Tag Archives: Gold Standard

Jul 31 2018

World Trade & Who Needs the Flash Cards?


Armstrong Economics Blog/World Trade

Re-Posted Jul 31, 2018 by Martin Armstrong

 

The Independent reported that an EU Official said that Juncker used ‘‘brightly coloured, simple flashcards” to explain trade to Trump during the meeting. The EU official said ‘each card had at most three figures about a specific topic. While these remarks are deeply offensive, what they really reveal is how much EU officials prefer to promote propaganda as well and create their own FAKE NEWS to distract people from reality. It has been Europe that delayed the TTIP deal and made it completely unworkable. What they are NOT explaining to people is that there is another MAJOR PROBLEM with the EU structure being exposed by trade negotiations and why Britain who run as fast away as possible.

All 28 EU countries have a common external tariff, which is collected by the national customs authorities. This is then paid into the EU budget. This tariff produces around €20 billion euros per year. Now enters the great disparity of economics. Germany produces 25%+ of that tariff – some €5 billion. It was true that the goal of the EU was to eliminate tariffs and champion free trade among member states as takes place in the USA. This is where we get this slogan of the “single market” for the more than 500 million EU citizens.

That all sounds very nice. The dirt is always found swept under the rug. Creating a “single market” was beneficial primarily for Germany who has an export-economic model. Germany’s car business is its lifeblood. It survives by selling cars to the world. So naturally, the euro was a dream come true for Germany. The euro and single-market eliminated FOREX risk for its customers and German producers which would result in more sales. That was a win-win for Germany, as the sales pitch went.

However, the creation of a single government has introduced a lot more problems that nobody bothered to consider. Germany clearly dominates the foreign trade of the EU. It exports to the world beyond the EU. Without Germany, the EU would flounder and be saddled with trade deficits. However, now we introduce the EU government. Suddenly, Germany cannot conclude its own trade treaties outside the EU. Everything must be negotiated by Brussels through the customs union.

Now we begin to look beyond mere currency. I have warned that one-size does not fit all as people had expected would emerge from creating a federalized EU. The second largest player in the EU is France. Because of crazy unions and socialism that has dominated France, the French are not the bastion of production and instead have a perpetual foreign trade deficit. Its socialistic policies have produced chronic protectionist policy that results in higher wages and higher costs of production that are simply uncompetitive even within the EU. Therefore, France is always at odds with Germany when it comes to trade deals for the EU.

In actual negotiations under the Obama Administration on the TTIP deal with the EU, the process dragged on from 2013 to 2017. Each of the 28 member states had their own protectionist issues. This delayed negotiations endlessly and it demonstrated that the EU structure really did not work. Each country wanted its own deal, but it had to negotiate collectively. So France could prevent Germany and likewise other members could block France. This is the reality of what President Trump walked into. The audacity that Juncker had to explain trade to Trump with flash cards was probably the most arrogant statement I have ever read from a government that is clueless. Trying to negotiate trade with the EU when its own 28 member states fight with each other is impossible. Already, Trump offered to eliminate all tariffs. Germany licked its lips. France said NO WAY!!!! Who needs the flashcards?

The only possible tactic that Trump could take to break this deadlock was to threaten wholesale tariffs. The Europe-wide tariffs were the only possible way to deal with the situation that probably still will not lead to some universal commitment to real free trade on either side of the Atlantic. It is Europe that is burdened with protectionism that has for decades put up a significant renaissance against free trade.

Trump’s favorite slogan, “America First,” has gained all the headlines and people PRESUME he is starting some protectionist war. In reality, there is NO free trade whatsoever and this issue of trade is like someone who punches you in the face, but the police charge you with assault for hitting the person in retaliation and ignores any evidence that they hit you first. TTIP was a complex mess and by no means would it actually create free trade. It was all about protectionism simply labeled free trade. The EU structure is hopeless. It wants to pretend it is a “single market” but it cannot negotiate any trade deal because it is 28 members who have to unanimously agree and that took 4 years to reach TTIP and a complete mess.

Of course, the media generally at large just like to bash Trump. Why bother explaining the real nightmare of tariffs and duties which are merely tariffs in sheep’s clothing.

Jul 30 2018

What is a Superposition Event


Armstrong Economics Blog/Training Tools

Re-Posted Jul 30, 2018 by Martin Armstrong

Socrates wrote about a Rare Superposition Event took place last week in the Dow. They can take place at all levels of time and can be on a closing basis or on an intraday basis. This is the 43rd such event on the weekly level in the Dow since 1914. You can read more about them in our Research section.

Jul 28 2018

The IMF’s SDR & Monetary Reform – Another Crazy Idea?


Armstrong Economics Blog/Monetary Reform

Re-Posted Jul 28, 2018 by Martin Armstrong

QUESTION: Hi Martin,
I am a long time reader of your blog and a big fan of the tools that you have developed for investors. Thanks for all that you do and I wanted to reach out and ask about your opinion of the thesis that ——-  outlines for the IMF implementing SDRs as world money during the next downturn? This type of scenario seems to make sense considering the current balance sheets of central banks and the current lack of demand for EU debt.
Nicky

ANSWER: I was in a discussion about that back in the 1980s (see the response from the White House rejecting SDRs). That was a day before the IMF became so corrupt. That was rejected countless times. The entire problem still stems from the cross-currency borrowing by nations. Even if the emerging markets borrowed in SDRs instead of US dollars, it really would not alter the world money system nor prevent a crash at the hand of a Sovereign Debt Crisis. What it would do is simply relieve the dollar marginally. The problem would emerge on how do you manage such a system. As long as governments issue debt, then once they issue that debt in ANY currency other than their own, RISK enters the game.

Even if we switched the reserve currency from the dollar to the SDR, the ONLY way to enforce it would be to restrict currency. For example, I could issue a bond in Japanese yen for years and sell it to you in Canada without it being approved by the Japanese Ministry of Finance. China still has currency controls where its people have to ask permission to send money out of the country. The only way to enforce an EXCLUSIVE SDR reserve currency would be for all debt to be denominated in SDRs. However, then every country would still have the risk of their currency fluctuating against the SDR.

The only way to practically reduce the risk is to prohibit governments from issuing debt in any currency but their own. That introduces yet another problem. Many pensions bought emerging market debt to get the higher yield, but they did so because they issued that debt in dollars to attract foreign buyers. As the dollar rises and rates rise, the value of emerging market debt declines and the risk of default rises as the US dollar rallies.

So you see, if we are really talking about revising the world monetary system, it is going to be far more complicated than simply replacing the dollar with SDR, gold, or clamshells as they issued during currency crisis of 1933.

Jul 25 2018

Trade Wars & Rising Interest Rates – The Top Concerns of Fund Managers


Armstrong Economics Blog/Interest Rates

Re-Posted Jul 25, 2018 by Martin Armstrong

The interesting fact is that the majority of fund managers today have reduced their equity allocation to their lowest level since November 2016 according to Reuters. The reason for this is their focus of trade and their assumption that the Great Depression was caused by a PROTECTIONISM. According to yet a recent monthly report by Bank of America Merrill Lynch (BAML) where they conducted a survey of fund managers, the majority, some 60%, now fear a trade war. Clearly, the biggest concern out there is a trade war poses the greatest risk to the stock market. Another 19% fear excessively higher interest rates by the Federal Reserve. These two perceptions are the dominant reason we see consolidation.

However, our computer forecasted the consolidation for 2018 at the start of the year. This has sparked a number of emails asking how was it possible for the computer to forecast consolidation before the fundamentals? What I have noticed over the years in working with this model has been that trends will last ONLY for a specific amount of time. Like being cold all winter and suddenly the sun shines with Spring, we call it “Spring Fever” and everyone runs out at starts doing things when the weather changes. We respond similarly to cycles in markets. They will last only for so long and we get tired. It is NOT that specific fundamental that comes into play and causes the consolidation. Instead, the market trend shifts and people begin to look for explanations to explain it.

I have shown charts that demonstrate that rising interest rates are a market myth. The stock market has risen with higher rates and when the market crashes, demand-side economic means they lower rates trying to “stimulate”  demand under Keynesianism which has never worked. The ECB has kept rates so low for nearly 10 years and they have destroyed the European bond market as reduced Europe to an economy that is ranked even below China. And as far a trade is concerned, I have shown that Trade Tariffs were a response to the currency and the collapse in agriculture due to the invention of tractors and electricity during the early 20th century. Like the internet today is displacing jobs, electricity reduced the jobs in the manufacture and the combustion engine expanded to tractors reducing employment in agriculture from 40% of the civil workforce to 3% by 1980.

Consequently, the computer is forecasting the trend. People try to explain the change in trend and fit the fundamentals to try to explain what took place. I have written before that the book I had to read in school on the Great Crash by Gailbraith, never mention the Sovereign debt crisis of 1931 because he was a socialist who wanted to blame corporations EXCLUSIVELY. Others actually claimed that Hoover embraced the rise of Nazis in Germany because he wanted to trade and ignored Russia. Hitler came to power in 1933 and Hoover lost the election in 1932. They will even alter timelines to support a predetermined conclusion.

The trend changes due to cycles for we can only endure a trend for so long before we just want a change as we do in politics. The cycles are not altered by the fundamentals. Commentators fit the fundamentals to explain the cycle. The sharp decline in asset allocation to equities has not been met with a collapse in market prices. This is a very interesting development for the majority NEVER manages to sell the high.