QUESTION: Hi Mr. Armstrong.
I’ve learned more reading your blog last 4 years than working in finance for 20 years. As you say, the average employee in finance hasn’t got a clue about what’s going on.
Question: There’s one thing that has bothered me for a long time; uncertainty about numbers regarding GDP, unemployment and so forthcoming from governments; are they trustworthy?
The reason behind the question is what happened during 2007 to 2009, where banks, rating companies as Fitch, Standard & Poor, Moodys, SEC, and all who are supposed to be reliable were lying about the real situation for several months before the bubble popped. Subprime loans didn’t get downgraded for several months even though there were severe defaults all over.
Are the key numbers revealed trustworthy when we know what the finance sector is capable of regarding lying/hiding, and now there are the government’s own bonds at stake?
Best regards
FF

ANSWER: Thank you. They just do not teach international analysis anywhere. It is the foundation of hedge fund management. It is also why we have the largest international client base anywhere. I have been asked now by three universities to teach. I just do not have the time. I keep telling myself I should do a textbook. I think I will get to do it in my next life perhaps. There never seems to be enough time.

Regarding the numbers, I have two factual encounters that have formed my conclusion. Because I have been an international adviser, I had to look at the numbers globally. What I discovered back in the 1980s was that every country had its own formulas. Comparisons were not realistic. I was asked if I would debate the top economist in Canada because my comments on economics were different from everyone else’s. I said sure. I debated him in Vancouver and it was hosted by Michael Campbell. The economist kept trying to compare GDP and inflation for Canada and the USA, and I would just respond that the formulas were completely different. He knew that, but economists only have the government numbers to play with. After I corrected him several times, he lost his cool on stage and said, “I am sick and tired of you Americans coming to Canada and telling us what to do!” At that moment, Mike Campbell stood up and ended the debate. After that, the AAP in Australia asked me if I would debate the top three economists in Australia on national TV. I said sure, why not. They all declined.

I hired a staff member, Lynn, who worked for me before she got married back in the 1980s. She was fantastic. Her job was to analyze the numbers of every country (below is one of her notes on inflation). We tore apart every country and created our own set of numbers that allowed us to actually do real-world comparisons to identify global trends. By the end of the 1980s, I was named the Top Economist in America all because we had the real numbers and not the government’s fake numbers they like to play with.

Going into 1980, just about everything was indexed to inflation basis the CPI. Even private contracts for rents were typically indexed to the CPI. The government discovered that if they could change the formula to reduce inflation, they could reduce expenditures. The CPI revisions began removing real estate and replacing it with rents on the theory that real estate was an investment — not your cost of living. They then reduced the sample to rents where they were controlled, which further reduced inflation. They have altered the number so many times that it is IMPOSSIBLE to ever get inflation based on the CPI back to the 20% level of the late 1970s.

One day Lynn came to me and asked me to review her work for she could not find a mistake that was so obvious. In GDP, the government calculates total government spending as a component. They also add total personal income. The mistake stared us in the face. It appeared that GDP was counting workers for the government TWICE: (1) total spending, and (2) total personal income. We searched every calculation to try to find where they were accounting for this blatant era. I knew the top people at the BEA (Bureau Economic Analysis) so I called, explaining the error, and asked for assistance in showing me where it was backed out. They said they would check and get back to me. Several weeks passed and no return phone call. I called my friend again. His response: “No comment.”

Using government numbers is Pandora’s Box we dare not rely on. Zeus presented Pandora a box/jar as a gift and when she opened it, sickness, death and many other unspecified evils and plagues were then released into the world. The only thing which did not escape before she tried to close it was hope.

Notes for our 1986 research project: (N.S.A = not seasonally adjusted: S.A = Seasonally adjusted)

Inflation  11/21/86

What to say?  US has many measures.  WSJ more or less picks up most of them but seems to emphasize s.a. change in a month.

Best to use year over year for int’l comparisons, probably.  Do we or don’t we have seasonal adjustment problems then?  IN U.S. we get month over year ago n.s.a.

What about the compound annualized rate for calculation of real interest rates? This way we’d have two forward-looking rates.  It’s probably a good idea to work with an average for three months

If we want to talk about GNP growth and consumer price inflation in the same breath, be sure the percentage changes are figured in the same direction: annualized forward, or compared with the same period in the prior year.

BLS says that to look at the trend, it’s best to look at s.a. numbers.  If we want to know about actual prices we’re paying, unadjusted numbers are best

Japan’s CPIs seems to be n.s.a.  UK RPI is n.s.a.  German cost-of-living indexes are n.s.a., but we have s.a. in Supplement on S.A. Economic Data.

Remember that consumer price inflation in Latin American countries is typically reported as changes between the current period and previous period seasonally adjusted at compound annual, rates… i.e. as forward-looking rates.  But there’s another twist. They usually say something like “bringing cumulative inflation to 67% so far in 1986.”

QUESTION:

Hello Marty,

Your commentary and Socrates’ predictive capacity is ground-breaking. I have been following you for years. Thank you for your time and efforts.
I find it fascinating that the foretold decline of the West (by Socrates) coincides with the fourth-turning demographic study described by Strauss & Howe. Watching it unfold is causing some careful consideration and sleeplessness!

Few questions regarding the future disruption:

1) Could the pledging of negative-yielding bonds as collateral be causing the liquidity problems? As a private lender myself, how can a central bank (or anyone) lend against its par value (even overnight) when held to maturity you receive less than par?
2) What Brokers can protect against a Corzine / MF Global invasion of segregated accounts?
3) I am an Italian national. Do you think living low-key in Panama may be a way to ride out the coming chaos?

I appreciate your insights and opinion.

All the best,
JTK

ANSWER: There is about $17 trillion in outstanding negative-yielding bonds. It is far too complicated to go into great detail on a mere blog post. Suffice to say that the negative-yielding bonds are going to crash like something not witnessed since 1931. While a complete default is not likely prior to 2025/2026, we are going to witness the start of the collapse in 2020. These bonds have been bought by PUNTERS who are just trading them back and forth like a game of musical chairs. When the music stops, a lot of people will get caught holding these new 2.0 versions of financial debt bombs. Nobody is buying these things to actually hold. It is more akin to trading commodities where people are not actually interested in taking deliveries of lumber, hogs, silos of wheat or bars of silver. These are trading instruments only.

I strongly urge people to write to the White House and demand LEGAL REFORM in New York City. The entire fate of both the world economy and the domestic economy rests on the integrity of the rule of law which no longer exists. President Trump has the power to address this problem. He could clean house in the SEC and CFTC who will ALWAYS protect the bankers, as is the case in the Department of Justice. The banks have blown up the entire world economy. M.F. Global was using their clients’ money for its own punting and lost big time. Not a single banker was EVER changed, no less Corzine.

Judge Martin Glenn presided on M.F. Global bankruptcy and created the first BAIL-IN without Congressional Authority. He was the first one to engage in FORCED LOANS by abandoning the rule of law to help the bankers and protect Corzine from losses by taking client accounts to cover M.F. Global’s losses. That is no different from what we saw in Cyprus. He simply allowed the confiscation of client funds when in fact the rule of law should have been that the bankers were responsible and M.F. Global’s losses and it should have been reversed. Never should the clients’ funds be taken for M.F. Global’s losses to the NY Bankers.

What Judge Martin Glenn’s ruling warns is you should NOT trust any company based in New York City. No other circuit would uphold what Glenn did to protect Corzine. While Glenn could not prosecute Corzine, the Department of Justice closed its eyes as did the SEC and CFTC. We lack legal integrity and that leaves a COUNTRY RISK that we would have to warn a client about if we were dealing with a third-world country. This is part of the reason China is still lagging behind. There MUST BE a straight forward Rule of Law or capital that cannot invest if there are no definitive rules.

As far as Panama is concerned, it has been one place that people have moved. Another is Thailand if you are looking at Asia