression hit in 1930, unemployment was very high because 40% of the population was still employed in Agriculture. If Agriculture was the bulk of a nation’s wealth, then it made common sense that the more LAND you possessed the richer the nation would be. That inspired Empire Building.

Then comes along in 1776 Adam Smith who disagrees and sees that a person who makes a carriage and exports it to another country returns with money the same as a farmer. Smith adopts what many hold is as the Merchantile Wealth Model. This gives way to the idea that the Wealth of a Nation is not its agriculture, but gold since gold is used as money among nations. As the Industrial Revolution begins and people begin to move from farms to work in the manufacture, Karl Marx (1818-1883) enters the arena.  Now Marx sees that labor is employed by someone with money and he then makes a profit by selling what his workers produce. Marx then sees the wealth as labor and advocates taking the wealth away from the capitalists and hand it to the people.

With the end of World War II, what has been proven is that gold is no longer MONEY that constitutes the Wealth of a Nation, it is, in fact, the total productive capacity of the people. Proof of this statement is the rise of Germany, Japan, and China have all accomplished the rise in economic stature not because of its possession of gold or even natural resources, but the TOTAL capacity of its people to produce what it has as a comparative advantage in the world of commerce. Now the UAE and Saudi Arabia have woken up. They realize that what has made their nations wealthy was selling oil to everyone else who used it to enhance their production of whatever that was their comparative advantage. It was David Ricardo (1772-1823) who advanced that understanding.

Therefore, the only rational explanation becomes clear. War has become obsolete. The days of Empire Building are no longer viable because we realize today that land does not equal wealth. We can even grow food indoors in warehouses of cities. Agriculture has itself gone through a cycle of evolution. So the USA has no interest in invading China or Russia and occupying their land. Nobody wants the management problem. It appears that war has devolved from economic gain to just two drunks in a bar who want to fight for no particular reason that one looked at the other the wrong way and did not even say a word.

If the wealth of a nation is the total capacity of its people, then why send your boys off to war when there is no longer any economic gain? By reducing your population, you actually reduce the wealth of a nation. Interesting how things have evolved over the centuries.

COMMENT: I saw you in front of the Bank of England. Then within a matter of days, the pound crashes. You may not be a household name but you are in the circles that matter. So did you orchestrate the reverse trend in the pound?

OD

REPLY: No! The pound crashed simply because it was on schedule. My mere presence in London did not signal the end of the pound rally. I was there for some very important meetings with clients regarding other matters, not to help the Bank of England sell the pound. I do get rather tired of being blamed for everything. What you fail to grasp here is that there are very few of us with international experience. Local economists do not cut it and it seems that nobody else with hedge fund experience who has actually traded billions of dollars when a billion used to be a lot of money is around for consultation. They were trying to make another documentary about such things and nobody else was willing to appear because they feared to speak publicly about the fate of the Euro.

I get called because I tell the truth. I do not twist my view to what they want to hear just to get paid like some actor putting on a show. It is what it is. I have intimate knowledge of many aspects because when they were creating the Euro the commission in change all attended our WEC in London that year. I have been called into just about every crisis since the mid-1970s.

You cannot get in the door if you have ANY conflict of interest. I no longer manage money so there is no concern about insider trading that I will profit from the info from a closed-door meeting. It is as simple as that. I also sign confidentiality agreements to ensure that sensitive names and positions are not disclosed.

I did NOT meet with the Bank of England to orchestrate the shift in trend in the pound. The markets are bigger than me, and bigger than the Bank of England and ALL the central banks combined. Remember the Louvre Accord? That is when the central banks came out and tried to stop the decline in the dollar going into 1987. NEWS FLASH!!!! They failed! So, what happened? They called me again since I was the one warning them in 1985 they would unleash volatility.

Everyone knows my work. You cannot manipulate an individual market because we are all connected. Capital flows around the global financial system like a bottle on the ocean current.

I am called by governments and institutions, not for my OPINION, but because the computer is the only thing in the world that monitors the entire political-economic landscape and has a proven track record for almost 40 years.

You cannot manipulate any market beyond the normal channel of daily noise. You cannot make gold rise or fall if it is out of sync with the rest of the world. Those who keep poisoning the minds of people on that do so because their theories are wrong and have been since 1971

Argentina has just raised interest rates to 40% trying to support the currency. I have explained many times that interest rates follow a BELL-CURVE and by no means are they linear. This is one of the huge problems behind attempts by central banks to manipulate the economy by impacting demand-side economics. Raising interest rates to stem inflation will work only up to a point and even that is debatable. The entire interrelationship between markets and interest rates has three main phase transitions and each depends upon the interaction with CONFIDENCE of the people in the survivability of the state.

PHASE TWO: Raising interest rates will flip the economy as Volcker did in 1981 ONLY when they exceed the expectation of profits in asset inflation provided there is CONFIDENCE that the government will survive as in the USA back in 1981 compared to Zimbabwe, Venezuela, Russia during 1917 or China back in 1949. In other words, if the nation is going into civil war, then tangible assets will collapse and the solution becomes assets flee the country.

In the case of the USA back in 1981, the high interest rates worked because we were only in Phase Two where there was no civil war or revolution so the survivability of the government did not come into question. Hence, Volcker created DELATION as capital then ran away from assets and into bonds to capture the higher interest rates. Then and only then did rates begin to decline between 1981 into 1986 reflecting the high demand for US government bonds, which in turn drove the US dollar to record highs and the British pound to $1.03 in 1985 resulting in the Plaza Accord and the creation of the G5 (now G20).

So many people want to take issue with me over how the stock market will rise with higher interest rates. It is a BELL-CURVE and you better begin to understand this. If not, just hand-over all your assets to the New York bankers now, go on welfare and just end your misery.

Here are charts of the Argentine share market the currency in terms of US dollars. You can see that the stock market offers TANGIBLE assets that rise in local currency terms because assets have an international value. Here we can see the dollar has soared against the currency and the stock market has risen in proportion the decline in the currency. I do not think there is any other way that is better to demonstrate the BELL-CURVE effect of interest rates than these two charts.

To those who doubt that the stock market can rise with rising interest rates, I really do not know what to say. Keep listening to the talking heads of TV and all the pundits who claim only gold will rise and everything else will fall to dust. Then we have the sublime blind idiots who never look outside the USA and proclaim the dollar will crash and burn not the rest of the world so buy gold and cryptocurrency you cannot spend and certainly with no power grid.

PHASE THREE

Is when no level of interest rate will save the day. Capital simply flees the political state for the risk of revolution or civil war means that tangible assets which are immovable will not hold their value such as companies and real estate. This is the period that Goldbugs envision. At that point, the value of everything will even move into the extreme PHASE FOUR where even gold will decline and the only thing to survive is food. There, the political state completely collapses and a new political government comes into being.

The UAE government came under tremendous pressure by the dealers that the VAT was killing their business. The government has responded dropping the VAT (Sales Tax) on gold, diamonds, and precious metals for investors. Taxing such products is, in reality, taxing money the same as if it bought bonds or stocks. Not everyone buys stocks just as not everyone buys gold. Taxing gold and not stocks is a form of investment bias

QUESTION: Mr. Armstrong; You have said that Brexit is good for Britain and that the financial center could never move to Paris or Frankfurt and survive. Can you elaborate on that topic for us Brits?

GS

ANSWER: It is amazing that the politicians are so clueless and the heads of the banks are far too often just talking politics. London is bigger than all the financial centers in Europe COMBINED! Because of regulation being consolidated in Britain, it even beats New York City – a fact that is often overlooked. The United States has SEVEN regulatory agencies that compete with each other for power compared to one for Britain. London still wins hands down.Neither Frankfurt nor Paris even has the infrastructure to function as London does