Tag Archives: Monetary Policy

Aug 31 2016

It’s Time to Turn Out the Lights in Illinois


Armstrong Economics Blog

Re-Posted Aug 31, 2016 by Martin Armstrong

Illinois Road Tax

The roads in Illinois are in decay. This may be the first state to go bankrupt. The question is not if, but when. State unions are so greedy that they are destroying the very state. This is exactly how Rome fell — government employees against the people.

Seven states have constitutional provisions that state employee pensions must come BEFORE everything, including debt payments. Since the legislature in New Jersey was Democrat, they fought Governor Christie on pension reform. Their solution? On the ballot in November, there will be a provision to amend the state Constitution to put employee pensions before everything else. The people are generally kept ignorant of what that means to property taxes and the future of the state. Therefore, the average person will say, “Sure, I should get my pension, so they should also.”

Turn out Lights

Illinois should declare bankruptcy. It is simply inevitable. There is absolutely no hope for Illinois whatsoever. Every year they will have to pay more and more. If the state who manages the pension money loses, well, the taxpayers have to cover those losses as well. The governor tried to stop the downgrade of expectations for earnings in the pension fund from 7.5% to 7%, which means they have to raise taxes and/or cut service by almost a half-billion.

It’s time to just turnout the lights in Illinois. Welcome to the Sovereign Debt Crisis. This is the contagion you will finally start to hear about, but only after the elections. Why spoil the party?

Aug 31 2016

Heads They Win, Tails You Lose


Armstrong Economics Blog

Re-Posted Aug 31, 2016 by Martin Armstrong

Coin-toss-r

Money Market

QUESTION: Sir,

You mentioned in your blog post that money market funds now have to be in government bonds as per SEC ruling. You have said we are going through a sovereign debt crisis which means government bonds are at risk. If I’m trading and my money is now parked as “cash” before I make another trade in a money market fund, does this mean outside of a trade, my money is now at risk when government bonds crash?

Thanks for all you are doing

DK

ANSWER: Yes. There are two types of funds. One is marked-to-market, so there will be no guarantee you get back 100%. The other will be fully invested in government bonds. There, you will be told you lost nothing, but in reality, you may not be able to sell. When the crisis comes, the only buyer will be the central banks and if they stop buying, look out below.

Personally, if I were in the business I would create a corporate bond fund only that prohibits all government paper. That may not be “politically correct” but neither are politicians.

Aug 30 2016

Hoardng Cash – Prelude to the Crash & Burn


Armstrong Economics Blog

Re-Posted Aug 30, 2016 by Martin Armstrong

Swiss 1000-CHF

We are monitoring confidence in the banking system as reflected by cash withdrawals. The sale of home safes has exploded in many countries. I previously reported that one in ten currency notes in Switzerland being printed is now the 1000 franc note. In fact, there is some 41.6 billion in Swiss francs now in circulation in 1000 CHF notes exclusively. The ECB is truly brain-dead for they thought by moving with negative interest rates, people would spend their money and that would rekindle inflation. They are correct that people would not want to pay negative interest rates. However, they totally never guessed that they would withdraw their money and hoard it rather than spend it. The trend toward hoarding cash really became in 2011. It started to make the news in 2012. Now the German savers are buying home safes as well and pulling out cash. Of course, they attribute this primarily to negative rates. However, the concerns that Deutsche Bank may be in serious trouble is also helping matters.

Crash-BurnWe are witnessing this trend around the world throughout Asia as well. Japan has been printing 10,000 yen notes like crazy. The Japanese are also withdrawing cash and keeping it at home. Even Americans began hoarding cash also back in 2011, which began to make news by 2014. In fact, 43% of Americans keep their savings in cash these days for interest pays nothing. Yet, an amazing 53% of those cash-hoarders “plan to hide bills in a secret location at home.”

Everything is going as our model has projected. The peak in trusting banks and government is in place. From here on out, all we have is the collapse in public confidence and the 2016 elections bring that home.

All we are waiting for now is simply the Crash & Burn. This will be a serious topic for this year’s WEC in Orlando.

Aug 29 2016

US Debt: Who is Really Selling & Who is Buying?


Armstrong Economics Blog

Re-Posted Aug 29, 2016 by Martin Armstrong

USBonds

QUESTION: Marty; Since you wrote that central banks have been net sellers of US Treasuries for the first six months to support their currencies, others are jumping on board and are claiming nobody wants them so buy gold. Would you care to elaborate on this subject? It seems another desperate attempt by the hyperinflationists.

Thank you

PG

ANSWER:The central banks, AT THE REQUEST OF THE USA, are trying to support their own currencies and engaging in the very same action as they did following the Plaza Accord in 1985. The US position is that it needs a weaker dollar to prevent a recession. This will not prevent what is coming. Furthermore, what has been taking place is the 10-year is the new 30-year. Demand for 30-year paper has collapsed because nobody knows what will happen two years out, no less 30 years. The main buyers have been pension funds in the States who are desperate for higher yields.

As far as this being the sign to buy gold or a signal that hyperinflation is around the corner — of course it is not, lol. The people who make these claims are like horses with blinders. They only see the United States and everything they talk about is only in the USA. They cannot get it through their heads that things are far worse outside the USA. Even China has sold Treasuries to support their currency. Everyone has agreed to ban together to try to prevent the dollar rally and keep the capital where it is in a desperate attempt to stimulate their economies in hopes they reverse. They will fail.

A rise in the dollar is the key to the Sovereign Debt Crisis. Now, even the Bank of International Settlements is starting to warn that there are so many loans in dollars outside of the USA, which were originally to save on interest way back when, that a rise in the value of the dollar will cause a cascade failure in sovereign debt, especially among emerging markets. There may be the skeptics out there who think we are just making a lot of noise, but those in high places pay attention to our models no matter what the critics think. A strong dollar is the lynchpin that unravels everything. This is not about gold or hyperinflation. Clearly, those people lack any comprehension of what is unfolding on a global scale.

Central bankers are trying to keep the dollar from rising. This is what has been going on. They are fighting tooth and nail against the trend, but our computer says they will lose. The ECB’s insane policy of negative rates is tearing Europe apart and we can look at the raw capital flows to see how the peripheral economies within the Eurozone are moving to hedge the failure of the euro. The European banking crisis is beyond contemplation. The main central banks are selling Treasuries while the peripherals are buying. Just open your eyes and forget the propaganda.

Corp-Treas%

Capital is also moving shorter-term for the declining trend in public confidence. I attended a meeting of a very large pension fund who has followed our advice. They too SOLD TREASURIES and moved to corporate debt to get the yield. The rating agency came in and exclaimed that they were taking on more risk. They responded by saying they did their due diligence on our advice and confirmed that the top of the crop of corporate debt does not default, but governments do. The premium of corporate yields over Treasuries is declining. Our smartest clients are jumping on board. You cannot forecast the future without known the past.

Here is the breakdown of holdings per country for the past year. The actual holdings rose overall. However, note the countries who have been increasing their holdings like Poland, Spain, and Italy. Turkey has been a major seller but this is political. There are peripheral countries increasing Treasuries as a hedge against the euro. The main G5 have been net sellers in an effort to support their currencies such as China, Japan, France, Belgium, and Australia. Germany increased its holdings since it has been the target of European capital inflows. The Swiss have been buyers of Treasuries to hedge against the euro. Here is the full breakdown (Source central banks):

US Debt Holding June 2016

Aug 29 2016

New SEC Money Market Rule Will Send Cash into Treasuries


Armstrong Economics Blog

Re-Posted Aug 29, 2016 by Martin Armstrong

Money Market

 

The new SEC rule on money market funds takes effect October 17, 2016. There is never a crisis that simply passes. Such events always lead to more regulation even when those creating the rules are clueless about what they are regulating. The 2007-2009 crisis did more that wipe out Lehman Brothers and Bear Stearns than anything else. The impact of the crisis led to a panic in money market funds. It was assumed that all money market funds were safe and that you would never get less than what you invested. That proved to be false in the midst of the Lehman failure.

The Reserve Primary Fund, which was the oldest US money market fund, fell during the crisis to 97 cents. You might say it was due to negative interest rates. However, it was perceived as a risk and not safety. True, the fund had some Lehman paper, but that was only a very small portion of the Reserve Fund’s assets. The collapse in confidence was the key. People feared banks and bank paper. When the market began shorting Goldman Sachs shares, its former CEO came to the rescue and banned the short selling of banks. Investors essentially stampeded out of the Reserve Fund in mass, for if Paulson was banning short selling on Goldman, then a collapse of the banking system was not so far-fetched. This triggered a run on money market funds, and when the oldest went, the contagion spread and threatened the liquidity of the entire financial system.

PE Ratio 2007-2016

Big, smart money ran to equities. Many individuals ran into gold. The PE ratio on the S&P exceeded 100; at the peak of the dot.com bubble, it only reached 50:1. Money market funds became vulnerable for they invest short-term debt securities like commercial paper. Indeed, banks and big corporations rely on those funds for liquidity to fund immediate operations. Lehman failed for it could not redeem its overnight paper it borrowed against in the overnight repo market. They had just 24 hours to pay or fail, and they did the latter. This is why the government had to step in with bailouts to make sure the whole system didn’t collapse. It was liquidity that evaporated.

The critical factor is always liquidity. Liquidity is the lifeblood of the financial system. When confidence is lost, people hoard money and do not invest or deposit in banks or money market funds. The SEC assumed that the run on money markets was simply because the Reserve Primary Fund fell below par value. They are not looking at the market as a whole.

The October SEC rule will change the valuation of money market funds by eliminating this presumption that what you put in is always there. The funds will be marked-to-market and the SEC thinks this will prevent another run during a crisis. The rule, of course, exempts funds who invest ONLY in government paper. So everything else is perceived to be “risky” so it must be marked-to-market for transparency, but if it is a pure government fund, hey, the rules do not apply.

Already, the weak minded are moving to government-only funds that will just be like the Japanese funds were who hid any losses. The accounting will assume you have lost nothing as long as it is government paper. Investors are being told already that their money market funds restricted to government paper are 100% safe and will always return their money. The floating NAV values for all other funds are risky.

Fed Excess Reserves

What is happening is very clear, almost $500 billion has moved from money market funds into government funds. Total assets in money market funds have now dropped below $1 trillion for the first time in 17 years. This is very bad for it will enhance the economic decline when banks are already not supporting the economy and hoarding cash deposited at the Fed in its Excess Reserves facility.

Despite the hoopla that sales of US Treasuries are signaling that the end is near, to the contrary, the landscape is changing already and the new rule has not yet gone into effect.

As always, you have to pick up the rug to see the real trend. Analyzing just the surface never reveals the truth. You have to pay closer attention.

Aug 29 2016

Are Central Bankers Coming to a Bitter End?


Armstrong Economics Blog/Banking Crisis

Re-Posted Aug 29, 2016 by Martin Armstrong

Central Bank Confidence

Central bankers these days are seriously trapped. They cannot now reverse their policies for that means they have to admit that they have failed. That is far more serious than you might imagine. To even entertain backing down from negative interest rates means they have to admit that Keynesian/Marxist economics has failed and therein socialism, which is based upon the very principle that government CAN and is CAPABLE of managing the economy. This is the real question presented in the American presidential elections, yet nobody will articulate it in this manner. Hillary still preaches the same failed socialist agenda as if government can even do anything other than attack people who earn more money as did Emperor Maximinus of Rome.

Just before Paul Volcker became Federal Reserve Chairman Paul Volcker, who served (August 6, 1979 – August 11, 1987), he delivered his Rediscovery of the Business Cycle in 1978 (published on May 3, 1979). If you Google this book, you will see our site comes up first. You can find used copies around $500. Why is this book so rare? Because before Volcker became Fed Chairman, he told the truth.

“The Rediscovery of the Business Cycle – is a sign of the times. Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment.”

This “New Economics” was all about empowering government to manipulate and control the economy. Even Larry Summers, who is the father of Negative Interest Rates, has publicly admitted that government cannot forecast economic declines. Implicitly, he too is conceding that the “New Economics” has failed and his negative interest rates is not bankrupting pensions and has underwritten government debt like never before. Summers has pushed society over the edge. The conundrum in which we now find ourselves is where global central bankers can gather at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming, but all they can do is hope something happens to save them. Governments are beginning to depart from the grip of austerity forced upon Europe by Merkel which has greatly suppressed economic growth and created an economic depression exactly as what took place during the 1930s. The option of deliberately creating deflation was the policy of Germany only because they misunderstood the causes behind the German hyperinflation of the 1920s. The failure of the economy to rebound in Europe and in Japan, while the United States has been only a dead-cat-bounce, led to governments insisting politically that central banks maintain and extend their own stimulus efforts.

wizard-of-oz-BehindTheCurtainIt is clear, central bankers are in a state of panic. They are looked upon as the sole economic magician and this political shift for responsibility has overburdened then dramatically. They know all too well that serious structural reforms are now necessary. However, central bankers can’t be seen to be giving up on this Keynesian/Marxist policy Volcker called the “New Economics” and Larry Summer pushed to Negative Rates. They are now trapped, unable to reverse policy without sending a signal that they’ve have failed. The great fear is the collapse in confidence, which is on the horizon. They wake up from a nightmare in cold sweat fearing the curtain will be pulled back and the world will witness there is no wizard as in that film – the Wizard of Oz.

The central bankers tremble at market sensitivity to any change in the perception of what they are up to next. They sought this power of a demigod, and now live in fear that they might be discovered as confused and powerless. This is now all about policy makers being unable to admit complete and utter failure. This is the foundation fro

Aug 28 2016

Bank of Japan Prepares for Crash Triggered by Fed Tightening


An interesting analysis and could very well be the right move!

Aug 28 2016

Money Smuggling v Money Laundering


Armstrong Economics Blog

Re-Posted Aug 28, 2016 by Martin Armstrong

big-stack-of-money

I have warned that when I am traveling these days, the question always posed is – “How much cash do you have?” Even traveling to Warsaw, there are big signs saying you may not have more than €10,000 in “value” on your person. In Italy, if it looks like you have a lot of jewelry, they weight it. The hunt for money by governments is getting desperate. They use terrorism and the drug trade as the excuse. Granted, there may be cash being smuggled into Mexico like the latest catch of $3 million in the trunk of a car at San Diego. But the problem becomes, we are all now suspects without doing anything.

What is the importance of such seizures to our liberty? Granted, the drug trade may have a bunch of cash. But unless you actually prove they were drug dealers, what they are calling this is “money smuggling” not “money laundering” or even “drug money” these days. That means they claim the right to just take whatever cash a person has without proving that it is the proceeds of a crime. That means, you have no right to travel with your own money.

When I was in the gold business back in the 1970s, an old farmer looking guy with a moth-eaten jacket and a cap, came walking into my office. He was watching the ticker tape display above the vault. Those were my younger days and then guy said: “Hey kid. How many Krugerrands would a half-million buy?” I just put it in the calculator just to answer his curious question. He then said: “I take then!” I was shocked and looked at him. He then handed me a brown paper bag from a food store and said: “Here’s $250,000. Watch this. I go get the other bag.” No bill was newer than 1934 and trying to count that much mostly in $20 and $50 bills that smelled really mildew, you felt you needed a shower afterwards.

Arab-Dinar-HoardI told the story to a friend. For he paid cash. I never knew his name. Back then we were free, not like today. There was no requirement to give up everything to do a transaction. My friend then told me his name and the story. His family was one of the largest landholders on the East Coast. He had sold all the land for Six Flags Great Adventure. The story went that his family had lost a lot of money in the bank failures during the 1930s. So they built their own vault in the basement of their house and never trusted banks again.

Roman-Hoard-BritainBetween “money smuggling” and “money laundering” regulations, you do not have the right to your own money anymore. The “money smuggling” is simply traveling with your money and that requires disclosure for $10,000 or more. Then they use “money laundering” for hiding your cash as in a safe deposit box. Read the fine print for such a box. You are not allowed to have cash or gold in a safe deposit box for that is now “money laundering” meaning you are hiding it from the government. In either case, they just confiscate your money. They need not prove it is the proceeds of a crime or that you didn’t pay a tax on it. Even if your cashed your pay check and kept it in cash accumulating your savings outside of a bank today in cash, that is now hiding your money from government and as such it is “money laundering.”

Had that family been around today, that would justify storming their house with swat teams. That family was not engaged in any criminal activity. They just didn’t trust banks after the failures of more than 9000 banks during the late stages of the Great Depression. Back then, it was not “money laundering” to keep your wealth in cash and in your own vault in the basement. Today, they just presume you are up to something and that justifies taking everything you have.

This is obviously the same human response that has unfolded over the centuries. This is why hoards of coins are still found buried in the ground in all cultures from all centuries. This is what happens with the collapse in the confidence of government. What you think is yours, they view as their’s. Hillary Clinton said in Detroit that Trump is worth $4 billion. She told the audience – think what we could do with that! This is how career politicians look at the world. What can they take from us next.

Aug 26 2016

Central Banks Cut Interest Rates 667 Times Since ’08 & Owns $25 Trillion Of Financial Assets – Episode 1058


From X22 Report Click On Picture To See Larger Picture Gold slammed down again. Subprime auto delinquencies surge. Durable goods orders decline. Capital goods shipments decline. Services PMI declin…

Source: Central Banks Cut Interest Rates 667 Times Since ’08 & Owns $25 Trillion Of Financial Assets – Episode 1058

Aug 26 2016

The Condo Market Turning Down


Armstrong Economics Blog

Re-Posted Aug 26, 2016 by Martin Armstrong

Porsche Building

The condo bubble has broken in many markets. Even rentals in Miami and other prime markets have begun to decline. In part, the rise in the dollar is now curtailing foreign investment. Likewise, I personally know some British friends who are selling property in the states to take advantage of the huge profit in the drop in the pound when converting back to the base currency.

As with every peak, developers see how condos sell so they have increased the supply right into the peak in prices. This cyclical pattern repeats over and over again. The foreign investors who got into US property back in 2011 have made a fortune in the home currency and are taking profits.