The European banks are in much worse shape than their US competition. The reason being argued in Europe is that the US government imposed a ban on speculation after the financial crisis. However, that was imposed on September 19, 2008, and it ended on October 9, 2008. But some Europeans claim that is why US banks survived and want to outlaw short selling on banks stocks in Europe. The problem with this proposal running around behind the curtain is that Brussels would lead, not to short selling, but wholesale liquidation. They would have to suspend all trading, period. The problem is that it would not last for more than one month, as was the case in the United States. This would only destroy confidence in Europe altogether.

QUESTION: Mr. Armstrong; I have a very basic question. With all the trillions of dollars of stimulus in Europe, USA, and Japan, we are in the age of deflation as you have pointed out. The Federal Reserve itself predicts less than 2% economic growth so that is probably optimistic yet the best in the western world. This all seems to defy logic and you explained it is confidence and not the empirical level of money. The various explanations running around focus the cause on being the 2008 crisis as the main culprit. That appears to be bit shallow. Could you put your two cents into this nonsense?

I respect the fact that whilst you were one of the billionaire hedge fund managers and even won hedge fund manager of the year and are clearly not with the bankers. Your public track record showed you had the lowest draw down of anyone in the management field. What they did to you proves you are not one of them. It is becoming terribly obvious that it takes a global perspective to comprehend this mess. There are too few real big international hedge fund managers left these days and they seem to be in league with the bankers donating to Hillary and not very trustworthy.

I appreciate you speak with experience and distinguish opinion from fact. You are truly alone when others remain silent or just buy government.

Thank you; See you in Orlando

PM

ANSWER: The crisis of deflation has very loose ties to the 2007-2009 crisis, but its tentacles spread far and wide. It is also a direct factor of the decline and fall of western society — our moment with destiny. The entire structure of government social programs is predicated upon a Ponzi scheme that uses Marxism to justify robbing one generation for the previous one. Stir in Keynesianism, and you have a lethal cocktail we cannot survive.

To start, the leveraging of housing was far more significant than just real estate. For example, people would often take home equity loans for various purchases in many categories that were expensive like a piano. To this day, pianos are anywhere from 25% to 50% below 2007 price levels. There was a bubble in this market as well because people could get easy home equity loans with no problem. Those days are gone. Many high-end things of this nature are off considerably since the ability to borrow easy money on your home came to an end.

Consequently, the 2007-2009 crash in real estate impacted other markets beyond just housing. We have seen a contraction in many areas that relied on home equity loans for financing. So the days of easy money came to a terrible end. The collapse in that leverage is not fully appreciated.

The shift to Asia can be also demonstrated with pianos. The top name is Steinway and Weber. Both were German. They are now mostly manufactured in Asia. Japan began to make pianos, and eventually the Japanese improved quality. Now the top names in pianos are Yamaha and Kawai. Pearl River may be the biggest manufacturer in the world. They are in China and they manufacture for other brands. So first product manufacturing migrated for the better price, but that manufacturing improved and actually became a top brand. This is the path all products follow.

Then there is the crisis in pensions mixed with the crisis in demographics. All the pension systems were based upon a Ponzi scheme whereby the assumed population would always increase, so the young would pay for the old. Obamacare was constructed on the same fatal flaw. Note that the trend in lower interest rates did not begin with the 2007-2009 financial crisis. Pension funds WRONGLY assumed that government debt was safe, and as a result, many pension funds simply bought 30-year bonds in an effort to match maturity dates for pensions. That led to a strong bull market and the break-even was 8%. They kept bidding to try to lock in rates for pension payment in the future and their lack of management skills led to this 35-year bull market. Rather than picking stocks, they just believe government is the best thing since sliced bread. Now, they can no longer survive with rates this low, which is why the Fed keeps saying we must “normalize interest rates” for we will see a massive wholesale collapse in pensions. Yes, the 2007-2009 crisis helped create the final Phase Transition into a major long-term high in bonds (5,000 low in rates), but it obviously is not responsible for the 35-year bull market in bonds (decline in rates).

Taxes have risen sharply. Back in 1980, the tax rate was 70.0% on $600,177 for married couples filing jointly. What Clinton calls “trickle-down economics” actually worked. The top tax bracket under Reagan dropped to 50.0% on $203,661 in 1982, and it fell to 38.5% on $181,189 in 1987 for married couples filing jointly. In 1988, in response to the 1987 Crash, the rate was cut again to 28.0% on just $57,738. It then began to rise in 1991, reaching 31.0% on $138,481. Then in 1993 when the Clintons came to power, they raised the tax rate to 39.6% on $397,221. It fell back in 2001 to 39.1% on $385,487, and in 2002, it fell to 38.6% on $391,867 followed by 35.0% in 2003 on $389,249. It was raised again in 2013 to 39.6% on $440,876.

When we look at the annual growth rate in the economy using GDP, nothing even came close to the surge in economic growth during Reagan’s administration. If you look to buy a car and one dealer wants full sticker and another gives you a 5% discount just 5 miles away, I think you would drive the 5 miles. Lowering the tax rate from 70% to 28% by 1987 produced the biggest surge in modern history. Yet all we hear is that trickle-down economics failed.

The growth in the national debt was steadily declining, demonstrating that trickle-down worked. The debt soared during Cheney’s war. This clearly shows that it is a fallacy that war is good for the economy. True, it worked with World War II only because 40% of the workforce had been farmers displaced by the combustion engine and the Dust Bowl.

The other fallacy being totally overlooked is that under Obama, the interest expenditures have soared despite the fact that interest rates have declined. Under Reagan, the national debt was $1.029 trillion, and under Obama, as of September 2016, it stands at $19.528 trillion. If interest rates today were 8% as they were under Reagan, the interest expenditures along for the year would be $1.6 trillion.
Hillary will raise taxes again. Every Democrat has done that except Kennedy, who also cut taxes like Reagan. Government is growing and it is consuming all the productive forces within the economy, and regulation like FATCA is destroying international trade. There is nowhere to go but down. This was not set in motion by 2007-2009. That was simply the catalyst, but not the total cause.

QUESTION: Marty, can you say what the actual capital flow number was per month?

ANSWER: The net foreign private inflows were $113.0 billion, and net foreign official outflows were $39.3 billion for August on securities. That is cash, minus trade. So this is the amount of money running into money instruments.

Apparently, there are a lot of people calling for a crash in the stock market as usual claiming it looks just like 1987. Sorry, there is nothing of that magnitude showing up at this time. We did elect one Weekly Bearish Reversal back at 18368. However, the main bank of support lies at 17710 followed by 17330. Only a weekly closing below 17330 would hint of a more serious correction. We did rally back and closed above technical support at 18068 last Friday. Now we need to pay attention to this area for a breach of 18050 should mean PAY ATTENTION. A break of 17990 will be more of a warning and this means last week’s low of 17959.95 comes into play. This would warn of a possible drop to 17710.

Note this this coming week is a Directional Change as well as a turning point. Note that we have turning points every other week right now so the pattern looks to be choppy. The key week appears to be the week just after our conference, November 14th. The two primary targets remains November and January.

A weekly closing back above 18370 will signal a rally ahead. Until then, we are retesting support.

QUESTION:  Hi Marty,
I have a question for you on the movement of the financial capital. Is there a reason it moved to NY (as apposed to VA, MA, or MD) in 1914? Also is it possible to predict what region in china it will move to, or can we just assume it will move to Beijing.
Thanks for all your hard work. I read your blog for breakfast.
-AM

ANSWER: Philadelphia was the financial capitol of the United States. That is where the Bank of the United States began, and to this day, you can go to dinner on Chestnut and Walnut Streets at many fine restaurants that were once banks. That was banker’s row until the state sovereign debt crisis of the 1840s, thanks to Andrew Jackson. The Second Bank of the United States is now a museum. This was the bank that Jackson attacked.

Jay Cooke was the first “Primary Dealer” to sell government debt for the Civil War, and he was the real financier of the Civil War. He is considered to be the first major investment banker in the United States. Cooke embraced technology by adopting the telegraph and thereby establishing the first wirehouse firm. He used the railroads to distribute bonds to people around the nation. This is why Lincoln went to Cooke to sell debt. The Panic of 1873 ended Jay Cooke & Company.

With the collapse of Jay Cooke & Company, the field opened. The next man to fill that role was none other than J.P. Morgan, who also began in Philadelphia. J.P. Morgan moved the financial capitol of the United States to New York City. It was from there that he organized the gold loan for the United States during the Panic of 1896. That is why New York is New York. It was not Wall Street and the stock market, it was the banking center and insurance center that was given life by J.P. Morgan.

There has always been a rival against New York for it sees itself as the real capitol of the United States since that is where Washington was sworn in. The capitol moved south after Alexander Hamilton struck a deal with Thomas Jefferson to allow a national debt. Jefferson demanded the capitol move to his state, Virginia.

If there was ever any question that this is a bond bubble with a 5,000-year low in interest rates, the final bit of insanity just took place. Italy managed to sell its first 50-year bond last week as investors were betting that the European Central Bank might soon add ultra-long debt to its asset-purchase stimulus scheme. Draghi has said he would do whatever it takes to stimulate inflation. Hence, speculators are betting they can sell these 50-year Italian bonds to the ECB for a profit.

The speculation was so great that about 16.5 billion euros in orders were received for a bond issue that was about 20% of that amount. They are not considering the risk that the upcoming referendum might overthrow Italy’s prime minister. This is speculation gone completely mad. These insane speculators have already bought 50-year bonds from Belgium, France, and Spain as well. Many of these same speculators have also signed up for Ireland’s 100-year bond in March.

QUESTION:

Marty,

In your September 8 post you said “The Reversals have done a good job and this is actually an appropriate example of how to use them to stay out of trouble. Gold exceed the 1362 Month Bullish intraday moving up to 1377, but then failed to elect that number only to go crashing back down. On Friday, we had the 1311 Weekly Bearish. Gold fell to 1305 and then failed to elect that number only to rush back to the top of the channel.”

It seems the same is true on the quarterly level as well. Gold exceeded the quarterly bullish at 1347 then failed to elect on September 30. Now today it goes down hard. Fascinating to watch your reversals work. I have been confused over the last months as I anticipated a 3 month reaction that has stretched to several months. it makes sense now since this was a 3 quarter reaction. Is that what you mean by everything is fractal?

Thanks for the ongoing education. Sometimes hard to comprehend but worth the effort. Looking forward to the next video. Do you still see a Possible November high or has the pattern changed.

ANSWER: This is why we look at time on five major levels. Reactions are limited up to three units of time and that runs up to yearly. For example, even if we look at the Great Depression, you will see a fall in the Dow from 386 to the 42 area. That took place in 34 months of from September 1929 to July 1932. It is confined to the three-year rule. Because it fell so far, it could not continue.

The Nikkei turned into a bear market passing that three unit time interval. Then the minimum became five to six years, and the next is 10 to 13. Go beyond that and you are off into 23 to 26 years. So it is a factor of how far you move within a given time period.

Even in gold, we bottomed on the benchmark (a date that we gave years in advance) in December and then elected the first Quarterly Bullish at the end of 2015, signalling a bounce. Gold rallied but could not close above the Monthly Bullish, and then it crashed but could not exceed the Quarterly Bearish. If we close below our Yearly Bearish Reversal at year-end, it will get interesting indeed.

So we have the combination of a three-year drop into 2015 from the highest closing, but a three-quarter reaction rally.

QUESTION:  Any update or longer term array for the GBP? You said they are attempting to hold the USD’s advance back any chance there’s also attempt to punish the UK with an attack on the currency?

LM

ANSWER: Of course. Europe has a different mindset when it comes to currency. They view the currency as if it were a share and the high the better. This is because after World War II, politicians used the rise in their currencies as PROOF they did a good job. When I was first going to open an office in Europe around 1983, I met for lunch with the head of one of the top Swiss banks in Geneva. I proposed various names and asked his opinion. They were all something like European Advisers. He asked me to name one European analyst. I was embarrassed for I could not. He laughed and and said there were none. He then said that is what everyone used our firm because he said I did not care if the dollar rose or fell. He explained, all European analysts would always be bullish their own currency. Indeed, with time I came to see what he said. It was political and to say your currency would collapse was treason.

So the ECB has been selling British assets. There is a concerted effort from Brussels to “punish” Britain for in their mind that will deter others from leaving. What they fail to grasp is a lower pound will SAVE Britain and it is Europe that will fail. Lower the pound and their exports are now cheaper so much so they can afford the tariffs and still be competitive.
The pound has broken back below the Break-Line from the US Civil War when it reached its historical high against the dollar. That was at 13755 for 2016. Crossing that line meant the decline was back in motion. This is a good thing for Britain. It was Britain who was the first to abandon the gold standard ending deflation. It was that end result that George Warren used to convince Roosevelt to devalue the dollar against the advice of his Brains Trust who argued like Merkel today for deflation.