February 28th Market Update; The reflex reactions are working as intended

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-Charts repainted, but be careful about an engineered rally. Treasury Secretary, Mnuchin, and NEC’s Kudlow, on the Coronavirus task force.
-Eventually, this new reality will be priced in to stock prices. My concern is that this will all end up with more centralized management of data and supply chains.
-Bond prices explode here as yields continue to make new ATLs
-Watch out with gold and bitcoin. They are not behaving as intended and it reminds me of 2008. Maybe gold telegraphed the problems and now that they are clear, gold is retracing.
-Silver is an industrial metal and is getting hammered this AM.

I have a cold, so I am congested. Sorry about that.

2/25/20 Market Update – The latest weakness in gold and bitcoin may be a concern here

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-Gold and silver sell off into the afternoon. The gold COT is the most overbought in history and may be ready to unravel if margin calls increase.  The commercials are heavily underwater and may just wait for the weak hands to dump here. If the asset selling pressures grow, we could see a redux of 2008 in the gold and silver futures markets if more institutions need to meet margin calls.
-Bonds held up very well and yields on the long-end continue to move in the favor of the nation-states and their financiers. The yields on the 10′-30’s keep putting in new ATLs. This tells us that the system is running as designed.
-If yields rose here, I would be very concerned, as that would indicate cracks in the system.
-Bitcoin is having problems, and the chart and market action is dicey. I would have hoped to have seen btc perform better. This would help to cement its position as a haven asset.
-Nothing like a good old pandemic to help TPTB with financing and overbought COTs.

A subscriber observes; Was Japan’s experiences since 1990 a beta test for the United States?

Central bank policy makes sense when we know the Conspiracy

Question: Since most economists view BOJ policy as a failure, why were the other major central banks so eager to engage in the same after 2008?

Answer: To those in control of the financial system, the BOJ’s ZIRP and QE programmes have been successful. These elites have been able to keep the nation-states on an indefinite financial IV-drip, while consolidating global wealth at a breathtaking pace. Essentially, the overbearing weight of debt service precludes sustained inflationary pressure.

If need be, the central banks can work with their member banks to effectively sterilize money stock. Shocks to the system like the coronavirus crisis can also be beneficial and can help to lower bond yields. Indeed, Japan’s economy has recently taken another downturn, which only bolsters the staying power of its QE and ZIRP programmes.

Looking at the chart below, we can see that inflation data in Japan have actually ticked up since the latest large scale round of QE, but the rate of growth has been minimal.

Japan’s CPI since 1998 has barely budged. Of course, Japan’s long-term QE & ZIRP experiment was helped along as Japan has been experiencing population declines. The latest population data (2019 not shown) shows even more declines. This keeps a lid on price inflation.

Chris
As I look at the situation in the U.S. I can’t help but see similarities to the experience of Japan since 1990.

I have to wonder if they (Japan) were a beta test for the U.S.?

Regards
D

Japan’s CPI has been so anemic that nominal GDP is lower than real GDP growth since 1994

The short answer to D’s question is “yes.” I recall reading the transcripts of meetings from 2002 on the U.S. Treasury’s website, between US Fed and US Treasury officials. They are no longer available, but there were discussions regarding how to deal with a sudden drop in demand for US Treasuries at prevailing rates. The Fed and Treasury observed the types of policies that the BOJ were employing and were tentatively encouraged by their results.

The Fed and Treasury also contemplated asset purchases, but did not call it QE at the time. In addition, both parties discussed ways in how they could engage with the large commercials to underwrite and sell cheap UST put options to investors and institutions. This would allow these large holders to cheaply insure their UST holdings against sudden yield spikes. There was also an implied promise that these put options would either expire worthless or that the commercials would be made whole. Indeed, this system is much more managed than most wish to believe.

We can observe how Japan has fared in the face of its longer-dated ZIRP and QE programmes.

For those with assets, this chart is encouraging.  The BOJs total assets as a percent of Japan’s GDP has eclipsed 100%, and yet, Japan’s system is intact, while inflation and GDP growth remain muted.
What does this mean for the United States going forward?

Objective: The owners of the Fed hope to carry out QE and ZIRP without spiking CPI data, which would mean lower bond yields over time. While the BOJs balance sheet has exploded over time, their system remains intact. This is encouraging to the Fed as it may be able to  continue carrying out QE in a similar magnitude if conditions warrant.

The problem with the United States is that its demographics trends are much more favorable than Japan’s (The U.S. added as many people to its population since 2008 than Australia’s total population), but the U.S. dollar is the global reserve currency. Thus, domestic inflationary pressures can be more effectively offshored than with Japan.

The circumstances between Japan and the U.S. may differ, but the objectives are the same; Carry out QE and ZIRP without stoking higher than normal inflationary growth.
Based on the action in the longer-end of the yield curve, QE has worked as intended
The BOJ buys equities; will the Fed do the same?

In the seven years since the BoJ embarked upon its latest QE programme, its equity holdings have now reached phenomenal levels. According to the BoJ funds flow report for Q3 2019, the bank now owns some 8% of the entire Japanese equity market, mostly through the current ETF-buying programme.

Perhaps, the Fed may have to modify its current charter to accommodate equity purchases. If the markets swoon enough, never underestimate the Fed’s ability to conjure up more programs. The more assets on the balance sheet of the central banks, the more power the elites hold over the nations states.

Here is my one warning to my readers. If the Fed cannot control the longer-term inflationary trend, and by extension, bond yields, it’s game over. If this were the case, we would need to sell everything, including gold. My concern is that we could see a replay of 2007-2008 unfold. But, I doubt we would get to that point without the Fed attempting to buy every UST outstanding.

2/21/20 Market Update – The system is operating as we theorized; longer bond yields plumb new depths

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PMI data show contraction for the first time since 2013. European and Japanese economic data show marked declines. Price growth data from last month show fading. The Coronavirus concerns have only added to demand shock. The demand shock is so far prevailing.
-Our theses remain intact as the markets are behaving the way we theorized.
-While I haven’t actively day traded stocks in almost 15 years, day trading can be very profitable. It provided my seed money to invest in real estate. While I do not provide a trading service, I have received interest from many Martin Armstrong refugees.
-Our goal is accumulate income generating assets as we get older. The younger we are, the more we should speculatively trade. Plow your profits into income generators.
-The supply of most items continues to remain elevated as interest rates plumb new depths. The 30-yr UST dropped to a new all-time low today.
-Any correction in stocks and other assets will remain muted as long as rates here fall.
-Fed Vice Chair, Clarida, says the markets are not pricing in rate cuts, but he is being disingenuous. He knows rates are coming down and he needs to temper trader enthusiasm.
-With dropping bond yields, housing data rise in the face of uncertainty. There is a lot of hidden demand as many renters would rather own.
-I haven’t forgotten about Facebook’s Libra, and neither has Facebook. They are still working behind the scenes in stealth mode to make it a reality. Shopify joins the consortium.

Know Your Adversary; Accurate and free economic analysis for anyone with eyes to see

Follow the logic, and the complex begins to look simple

Hi Chris,
I don’t know if you look at Martin Armstrong and his blog, but he often sounds confusing and is trying to sell a lot of stuff. What do you think? Does he really know what he’s talking about?

J

Before I comment on Armstrong’s analysis, I want to quickly review my investment theses, which have essentially remained the same since before 2013.

The evidence is clear, the global powers are in firm control of their own system

For those who refuse to accept this one important assumption, they will continue to make the same financial mistakes that virtually all followers of the alt-financial media make.  But I submit that this is a misguided narrative that has been deliberately planted to deceive the masses. How else can the top of the pyramid consolidate the global wealth without having us catching on to the scheme. The elites manufacture the necessary chaos to achieve their objectives, and as long as we underestimate their power, they will succeed.

All the evidence tells me that there is a guiding hand moving things along. It is like flipping a coin 50 times and having it come up heads every time. Only the willfully ignorant (Martin Armstrong comes to mind) will refuse this one assumption, or that there is a conspiracy. Armstrong has many superfluous and expensive services to sell you, which is why he won’t explain things in a concise manner. Like any marketer, he needs to create the need.

The “big bang” of sovereign debt took place in 2008, not 2015

By 2008, the world’s system that existed at the time reached a denouement; for the first time in history, under a global fiat and debt-backed monetary system, the ongoing borrowing needs of the nation-state governments outstripped the world’s ability to finance them. Under the pre-2008 monetary system, there was no longer any way for the nation-states to continue spending. That system essentially exhausted itself.

The US dollar collapsed going into 2008 as this became clear

As the debt pressures mounted going into 2008, investors began to question the very integrity of the financial and monetary systems they once took for granted, and as a result, the USD’s value collapsed. Ask yourself; if the USD-based global monetary system was in terminal decay, shouldn’t the dollar die as well? After all, the majority of dollars are actually held overseas.

Without QE, this current monetary system would have collapsed. As confidence in the current QE arrangement grew, so did the value of the US dollar. The dollar’s value is a proxy of QE’s success

The elites chose the QE path over all others

Since the nation-states were now consuming more debt than the world’s credit availability, the private central banks began to monetize debt under QE to make up for the shortfall in organic lending. There were a number of choices the central banks and governments could have taken (e.g. confiscation of pension and defined contribution assets, bail-ins, bail outs, debt haircuts, debt renegotiation, creating a new currency, etc.), but chose instead to maintain the current system with a twist. They chose to effectively monetize sovereign debt to maintain nation-state spending.

The U.S. dollar remains well supported in an over-indebted world of QE

Despite calls to the contrary, under the current QE system, the USD will remain well supported. As global debt levels grow in a world of non- repudiation, the dollar will remain the currency of choice as there is nothing to replace it. It is clear that there will be no debt repudiation and that all the global sovereign debt will remain in force.

Deflation; Although the world can no longer fund itself, with QE, it’s now stuck with ever larger mountains of debt to service

This logic is straightforward, and easily explains why the economy and consumer price measures continue to struggle. Under the pre-2008 system, the world could only fund so much deficit and debt spending before it reached its terminal phase. After all, there is only so much demand for debt investing and once that level is reached (like in 2008), the system collapses.

If QE enables this system to be perpetuated, then there will be an ever rising level of sovereign debt that must be serviced. It won’t matter if bond yields go negative; the principal balances will grow and become an ever larger burden to the economy. Over time, debt servicing will consume an ever larger portion of economic vitality and thus, price growth and GDP measures will struggle to rise. The economy will be burdened with an ever heavier deflationary millstone.

The dynamic of QE creates the deflationary debt burden that generates lower bond yields over time. The central banks are not actively micro-managing the yield curve, per se, but rather indirectly manage it via the function of QE.  With this said, the central banks will intervene from time to time to handle the unforeseen circumstance that may arise from artificially suppressed interest rates. The recent Fed actions in the short-term lending markets come to mind.

As interest rates fall and market globalize, producers tend to over supply the markets

This logic is simple and explains why commodities of all sorts struggle to rise in the face of higher monetary growth. Recall our discussion of the velocity of money. Much of the USD money stock has been effectively sterilized via IOER and dollar offshoring, and without these deliberate centralized actions, price inflation in the US would be higher.

As interest rates fall over time, a firm’s cost of capital will fall, and it will tend to expand productive capacity. As it does, total fixed costs per unit produced should fall, and the firm will find it profitable to produce higher quantities with lower revenue per unit. Under an optimal scenario, the firm will produce until marginal costs equal marginal revenue. If a firm has invested and expanded production, it should be able to accept lower prices as the fixed and marginal costs should have been reduced. This is especially true if the price growth of raw materials and input factors remain low.

If input prices fall or interest rates decline, the supply curve will tend to shift shift out. In a world of low interest rates, prices growth is subdued and markets are well supplied.
Case in point; Oil demand continues to increase, but prices remain subdued as producers maintain a well supplied market

As interest rates fall, asset prices rise

With this all in mind, It becomes apparent that we do not need to employ an expensive forecasting service to predict what we already know.

Asset prices across the board keep rising as the central banks carry out QE with aplomb and interest rates fall over time. It really is as simple as that.

It does not matter if investors are taking out cheap loans to buy assets or not. If an asset is generating a certain level of income, it will be more attractive to an investor as prevailing rates fall. It’s that simple. I place no judgment on the rise in asset prices and have no opinion on the climbing stock index levels. They are only a direct result of falling interest rates from the ongoing (and so far, successful) QE program.

Since 2013, I have primarily recommended US dollar-based assets over all others

Since this current system remains intact and has been accepted by the global investor, and the US dollar is the head of the class as the global reserve currency, USD-denominated assets will be sought out over all others. If the euro were the primary global reserve, we would be discussing the ever-rising German DAX.

Under this system, the USD will be well supported and global investors will feel more comfortable holding USD-based assets unhedged over all others. Moreover, domestic investors will be more likely to keep their money here in the U.S. Keep in mind that I also view global real estate as a defacto USD-denominated asset.

The U.S. domestic economy continues to perform well, because of the USD’s global status. The Fed and Treasury can continue funding all their largesse while offering higher yields to investors. These dollars and Treasuries can be spread far and wide, and in an over-indebted QE-driven world, the demand for dollars will remain elevated.

My thoughts on Armstrong’s work

With respect to Armstrong’s cycles analysis, I am here to tell you that he is being disingenuous by claiming its high accuracy rate. Prior to the 3Q of 2015, I thought he had somehow figured it all out. After all, he was out of the public eye for a number of years, so I had no comparison prior to his release to gauge his accuracy.

But anyone who wishes to place his trust in a convicted white-collar felon who was responsible for losing hundreds of millions of client money has no one to blame but himself when the losses mount. Armstrong may be right about some markets, but his reasoning is misguided. Since he discounts talk of conspiracy on an a priori basis and chalks it up to stupidity and greed, his logic is flawed, and because of that he will lead his paying subscribers into ultimately making the wrong decisions.

Do you really want to know when this cycle will turn? If the central banks lose their grip on their nation-state financing scheme, then sell everything you can. If interest rates and inflation rise, it’s all over. Until then, stop listening to the scaremongering of the alt-media and its cadre of disingenuous shills of doom.

If I charged my readers a ton of money like Armstrong, they would derive more utility from my work and take it more seriously. However, since I don’t charge any money and make it free for all who come by, it is somehow sullied in the eyes of most readers. But the last time I checked, I have been more accurate than anyone else I have come across.

It pays to know the conspiracy for the global financial dictatorship.

2/10/2020 Update – Some thoughts on the current crisis timeline and what it means for investing

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-This system is being fed by crisis and uncertainty. Interest rates seem to want to keep going lower. The worse the economic prospects, the more stable the monetary system.
-Demand is contracting as the world swims in a sea of oversupplied markets. Commodities keep stumbling. This is great news for investors and helps the central bank agenda.
-Powell will give Congressional testimony tomorrow and Wednesday. I have to believe that he will tip his hat to the Coronavirus crisis. This crisis plays into the overall narrative.
-Based on recent market behavior, I have some suggestions on what I think will unfold.
-I am closing on another condo unit in about a week; the first property I purchased in about four years. It is in turnkey condition with a 10% cap rate, based on purchase price. All cash.

A subscriber asks; How will negative rates affect business valuations?

Everything depends on interest rates. Those who can correctly predict their direction will be more effective at exploiting the opportunities in the asset markets.

Chris,

I am wondering what the [e]ffects negative rates will have on the entire finance industry.

Think about Discounted Cash Flow analysis and asset pricing models. What will borrowing costs look like?

So, you will have a cost to borrow but have no return for deposits?

The only way to make a return will be a cash flowing business or some investment vehicle that will allow part ownership in a cash flowing business.

Where is the opportunities in this? There must be some avenues to exploit beyond real estate.

A

Before we discuss the concept of negative rates, let’s review how asset prices respond to ever lower positive interest rates. This discussion can pertain to stocks, a vending machine business, rental real estate, or a hamburger franchise. Any business that generates cash for its owner can be valued by employing a discount rate.

With each incremental drop in prevailing interest rates, asset prices respond ever more strongly. This is based on the percentage change in rates rather than their total change.

As the world’s prevailing interest rate yield curve moves lower over time, asset price movements have been responding in a similar fashion to what we see in the chart above. It doesn’t matter whether we are pricing stocks, existing bonds, a retail franchise, real estate, or a medical or legal practice. When interest rates move lower, we need to plug in a lower discount rate in the discounted cash flow (DCF) formula. We can easily see that as rates move to zero, asset prices can explode.

It’s the percentage change in interest rates that determines the movement in asset prices. Thus, asset prices should respond as strongly when the DCF discount rate moves from 2% to 1% as they would with a drop from 8% to 4%, all other things being equal.

Imagine a scenario as rates here move closer to zero. We would need a protracted global war or a disease outbreak much worse than the Coronavirus to make asset prices fall in the face of zero rates. Even if the  underlying currency used in the asset pricing model is derided (e.g. USD), as long as interest rates remain low, asset prices should hold up when priced in that currency. Why is this? If interest rates in a particular currency are low, this would show that the currency is stable and viable for investment.

However, if that currency begins to fail, rates would rise to compensate for the currency risk. Thus, asset prices would fall as the currency fails. Once again, it comes down to the movement in prevailing rates. Some may think the US dollar is garbage, but with interest rates moving lower, the dollar is actually more valuable, and so will the prices of those assets denominated in the greenback.

All this runs counter to the logic in the alt-financial media. Those who have listened to the bears have basically rejected this simple line of reasoning. It’s hard to over come falling interest rates. The central banks and nation-state governments can make a lot of mistakes and the nations can run massive deficits, but if rates remain low, asset prices will move up higher.

Many types of businesses can also be valued using the capitalization rate (cap rate) and internal rate of return (IRR), although these two measures are primarily reserved for real estate and other tangible income-generating assets with finite holding periods. Although the cap rate is a static measure, we can determine whether an investment’s cap rate is attractive when compared to prevailing rates. The lower interest rates move, the lower the cap rate that investors will accept and the higher the asset’s price.

The IRR is similar to the DCF formula; as rates move lower, we can plug in lower discounting rates or accept lower returns, which will mean higher asset prices. I often use residential real estate as an example, since their asset values can be easily determined, measuring their rates of return are straightforward, and housing generally has a larger pool of potential buyers than say medical practices or 7-11’s.

I have been relaying these sobering realities to my audience for several years now, and have been warning that the central banks needed to guide rates lower over time. They have the power to make it a reality and there will be more to come.

Okay, so what about negative rates?

With negative rates, two things are certain;

  • Households will need to continue taking on more debt as asset prices move higher, and
  • The nation-state governments will need to continue to exert an ever greater control over most economic sectors as well as the financial and banking systems. As banks find it less profitable to lend, the governments and central banks will have to fill the vacuum and become guarantors/lenders of last resort. The governments and central banks will effectively ration out capital to the biggest and best funded.

So, how will asset prices respond to negative rates? I think we can draw some ideas based on Behavioral Economics, and from what I can see, the average person has been acclimated to the inevitable. While this is really uncharted territory, we can get a glimpse into the future by looking at the nations that already have been employing longer-term ZIRP or NIRP policies.

Switzerland and Denmark have been employing longer-term NIRP policies in an attempt to cheapen their currencies, and both have the highest household debt-to-GDP ratios in the world (outside of Australia). The Dutch also have negative longer-term yields and they are fourth.

It remains to be seen how the world will respond to a systemic regime of longer-dated negative rates. I have to believe that at first, we could initially see some serious dislocations in the capital markets. But as global investors grow accustomed to institutionalized negative yields, they will adjust and price assets accordingly. I have to conclude that asset prices, especially real estate, could move much higher than what most are willing to imagine.

Furthermore, this reader brings up a point about banks deposits with negative rates. As borrowing rates drop, banks will find it less profitable to lend to borrowers. Thus, I see the need for governments to exert ever more control over their credit markets. Think about what we have seen with the Fed’s ongoing intervention with overnight lending. This is just the shape of things to come. As rates drop, the government will continue to increase its intervention in most lending sectors.

Unfortunately, the only way to profit from NIRP policies is to invest in assets that generate cash, since money in the bank is quickly becoming a liability on the balance sheet. But at these relatively high asset price levels, many have been psychologically shut out.

Is ZeroHedge correct? Governments acting as if Coronavirus is escaped bioweapon; Be prepared for MASSIVE emergency monetary stimulus

-Despite the still small number of those affected by this new coronavirus, the governments are acting as if there is something much more sinister at play.
China deploys 1,400 military doctors, nurses to staff makeshift hospitals in Wuhan
-Zero Hedge has actually been doing a thorough job with their reporting on the Wuhan Coronavirus. They have a alternate Twitter handle for now – @freezerohedge.

Daily 10-yr UST (candles) & 30-yr UST (line); Last weekend we mentioned the direction of yields would be down. Based on government behavior, something more serious is transpiring. Be prepared for massive emergency monetary stimulus.

-After viewing the Powell and Clarida interviews/press conferences, I can picture a scenario where the Fed may enact emergency monetary stimulus measures to help offset the growing coronavirus crisis.
-If the virus is able to be contained primarily within China, the need for emergency stimulus can be alleviated. If the crisis becomes truly international, the Fed will have to act as needed. Do not be short bonds, stocks, gold, or bitcoin.

Daily chart of WTI (blue), Hg (yellow), Dow Jones Commodity Index (red/green). Recent price inflation stemming from Mid-East tensions quickly turned into deflation as the coronavirus has forced the narrative.

-The commodity markets will remain net oversupplied for now, despite any productions closures. Demand will shrink much more quickly.

20-year performance of gold continuous contract (candles) and 10-yr UST (line); There is a high positive long-term correlation between lower bond yields (higher bond prices) and higher gold prices

-Despite the very bullish gold backdrop, this past Friday’s gold COT report is the most bearish in history. The Large Commercials have a net short position of slightly more than 360,000 contracts, which is slightly higher than 50% of total open interest. These numbers are staggering.
-The elites are struggling to contain gold prices. I believe that in the short run, they may fail, especially if the coronavirus crisis becomes more protracted, and the central banks are forced to act as we predict.
-By extension, I see BTC having a floor here for now. Do not count out a push to $10,000 this week.

2/1 Update – Manufactured crises, falling rates, and QE are elements of a system the futurists and Bible discuss

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-Last weekend, we said we were not sure how the coronavirus crisis would unfold, but stated that interest rate support (bond price resistance) may have been breached. One week later, it’s become clear that this crisis clearly has legs, and it looks that if this situation grows and becomes more protracted, the long end of the yield curve will invert further, with yields putting in new all-time lows.
-This crisis is such a propitious circumstance for the central banks that has ostensibly come out of nowhere. We can see that this system is working as predicted as commodity prices tumble, inflationary pressures abate, and economic growth fades. If the opposite happened, I would be worried about the loss of control.
-Do not listen to the official word out of the Fed. In order to keep the Federal government in business (The Fed’s prime directive), The Fed desperately needs lower inflation and fading economic growth. This will strengthen its hold over the system of its owners. Much lower rates will prevail over the next few years.
-Powell and Clarida both seemed poker-faced when asked about future policy moves. They both know that QE can never die and that rates must come down
-The futurists and the Bible talk of a financial system that mirrors this current one, but with a regime of institutionalized negative rates. If you can comprehend a system with rates of a negative few percent, then you have the final system. No need for collapses anymore.
Denmark has finally passed the costs of negative rates onto their depositors. The official word is that negative rates work. Get ready around the world.
-Falling rates will continue to crush the working class. Rents in America’s heartland spiral higher, and it doesn’t matter if the people can afford these costs. Three to four years ago, I begged those listeners in Middle America to buy rental properties, since they were so cheap versus rents. Some deals can still be had as it all comes down to the numbers.