QUESTION: Sir,
You have advised us to avoid sovereign debt after the ECM date. I imagine that the crisis will affect nations unequally. It seems obvious that money would leave bonds in the more challenged, negative rate countries (EU and Japan). Might these flows come into US Treasuries, thereby stabilizing US rates, at least short-term? Could this be a trading opportunity (long) in our Treasuries? Thank you.
PK

ANSWER: So far, it appears that the capital flows will continue pointing to the USA going into 2022. Thereafter, we should expect a change in that trend in the same position of the ECM, which created the 1987 Crash also due to a capital flight from the dollar

Back in 2008, a California Socialist activist was gathering signatures in an attempt to impose a state wealth tax on the ballot that would have imposed a new 35% income surtax on top of the Federal income tax. He realized that people would flee the state, so the solution was to impose an exit tax, seizing 55% of assets exceeding $20 million that anyone possessed seeking to leave the state. On top of all of that, the proposed money raised would then buy controlling shares in large corporations operating in the state.

California is going broke and raising the income tax may present a problem. First, they are seeking to overrule Proposition 13 from 1978 which prohibited raising property tax rates. They are cleverly looking to overrule it by claiming that they should be allowed to raise taxes on business properties. That will open the door to raise property taxes on any property owned by a trust or any corporate structure. But the real concern is if the people vote for that on the 2020 ballot, the wording can be vague enough to allow property taxes to rise in economic difficulties.

Secondly, there is a proposal to introduce a wealth tax, which would circumvent the entire Proposition 13. This is just being talked about behind the curtain and would not be on the ballot in 2020. It is a proposed workaround because they cannot possibly reform and cut their own pensions

QUESTION: Mr. Armstrong; I just finished reading the Repo Report. I understand why you are reluctant to discuss this publicly when no one else seems to understand what is taking place. I was referred to it by a friend who is on the board of another company. He informed me that many regard you as the best analyst of all time because you have actually been in the trenches. We have no respect for academics in our company. They are always wrong and qualify their forecasts as all things remaining equal. I respect that you have actually worked at high levels. My question is this. Do you think you will be able to assist central banks in avoiding such a meltdown?

RH

ANSWER: I wish I could answer that question in a positive manner. Unfortunately, in this instance, the epicenter is outside the domestic jurisdictions of even the Federal Reserve. If you look closely at the minutes of the last meeting, there was the unanimous opinion that interest rates would not be lowered in 2020. The free market is pushing rates higher. The Fed was being bullied to lower rates just before the September Repo Crisis hit. They had a private meeting with Trump to explain he had to stop the talk of negative interest rates.

Even if the Fed called me in and gave me dictatorial powers over domestic policy, there is nothing I could do the prevent this crisis because it is outside the United States which is spreading and has become a cancer that threatens the global economy. China agreed to a trade deal as did Trump BECAUSE of the Repo Crisis. There are far bigger fish to worry about here than the nonsense of trade.

I am glad you understand the crisis I have laid out in this report. I am the only analyst who understands it appears because I have worked with institutions for nearly 40 years. These people come up with all sorts of conspiracy theories and claim this is helicopter money to just Quantitative Easing. In both circumstances, those theories were predicated upon a recession/depression which meant classic Keynesianism was being applied to increase the quantity of money to “stimulate” the economy. But unemployment is back to 1960s levels and the economy is ok. They just spout out the same nonsense they have done since 2007 without ever noticing that QE was buying long-term debt BECAUSE central banks do not control the long end of the curve. Central banks have dominated the short-term interest rates. So when the Repo Rate shot to 10%, that exposed the fact that the central banks are LOSING control of even the short-term rates.

I warned that there had been a destruction of the bond markets and I did a video interview on that when I was in Germany last year which was published in April 2019. I warned about the liquidity crisis and Basel III, which has also contributed to creating the current Repo Crisis. I also warned that we would enter a liquidity crisis come September.

Beyond that, I must be cautious with this crisis because it is the Mother of All Financial Crises and it seems only professionals even grasp the crisis. I have contacts at the very core of the marketplace who see this coming but cannot speak due to confidentiality agreements. The best I can do is keep it to a private service for the time being. I really do not have any choice. The implications can be too great and too broad. It is not something that will affect just Repo. That is simply where it begins. We are talking about a crisis that will dominate the next 8.6-year business cycle. Because this involves governments, they will search desperately for someone else to blame. The way they operate is stark and blunt because governments will NEVER accept responsibility for disrupting the global economy. They accused me of “manipulating the world economy” and the Commodity Futures Trading Commission tried to subpoena me for a list of all our clients worldwide. I had to defend against them in court and prevailed ironically because there is no law against manipulating the world economy and that is just a joke. So please respect, with this one, I just need to be cautious. I can only discus that in a limited service.

QUESTION: This is the year of the Rat. It has often been the year of economic change. Do you realize the next year will be 2032?

any comment?

ANSWER: The year of the Rat is interesting. Yes, it seems to align closely with change, but not always that year. Often it has been the year before. The year of the Rat is 2020 and 2032, which is curious indeed. The year 1924 was really the beginning to the economic boom in the USA. 1936 was the year before the peak and crash in 1937. The year 1948 was the year before the first round of devaluations in Bretton Woods. The year 1960 was when JFK was headed to the White House. The year 1972 really began set in motion the floating exchange rate after Nixon closed the gold window in August 1971. Then 1984 was the year before the Plaza Accord and the birth of G5. The next target was 1996, one year before the 1997 Asian Currency Crisis. Of course, 2008 was the Crash that changed everything. Here we have 2020 and then 2032. We are showing major changes unfolding on these targets

The Repo Crisis for year-end has had the Fed pumping in a staggering amount of about $234 billion into the repo markets. They are exchanging high-quality capital for cash to suppress market volatility and maintain the central bank’s overnight funds level, which is used as a benchmark for multiple other short-term interest rates within a range of 1.5%-1.75%. People who fail to understand this institutional market keep thinking it is quantitative easing. With inflation low and unemployment back at 1960s levels, there is no reason for quantitative easing to support the economy. Instead, the Fed is trying to maintain control over short-term rates for the free market is pushing higher. This means the actions of the Fed are an attempt to PREVENT the rise in interest rates, not to stimulate the economy.

On Monday alone, the Fed injected another $18.65 billion for a two-day repo operation and $30.8 billion in a one-day offering. However, both issues were undersubscribed which is confirming that there has been a lot of book-squaring going into year-end. This has been reflected in currency markets as short positions were being closed out in thin trading in the euro for example.

QUESTION: Marty:
In reading your blog about No Small Amount is Too Small, is it safe to say that the future of gift cards will be non-existent? Or will gift cards be the run-around?

NO

ANSWER: There seems to be a loophole right now with the gift cards. When I tried to buy an American Express debit card and load it with a couple hundred for a gift to send overseas, I was told I could not. It can only be in my name. As it stands now, if governments eliminated paper money but still allowed gift cards in bearer form, then they would simply become cash. It would seem that store cash gift cards would become the circulating cash in the black market economy. When that becomes more commonplace, they would probably shut that down or make them non-transferable in some name that is specific.