The Coming Banking Crisis & The End of Bailouts


Behind the curtain, there is a growing concern about a serious banking crisis beginning once again in Europe. Many governments are talking about the crisis behind-the-curtain and we are now beginning to see steps that are being taken to end the TO-BIG-TO-FAIL policies that dominated the 2007-2009 Crash.

The United States is looking at a new radical bank rescue policy where the government is proposing to revise a central pillar of the idea of bailing out banks creating new financial regulation with a new Chapter 14 bankruptcy procedure. They are looking at eliminating the risk of taxpayers’ costs to bail out banks. They are investigating the means for an orderly resolution so that the taxpayers do not have to bail out the banks. This development is causing some concern among the high-flying Wall Street banks, for if that is the case, then another crisis as 2007-2009 will result in even Goldman Sachs closing. The proposal looks to shift the burden to the shareholders and creditors of that bank. This means depositors who are thus creditors.

In Australia, we see similar legislation being proposed. This is the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017. This also authorizes bail-ins bringing an end to the bailout.

 

Rising Interest Rates


While the stock market crashed as the pundit looked in their bag to try to come up with an excuse, they blamed rising inflation and interest rates. Yet, nobody is really paying attention to the underlying trend. The cost of carrying debt has been rising gradually and there are noticeable measurable impacts that the pundits are of course oblivious to since they have to explain every day’s movements and not the real trend.

Already, the 10-year rate is piercing above the 2.6% area. There is an impact on the currency once people begin to comprehend the trend. The 10-year German bond rate is 0.70%, and this has been maintained by the ECB buying 40% of European government debt to no avail for nearly 10 years.

The real crisis comes when they realize that the ECB will not be there to buy government debt. The bidders will demand a higher yield so rates will rise very rapidly.

Meanwhile, the Fed will pursue higher interest rates as they need to be normalized to help pensions funds that are rapidly collapsing. This idea of a lower dollar will raise the price of imports and with tariffs, inflation in consumer products will rise.

Mueller is still not ending his investigation. Why should he? He would have to go get a real job in the private sector. Keep the investigation alive to pay the light bills. He shows no sign of embracing unemployment. His pretend indictment is dancing between raindrops, indicting people in Russia knowingly there will never be a trial. We cannot count him out yet as a factor that will undermine the economic confidence.

So we stand at the threshold of rising rates that will then feed into the market and create a bid for the dollar it appears after March.

 

India Enters the Sovereign Debt Crisis


I have warned continually that the Sovereign Debt Crisis will unfold not so much by people selling government debt, but by the lack of people buying new debt. The greatest peril is when there is NO BID for the new issues because all governments are operating a PONZI scheme. The sell new debt to pay off maturing debt. Currently, holders of Indian government debt have been dumping 4.7 billion rupees ($73 million) of government bonds on average every day this year, according to data from the Clearing Corp. of India. Last year, their net daily sales totaled 368 million rupees.

The Sovereign Debt Crisis emerges when the government is unable to raise enough cash to pay off the maturing debt. India has crossed that threshold so as we have warned, the Sovereign Debt Crisis will begin from outside the USA and spread to the core. This is how all Empires, nations, and city-states collapse.

The Evolution of Growing Food


QUESTION: Mr. Armstrong; You previously mentioned that we can grow crops inside warehouses without the sun or soil. How did mankind survive the last mini Ice Age wit dropping temperatures as we have seen in recent winters here in Europe?

LW

ANSWER: With each cycle, we tend to improve upon technology. Being able to grow food inside will be an important advance for us during this cycle. You can set one up in your basement.

Previously, there was the invention of the fruit wall which appeared around the beginning of the Little Ice Age that ran the course of about 200 years from about 1550 to 1850.

The invention of the fruit wall saved society. They built walls which reflected sunlight during the day essentially using solar energy to improve growing conditions. These walls also absorbed solar heat, which in turn was slowly released during the night, preventing frost damage. They created a warmer microclimate 24 hours per day.

Fruit walls also protected crops from cold blasts of winds from the north as we are experiencing today. They eventually began to construct wooden canopies to shield the fruit trees from rain and hail. They would also use mats suspending then from the walls in case of bad weather. I remember my grandfather loved figs and he had fig trees he would wrap during the winter to protect them in New Jersey. In Europe, these fruit walls were used as far north as England and the Netherlands.

Conrad Gessner (1516 – 1565) was a true Renaissance man. He was a Swiss physician, naturalist, bibliographer, philologist, zoologist, and a botanist. He wrote of the effect of the Fruit Walls which then popularized them in Europe.

The French began to improve the technology by pruning the branches of the fruit trees in such ways that they could be attached to a wooden frame on the wall.

The French botanist Charles Lucien Bonaparte (1803 – 1857) is credited with building the first practical modern greenhouse in Leiden, Holland, during the 1800s to grow medicinal tropical plants. The French called their first greenhouses orangeries since they were used to protect orange trees from freezing. Today, Holland grows more food in greenhouses than any other country.

metropolis-farms-24

Today, the next step forward is growing food in warehouses without the sun or earth.

Right Angle: Seriously?


Barack Obama’s official portrait was unveiled this week. There’s so many things to say about it and so little time…

Cryptocurrency Maybe Become a Tax Nightmare


Credit Karma is reporting that of the first 250,000 tax filings, less than 100 people reported owning any cryptocurrency. Credit Karma is reporting that only 0.04% of cryptocurrency-traders are paying taxes to Uncle Sam.

The dangerous aspect here is the IRS got over 20,000 names from the exchanges and they will match their accounts to tax returns. Anyone who thinks this is an alternative currency that circumvents taxes and the central banks will have a new reality after April 15th. They will know everyone who has bought or sold any cryptocurrency.

Volatility – What is It?


 

QUESTION: Dear Martin,

In the private blog you mentioned a few times that the volatility will rise again in the week of the 12th. When you mention volatility, do you mean volatility as measured by the VIX index?

 

So far the VIX has lost around 1/3 this week so I suppose you mean something else?

Thanks!

JWD

 

ANSWER: The VIX is not a true indicator of volatility. We have three main volatility measurements and each is different.

(1) you have the traditional measurement of close to close. That is interesting, but it does not truly capture the concept of volatility.

(2) Then there is intraday volatility which we measure and simply the percentage movement between the high and low of that session. You can have a 1,000 point swing in the Dow intraday yet close nearly unchanged. The first volatility measurement would never even show a blip.

(3) The third measurement is overnight volatility. This is measured from the previous close to the open of the current day session. For example, Monday, February 5th the Dow opened at 25337.87 compared to Friday’s closing of 25520.96 gapping down.

Our indicators are intended for trading, unlike the VIX. In our Arrays, you will see Overnight Volatility, Intraday Volatility, and Panic Cycles, which are extreme moves in one direction or an outside reversal which exceeds the previous session high and penetrates the previous secession low.

 

The VIX is a convoluted formula that does not reflect trading but more of a trend lending itself to manipulations. Hence, the VIX is not very reliable. The VIX is a measure of expected volatility calculated as 100 times the square root of the expected 30-day variance (var) of the S&P 500 rate of return. The variance is annualized and VIX expresses volatility in percentage points.

Volatility Index VIX Futures

where var = (365/30) x Expected 30-day variance.

The 30-day variance is the sum of squared standard deviations st (“volatilities”) of the S&P 500 rate of return at every point in time t during the 30 days:

Volatility Index VIX Futures

Japan Sells US Debt Trying to Ease A Trade War


The Japanese government once again reduced its holdings of US government bonds during December 2017. In total, Japan sold bonds worth $ 22.5 billion. This is not a huge amount. Nevertheless, this puts the total stock of US debt at about $ 1.06 trillion, which is the lowest level since 2012. Japan used to be the largest holder of debt externally. However, it has fallen to number two just behind China.

By contrast, the Chinese government increased its holdings by about $8.5 billion in December to $ 1.18 trillion. The acquisitions in the entire year 2017 were as extensive as last 7 years ago. Naturally, the hard-money biased reporting paints this as an imminent crash in the dollar. What they fail to understand is that helping to lower the dollar is a tactic to ease trade friction

Real Estate v Quantitative Easing


QUESTION: Hi Martin,
I just finished your new NYSE Boom/Busty report. This is excellent work and as always extremely fascinating. Thank you for continuing to share these profound views with us.
My question relates to your view that we are looking at a complete collapse of Quantitative Easing and that will likely see a massive capital flight to the dollar and the major safe haven will be EQUITIES. In the context of this possibility, are you able to comment on how this may relate to Real Estate. Your ECM seems to be calling for Real Estate to top out and structurally fall in 2032. Is it not possible that with the collapse of QE and potentially economies that we will see more negative rates in the short end and with the government powers to seize assets in bank accounts, would it not be prudent to have zero cash in hand and hence we see a massive capital flight to Real Estate too? Or will the collapse of QE lead to significantly higher rates across the curve and hence blow all leveraged exposure sky high?

Many thanks as always,

David

ANSWER: The problem with real estate has been that its value depends upon lending. This was what the government did as part of the New Deal by creating 30-year mortgages. This was a scheme to get prices up by extending the period people could pay off the loan. Typically, the duration was 5 years previously.

The collapse in Quantitative Easing will have the effect of causing rates to rise on the long-term. However, there will be a shift toward private assets and this will help to a large extent. However, keep in mind that many institutions will be trapped and unable to shift to private assets. Many boards will not understand the shift and still believe, wrongly, that unsecured government debt is best.

Prices of real estate will decline in proportion to the decline in mortgage availability. We are already witnessing banks beginning to withdraw from lending on real estate.

I have provided the guide-posts for what is to come. This will be an interesting future.

What is it like to be Wounded in Combat?


While in Vietnam in a Special Forces Camp A-341 near the Cambodian Border in 1967 I was the team XO and a 1st Lieutenant and this is my story

The Camp had been under attack for several weeks by VC/NVA units to our north and east when we came under attack for the third time and over the next several hours we continued to receive sporadic incoming mortar rounds from the Northeast. There was also some small arms fire but no signs of any kind of ground assault like we had beaten off previously. It appeared that this time we were just being harassed or probed and not attacked. As I remember it about 20 or 30 mortar rounds were fired at Bu Dop and the a joining 1-28th infantry positions during the night, more to keep us from sleeping than to inflict major damage. The 1-28th infantry was taking some casualties from shrapnel but I don’t think they had any KIA’s during this mortar bombardment. We fired counter mortar fire as did the 1-28th infantry but I don’t think any of us hit the VC/NVA mortar positions. They were probably just moving around firing a few rounds from one position and then a few rounds from another nearby position.

However, early in the morning at about 0300 hours one of these incoming rounds landed either: near the 4.2″ pit sending hot shrapnel into the ammo bunker; or it landed directly on the ammo bunker itself penetrating it with flash or hot shrapnel. In either case it didn’t matter for it ignited the propellant charges on the staged illumination rounds which are what propels the round to the target. Maybe even some of the illumination rounds themselves that we were getting ready to fire were set off. I do remember that there was a dull explosion and then several very intense waves of heat that went through the position igniting everything that could burn. Fortunately we had used up all the HE rounds that night and only a few illumination rounds were left unfired. If there had been any HE rounds in the pit and they had gone off when the incoming round hit they wouldn’t have found much if any of us. Just a few pieces and parts here and there scattered around the camp. For sure I wouldn’t be here talking to you.

I had on a standard issue steel pot, a nylon flack vest, jungle fatigue pants and jungle boots, your basic standard uniform for combat in Vietnam. Because we were in camp I did not have on any web my CAR-15 was in the pit with me but I did not have it in my actual possession. Most of us didn’t wear socks or underwear to try and prevent getting fungus infections from the heat and moisture that was always present. The heat from the blast hit me from the right rear while I was talking on the PRC-25 radio. I remember being engulfed by the flames as the fire ball rolled past me and several intense waves (I could feel the pressure as they hit me) of heat hitting me on the back and right side. These blasts or waves of heat were extremely hot such that the intensity of them melted the nylon flak vest completely off me as well as instantly setting fire to my pants and jungle boots. I must have instinctively closed my eyes as the fireball engulfed me and then there were a few seconds where I don’t remember what happened. The blast either blew me out of the pit or I crawled out (I’m not sure which), the next thing I do remember a few seconds later was that I was laying on the ground just outside the pit and seeing that I was on fire.

My first action was to put out the flames that were still consuming what was left of my clothes and flack vest. That probably took 20 or 30 seconds and while I was doing that I also saw there was an intense fire still burning in the 4.2″ mortar pit. After I put out the flames with dirt I got up and saw that SFC Broom and SP4 Schroeder were down on the ground in the pit and still burning, I think they were both unconscious. They were behind me, closer to the explosion, when the blast hit and so this was the first I saw of them after the fireballs rolled over us. I was in the process of climbing into the pit to help them when some of the other team members showed up. They stopped me and took care of the other two guys in the pit. I don’t remember which team members helped me besides that being a long time ago I probably wasn’t in the best state of mind.

I knew I was injured and burned but I had no sense that I might be seriously wounded. I was placed on a stretcher and I do remember getting a shot of morphine. A dust off was called and by 0400 hours we were loaded in it and we left Bu Dop for the last time. It was still dark and as we left I could see the camp and 1-28th positions dropping away as the chopper rose into the dark night sky. Still, not realizing the extent of my injuries I was concerned over my team and that I needed to get back right away, they needed my experience. I was thinking that I’d be gone for a few days, get some rest and then join my team in a week or so. I was very wrong in this assessment of the situation.

We were all medevacked to the 24th Evacuation Hospital in Long Binh for emergency treatment. I can remember going into the triage room and answering a few questions but then my memory starts to get fuzzy. Probably by that time shock was setting in as the next several days were disjoined and what I can remember is only a few images and feelings. At some point I remember being loaded on a medical transport and then being moved to the 106th army hospital in Japan I spent several days in Japan, of which I remember almost nothing but a few images of being in a hospital ward that I remember as being dark However, I was experiencing shock by this time and so I can’t really rely on anything I remember as being absolutely true. Then all three of us were placed on a military hospital plane and flown back to the states along with a lot of others. The ride back was one of constantly dropping in and out of consciousness and blurred images of patients, nurses IV’s and being very cold. I think there was a plane transfer somewhere in this process and then the three of us from Bu Dop were taken to the Brooke Army Medical Center in San Antonio, Texas. I remember very little of that plane ride from Japan but I do remember the airfield in the states and the ambulance ride to the hospital.

Brooke Medical Center was then the premier center, in the world, for treatment of burns, so if you were going to be burned this was where to be. I had 3rd degree burns on my legs and 2nd degree burns on my arms, back, neck and face for a total of 67% of body area). I had also inhaled hot burning gases in the pit when the fire balls rolled over me which had burned the inside of my mouth, tongue and my lungs. Besides that I had some shrapnel wounds and was experiencing a sever loss of body fluids. In general I was in very, very bad shape Later, when I was discharged from Brooke Medical Center, the Doctors told me that when I reached the hospital in December they had given me only a 10% chance of living through this trauma. There had been so much physical damage to my body that they just didn’t think I would be strong enough to make it. However, I’m certainly glad they didn’t give up and that they did still tried to save me despite their doubts. As I contemplated this brush with death a few years later I came to the conclusion that my life after this was a gift and that since I should have died then, but instead I had lived, that I would do something before I died to justify my existence. As a result I have been driven to accomplish something ever since and what I’ll do if I’m ever successful I don’t know.

Being burned extensively is not pleasant and the burned person’s body reacts to this, in part, by allowing the mind to hallucinate. I guess the hallucinations allow time to pass without direct knowledge of the pain the body is going through. I was no exception to this developing situation even when I knew what was happening to me. However, to me going into the hallucinatory state was a very frightening situation, much more so than the burns and associated pain. The pain, I could control mentally to the point of being the only patient in the ward that didn’t scream or in any way get violent during the treatments. That’s not to say that I in any way enjoyed it but only that between the two at least the pain was real. The real I could deal with but the loss of reality was frightening to me.

I had always prided myself in being in control of my internal self as I recognized that I could not control the external world in any way. However the pain and shock I experienced induced a hallucinatory state in me that I would go in and out of, a dream world and that I could not stop from happening nor recognize that I was in this state after it happened. While in these dream states I actually “believed” that what was happening to me was real no matter how bizarre the situation I was experiencing was. Many of these dream states involved some kind of fight with a tiger which made no sense to me at the time. After this hallucinatory state happened to me a few times I could sense it coming on but it was way too powerful a force to fight and no matter how much as I tried to stop it from happening, it would take control of me and I would be in another world.

During the initial period of my treatment at Brooke I dropped from over 180 pounds to under 100 pounds (98 pounds if I remember correctly). As I started my recover I started to gain weight back and also to have fewer and fewer hallucinatory states. After getting skin grafts from by chest to my legs where the skin had been completely burned off and healing from those operations began I had to learn to walk again. That was a task, as the grafted areas would quickly swell up when standing as well as being very uncomfortable. It was probably five or six years later before I really felt comfortable walking and I was never able to run again for any length of time.

While I was in the hospital I received several operations and skin grafts to repair the massive burn and shrapnel damage I had received in Vietnam. Unfortunately, both SFC Broom and SP4 Schroeder died at Brook Army Medical Center while I was there. I was therefore the only one of the three wounded in the mortar pit at Bu Dop that made it. SFC Broom was very severally burned and there was probably never any chance that he could be saved. I was bad but he was even worse as he was the closest to the explosion when it when off. He may even have shielded Schroeder and I from some of the blast. SP4 Schroeder was only slightly burned and was actually on his way to being released. He had been transferred to a different, non-critical, ward and then he developed an infection which ravaged his body with extremely high temperatures eventually killing him. Fortunately for me I was not that aware of what was happening and so I didn’t really comprehend that they were both gone until later when I was out of immediate danger.

The following paragraph was something I wrote to summarize what happened to me after that night in Vietnam over 30 years later when I decided to write about my experiences. By then I realized it was a major turning point in my life that was actually beneficial to me as it showed me how vulnerable we all are to what we think we know, rather than knowing what the truth is and what we don’t know.

On that night in Vietnam I was mortally wounded (all mortal wounds don’t kill you immediately). I was medevacked and sent to a hospital in Texas where I meet the grim reaper soon after arriving. He told me he was coming for me but I told him I wasn’t ready; he laughed at me and said he was going to come anyway. I told him it didn’t matter whether he came or not I just wasn’t going with him. But he wasn’t to be denied and so he visited me every night in the form of a large Bengal tiger and we battled all night for the rights to my soul. He was a very vicious and determined tiger and he tried his best to rip my soul from my body with his sharp teeth and claws but I was strong and stubborn and I would not let go. This battle lasted for two months and he chewed me down to 98 pounds but in the end I prevailed and he disappeared and I was not dead and he had to settle for taking the souls of the two men who were standing next to me in Vietnam.

The lesson I learned was that we are a creation of our teaching and experiences, but and this is a big but, how do we know what we are taught is the truth? Vietnam killed almost 60,000 boys and men and a few women as well plus wounding another 300,000. The war was a pack of lies from our government from the start to the end from both political parties. I did not realize this until the 90’s when I started to write about my Vietnam experiences. I realized at that point why I had lived and not died — it was to write my story about what happened to America after Vietnam so that others in the future would understand what happened and why. That will only happen after I and all the other boomers are mostly gone after 2040 or 2050. In summation my research can summed up in the following nine words.

Passion of purpose does not constitute correctness of thought!

 Then from Sir Karl Raimund Popper (28 July 1902 – 17 September 1994) was an Austrian and British philosopher and a professor at the London School of Economics. He is considered one of the most influential philosophers for science of the 20th century, and he also wrote extensively on social and political philosophy. The following quotes of his apply to the subject of research.

If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.

Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.

… (S)cience is one of the very few human activities — perhaps the only one — in which errors are systematically criticized and fairly often, in time, corrected