QUESTION: Sir,

The issue of credit default swaps (CDS) in 2017 is running at twice that of last year reflecting rising concerns of another coming crash. The number of hedge funds and banks dealing with highly sensitive credit derivatives has reached almost $30 billion in 2017 up from only about $ 15 billion in 2016 and just $ 10 billion back in 2015. The credit default insurance, which is supposed to pay certain amount of money a particular company or government registers its insolvency. The trading in CDS was blamed by numerous observers for creating the financial crisis that became a widespread contagion in 2008 in particular. 

Hedge funds are now investing in these risky securities in order to achieve returns on the order of magnitude that are difficult to achieve in the current market environment due low interest rates. High-profile funds such as Apollo, Brigade Capital and Blue Mountain are among those who bought tranches with terms of 2-3 years, according to the FT. The real danger with this instruments is that the next crash will be far worse in the bond markets than at any time since 1931 and the prospects of actually being able to collect on these time-bombs is more unlikely since the entire system will freeze. The crisis is one stemming from liquidity and failure to understand the contagion will lead to significant losses. 

The pending view on the stock market remains extremely bearish among professional since their historical view is very myopic and their models rarely extend back before 1971. The was the entire reason Long-Term Capital Management collapsed and set off a crisis that became a contagion. Because they could not liquidate positions in Russian debt, they were forecast to start selling investments around the world to raise cash to cover losses in Russia. Therefore, you can have a great solid investment in an area unrelated to the bond crisis, yet that investment can tank regardless of the fundamentals.

This is the REAL RISK that we face – the CONTAGION. This is why we absolutely must keep and eye on the Global Market Watch to pick up on shifts in trends being caused by directional changes in capital flows. This will NEVER be forecast by fundamentals. The words written by Herbert Hoover explaining the CONTAGION that resulted in the Great Depression are relevant today. Replace the events with 2010 and the Greek bond crisis and they still apply.

The Global Market Watch shows you the entire world at a glance. This is the best tool that shows when a CONTAGION is starting for it is monitoring everything that moves.

The Germany has posted a stunning 4.3% rise in tax revenues during the first half of 2017. I have warned that while the ECB keeps buying government bonds to “stimulate” the economy, they keep trying to sterize the expansion by raising taxes and hunting people for taxes.

They do not seem to grasp that injecting money by buying government debt and then raising taxes on individuals will not stimulate the economy. Nearly 10 years of this insane policy and we have less than 2% inflation. They seem incapable of comprehending that simply increasing the money supply does not produce inflation. The only thing that counts is the increase in net disposable income.

If I create $100 and give it to you and then demand you give me back $90, did I really increase the moeny supply by $100 or just $10? It seems that common sense is just rare these days.

QUESTION: Mr. Armstrong; I find it fascinating that your computer projected August as the turning point this year and the week of 09/04. I suppose that could be a set up for the August being a high close and a crash beings in September as it seems always to unfold be it 1929, 1987, 0r 1998. Do you have any idea why a crash seems to come always in September and October?

This has played out so far as you laid out in Hong Kong. I think I will come to Orlando as well.

JH

ANSWER: That is an interesting question people have been asking all my life. There is no real fundamental explanation why wars perk up in August and markets tend to crash in September-October. The joke has been the family spent too much on vacation and so they sell stock in September to pay the bills. It is definitely seasonal.

Remember one major thing. This is the move that has to suck people in on the wrong side in order to create the energy to swing back in the true direction. This is true in stocks as well as in gold. I have warned that we can get a potential HUGE false move, which can even be the biggest in history. The bigger the false move, the bigger the REAL move.

I have a feeling this is going to be a very interesting WEC in Orlando.

QUESTION:  Dear Martin,

ANSWER: There is little doubt that we stand at the threshold to some chaotic period ahead. I have warned governments behind the curtain of what is to come. It seems as if at times I am the only person who has ever read a history book. I point out that 99% of all revolutions begin with the abuse of taxes. No matter how many times I show this is the trend and all the countless rebellions in ancient, medieval, and modern times (within the last 309 years) such as the American Revolution (no taxation without representation) or France (let them eat cake), I am just one person and I cannot move a mountain. So I do this blog as a public service realizing that we must crash and burn and thus it is up to us at that brief opening in the clouds to push for the freedom we deserve for our posterity.

We know where the trend changes from gold at 1362 to the Dow at 23,000. We have not yet missed anything. The boat has not left the dock. Patience is required along with a clear head. Never act emotionally. Be clam and poised. Remember there must always be the false move before the slingshot move.

It is the fool who rushes in assuming he will miss the move before key points are exceeded. That is when losses are always the greatest. Rallies in gold are up to the next bank of Reversals as is support in the Dow. Keep in mind that September is a turning point in gold and August was key for the Dow. The two are not yet aligned. That may not unfold until next year.

According to the new draft law proposal, all persons who enter the US will have to declare their holdings in crypto currencies with a value over 10,000 dollars. This is the case with larger quantities of cash or precious metals. Naturally, they are calling this money laundering and possible funding of terrorism. It’s really about taxes. 

I have been warning that this would be the next step in government regulation. They are hunting money everywhere. There is no possible way they will allow crypto currencies to beat them. The stories that they cannot stop them are really nonsense. Income taxes are not illegal if you cannot pay, but if you fail to tell them what you made, that is criminal. Applying this same legal approach to crypto currencies is inevitable.

This will apply to Americans returning from overseas. If you fail to report it, they can jail you and confiscate everything you have. It will be the failure to declare.

The only way to be off the grid is still tangible assets and that will be non-real estate limiting this to simply movable assets. Even cash they can simply cancel as was the case in India. They are out for everything for we are the problem not their mismanagement from their perspective. This is also why they are in an all out war against Trump.  They will not tolerate anyone who is not a career politician regardless of what they say.

All we have been hearing since 2011 is how the stock market is going to crash and then there will be hyperinflation and all sorts of strange relationships that never materialize. They simply focus on the level of the stock market in nominal terms without adjusting it for inflation or showing how it has performed relative to the rest of the economy. Here is a chart of the stock market expressed as the total value of shares traded annually as a percent of GDP. Sorry, this illustrates that the retail market is not in crash mode just yet and it is still nowhere near the overbought levels of 2007.

This chart also reflects the crisis we have in liquidity. The more government tries to also regulate banks, they have been withdrawing from proprietary trading and we find the trading volume has been shrinking.

Government manipulates the statistics to always try to reflect that everything is OK and they are doing a fantastic job. Here is the ECB’s assessment of liquidity trying to pretend it’s back to normal. Real liquidity is HALF that of 2008 yet the ECB’s the Financial Market Liquidity Index is a complete fraud for it simply measures the spread between bid and ask and not the volume traded. The Index combines eight individual “liquidity” measures based upon their definition. Three of them cover bid-ask spreads: (1) on the EUR/USD, EUR/JPY and EUR/GBP exchange rates; (2) on the 50 individual stocks which form the Dow Jones EURO STOXX 50 index and; (3) on EONIA one month and 3 month swap rates. Three others are return-to-turnover ratios calculated for: (4) the 50 individual stocks which make up the Dow Jones EURO STOXX 50 index; (5)

Honestly, the bid ask spread can narrow and let a panic start and that will quickly vanish as market-makers withdraw. There is far less depth to the markets today than before back in 2007. A return on investment also means nothing with respect to liquidity.

So as long as we have analysts relying upon government statistics without thinking about their construction, this is really the blind trying to lead the blind. What a joke!

It is becoming painfully obvious that the amount of sheer theft of our forecasts right down to names of publications is escalating unbelievably. I personally fear that these charlatans are only looking to exploit people and could care less what is really at stake. From outright just stealing our track record and claiming they called markets to the day of the 1987 Crash to taking the title of the Great Bull Market in History and calling it their own, are confirmations that they really cannot stand on their own.

None of these forecasts we have made for the past near 40 years was  possible without the largest database ever assembled covering the entire world. Our initial Socrates launch covers about 500 instruments around the world. No individual analyst is capable of forecasting the world without such a database and computer systems designed to do so. There is just far too much for any analyst to watch every single day. And as for forecasting things to the precise day, only the Economic Confidence Model has accomplished that and I myself remain in awe of how the world is so precise. The complexity simply masks the hidden order. This was never my theory that I set out to prove, it is something that I bumped into along the way of just trying to forecast markets for my own trading.

I have advised more governments and been called into more crisis events than anyone I know of. That does not happen out of thin air. Such levels are achieved only with long standing track records that are know to be true over the course of decades.

Anyone taking our targets to stealing our track record claiming they accomplished the same, I warn that such conduct is not that of anyone you should trust. They are simply  charlatans  looking to exploit you for money and when crisis does come, they will be clueless what to advise. This not a game. This is reality. Such people are parasites looking simply to mislead you for profit.