QUESTION: Hi Mr Armstrong, I have read somewhere that you think that interest rates will go up higher than expected and at faster pace. I don’t understand its relations with bonds. Also your opinion seems to be in clear contrast to everyone else who thinks it will go up slowly over the next few years. If this happened this year, this would be one of your many landmark predictions.
thanks

HH

ANSWER: To some extent, you are mixing short v long-term. The short-term is set by the rates the central banks set. Even this will rise beyond what the central bank desires because of demand.

The long-term is set by the market. That is why the central banks tried Quantitative Easing buying in long-term bonds hoping that would lower the long-term rates which are set by the auction process.

I am not forecasting that the central banks will rapidly raise rate all on their own. They will be forced to follow long-term rates and as Quantitative Easing is reduced, rates will rise when government deficits expand because the fiscal side of the balance sheet has been on life-support by the monetary policy

QUESTION: Martin,

Last week, we had elected the weekly reversals at 24741.6 and 24395. Yesterday, we briefly recaptured, then re-lost those levels again.

Do weekly reversals expire at the end of the week, expire once they are elected, or do they remain active from week to week?

As always, thanks for all you do with your blog and with Socrates.

DB

P. S. – Do you prefer “Martin” or “Marty”? Many address you as “Marty”, but I don’t know if you reserve that name for your close friends. I certainly do not want to offend you.

ANSWER: No worry. I answer to both. As far as the Reversal System is concerned, when you pass beyond Reversals electing them on the close by more than 1% away from the number, you will typically rally back to test them before proceeding. In this case, you went to the third one and bounced. You always generate counter-trend reversals when you are making a low. In most cases, they are above the market activity.

In this case, two Weekly Bullish Reversals were elected and that is why we bounced. It was also why I have warned that it appeared this was not a 1987 meltdown, but a consolidation and choppy period. There were no Double Weekly Bearish Reversals that would indicate a meltdown if elected as was the case from the 1987 and 1989 highs.

The two reversals 24741.6 and 24395 were elected and they will provide overhead resistance. In the case of 1987, you took out all four Weekly Bearish Reversals and there was a gap from 286 on the S&P500 to 181.

The great thing about the Reversal System is we eliminate human opinion. The numbers are very black and white. How they are laid-out in a given market identifies the potential for a meltdown or just a correction. Then our Timing Array showed turning points every two weeks indicating also a choppy pattern. In this way, we are able to eliminate the human subjectivity that is always hit or miss.

We are moving into a crisis of monumental proportions. There has been a serious fundamental problem infecting economic policy on a global scale. This conflict has been between monetary and fiscal policy. While central banks engaged in Quantitative Easing, governments have done nothing but reap the benefits of low-interest rates. This is the problem we have with career politicians who people vote for because they are a woman, black, or smile nicely. There is never any emphasis upon qualification. Every other job in life you must be qualified to get it. Would you put someone in charge of a hospital with life and death decisions because they smile nicely?

Economic growth has been declining year-over-year and we are in the middle of a situation involving low-productivity expansion with high and rapidly rising budget deficits that benefit nobody but government employees.  Once upon a time, 8% growth was average, then 6%, and 4% before 2015.75. Now 3% is considered to be fantastic. Private debt at least must be backed by something whereas escalating public debt is completely unsecured. The ECB wanted to increase the criteria for bad loans, yet if those same criteria were applied to government, nobody would lend them a dime.

Monetary policy, after too long a phase of low-interest rates and quantitative easing, has created governments addicted to low-interest rates. They have expanded their spending and deficits for the central banks were simply keeping the government on life-support – not actually stimulating the private sector. Governments have pursued higher taxes and more efficient tax collection. They have attacked the global economy assuming anyone doing business offshore was just an excuse to hide taxes.

The combination of fiscal policy and monetary policy around the world has produced historically the most irresponsible economic mismanagement in history. This assumption that government can manipulate the economy is extremely dangerous for we remain clueless about how the global economy even functions. This entire Marxist/Keynesian proposition that governments are capable of managing the economy has implemented various miserably conceived theories that will lead to a budget crash and a debt crisis for every reasonably rational contemporary society. Historically, there were debt jubilees mentioned in the Bible.

You shall then sound a ram’s horn abroad on the tenth day of the seventh month; on the day of atonement, you shall sound a horn all through your land. You shall thus consecrate the fiftieth year and proclaim a release through the land to all its inhabitants. It shall be a jubilee for you (Leviticus 25:1-4, 8-10, NASB).

Religion aside, was a debt forgiveness a way to prevent monument collapses of society? The Romans never even had a national debt. Today, we have government hawking 100-year bonds. We have pension funds that required 8% returns and then governments ordered that the bulk of such funds if not 100% should be “conservative” and invest in only government bonds. We are reaching a crisis point in longer-dated yields because investors are unwilling to lend money at low rates long-term. Smart money is beginning to wake up to the perpetual mismanagement of the long-term trend by the government. The central banks have been backing off of continually buying government debt and the Fed in the USA has announced it will not reinvest when its holdings of government debt mature.

This is the Sovereign Debt Crisis and Monetary Crises we face in the years ahead.

In a 1992 case, the Supreme Court refused to require that mail-order retailers collect sales taxes from buyers in other states. For a quarter-century, that has given the online retailers a competitive advantage over brick-and-mortar stores. The States are broke and they are pushing to compel everyone online to collect sales taxes for them. We are looking at a complete nightmare. There are sites where people make arts and crafts and sell them. Suddenly, everyone would be legally required to file tax forms every month in all 50 states even notifying them they sold nothing to one of their citizens.

Legally, this will absolutely destroy the internet in one swift decision. Some states are particularly onerous and quite frankly even I would have to consider that people in certain States would have to be blocked from purchasing anything from us.

The only solution for us would be to simply close up shop in the USA and move everything offshore. There would then be no way for individual states to demand we collect their taxes from a foreign country.

When we moved to Florida, there was a mistake made in shifting our taxes on employees. The amount we failed to pay was $74. The penalty was $125 and then there was a late fee of $33. The tax owed with penalties and interest came to $236 on $74. Can you imagine simple mistakes by retailers can wipe them out! If the Supreme Court rules in favor of the States, all they care about is money. To hell with the economy. This is how the governments will destroy Western Civilization. There is never any consideration of reform. It is always scheming new ways to get more. They never solve the problem, so they constantly hunt for new ways to rob the people to pay their own salaries and pensions.

Counter-Party Risk

Last week (2^nd of February, 2018) ESMA (European Securities and Markets Authority) published the results of its second EU wide stress test for CCP’s (Central “Clearing” Counterparties). These tests are conducted under EMIR (European Markets Infrastructure Regulations) and were first published back in April 2016. There are sixteen CCP’s currently under this structure with around 900 clearing members, which includes multiple entries belonging to one group.

The result of this second test, under greater regulatory risk measures, found that using the test samples at different stages throughout 2017, two of the 16 would have problems under the credit stress test. Market volatility always acts as a platform for this kind of scenario so if they failed in 2017, what will they do in 2018! The volatility we forecast for this year should already be making you nervous.

Having years of actual trading experience, it is the fear that just one counterparty is experiencing problems occurs way before the clearing houses are even aware is what will drive volatility! The overnight repo market, collateral management triparty flow, and individual share price action are the early indicators of risk. Once these start to move you can forget about the end of day obligations to clearing counterparties, the money has already gone. There are always going to be problems when the derivative market sizes become multiples of the underlying.

This is how the credit risk is just pushed up the food chain. Initially, a brokerage is pushed up to the bank/exchange members, the exchange to other clearers and the bank pushed up to the central bank, the central bank is the currency. A collection of central banks (possibly the EU and the ECB) and exchanges results in global demand for the reserve currency. What could possibly go wrong!