COMMENT: You mention Dalio saying cash is trash. Did you happen to see them ask Tudor Jones about those comments only an hour after in Davos as well? He pretty much ignored the question as they are “friends” but you could tell he disagreed. I’ve watched other interviews with both of them together and is painfully obvious Jones is a trader and looks at the world through capital flows (yes obviously followed you for years) while Dalio is the traditional fundamental analysis type. Jones also talked about the coronavirus being a curveball that could interrupt the markets, while the reporters didn’t even believe him, at that point in time.

ps I will forward your letter on to John James candidate for US Senate against the incumbent democrat Peters

MR

REPLY: Yes, Paul actually bought hundreds of copies of the Greatest Bull Market in History back in 1986 and handed them out to all his clients. There is a SUBSTANTIAL difference between fundamentalists who try to reason the world and you cannot do that. A trader cares not if a given market rises or falls – it’s just a trade. I have told the story of how I went to lunch with the CEO of one of the biggest Swiss banks in Geneva. I was going to open our first office overseas in 1985 and I knew there was underlying American resentment in many places throughout Europe. I had a list of various names we came up with like European Advisers or something like that. He asked me to name one European analyst. I was embarrassed because I couldn’t. I apologized and said I sure there were, but just never met any.

He laughed and said there were none. If he was British he was also bullish the pound. The same with the French or Germans. He then explained to me why everyone used my firm. He said you do not care if the dollar rises or falls. We became the largest FOREX adviser because the analysts who worked for banks could never take a bearish position on their currency because the European politicians always used it as the proof they were doing a good job post-World War II because the currency rose in values reflecting the booming recovery.

A trade calls a currency, the Dow, gold, or whatever be it up or down because it is just a trade. I warned at the WEC in Orlando that the market was ripe for a correction come the January turning point on the ECM because it had risen 11 years.

Fundamentalists assume markets move only on events. That is not true. The market moves and the commentators try to find the explanation. It simply declined because it was tired and everyone who thought of buying had already bought it. Thus, a correction was ripe. That does not negate the long-term and new highs again just as we saw from the 1987 Crash or the 2009 low.

This is why you should NEVER give your money to a fundamentalist to manage. NEVER!!!!!

QUESTION: You said that the Fed does not print money out of thin air on its own. The goldbugs say you are wrong. I suspect that they are wrong not you. You seem to have a much deeper understanding of money than anyone else. Would you clarify this issue?

Thank you very much

PHK

ANSWER: When Congress created the Federal Reserve, a completely new currency came into existence. There were two types of currency issued under the Federal Reserve. The main system currency was simply known as the Federal Reserve notes. Then there was the Federal Reserve Bank notes that were issued by the independent branches.

The Federal Reserve Bank notes are inscribed “National Currency.” The first series to be issued by the indeed the jewel banks of the Federal Reserve was dated 1915 and consisted only of $5, $10 and $20 denominations. They were only issued by the Atlanta, Chicago, Kansas City, Dallas, and San Francisco branches. The obligation of this issue was to pay the bearer on demand only by that specific Federal Reserve branch. The 1915 series stated it was “secured by United States bonds deposited with the treasurer of the United States of America.” The later issue of 1918 stated, “secured by the United States bonds or the United States certificate of indebtedness or United States one year gold notes deposited with the treasury of the United States of America.”

The Federal Reserve notes of 1914 were issued in all denominations from $5-$10,000. They were issued by the United States to the 12 Federal Reserve banks and through them to the member private banks and to the public. The notes were not issued by the banks themselves as were the Federal Reserve Bank notes and the obligation to pay the bearer is borne by the government and not by the Federal Reserve banks. Hence, these notes were not secured by the United States bonds or other securities. Therefore the Federal Reserve notes were not secured by any certified means of backing and were authorized by the government, not the Fed. The Federal Reserve notes simply states, “United States of America will paid to the bearer on demand.”

The difference was substantial. The Federal Reserve Note was directed to be issued to create money which was unbacked even by bonds. This was to create liquidity because people were hoarding money uncertain about the future. This version could be termed helicopter money but it was not authorized by the Fed itself. Only the currency actually issued by the Federal Reserve Banks was backed by government bonds which was a different structure all together.

The goldbugs seem to confuse the authority to create elastic money where they can issue money to buy government bonds injecting liquidity which is not printing money out of thin air but on an elastic basis which is electronic, not printed. The image of the Fed creating helicopter money is not correct when they are simply swapping bonds for cash.

The ECB has the authority to create money out of thin air because it cannot back the currency with federal bonds that do not exist. The ECB has the power to create money without backing whereas the Fed can issue notes only backed by federal bonds. The euros are actually printed by each of the member states and not by the ECB directly. Each note has a code stating which nation state-issued the currency.

QUESTION: Marty, you are absolutely a Godsend. Nobody updates during the day of a panic but you. While everyone thinks the increase in the repo and cutting rates would save the market, you play these down as failed attempts. What is your take on this right now?

Your loyal follower for life.

HP

ANSWER: In the midst of this market turmoil, the New York Federal Reserve stepped in midday Thursday and announced a major asset purchase program. It offered $500 billion in three-month Repo operations, $500 billion in one-month Repo operations, and another at least $220 billion in operations with a duration of two weeks or under. This is a joke as was the rate cut. Rates rise in such panics because banks do not want to lend fearing credit risk and borrowers are not interested until the market settles. The rate cut was futile and the proof of the was the expansion of the Repo facility otherwise short-term rates would explode to probably 20%+.

There is nothing the central banks can do and this is becoming more and more obvious to the real money. We are entering a period we could call Central Bank Erectile Dis-function – they cannot keep the markets up & may not want to.

QUESTION: Marty, I could not help but notice that the array you posted on the Fed also has high volatility at the end of the month and another target the week of March 23. Is this also reflecting the repo crisis against at the end of the quarter?

Thank you for Socrates.

VH

ANSWER: Yes. We will most likely come to another credit crunch at the end of the quarter. This time we have a confrontation between real interest rates, which are rising due to credit risks that is part of the Repo Crisis, and the artificial lowering of rates under Keynesian economics to stimulate demand irrespective of credit risk. We are facing a true clash of the free market v the fake market.

QUESTION: Mr. Armstrong; You have warned that the European bank stocks were in real trouble. They have really collapsed. But you do not comment on them that often. Is there a reason for that?

DJ

ANSWER: Socrates is writing reports on over 1,000 instruments every day. It is impossible for me to comment regularly on everything. Plus, Socrates is supposed to be replacing me. That said, they are covered as the index and individually on Socrates. You can see for yourself that they have not been able to recover and here we have really crashed and burned. I think this simply confirms what I have been saying. Keep in mind that even I am human. I have said plenty of times, whenever my opinion differs from Socrates, it is usually wrong.

QUESTION: Hi Martin, I have been reading your blog with interest for six years now and recently I subscribed to Socrates. Thanks for all the insights.

I have a question regarding the repo crisis and interest rates. Socrates correctly predicted the start of the repo crisis back in September. When will the Fed give up or scale back intervening in the repo market? When do you/Socrates expect rates to rise as you have been predicting?

Thanks. W

ANSWER: The Fed is trapped. It cannot exit the repo market or else short-term rates will rise sharply. By lowering rates when the credit risks are rising, we create a real nightmare for the Fed. Credit risks are rising as many fear that some will be unable to make debt payments and states/provinces will suffer sharp declines in tax revenues. All of this points to rising interest rates — not lower rates. We have a real paradox forming here which is a completely new nightmare scenario all because of the ECB and BOJ are trapped into negative interest rates which have undermined the entire Keynesian Model.

The Fed cut rates but the market6 still crashed. This is reflecting the underlying collapse of Keynesian Economics.