QUESTION: Dear Martin, First of all, thank you for your daily blogs. First thing I read every morning. I can’t wait to attend Novembers Orlando conference. My question is about the inverse relationship of Gold(precious metals) and the Dollar. Looking at historical charts it would suggest that we may continue to see a price decrease in Precious Metals as the value of the dollar rises, deflation. This will continue until the Government panic sets in around 2021-2023 as your ECM tells us. Then serious lift off of Gold may occur as a new monetary system sets in and people want to get rid of dollars because of the complete loss of confidence in government and the future of the US monetary system.

Would love your input and thoughts.

D

ANSWER: There is no question that we should see deflation overall moving into 2020. But this is a different kind of deflation. This is capital contracting and hoarding so you will probably see asset prices rise, but GDP actually continue to contract. The classic “inflation” people talk about is rather narrow-minded. They tend to see waves of only demand inflation when people are rushing to buy things. This is associated with hyperinflation, but that is really when the collapse in confidence unfolds in a government. That can take place in the peripheral small economies like Zimbabwe or the collapse of a government post-war as in Germany and other Eastern European nations post WWI. It does not unfold in the core economy arbitrarily while others survive. It always comes from the outside in.

Now, let us look at cost-push inflation such as we saw with the OPEC crisis. They just raised the price of oil so the dramatic rise in the cost of production created the recession, but demand contracted. So prices can rise from a ratcheting up of cost which can be both private like OPEC or government with taxes.

QUESTION: Mr. Armstrong; On the one hand you show the debasement of the Roman currency, but then you say there was also massive hoarding and deflation. Can you explain how do you get deflation with debasement?

Thank you for the the mind food

PH

ANSWER: It may seem to be a paradox, but everything unfolds like a bell curve. This is why you do not get the same result by simply moving in a straight line. This is the same thing we are experiencing currently under Quantitative Easing by central banks. We have increased the money supply, but we are also moving toward negative interest rates and this promotes hoarding. People have not been investing. They have been sitting on the sidelines trying to figure out what to do.

Sir Thomas Gresham made the observation that debasing the currency results in bad money drives out good. But what does that really mean? What he is saying is that people then start hoarding the old money. It may be a paradox, but debasement does not cause hyperinflation, it causes deflation because the vast money supply that was circulating is hoarded. Therefore, the government needs to further debase desperately trying to keep a sufficient degree of money in circulation. The more it debases, the more people hoard. As people hoard, they contract from commerce and GDP contracts. This results is a reduction in tax revenue, which then causes government to further debase to make up shortfalls in revenue.

When you then introduce a collapse in confidence within government, then if people no longer “feel” secure, they then hoard even the based currency. This is why we find so many hoards of debased Roman currency during the chaotic 3rd century.

It is a curious paradox. Right now, people are hoarding as are the banks and corporations. It is hard to hoard paper currency for you will not be able to distinguish between old and new. This means that the hoarding will migrate ti tangible assets, shares, gold, silver, and antiquities.

The Dow does not need to break last year’s low. That was accomplished in the NASDAQ and S&P500. Nothing has changed there. The entire interest rate issue has far too many people brainwashed. No doubt, they would initially sell. However, the market will rise with higher interest rates as it has always done historically. Therefore, as shorts build, we can easily create a bear trap and that is the fuel to rally again. This is the churning we are in until it appears at least after September.

This time, we have a far more serious problem with where to put money – big money. Stocks are the modern-day version of what what gold use to be decades again when you could jump on a plane with a suitcase full and sell it wherever you landed. Today, metal detectors prevent that from taking place. Stocks are being used to move money but they must be the high-end shares that are traded globally (see article posted on Egypt).

There is ABSOLUTELY NO INDICATION yet that we are in a bearish trend poised to break last year’s low in the Dow. Another retest of support – YES.  Breaking last year’s low would ONLY be indicated with a monthly closing beneath 16000 and prior to August. That said, we have a more important number for month-end at 17579 followed by 17210. A May closing below 17210 would signal a possible test of the 16000 level in the months ahead.

Nevertheless, it is the first Minor Weekly Bearish Reversal in the Dow lies at 17434 which we have flirted with on Thursday. We need a closing below this today to suggest a correction is unfolding. However, make no mistake about it, the next critical area is 17120, which happens to be a Daily and Weekly Bearish Reversal. That is the level to watch for a serious short-term break.

Keep in mind that people continue to think this market is “rich” in price and the are concerned about earnings. Those ideas are so out of touch with reality. The PE Ratio reach 50:1 in 2000 during the DOT.COM Bubble, but it exceeded 120:1 during the 2007-2009 meltdown because blue chips are the place to secure money. The market is by no means “rich” from a historical perspective.

There have been a some unusual capital flow developments involving Egypt illustrating that there is a shortage of dollars building which has been caused by the decline in oil prices. This decline in oil has resulted in a decline in subsidies for Egypt from other Arab nations. What has been taking place is interesting. Shares of Commercial International Bank Egypt on the Cairo market have been bought using Egyptian pounds and then dumped in London sold for dollars taking a loss between 20% and 30%. There is such a shortage of dollars building, there are developing net capital movement through proxy instruments.

These trades have been creating regulatory problems. Typically, regulatory limits dictate how much of the company’s shares can be be traded offshore in the form of global depository receipts. This flow of shares is impacting regulations all because of  a shortage of dollars.

The first Minor Weekly Bearish Reversal in the Dow lies at 17434. A closing beneath this for the week will confirm what already appears to be in motion technically as well as after electing three Daily Bearish Reversals. The next critical area is really 17120 which happens to be a Daily and Weekly Bearish Reversal. This is the primary support. Breaking this area then opens the door for a more sharp drop ahead to retest 16000.

We have a more important number for month-end and that is 17579 followed by 17210. A May close below this level will confirm a correction into the August/September period, which can extend even into early 2017. This should produce a retest of the broader support at 16000 and a breach of that level on a monthly closing basis would set the stage for a new low under that of 2015.

Keep in mind the Fed realizes that it needs desperately to restore some “normalization” to interest rates. The Fed is departing from Draghi who is destroying the future of Europe as is the Bank of Japan. This is really turning into the Clash of Titans. This is also unfolding is helping to keep the dollar as the only game in town.

Last week, the Dow closed BELOW the technical support I warned had to hold on any retest, which it did not. This was the market warning that between the chaos of the elections, the BREXIT vote in June, and the Fed realizing it has to raise interest rates to try to ward-off the growing demands to seize all pension funds in the nation to bailout public pensions in the various States, the future looks a bit cloudy at best.

We need to watch gold as well. If gold exceeds last year’s high of 1307.80, the likelihood of a sustain breakout beyond 1360 is not very good with a strong dollar. However, such move would also confirm an extension of this entire mess and any reversal where there is a sudden crisis in confidence in government within the main segment of the population would probably come in 2017. This makes sense from the perspective of 2017 being the year from Political Hell. It also would not rule out the ultimate swing for gold to crash to new lows really twisting the minds of everyone with rising rates and the dollar.

June is the first target for a shake in confidence with the BREXIT vote. It still appears they will be desperate to rig the vote. David Cameron has been calling upon everyone to paint such a dark picture if Britain leaves it demonstrates how important this is to the survival of Brussels, not Britain. Everyone from Obama to Christine Lagarde have been in London to warn the Brits to stay in line. I seriously doubt even if the real vote is to leave, as Stalin said, elections are decided by those who count the vote. The election fraud in Scotland should warn that this is probably in the bag for the “establishment” and that does not look very good for Britain.

So hold-on. The markets are still churning. A monthly closing for the Dow beneath the 16000 level will warn of a new low under 2015 going into 2017. Nevertheless, everything will flip when the general public comes to realize that the future looks very chaotic and it boils down to how can you trust. That is when the flip come from Public to Private.

Keep in mind that the Fed is really caught between the worst of two worlds. It needs to raise rates to save pension funds, yet higher rates is going to devastate the bond markets and blow out federal budgets. I have been warning that there will be NO INFLATION as long as rates remained low. Raising the rates is the only way to ignite inflation. Europe and Japan and just brain-dead.

People have been indoctrinated with Marx and Keynes to such an extent, they cannot invest because they are confused and assume rates up stocks down. They just listen to the talking heads on TV and never grasp the real history of this move.

Therefore, a break even to a new low will get everyone offside and assume this is the mother of all crashes. This is when the reversals and timing will help to pinpoint that low. Keep in mind that we need the majority to turn bearish to provide the fuel to the opposite move. This is just the way markets function.

So watch the numbers now. It’s Just Time. Keep in mind we if we hold the 16000 level on a monthly closing basis, then we will just churn back and forth. That is the key area on any decline on a monthly closing basis.