The Looming Debt Crisis Nobody Seems to Look At


Around the globe, we are approaching a monumental awakening as municipal governments see their borrowing costs rise dramatically with rising interest rates. This is unfolding in Europe, the USA, Canada, South America, Middle East, and Asia. In fact, S&P is predicting the first-ever default by a Chinese local government financing vehicle this year as LGFV borrowing costs rise onshore. Forecasters never predict the change in trend and also see next year as pretty much the same as the last. Yet we have been at a 5,000 year low in interest rates and that speaks volumes of risks ahead.

Across the board, our reversal system in interest rates is poised with sharp gaps. This is warning that an uptick in rates will lead to an explosive rally in overall rates and then we will see the costs of funding explode. So buckle up – we are headed to the other side of the storm. We have been in the eye where it is calm but now we are preparing to come out and rates will move upward faster than before.

Anyone who has floating rate mortgages may now want to look at locking it in at a fixed rate before rates rise too fast.

5. GOVERNMENT


In Part Five of his WE THE PEOPLE V 2.0 series on economics and politics, host Bill Whittle walks us through history to show why when it comes to government, less is more.

 

4. CORPORATIONS


In Part Four of his ongoing series on economic basics, Bill Whittle talks about the type, the morality and the fairness of corporations.

3. CAPITALISM


In Part Three of his We The People v2.0 series, host Bill Whittle explains how capitalism not only incentivizes extra work, it also is, by far, the most moral and fair economic system ever devised.

2. SOCIALISM


In Part Two of his WE THE PEOPLE V2.0 series, host Bill Whittle looks at the false “fairness” of socialism and demonstrates why they are economically unsustainable.

1. MONEY


In this first installment of this new series aimed at younger Americans, Bill Whittle starts with the basics: the demonized, misunderstood commodity called MONEY.

The Dow Down & Dirty


COMMENT: OK Mr. Armstrong. Looks like the government was right. You come out and said the Dow reached a turning point and it crashes. You posted: “In the US Share Market, this is now a turning point we have reached. I have warned for months that exceeding the November high would lead to a January high.” You are too influential.

REPLY: Or perhaps our models are correct. This nonsense that people can move the market is absurd. Governments have spent trillions and failed. Why is it I am the only person who can move the world? Does a tree make a sound when it falls in a forest even when nobody is there to listen? They tried to silence me yet it still did not matter. Here is the internal 37.33-week cycle within the Economic Confidence Model. The target date 2007.86 was November 9th/10th. It was November 9th, 2007 that all four Daily Bearish Reversals were elected from the major high. Why do things take place precisely to the day even when I do not announce them?

So far, we have elected the first Daily Bearish Reversal. There are three more to go before we can say we are headed into a March low. Time will tell. It should be choppy for the next couple of weeks. When you gap lower like this, you normally will bounce and eventually fill that gap. So caution is always advisable.

The first high was the precise day that the Real Estate market peaked in 2007. They called that Armstrong’s Revenge on the trading floor that day since it was again to the day. That was precisely to the day of which the same calculation produced the very day of the low during the 1987 Crash. Markets peak and bottom in sync with our models around the world even when I do not mention them. Even Greece petitioned the IMF for help precisely on the turning point. Then on the very day, Russia entered Syria on 2015.75. These events are all the same model and the calculations are cast in stone.

Sorry – there is just something beyond the surface that warrants our attention. These dates are not random. They cannot be fudged. You can blame me, but they have existed before my time and will continue beyond my lifetime.

CFTC Has Made Spoofing a Crime


The Commodity Futures Trading Commission announced that it has brought a case in conjunction with the Department of Justice and Federal Bureau of Investigation’s Criminal Investigative Division, charging criminal and civil enforcement actions against three banks and six individuals involved in commodities fraud and spoofing schemes, which they define as bidding or offering with the intent to cancel before execution. The problem with now claiming to spoof is a crime, they are dangerously destroying how markets have traded from the beginning and this is only reducing the liquidity. That means in the years ahead, during a crisis, there will be fewer and fewer big players left in the markets and that will become dangerous. The government tries to spoof itself during a panic and always comes out and says the market is fundamentally sound to try to stop a panic. They simply write a rule and it becomes a crime that is contrary to a Democratic form of government. Any crime should ONLY be authored by Congress – not agencies.

We use to call that “flash” bids or offers. It was simply a way of trading that was often mandatory. Of course, there was the risk that you could be tagged. I was short one time in gold about 5,000 lots and it was a turning point so I wanted to cover and flip to a long position. There was a large local trader in the pit. His style was to do these flash offers or bids to try to push the market to the next level. I instructed my guy on the floor to just wait for him and as soon as he would flash offer a thousand lots, buy them. He flashed 1,000 and I said done. He then flashed 1,000 again and I said done. He tried a third time 1,000 and I said done. Gold then rallied. It is one thing to bid or offer and you are not willing to take that position. I seriously doubt that anyone in their right mind would do that. If you are going to flash bids or offers, you can also be tagged and you have to be good for the trade.

The CFTC is totally destroying the market and liquidity. They filed charges and settled charges against Deutsche Bank AG (DB AG) and Deutsche Bank Securities Inc. (DBSI) (collectively, DB), requiring DB to pay a $30 million civil monetary penalty and to undertake remedial relief. The trades were between February 2008 and continuing through at least September 2014, in precious metals. They call this a scheme to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on COMEX, and by trading in a manner to trigger customer stop-loss orders. This is how the markets have traded since inception.

The CFTC also charged and settled against UBS AG(UBS), requiring UBS to pay a $15 million civil monetary penalty and to undertake remedial relief.  Again, this was concerning precious metals futures contracts traded on COMEX.

The third charge was an Order filing and settling charges against HSBC Securities (USA) Inc. (HSBC) for engaging in numerous acts of spoofing with respect to certain futures products in gold and other precious metals traded on COMEX. HSBC was ordered to pay a civil monetary penalty of $1.6 million.

The CFTC Division of Enforcement Director James McDonald said:

“Spoofing is a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology.  The technological developments that enabled electronic and algorithmic trading have created new opportunities in our markets.  At the CFTC, we are committed to facilitating these market-enhancing developments.  But at the same time, we recognize that these new developments also present new opportunities for bad actors.  We are equally committed to identifying and punishing these bad actors.  The CFTC’s enforcement program is built around the twin goals of holding wrongdoers accountable and deterring future misconduct.  We believe these goals are best achieved when we hold accountable not just companies, but also the individuals involved.  As these cases show, we will work hard to identify and prosecute the individual traders who engage in spoofing, but we will also seek to find and hold accountable those who teach others how to spoof, who build the tools designed to spoof, or who otherwise aid and abet the wrongdoing.  These cases should send a strong signal that we at the CFTC are committed to identifying individuals responsible for unlawful activity and holding them accountable.”

Is Everyone Now Bullish in Stocks?


At last, we have entered the middle-ground of analytical thought. Between 2009 and 2017, the majority were bearish calling for the inevitable crash any day now. So after 8,6 years, they have now crossed the Rubicon and we now see there is a general expectation that stocks will keep rising, albeit at a slower pace. The reasons they now have adopted a focus on the Trump Tax Cuts and the odds seem low for a recession this year. They are also touting that economies around the world are finally in sync and starting to grow together, yet that seems to be delusional at best.

Then we have the typical fundamental arguing that should keep profits on the upswing for companies, and stock prices tend to follow the direction of profits. That too is a myth for even Shiller has admitted that since 1881, the correlation of the past decade’s real earnings growth with the price-earnings ratio is a positive 0.32. But there is zero correlation between his CAPE ratio and the next 10 years’ real earnings growth. He has even stated that real earnings growth per share for the S&P Composite Stock Price Index over the previous 10 years was negatively correlated (-17% since 1881) with real earnings growth over the subsequent 10 years. So the whole earning issue really cannot explain market performance no matter how logical it may sound. Shiller has even conceded that bond markets also fail to correlate to inflation. It is the past the rules the future. He has stated that long-term interest rates tend to be high when the last decade’s inflation was high. He has pointed out that the US long-term 10-year bond yields are highly positively correlated (70% since 1913) with the previous 10 years’ inflation. However, he notes that any correlation between the Treasury yield and the inflation rate over the next 10 years is only 28%.

Shiller has concluded that he cannot figure the market out: “The truth is that it is impossible to pin down the full cause of the high price of the US stock market. The lack of any clear justification for its high CAPE ratio should remind all investors of the importance of diversification, and that the overall US stock market should not be given too much weight in a portfolio.”

Of course, diversification is the uneducated way to invest. It is admitting you cannot forecast so the best way is to spread out your bets. You can see the results of diversification strategies at any casino’s roulette wheel.  People will bet on many numbers staggering their wagers between them hoping to catch the number with the biggest bet and hedging it with smaller bets on a variety of numbers. Investment diversification is the same. They do not know which market will perform best so they spread their bets around hoping for the best. They guarantee to take some losses in hopes of a reasonable win.

Yet, there is a growing consensus that the market is going up and they really do not know why so they are punting out theories. They still are touting risks that they see lying ahead. One concern centers on just how long and strong this bull market has been. Since the rally began from the 2009 low, they say that stocks have become more expensive than they’ve historically been, relative to corporate profits. Yet Shiller has conceded that does not produce a winning correlation. We passed the entire length of the bull market during the Roaring ’20s, which was 97 months last April 2017. This scares many as they keep talking about value.

Many warn that an unexpected spike in inflation can kill the bull market, although I totally miss this logic. They obviously do not understand the three different types of inflation. They look at the past deflation and low-interest rates and then assume the market has risen with low-interest rates and low inflation. Others attribute the rise to the central banks around the world massive stimulus programs to avoid a downward spiral.

Inflation is still relatively modest, but the job market is at its healthiest in years, and the unemployment rate is at a 17-year low. All of this baffles the analysts. They think this should lead to higher wages for workers, which could push inflation higher across the economy, but then there is the technology boom replacing workers. Banks have been letting go their older more expensive staff replacing them with junior people to save money. This too is creating confusion in the analytical world.

Others fear that if inflation picks up faster than the Federal Reserve is expecting, that it will force them to raise rates more quickly than it has prepped markets for. Then they calim a crash is still possible as if then people will sell private shares and run into government bonds once again.

Then there is the growing potential for a trade war. They argue that companies in the Standard & Poor’s 500 index got 43% of their sales from outside the country in 2016, Therefore, they see a trade war will kill earning and cause the crash. On the one hand, they admit Trump’s policy is a winner, but then again, it can backfire.

Then we have those who say Trump will create a real war with Korea. That they see as a geopolitical risk that can kill the bull market. Yet stocks have tended to rally during war periods.

They some say that the expectations have become just too high. Among the analysts at least, there is more recent optimism and more complacency after being wrong for the first 8 years.

Of course, our correlation models are completely different and proprietary so we do come up with different results

CNN Confirms Soros Lost $2 Billion on Russia


CNN-Conservative 1998-R

COMMENT: Marty; I was just surfing and discovered that CNN did quote you back in 1998. They said you beat Soros since he lost $2 billion and you correctly called the Russian collapse and the Long-Term Capital Management collapse. Maybe they will wake up and quote you again being the only one to get the Dow right since 2010.

Pete

REPLY: Interesting. I forgot about that interview. It is the computer that is tracking the world. It is impossible for one person to monitor every market around the globe constantly. I do remember some others back then saying similar things. That was when I was named Hedge Fund Manager of the year.

All the Hedge Fund punters were colluding together on Russia. They were all expecting guaranteed trades. As I have said before, Edmond Safra invited me to the IMF dinner where he rented out the entire National Gallery of Art in Washington. They were trying to get me to join them on Russia and bluntly said the IMF was in their pocket and would keep the loans going so they could get tens of percentage points in interest from Russian bonds. I told them my model said it would collapse. They disagreed because they paid off the IMF and had the “perfect trade” in play.

After the London FT put our forecast on the front page of the second section, that started the blame game where I became the target since they all lost. As I said many times, the majority must be wrong even when they have billions and the IMF in their pocket.