Understanding the Markets


QUESTION: Mr. Armstrong; On your January 29 blog, you wrote “In the US Share Market, this is now a turning point we have reached. I have warned for months that exceeding the November high would lead to a January high. Now, the failure of February to make new highs warns of a March low. The support for a correction now lies at the 25637 level on a weekly closing basis (this is not a reversal). We will elaborate today on the Private Blog.” You warned that March could produce a high and keep the cycle inversion process in play. That proved correct since the Nasdaq made new highs and the Dow a reaction high. So that led to the drop into the first week of April. For the actual buy and sell signals, we should only do so on reversals and turning points. The January high you did with the turning point I assume and then the reversals kicked in. The buying opportunity I also assume we must wait for the turning point as was the case for the high. Correct?

PF

ANSWER: Correct. I have made it perfectly clear that NORMALLY one turning point is followed by the OPPOSITE event on the next. So a January high would traditionally produce a March low. However, I pointed out that we have been in a Cycle Inversion. September 2017, November 2017, and January 2018 followed by March 2018 were all the monthly sequential turning points. Normally, each would produce the opposite. That was not the case and each produced a high. This is the Cycle Inversion and it is also warning that we are still consolidating. March produced a high in the Nasdaq and only a reaction high in the Dow. This further warned that there was a shift from an international focus to domestic (Dow v Nasdaq). March also produced only a reactionary high the week of 03/12.

Far too many people expect a guru and want to act based solely upon a comment. Buy this or sell that and that person should always be correct. That is the dream of a fool for nobody can do that. They will ALWAYS quickly lose their money and then blame their pretend guru. That is a sure-fire way to go broke and if they are trying to trade short-term on such comments, they must be insane.

I have stated at the outset of this year that 2018 was a Panic Cycle. That means you test both directions! I further warned that we would see consolidation dominate the first part of 2018 so there was no reason to rush back in until we reach (1) turning point and (2) reversals. The closing of the first quarter was neutral in many markets once again showing that we are still in this consolidation mode. Buy or sell signals are on REVERSALS – never comments.

If you are trying to be a short-term trader and you think that will lower your risk, you are dead wrong. The best performance is to go with the trend and act ONLY on Weekly to Monthly signals – not commentary. January was a critical turning point. All our models were converging at that time so it was ripe for the correction which is why I stated that and was already getting criticism by January 31st, 2018.

The high was Friday January 26th. Every model we had was starting to scream DOWN! The Cycle Inversion was confirmed on the first day of December. I warned if we exceeded the November high, we would rally into January. The high came exactly 43 days (8.6 /2) from the breakout. That frequency does work in the share market except at extreme turning points. That lined up perfectly. The oscillators, always a lagging indicator, turned down on the 30th. Our Skew Model bottomed one day from the high on the 29th. Our Energy model peaked on the day, The subsequent sharp rally into March confirmed this was a reaction high.

Here is the Array on the Dow. There were three weeks targeted 02/12, 02/26, and 03/12 followed by 04/02. The week of 02/12 was a Directional Change and that sent the market back up leaving the February low intact. The next target was 02/26 which produced the reaction high in the Dow. The next target 03/12 produced the high in the Nasdaq.  Then the next target 04/02 produced the retest of the Feb low. Once again, we can see how the markets were interacting and producing the shift from international to domestic.

Clearly, commentary is just an attempt to expalin what is unfolding. It is NEVER for trading purposes. We trade based upon the Reversals and Toming exclusively.

Companies Stop Buy-Backs Causing January Crash?


QUESTION: Mr. Armstrong; The analysis being punted around is that the crash from January was caused because companies stopped buying back their own shares. The analysis claims that $4 trillion in buy-backs have taken place since 2009 and they stopped because of regs and that was the cause of the crash. It seems to me that this is bogus for the Nasdaq rallied into March and it was the Dow that led the whole way. This analysis appears to be fake news for it is as you say, trying to reduce everything to a single cause. Would you agree?

HC

ANSWER: Absolutely. Yes, Bloomberg wrote about that and put out the research of Goldman Sachs. During the Great Depression, companies tried to support the market and were buying back their shares aggressively during the crash. It not only failed to support the market, it undermined the companies themselves and many failed because they could not raise money nor borrow money as the Great Depression continued. This fundamental sounds logical, but it is just nonsense. Not only did companies rush to buy their own shares back as the 1929 Crash unfolded, they even went as far as to offer loans on their own shares to workers. I wrote about that in the Greatest Bull Market:

/id. page 231

None of all this support had any impact in stopping the Crash. As I have stated many times, everything is connected. If the entire market is crashing, a company trying to buy back its own shares to support its share price has NEVER worked even once in reversing the trend. Bloomberg’s report is indeed bogus. It is simply trying to report ah – this was the cause! It never works that way

Comprehending The Capabilities of AI


QUESTION: Mr. Armstrong – Neural nets and deep-learning algos are not all that new. However, with the advent of quantum computing power and huge cloud data stores recording every flinch people make, the business world is abuzz that this is the portent for AI to now transform business, business management, and our lives. Of course, trading systems are now being ‘trained’ on datasets. However, regardless the algo, it’s learning capacity is still limited by the extent of the data that it is presented. Since you have spent so much exhaustive work amassing such a long-term financial (and governmental, etc.) database, using even such things as coinage records for your forensics, I have to wonder if these other systems will still have a long run to go before their forecasting power can match that of your models. Do you expect this to provide Socrates an advantage over the new wave of AI market/trading forecasters that will last for some time yet?

SC

ANSWER: The long-term database is essential. That cost more than $100 million to assemble and quite frankly, nobody seems to be willing to spend that much. This is why all prior models have collapsed creating economic catastrophes such as Long-Term Capital Management debacle. They collapsed again in 2007. Nevertheless, then you have the problem of Neutral Nets are just incapable of handling the vast array of variables. The attempts to create trading models are all flat-model based. Our system has made so many accurate forecasts for so long on so many markets around the globe that I do not even comment on. It is far too much for me to even write about. That is the whole purpose of Socrates.

I had to design a completely different programming technique to work out the complexity. Just image calculating every market in the world in 35 different currencies. The number of variables is beyond comprehension. If we are talking about a limited number of variables for normal business operations, Neural Nets are fine. When it comes to market forecasting, they can develop a Deep Learning system on a single market, but without correlating this with all other markets, you will NEVER see the contagion coming. When everything crashed in 1998 because of the collapse in the Russian debt markets, the illiquidity caused funds to sell other assets to raise cash to cover losses elsewhere. The Russian bond collapse caused a massive sell-off in Japanese yen/dollar rate that had absolutely NOTHING to do with the fundamentals in Japan. Contagions always emerge externally so you can create a model and it will work for a while and then you lose everything.

Bernie Sanders Admits the Democrats Are a Failure


 

Bernie Sanders is probably the only Democrat who has been honest enough to admit that the Democratic Party has been a complete failure. It’s focus on Marxism and creating class warfare has been a serious issue that will fuel civil unrest as the Socialist agenda continues to implode. Sanders recently said: “The business model, if you like, of the Democratic Party for the last 15 years or so has been a failure. People sometimes don’t see that because there was a charismatic individual named Barack Obama.” When we look at the total seats held in both the Senate and House by each party, the bear market in the Democrats becomes obvious. The Democrats actually peaked with the first election of Franklin D. Roosevelt in 1932. They have been gradually declining ever since.

 

 

Bernie pointed also to the Democratic Party’s many state legislative losses to Republicans. He has pointed out that the Republicans control most of the state legislatures throughout the country. What Bernie fails to grasp is that government is far too corrupt to actually govern and provide any true improvement in the lifestyle of the average person. The entire Socialist agenda has been devastating on absolutely every front. The introduction of Social Security shifted the focus away from inter-family security being replaced by the state. Kids no longer save to take care of their parents for that is the government’s job. Eastern Europeans still rely upon the family as you also see in China. In the USA, an amazing amount of children are still living with their parents into the 30s all because of taxes.

On top of that, the tax burden upon people has steadily risen. During the 1930s, it took just one person to earn a salary to support a family. It was the Democrats who imposed the income tax all the way down creating the Payroll Tax. They changed the definition of the rich from $5 million to $250,000 just to collect more taxes. What they have done is not just caused more children to be living with their parents into their thirties, but young families cannot survive unless the wife also works. That may be great for the Women’s Liberation Movement, but it has also robbed women of even the luxury to stay home and raise their children during the formative years. It now takes two incomes to sustain what one used to do before the income tax.

The Democrats also seriously altered the black family, which was once stronger than even the white community because they needed each other. With the introduction of welfare, they began to pay girls for the number of children they had and created an incentive not to get married. Similar programs in New Zealand provided total care for a girl if she had no idea who the father of the child was. Even the white community found the number of women who had no idea who the father was rose dramatically because they received free housing. The guy just ran out the back door when the social worker arrived. The ethnic background or race does not matter – it is economic incentives to undermine the family structure. Today, the black family has fallen to the bottom compared to whites and Hispanics all because of decades of economic incentives not to have a family structure. Studies now show the net effect of such social policies. “The United States shows striking racial and ethnic differences in marriage patterns. Compared to both white and Hispanic women, black women marry later in life, are less likely to marry at all, and have higher rates of marital instability.” Instead of blaming race, we need to look closer at the failure of Socialism.

The only message of the Democrats is also the same – vote for them because you are the victim of the rich. Instead of being like King Midas where everything he touched turned to gold, everything they have touched has crumbled to dust. Have Democratic policies ever worked? Communism failed. Behind the old Iron Curtain, the people as a whole learned the hard way that government is not something you can trust. Unfortunately, Europe and North America must learn the same lesson. The first major reform is not to simply lower taxes, but to prohibit direct taxation as was originally set forth by the Founding Fathers until the Marxists amended the Constitution and have ever since been destroy our culture. One of the primary reasons corporation have moved offshore is not because they will pay wages that are cheaper. The number one reason is for consistency. It is always a battle over taxes. How can you invest in a plant and assume your profit margin will be XYZ, and then the Democrats raise the taxes when they get back in. Other countries office 25-year tax guarantees NOT to raise their tax rate. Would you sign a lease for an apartment that said if the landlord needs money, he can raise your rate any time he desires and if you refuse to pay he can throw you in prison? Welcome to the American tax system.

The Right to Privacy Means Nothing


QUESTION: Has the world lost sight of what is a Protection Priority??
Equifax CEO Richard Smith Resigns after Backlash Over Massive Data Breach Equifax that compromised the PERMANENT data (SOCIAL SECURITY NUMBERS ) of 143 million Americans. AND IS REWARDED $18.4 million. (including a $7.6 million bonus.)
Facebook CEO Mark Zuckerberg has to testify next week on Capitol Hill regarding recent revelations about uses of people’s data (where they shop, eat, play) that they made public in the first place.
What are our security priorities??

MG

ANSWER: Our entire loss of privacy rights should be a major class action lawsuit. To sign up for anything, they have tremendous detailed legal agreements where effectively you waive all your rights to privacy. It is a situation where UNLESS you waive your rights, you cannot participate in the digital world. My personal legal theory is straightforward. I will be glad to help any law firm that wishes to bring such an action. You CANNOT possibly waive any Constitutional right whatsoever BECAUSE such an act of waiver means that every person in this country, even if not a citizen, can constructively amend the Constitution. That means the Constitution is a scrap of paper with no substance. The only authority to amend anything in the Constitution remains Article Five and that requires two-thirds of Congress to vote for such a change.

Constitution Article Five

The Congress, whenever two thirds of both houses shall deem it necessary, shall propose amendments to this Constitution, or, on the application of the legislatures of two thirds of the several states, shall call a convention for proposing amendments, which, in either case, shall be valid to all intents and purposes, as part of this Constitution, when ratified by the legislatures of three fourths of the several states, or by conventions in three fourths thereof, as the one or the other mode of ratification may be proposed by the Congress; provided that no amendment which may be made prior to the year one thousand eight hundred and eight shall in any manner affect the first and fourth clauses in the ninth section of the first article; and that no state, without its consent, shall be deprived of its equal suffrage in the Senate.

The Constitution is NEGATIVE meaning it is a restraint upon government. Any waiver means you are amending the Constitution to give them more power than the Founders granted. That is an un-Democratic result. Justice Jackson explained that these constitutional principles in the Bill of Rights “grew in soil which also produced a philosophy that the individual[‘s] . . . liberty was attainable through mere absence of governmental restraints.” West Virginia State Bd. of Education v. Barnette, 319 U.S. 624, 639 (1943).

One of the greatest legal minds of today is Judge Richard Posner of the 7th Circuit. In November 1980, in Joliet, Illinois, a car turned over and caught fire. A policeman arrived and began directing traffic away from the scene. He made no effort to determine whether or not there were people in the car. There were, and they burned to death. The city was sued for damages on the ground that, by failing to save the occupants, the policeman and therefore the city had deprived them of life or liberty without due process of law. Relief was denied.

Judge Richard Posner wrote that the Constitution “is a charter of negative rather than positive liberties. . . . The men who wrote the Bill of Rights were not concerned that Government might do too little for the people but that it might do too much to them. The Fourteenth Amendment, adopted in 1868 at the height of laissez-faire thinking, sought to protect Americans from oppression by state government, not to secure them basic governmental services.” Jackson v. City of Joliet, 715 F.2d 1200, 1203 (7th Cir.), cert. denied, 465 U.S. 1049 (1983). Thus the city had no constitutional duty to help the accident victims, and thus its failure to act deprived them of neither liberty nor life /Id. at 1206.

Therefore, the Constitution is unquestionably NEGATIVE and it imposes no duty upon the government to create any program even under the Socialist philosophies. Instead, it was always a restraint upon the government to ensure our liberty. Hence, you CANNOT waive any Constitutional right for that would be constructively amending the Constitution and therefore you are granting power to the government to act unconstitutio9nally which would then also violate Equal Protection of the laws for they can coerce everyone to surrender a right and that means people are not treated the same.

In Griswold v. Connecticut, 381 U.S. 479 (1965), is a landmark case in the United States that established the Right to Privacy which Facebook and just about everyone else is coercing people to surrender. The case involved a Connecticut “Comstock law” that prohibited any person from using “any drug, medicinal article or instrument for the purpose of preventing conception.” They prosecuted and convicted a doctor as accessories for giving married persons information and medical advice on how to prevent conception and, following examination, prescribing a contraceptive device or material for the wife’s use. The Supreme Court held that the statute was unconstitutional, and that “the clear effect of [the Connecticut law…] is to deny disadvantaged citizens […] access to medical assistance and up-to-date information in respect to proper methods of birth control.” By a vote of 7–2, the Supreme Court invalidated the law on the grounds that it violated the “right to marital privacy”, establishing the basis for the right to privacy with respect to intimate practices. This and other cases view the right to privacy as a right to “protect[ion] from governmental intrusion.”

Can you imagine that the government passed a law which decreed you could not have sex in some particular position? The question that immediately jumps out at you is HOW can they enforce such a law? Would government then have the right to witness a private sexual act in your home to grant approval or not? You can easily see that is the problem. Yet in Switzerland, they have some strange laws. A man cannot urinate standing up after 10 PM because he might make noise that disturbs a neighbor. This is an example of intrusive government.

The Right to Privacy is critical. The government violates that law every single day. Congress can enact any law it desires even one that said every person must kill their first born male son. The burden then falls to the citizen to argue in court that the law is unconstitutional. The French system requires the court to rule BEFORE the enforcement of any act. The American system is tyranny for only if a person has enough money to defend themselves can they uphold the Constitution. This is a terrible legal system that denies Equal Protection of the Law for it obviously discriminates according to class.

Facebook and others can take all your private data and sell it for a profit. They will also turn it over the government. Therein is a serious conflict of interest. The Right to Privacy should be restored and forcing people to surrender that right to be part of the digital era is outrageous coercion. It is long beyond the time that we actually apply the Constitution as a NEGATIVE restraint upon government as it was intended. We have no LIBERTY until that is restored.

 

The Federal Reserve Un-Discussed Structure


COMMENT: Your 4-2-18 FEDERAL RESERVE VS CONGRESS Blog should be framed & sent to every talk show host and politician in the country. It really puts everything in perspective.
SC

REPLY: What I find most astonishing is that to write that article, all you have to do is a little investigation. Nobody bothers to question anything. That is the most shocking thing I have encountered. So often I get responses like how come I am the only one saying this? Some people think this is just sophistry or made up. I cannot explain why investigative journalists never dare to actually investigate. All I can assume is that some have tried, but their editors will not allow such articles to be published. It is truly mind-numbing.

Contemporary journalism back in 1913 called it a monetary change from a national currency system to a national credit system. There were cartoons and well as criticism of the new central bank. The entire theory of elastic money was talked about. Today, the vast majority remain ignorant of the entire debate of that era.

It is no wonder why people just read the Creature from Jekyll Island and assumed evil lurks behind the scenes. They focus on the Fed is “owned” by the banks and merge that with elastic money and have no idea that the ownership was because the taxpayer was not going to fund a bank bailout so the banks had to put up their own money to create the Fed and pay into it to support the system. The elastic money supply was in use since the 1850s and the Fed would buy ONLY corporate paper when banks were not lending to preserve the economy and prevent corporations from laying off workers. The corporate paper is secured and is retired.  The structure was changed with World War I when Congress instructed the Fed to then buy ONLY government paper. Temporary solutions always become permanent and thus the Fed today is nothing close to the original design.

Individual v Institutional Portfolio


QUESTION: Martin, in today’s answer re: Asset Allocation you had mentioned of helping a couple of large funds prepare for what is to come.Was wondering if we regular folks will also be privy to this info at some point and also will we get a heads up when things are getting closer to the Big Event.In an earlier blog you had mentioned something about 2022, will that be a critical time for our savings/economy?

Thank you always for your work.

W

ANSWER: The difficulty in turning around major portfolios is substantially different from a private individual. Often these major portfolios are dominated by real estate and government bond positions in the hundreds of billions of dollars. How to strategically shift such portfolios is highly complicated and it cannot be done on a single phone call. The complexity is significant and the general advice on here is not opposite of recommendations to institutions. How to execute such shifts and when is critical timing.

I have stated many times that you can turn a speedboat on a dime. That is not the case with an aircraft carrier. This is the same difference between a private portfolio and a major institution. They just cannot pick up the phone and yell sell everything at the market! This is substantially a different position altogether.

The advice we provide for a major portfolio shift has to be tailored to the asset allocation mix. We must run timing models on each and every component for selling one aspect can have an adverse impact on other assets classes. It is by no means a simple project.

New York Real Estate


QUESTION: Mr. Armstrong; I listened to you perhaps a bit too late. Put my condo on the market here in New York City and nothing for six months. The realtor said they have never seen buyers disappear so fast. Is there still hope for those of us trapped in the Big Apple?

GB

ANSWER: Real estate in New York has collapsed 25% basis the number of sales by the end of the first quarter. Sorry, but you may have to just lower your price until you find a sucker. Keep in mind that as interest rates rise, banks will tend to run away from mortgages very fast. The last crisis was real estate. They will be more reluctant with real estate than any other sector going forward. If funding for mortgages dries up, prices crash.

 

Shooter at YouTube Campus Identified as Iranian, Vegan, PETA Activist, Angry Over YouTube Policies…


Police have identified the shooter who attacked a San Bruno YouTube campus wounding three employees and killing herself as Nasim Aghdam.  Apparently Ms. Aghdam was a user of the platform and was considerably upset about YouTube ad revenue policies.

Nasim Aghdam has a website [available here] displaying a weird manifesto of sorts where she admonishes YouTube for censorship and demonetization of her video content. Her self-identification is an “Iranian Vegan”, and apparently she is also an animal rights activist.   Prior to the rampage she might not have entirely lost all her marbles, but there was definitely a big hole in her bag.

(Via ABC7) […]  Aghdam is said to have no relationship with anyone in the YouTube facility.  Sources contacted by ABC7 News say that Aghdam did not have an ID badge, but was carrying a purse, and that nobody in the facility knew who she was.

According to her website, a possible motivation for the shooting could have been tied to her many YouTube accounts, which she says have seen a decline in viewership over the past few months. (read more)

(Visit Sketchy Website Here)

Yikes…

Asset Allocation


QUESTION:  Hi Martin,
First of all I enjoyed your 2018 Share Market Report and I am looking forward to your video updates. I am one of those retired investors with a typical 50% equities and 50% bonds portfolio. In your recent blog you stated, “The biggest losers have been the asset allocation followers. They assume they cannot forecast the future so they spread their assets hoping that the traditional 60% equities will make up for the losses on the 40% bonds.” Since both equities and bonds prices have rallied since 2009. Is this the time to change our portfolio mix to raise our equities percentages over bonds (my bonds are one year US treasuries). If so what should our portfolio mix be going forward?
Thank you for your guidance!
KC

ANSWER: I really cannot wait to launch Socrates. Answering these questions depends entirely upon (1) your currency base, and (2) the country in reference. There will be a great divide between US government debt and that of Europe. The dividing line appears to arrive in 2019. For now, US debt will be the best performing and the short-term debt will have the least risk of a Forced Loan Conversion, which has taken place in Europe before post-World War II. A “Forced Loan Conversion” is a phrase I coined to identify what happens when a government cannot repay its debt. Italy simply decreed that short-term paper such as 90-day bills were converted to 10-year paper. There is no risk of short-term US debt going through a Forced Loan Conversion.

The Italian government engaged in a Forced Loan Conversion which was a mandatory debt conversion, known as “conversione forzosa” during 1926, which they would again impose during 1934. They forced debt holders to extend their debt by lengthening the maturity. This seriously impacted the full faith and trust in the Italian government. During the post-1926 years and then again after 1934, the mandatory conversione forzosa effectively was seen as a partial default by the government, which made it extremely difficult and costly to borrow on a short-term basis thereafter.

Governments are concerned about appearance. They will mere engage in Forced Loan Conversions to be able to say with a straight face that they are not defaulting. Therefore, the shorter paper will have the greater risk in Europe from 2019 onward. Additionally, interest rates will be on the rise as pension funds fail and smart money continues to migrate from Public to Private debt.

Any asset allocation to bonds MUST be private!!!!!!! A government can default or suspend debt and will never be prosecuted. Private companies do not have that luxury. The traditional asset allocation models will all blow up. We are in the process of helping some very huge portfolios to shift in preparation of what is to come.