COMMENT: Your 4-2-18 FEDERAL RESERVE VS CONGRESS Blog should be framed & sent to every talk show host and politician in the country. It really puts everything in perspective.
SC

REPLY: What I find most astonishing is that to write that article, all you have to do is a little investigation. Nobody bothers to question anything. That is the most shocking thing I have encountered. So often I get responses like how come I am the only one saying this? Some people think this is just sophistry or made up. I cannot explain why investigative journalists never dare to actually investigate. All I can assume is that some have tried, but their editors will not allow such articles to be published. It is truly mind-numbing.

Contemporary journalism back in 1913 called it a monetary change from a national currency system to a national credit system. There were cartoons and well as criticism of the new central bank. The entire theory of elastic money was talked about. Today, the vast majority remain ignorant of the entire debate of that era.

It is no wonder why people just read the Creature from Jekyll Island and assumed evil lurks behind the scenes. They focus on the Fed is “owned” by the banks and merge that with elastic money and have no idea that the ownership was because the taxpayer was not going to fund a bank bailout so the banks had to put up their own money to create the Fed and pay into it to support the system. The elastic money supply was in use since the 1850s and the Fed would buy ONLY corporate paper when banks were not lending to preserve the economy and prevent corporations from laying off workers. The corporate paper is secured and is retired.  The structure was changed with World War I when Congress instructed the Fed to then buy ONLY government paper. Temporary solutions always become permanent and thus the Fed today is nothing close to the original design.

QUESTION: Martin, in today’s answer re: Asset Allocation you had mentioned of helping a couple of large funds prepare for what is to come.Was wondering if we regular folks will also be privy to this info at some point and also will we get a heads up when things are getting closer to the Big Event.In an earlier blog you had mentioned something about 2022, will that be a critical time for our savings/economy?

Thank you always for your work.

W

ANSWER: The difficulty in turning around major portfolios is substantially different from a private individual. Often these major portfolios are dominated by real estate and government bond positions in the hundreds of billions of dollars. How to strategically shift such portfolios is highly complicated and it cannot be done on a single phone call. The complexity is significant and the general advice on here is not opposite of recommendations to institutions. How to execute such shifts and when is critical timing.

I have stated many times that you can turn a speedboat on a dime. That is not the case with an aircraft carrier. This is the same difference between a private portfolio and a major institution. They just cannot pick up the phone and yell sell everything at the market! This is substantially a different position altogether.

The advice we provide for a major portfolio shift has to be tailored to the asset allocation mix. We must run timing models on each and every component for selling one aspect can have an adverse impact on other assets classes. It is by no means a simple project.

QUESTION:  Hi Martin,
First of all I enjoyed your 2018 Share Market Report and I am looking forward to your video updates. I am one of those retired investors with a typical 50% equities and 50% bonds portfolio. In your recent blog you stated, “The biggest losers have been the asset allocation followers. They assume they cannot forecast the future so they spread their assets hoping that the traditional 60% equities will make up for the losses on the 40% bonds.” Since both equities and bonds prices have rallied since 2009. Is this the time to change our portfolio mix to raise our equities percentages over bonds (my bonds are one year US treasuries). If so what should our portfolio mix be going forward?
Thank you for your guidance!
KC

ANSWER: I really cannot wait to launch Socrates. Answering these questions depends entirely upon (1) your currency base, and (2) the country in reference. There will be a great divide between US government debt and that of Europe. The dividing line appears to arrive in 2019. For now, US debt will be the best performing and the short-term debt will have the least risk of a Forced Loan Conversion, which has taken place in Europe before post-World War II. A “Forced Loan Conversion” is a phrase I coined to identify what happens when a government cannot repay its debt. Italy simply decreed that short-term paper such as 90-day bills were converted to 10-year paper. There is no risk of short-term US debt going through a Forced Loan Conversion.

The Italian government engaged in a Forced Loan Conversion which was a mandatory debt conversion, known as “conversione forzosa” during 1926, which they would again impose during 1934. They forced debt holders to extend their debt by lengthening the maturity. This seriously impacted the full faith and trust in the Italian government. During the post-1926 years and then again after 1934, the mandatory conversione forzosa effectively was seen as a partial default by the government, which made it extremely difficult and costly to borrow on a short-term basis thereafter.

Governments are concerned about appearance. They will mere engage in Forced Loan Conversions to be able to say with a straight face that they are not defaulting. Therefore, the shorter paper will have the greater risk in Europe from 2019 onward. Additionally, interest rates will be on the rise as pension funds fail and smart money continues to migrate from Public to Private debt.

Any asset allocation to bonds MUST be private!!!!!!! A government can default or suspend debt and will never be prosecuted. Private companies do not have that luxury. The traditional asset allocation models will all blow up. We are in the process of helping some very huge portfolios to shift in preparation of what is to come.

QUESTION: Mr. Armstrong; I really wish I found you sooner. A friend of mine has been telling me to listen. He bought the Dow at 17,000 and sold it 26,000 on your advice. He paid off his house and has told me – see, I told you so. I get these emails from the gold community who seem to never give up on every day will be the start of a new rally. This latest one also paints the United States as “dollar hegemony” and they claim that the US expanded greatly following the fall of the Soviet Union. They say China has woken up making money on trade with America. They now say the dollar will collapse and China will be the new world order so buy gold and sell the dollar.

These people seem to have no morals. They sleep perfectly fine raking in the money from people like me robbing us of our savings and preventing us from participating in the real economy as we should. Is there any real dollar hegemony or is this also just hot air?

WH

ANSWER: No, it is total nonsense and you are correct – it is designed to rob people of their life savings. There is no “dollar hegemony” for that assumes that the USA is somehow imposing the dollar upon the entire world by sheer will. History shows that the USA has pursued a policy of lowering the value of the dollar for trade purposes. Even the Plaza Accord in 1985 was a deliberate attempt to lower the dollar and it was at that meeting when the USA argued that Europe needed to create a single currency to compete with the dollar.

There is no competition with the dollar and that is the problem. The Fed wanted to raise interest rates back in 2014 but was lobbied by everyone not to. The Fed has lost control of the local economy because the domestic policy has been suppressed by international policy. The IMF, Europe, and emerging markets all pleaded with the Fed NOT to raise interest rates regardless of the domestic policy objectives.

This is complete sophistry and the arguments of people who really have no clue about how the global economy functions. I have been in meetings in Washington where I have been asked how to PREVENT the dollar from being the reserve currency. The answer is simple. There is no law that the USA can pass to bring about such a result.

It is coming. That will be the Monetary Crisis. But every such crisis has resulted in the dollar rising. That will bring the new monetary system. Not a lower dollar