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.