QUESTION: Dear Martin Armstrong,
In your  blog post “Liquidity Crisis & the Pending European Banking Crisis”  Posted Oct 2, 2019 ” you write

‘Those in Europe who have a position in cash, it may be better to have shares or a private sector bond or US Treasury. Given the policy in Europe of no bailouts, leaving cash sitting in your account could expose you to risk in the months ahead.”

I am in England/Uk and  I am lucky to be in the position of trying to buy an ‘average priced’ house with cash, therefore, I have money spread across a few UK banks. Should a person like myself be worried? You are the only person out there who I trust to have an impartial assessment because of the amazing work you have done with your computer Socrates. With the highest regard and many thanks from a concerned UK citizen.

ANSWER: As far as bank bailouts are concerned — no, they are separate as they will fall under separate central banks. However, prior to the crisis, structured trades were signed separately using negotiated ISDAs. Once they started trading through an exchange, it was London that won that mantle. So today, most derivatives are cleared in London and that is where the problem could ultimately lie.

In February, the BOE and the EU announced that European counterparties could trade in London and that ESMA (European Securities and Markets Authority) would immediately recognize the three London clearers (LCH, LME, and ICE). This is where London really lost its chance of separating itself from the mess. Because of this action, the market has maintained trade, but at what cost?

There is a huge gap between the board of directors of banks and those who are actually trading. Consequently, even the big banks are clueless with respect to the hidden risks in the financial markets because of the interference of politicians.

The banks are not aware of the problem because their management are not traders. It was this action that relieves the bank’s board or clearers from running the risk that they run. Very few people will see this risk coming as ‘no-one’ looks at the amount of money that is proportioned to clearinghouses. The burden is expected to be borne by the clearers, but what happens if half the clearers all go at the same time?

The REPO market is where 2008 began. However, very few people even on a trading floor will see that as a risk and definitely no one on the board! It will not be until the NIM (Net Interest Margin) starts to underperform that questions will be asked at the board level. And as we know, by that time it is way too late.

Some do not understand why we even get called in because there is the presumption that bankers know what is going on. That is so far from the truth. Congress will call heads of banks to explain and testify, but they are only relaying what they have been told by others.

The trading desks in banks have to sell trades to management using fundamental explanations. It is akin to trying to explain a trade to freshman students in high school with no experience. There is just a major gap between the levels even within major banks.

One of the top 10 banks was having an international internal meeting about the problems in markets. Two offices insisted we be there to address the meeting. They paid our fees and everything, but at the last minute the senior board said no, they did not want to air the problems in front of an outside firm. That’s what I mean when I say we never get called in to avoid a crisis, only when the crisis hits. Then the trading side of the banks wants us to come in because then they hope the boards will listen to us rather than them who they want to blame for everything.

QUESTION: Dear Mr. Armstrong.
I hope that you will please give me some advice on the following topics. Sorry for the grammar.
I live in Denmark and have been saving up some money that I want to invest. My options are:
– buying a house and rent it out (I have 1/5 in cash and need to lend the rest as fixed mortages) or buying stocks for the money or simple wait and saving up more money and then buy stocks or a house in 1-2 years when things fall apart in Europe? What would you suggest?
I already have some money invested in stocks (only Danish stocks). Is it better to sell out now (in 1-2 years) or hold on to them through the next crisis?
And how about in the long term (when war breaks out in 2024-2027) is it better to buy something else or save the money so I can quickly migrate to another place on Earth (with cash?)
Regards J

ANSWER: I believe the best thing is to remain liquid, and equities tend to be the better road rather than investment property which is not movable. You can open an account in the USA or even Singapore or Thailand. In that way, you can always move your money offshore as Europe become more aggressive in their hunt for taxes.

The next several years are not like the ’50s or even the ’80s. They are going to be much more choppy and volatile. So this is something you will have to keep an eye on for the trends will tend to swing every 2 to 3 years.

We all need a place to live. So what I am talking about is investment properties. They will be highly dependent upon banks willing to lend mortgages. As the banking sector get hit, you will find that the liquidity in real estate will dry up very rapidly.

QUESTION: Mr. Armstrong; When I first brought this topic up at our board meeting about the split in interest rates between private and public, there was skepticism because such a proposition had never taken place in the short-term memory of our perception of history. I explained your theory and the rest of the members listened only because it was you saying this. That skepticism has now vanished. It is painfully obvious that the events in repo market have proven your theory was correct that the real rate has risen and the Fed has been forced to intervene to try to prevent real rates from exploding. Is this what the future holds? The free market will undermine the central banks?

KH

ANSWER: I understand what I have warned about is not in any textbooks we were ever handed in school. During a liquidity crisis in which we have begun post-Labor Day, the shortage of money forces real rates to rise and that can be very dramatic. Don’t forget that it was the REPO market which brought down Lehman and Bear Stearns.

In 1899, there was a major liquidity crisis when call money rates soared touching 200%. The Federal Reserve did not exist at that time, but the Bank of England (BoE) did. There was a surge in stocks and the BoE feared speculation. Their discount interest rates were 3% in February 1899. They intervened and doubled the interest rate to 6% in November 1899. This set off a major panic. The British investors in America were forced to sell assets to take money home to meet the liquidity crisis created by the BoE. This created a global contagion and the US market plunged into a massive liquidity crisis as well as imported thanks to the BoE.

The USA had no central bank so the call money rates were a totally free market. The week of December 4th, 1899, saw the US share market collapse opening BELOW the previous week’s low and plunged 20% in just two weeks. On December 18th, 1899, the call money rate touched 200% in the midst of this liquidity crisis.

When I say we have put together the largest database on a global scale of the world economy, I am not kidding. I fully understand that nobody has ever heard of a split in the interest rates between public and private that can be at odds with one another. But in assembling all of this data and allowing the global correlations to unfold, we actually have a shot at understanding how the economy truly functions and where we are headed. All of the economic theories we were taught in school have FAILED!!!!! Quantitative Easing for more than 10 years has utterly failed to produce inflation despite the vast increase in the supply of money. That alone stands as a witness that Keynesian Economics does not work.

I have learned both from my clients around the world which taught me to view the world from their perspective based upon their currency. Socrates has taught me so much by showing me the correlations that no one else has ever dreamed of. This combination has resulted in a different perspective that I fully UNDERSTAND will often go against the established norms.

As for what lies ahead, the Free Markets will dictate the trend. The central banks have lost control of the world economy and they have become the source of the problem. They are trapped. As time passes, you will come to see the full force of the Free Markets. BTW – it was also the Free Markets which defeated Communism. They are doing the same with socialism.