One of the most fascinating observations I have made over my career has been that the banks always lend at the top and contract lending at the bottom in every market. Going into 1980, banks were calling me to ask if I wanted to borrow money. Recently, I got a phone call from my bank asking, once again, if I would be interested in a loan. This to me is merely a confirmation that we are approaching a major turning point.

When I look at lending into the agricultural sector, the big Wall Street banks are once again perfectly in line with the cycle. They peaked in loans to farmers back in 2015, and have been declining ever since going into 2020. Bank lending to the agricultural sector peaked with the ECM and we will see it bottom in 2020. Our model will be correct in forecasting the next wave, which will be a cost-push inflationary wave. As the agricultural sectors come back to life, thanks to shortages, then the bankers will be willing to lend once again. The banks are the PERFECT indicator of how not to run a business. They make decisions emotionally and always get the economy dead wrong (i.e mortgage-backed securities peaked in 2007)

QUESTION: Marty, You are wrong. The US Treasury can create the money as the Constitution says it can. Article I, Section 8, Clause 5. The Congress shall have the Power to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

To coin is used as a verb. At the time the Constitution was written, to coin money meant to create or to make money. Today’s Dictionary defines to coin as a verb meaning to make or to invent.
Why did you fail to mention this in your Blog today?
TD

ANSWER: Yes, you are correct. I suppose I was referring to the 99.99% of the money supply rather than the coins put into circulation by the US Treasury. President Nixon only closed the gold window in 1971. He did not demonetize “gold” as money under the Constitution. Yes, technically the US Treasury can coin money, but it coins today’s coins. The Fed does not do that. The coinage it creates is minimal in comparison to the overall scheme of things. Since 1913, the printing of currency has been delegated to the Federal Reserve. Prior to 1913, the Treasury issued the paper currency which was backed by coins.

This was the last issue of paper currency issued by the United States Treasury in 1913, the year that the Federal Reserve Act was passed.

Note that in 1934, the Fed actually issued $10,000 bills

QUESTION: Hello

Where do you guys see as the next World economic conference in 2020?. Will there be another one in Asia? or Europe?

Also, I wanted to try to give this question to Marty, although I never had the luck to get his response… more than once. “Trump just announced to nominate Judy Shelton as the next candidate for the Fed chairmanship. Judy has been promoting to peg the dollar to gold and going back to Gold standard once again, What do you think about this?. Is it possible for the Fed to go back to Gold standard?. I thought we’ve much more issues when we had Gold standard, why are they keep pushing for this agenda?.”

Thank you.
CK

ANSWER: We have not yet decided where to hold the next overseas WEC. Given the seriousness of things developing in Europe, we may hold it in Germany. This is still in question.

President Trump’s Federal Reserve nominee Judy Shelton has long been a proponent of free trade and once advocated for an open border with Mexico back in 2000. Shelton would not be the first free trader to get a top job from Trump. Larry Kudlow, the president’s top economic adviser, is a longtime friend of Shelton and has been a “free trader” who initially criticized Trump’s calls for tariffs. Trump explained to him that free trade will never exist without using tariffs as a negotiating strategy. Indeed, Trump offered to drop all tariffs with Europe if they would do the same — France refused. Trump’s prior Fed nominee, Stephen Moore, also fits this pattern of free trade. I have known Steve over the years and he backed out because of the onslaught of personal threats and attacks against him and his family by the left. Herman Cain also dropped out of consideration for similar reasons.

Last year, Shelton called for a “new Bretton Woods conference,” akin to the 1944 meeting that established the post-war economic order, perhaps to be held at Mar-a-Lago, where a return to the gold standard could be considered. “We make America great again by making America’s money great again,” she wrote in the journal of the Cato Institute. This nostalgia with a return to the gold standard is really insane. The very reason Bretton Woods collapsed was that you cannot fix or peg the dollar to gold while you continue to create dollars without restraint. You would think a third grader would figure that out, but those in power seem to understand less about reality for they spend too much time talking among themselves.

Yet the idea that every US dollar should be backed by a small amount of actual gold may seem to be a popular idea and enthusiasm for a return to the gold standard has become more prominent since Trump’s most recent nominees to fill the vacant Federal Reserve governorship have endorsed a return. The problem with this idea is that the entire socialistic agenda has to come to an end. You cannot run deficits perpetually and we can not continue to accumulate debt with no intention of ever paying anything off.

The only way to return to a gold standard is to abandon the entire political agenda currently. When the left is advocating the Modern Monetary Theory of endless creation of money, the gold standard represents the extreme in the opposite direction. We die by hyperinflation on the one side or deflation on the opposite. Both will lead to the destruction of Western Civilization as we know it.

I fully agree that we will be forced into a new Bretton Woods meeting probably 2021/2022. But make no mistake about it, a serious political reform will be required.

The yield curve has been inverted for the last month. An inverted yield curve occurs when long-term government debt yields fall below rates on short-term notes and bills. For stock market investors, an inverted yield curve is typically a sign that equities could peak before an economic recession will follow. It also can be a precursor to a bear market in stocks, where equities fall 20% or more from highs which is the typical forecast. Some have pointed to the escalating China trade war. Investors, the claim, are worried that the China trade war and U.S. tariffs will slow global economic growth.

The 10-year Treasury note yield fell to 2.24% in early trading on May 29. Yields on three-month Treasury bills rose to 2.35%, well above the 10-year rate. The 10-year Treasury note fell below 2% on June 25 following the release of weaker-than-expected consumer confidence data. The three-month note traded at 2.13.%. Ten-year rates stood at 2.69% at the start of 2019. On June 4, 10-year Treasury notes slipped to 2.1 in midday trading, its lowest level in 20 months.

But much the real trend driving the inverted yield curve is capital inflows seeking long-term yields. Much of the capital has moved in from Europe. In addition, the amount of money in fixed-income exchange-traded funds passed $1 trillion last month, an ascendance that has reshaped the market in which countries and companies raise money to pay their bills. This has also altered the yield-curve. These forces have changed the dynamics of the marketplace and the traditional inverted yield curve does not necessarily mean what it once did and more than central banks use to be in control of the economy or money supply.

QUESTION: You said the “crash is in the debt markets”. Can you please explain how that will evolve?
Liz M.

ANSWER: Once upon a time before 1971, there used to be a difference between debt and cash. Government bonds were not acceptable for collateral. You could not borrow against them. You had to liquidate them. This is why they once believed that it was LESS INFLATIONARY to borrow than print. Today, you can buy TBills and post them as collateral to trade futures contracts.

When paper money was beginning during the American Civil War, the government issued compound interest currency. In reality, this was merely currency that paid interest. Therefore, they were a hybrid where they were actually bonds that circulated as if they were a currency. We have returned to that whereby TBills are a street name and are good collateral so they have become the equivalent of bearer bonds that merely serve the purpose of currency.

Civil unrest is continuing to rise in Hong Kong after crowds of mask and helmet wearing demonstrators fled the area to escape hundreds of riot police firing tear gas. The entire issue has arisen from Lam’s government pushing legislation that would allow extraditions to China, a move that alarmed locals and multinational companies. The clashes have embarrassed the government in Beijing. The demonstrations came on the anniversary of the former British colony’s return to Chinese rule.

In 1863, the Hong Kong Government declared the silver dollar (a form of international currency issued by many nations) to be the legal tender for Hong Kong. In 1866, the government began issuing a Hong Kong version of the silver dollar. The silver standard became the basis of Hong Kong’s monetary system until 1935, when during a world silver crisis, the government announced that the Hong Kong dollar would be taken off the silver standard and linked to the pound sterling at the rate of HK$16 to the pound.

In 1972, the Hong Kong dollar was pegged to the U.S.dollar at a rate of HK$5.65 = US$1. Between 1974 and 1983, the Hong Kong dollar floated. On October 17, 1983, the currency was pegged at a rate of HK$7.8 = US$1 through the currency board system.

The problem Hong Kong will face is as the financial crisis in Europe erupts it will push the Greenback higher. If Hong Kong keeps desperately trying to hold the peg, they will import DEFLATION and turn their economy down very hard all because of international events. The models we showed at the Singapore Conference targeted 2019 for an important turning point.

The Hong Kong dollar peg climbed as much as 0.19% to 7.7987 a dollar on Tuesday, crossing the 7.8 threshold. Local interbank rates remain near a decade high, outstripping the income a trader can expect on U.S. dollars. That’s undermining a carry trade — sell Hong Kong dollars, buy greenbacks — that had been profitable for years.

The tight liquidity is coinciding with dramatic street protests. There has been a surge in borrowing costs suddenly. Companies are hoarding cash.

QUESTION: Mr Armstrong, love your blog, as with all your readers its opened my eyes to new ideas and ways of looking at the world.
I’m a recent computer science graduate who’s very interested in finance and trading so I read your blog every day and have a subscription to Socrates. I read a post where you said the soul of traders was forged in the pits, how does a new kid like me go about learning to trade really well in the age of tech? How does a computer science guy like me advance in the direction of finance and computer science like you have?
JB

ANSWER: I was told I had the last TransLux ticker-tape in the country. They came to my office and said they were taking it out. They would no longer support that service. Yes, I used to do my charts by hand in the 1970s. When the screen appeared in the ’80s, I still kept my paper tape. I would learn to trade from the sound. If something would be happening, it would sound like a machine-gun constantly shooting. Quiet days it would tick, tick, pause, tick.

I believe it was the sound that helped me learn to trade. I would just get a “feeling” or sixth-sense so to speak. You could smell the blood on the floor by the tape.

Trading in the pits was like playing poker. You had to read the faces around you and get a sense if they were bluffing or real. That was the real trader environment. You had to know when to press and when to fold.

I have some ideas to help with getting that sixth-sense. It is on my bucket list of things to accomplish. I am trying to pass on what I have learned before it is my time to pray to beam up, please.

With pit trading closing and moving to electronic, we are losing a lot. I fear the next crisis for there will be even less liquidity with people only looking at screens. It will lack the “feeling” and the smell of blood on the floor to know when the trend will shift.