QUESTION: Marty, you recently said that there was a shadow repo market. Nobody has ever heard of this. In the Fed’s statement, there is a curious announcement that’s talking about coordinated swap lines. They also said: ” both a collateralized and uncollateralized basis, to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.” Is this the commercial paper you are talking about?

ML

ANSWER: Yes. They call this “coordinated swap lines” between central banks. It is the shadow uncollateralized Repo Market. They are now coordinating this with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank. In other words, the Fed is providing liquidity to other central banks. I have said before. They actually had red phones connecting the central banks after the Plaza Accord. I was sitting there in the room when one of those red phones started to ring. I just call it the shadow Repo Market.

The “uncollateralized” loans mean commercial paper other than government treasuries

QUESTION: Do you think there is some single plot behind this Coronavirus scare?

SH

ANSWER: No. It seems that there are a lot of people using this Coronavirus for personal political agendas. Illinois Tollway is now using it to implement All-Electronic Tolling as Precaution Against Spread of Coronavirus. You have others in Europe saying they should be nationalizing companies since they cannot be bailout under EU rules. Others are using it and blaming Trump as if any government can really prevent such a pandemic.

I do not think this is a single-minded plot. However, history also demonstrates that they will always take advantage of a good crisis. In Europe, the central bank is already at negative rates. There is nothing left for them to do. This is now turning to emergency political measures. The drive to use this as the excuse to eliminate paper currency is a side-benefit on their wish list and this does provide the excuse to justify that action.

Whatever measures you see, they rarely ever reverse. They tend to be permanent.

QUESTION: Marty; first I want to thank you for Socrates. It called the crash in stocks, gold, currencies, and Bitcoin when everyone else was foaming at the mouth. The rumor was that $16 billion in gold was dumped. Was this just trying to crush the goldbugs, or was this more what you said at the WEC about this would be like the LTCM crisis of 1998? Does the coronavirus have any real impact or is this just the excuse for the 20% correction you forecast at the WEC in October coming in January?

GS

ANSWER: I won’t mention your name, but your initials are not for Goldman Sachs.  The market was ready for the crash. The Coronavirus is really just the excuse. It would have been whatever. The markets were going down. It was like our forecast that a third-party candidate could win in 2016 when we made that back in 1985. That was just the timing. It was not a forecast of who it would be. The fundamental seems to emerge to fit the timing.

As far as Coronavirus is concerned, it is just an excuse. December to February the 2018-2019 flu season according to CDC, they estimated that 16.5 million people went to a health care provider last year for the flu and more than 34,000 people died. That was 5% of the American population. The proportion of outpatient visits for influenza-like illness increased slightly to 1.7%, which is below the national baseline of 2.2%.

The flu has results generally in 9.3 million to 49 million illnesses each year in the United States since 2010. That means that 5% up to 20% of the United States population gets the flu. Why all this craziness over the Coronavirus seems to be fed to people who love to spread conspiracy theories for the wilder this gets, like 911, the government can justify more power. In Germany, the finance minister is proposing to NATIONALIZE companies because the rules do not allow bailouts. So are these people knowingly spreading these conspiracies and creating a major panic deliberately, or are they being fed a story the Deep State knows they will use to paint the end of the world? To what purpose? If the death rate is 2% or 7%, so what? Biological weapons like Antrax have a death rate of 60%+ and the Black Plague killed 50% of the population. We are not at such a dire level yet they have scared the hell out of everyone. Others are trying to use this to overthrow Trump. Why? Are they closet Communists?

This is the 7th flu season since the low of 2011. We have 156,000 infected and 5800 deaths, but not everyone seeks medical attention. The press which hates Trump is already blaming him to try to influence the election from Vanity Fair to the Washington Post. You can see that those eager to blame Trump are clearly political critics and others just think that if the world crashes and burns, they will be rolling in wealth because they have gold or Bitcoin even if there is no power grid. It’s like trying to flee a hurricane in a Tesla with no hope of plugging in your car.

It is estimated that the flu results in 31.4 million outpatient visits and more than 200,000 hospitalizations each year. The 2017-2018 flu season was one of the longest in recent years, and estimates indicate that more than 900,000 people were hospitalized and more than 80,000 people died from flu. The 2017-2018 flu season saw children dying whereas the 2018-2019 flu season took the greatest toll on adults age 65 years and older. About 58 percent of the estimated hospitalizations occurred in that age group.

I fail to understand why these people must always paint the worst possible scenario. They seem to be the same people touting gold and Bitcoin. Are they spreading this information hoping to illegally benefit from creating fake of exaggerated reports? In equities, that is jail time under the SEC. You cannot talk up your own book.

As far as the dumping of gold and Bitcoin, yes, this is what I was talking about that this crisis would be a combination of 2008 & 1998. Here the problem is not mortgage-backed securities, but hedge funds were buying piles of US Treasuries and selling the derivatives trying to lock in guaranteed trades as always. The spread has reversed and we have seen massive selling of off-the-run Treasuries which are the older issues. The market is not as deep for the older issues and they normally trade at a slight discount to the current benchmark. Here, they crashed and were trading at 25bp below. This was reflecting panic selling to raise cash.

This is what I meant about a revisit of 1998. Hedge funds get trapped and start selling everything. They tend to group together on the same trades. Hence, those who thought gold was the safe haven were caught on the wrong side of the Quantity Theory of Money philosophy and discovered that “cash is [not] trash”, but KING! Yes, the rumor is one fund lost $32 billion last week. People would not deal with one bank out of fear they had exposure to a certain hedge fund. That forced the bank to come out and announce it had no such exposure.

Happy Pi Day

I want to wish everyone Happy Pi Day. I would also like to say I have no symptoms and I did not shake the hands of the Brazilian Press Secretary when at Trump’s Mar-a-Largo. Since he tested NEGATIVE, I have no worries. I have been sequestered anyhow inundated with clients around the world as this market has begun its decline.

Thank you for all the emails thanking us for our volatility models which were picking the week of 03/09. We still have not concluded this volatility. As they say, it ain’t over until the fat lady sings in opera (they usually have the best voices). We will release a specialized report for those interested in option volatility. Yes, our models are forecasting volatility and are not the typical implied volatility models which are simply weighted moving averages.

The VIX formula is not forward-looking. It is simply weighted to the current volatility and really projects the same trend will remain in motion. Our volatility models are NOT based upon such assumptions nor are they based upon moving averages. Our models are published on the VIX and the low there was the week of January 13th, 2020 which was the precise turning point on the Economic Confidence Model. This confirmed that we should have been expecting rising volatility and our models were projecting that trend into this period and then rise again for the end of the quarter.

While all the headlines show the widening spread in rates in Europe and capital has been buying Germany and selling others, Spain and Italy outlawed shorting their short-term debt because the spreads have a blow-out. But look at the Bunds. They have been unable to make new highs even in the midst of a traditional flight to quality.

So hang tight. This is not over yet and we are getting some very interesting shifts. I have spent all day writing a very important special report because we are facing a major central bank crisis and this is threatening not just the rest of the year, it is threatening the very existence and survival of our global economy. This should go up for sale tomorrow or Monday at the latest. I have written it on Pi Day and will release it on the Ides of March – Caesar, beware!

QUESTION: Marty, your explanation of the 1987 Crash and the Nikkei are very informative. Can you elaborate on how we can see that on Socrates?

Thank you for the education

UD

ANSWER: The easiest way to see that is by using the Energy Model I developed. The very purpose of the model is to measure the amount of energy in the system, which is not the same as looking at the price movement of charts thereof.

Compare how the Energy Model performed on the Great Depression and then look at the 2007-2009 Financial Crisis. The Dow did not make new highs on the Energy Model until 1954. That took 25 years to accomplish. This was a Public Wave where sentiment shifted to secure government bonds, and equities were viewed as the speculative play toys of the rabble.

Now, look at the 2007-2009 Financial Crisis. We were making new highs on the Energy Model by February 2010. This confirmed that we would be making new record highs and this became the Most Hated Bull Market in history.

The 1987 Crash was interesting, for the Energy Model continued to make new highs after the market peaked. This was a warning we were dealing with a short-term event, not long-term. However, that high in energy from 1987 was not exceeded until July 1995. From that point onward, the US market began to rally significantly.

The US share market broke out on our Energy Models in July 1995 while the dollar bottomed against the Japanese yen in April 1995. This also confirmed we were dealing with a capital flow shift that would turn toward the dollar and the US equities.

Our Energy Models were designed to provide a completely different view of market activity. Even if we look at the standard oscillator, it peaked in January 1925 and that was not exceeded even into 1929, It was finally marched only in February 1955. So that was no help in really forecasting the Great Depression or the rally thereafter.

The Energy Model offers a completely different perspective and it has nothing to do with oscillators or moving averages. Moving average convergence divergence (MACD) is one of the most commonly used technical analysis indicators. However, the MACD (26/12) did not cross until June 1930. So this trend following momentum indicator looks at an asset’s momentum to ascertain whether the trend is up or down, but it failed to provide a trading signal that would have gotten you out of the market for nine months after the high. Therefore, oscillators and moving averages can be good confirmation tools, but they are not consistent insofar as providing always an advance warning.

Well here we go again. These people who claim to be experts are warning that it is the fallout from the global coronavirus outbreak that has caused the crash and one says this could be “worse than the financial crisis” of 2008. Another claims to have forecast the 2008 Financial Crisis is now saying the idea of a major global recession “doesn’t sound too farfetched.” These people who always claim the market will crash then claim to have forecast the crash but only one out of 50 such forecasts are ever correct. They then also market themselves to please buy their newsletter because they were right.

The German top newspaper, Die Welt, commented on the stock market decline mentioning our perspective correctly February 28, 2020: