QUESTION: Hi Martin,

thank you for your great work with Socrates and especially for presenting the Indicators for us whom are still outside of the Trader Level.

 

I have some question about the recent sell off in the DOW. True, it was really time for a correction/drop. But the retail investors are still on the side-lines and the interest rates are lowest ever in history. To sell off the DOW on fears of increased rates and slower GDP growth is one thing, but then what? Where to run? Interest rates are close to zero. Bonds will loose much of their value when interest rates go up. Gold does not yield. Real Estate has already topped.

You are so right that the hunt for yield will soon be transformed into the hunt for preservation of value.

So we are back to the DOW anyway, right?

 

Do you see in Socrates Indicators that this Phase Transition may emerge already in the end of 2016?

Kind regards,

ANSWER: You are correct. There will be no choice but to run into equities. With the European banking crisis looming on the horizon, real estate on the high-end has been targeted by governments around the world passing various laws against foreign ownership from making it criminal in Australia to demanding 15% of the sales by a foreigner in the USA is seized by the IRS, this does not leave a lot of room for big money to get off the grid.

 

Then there are the mandates by countries that pension funds MUST be invested in government bonds. This negative interest rate is creating the next major crisis. As a matter of law, these funds cannot even divest all government bonds in many countries. We are looking at a crisis far worse than any derivative or banking crisis. It is the Pension Crisis that nobody talks about. This is the political crisis that is bringing socialism to an end.

 

You are correct, gold offers no yield for income, only capital appreciation. That does not provide a base for institutional money to park, besides storage problems. But here to, government are tracking all buying and selling of gold. Only the institutions had to turnover their gold in 1934. Individuals could hold their gold at home in a sock drawer. So this distinction has always existed between big money and individual investors. Gold is for the individual. It cannot satisfy institutional money on a yield perspective and it cannot be protected by an institution. Consequently, gold is eliminated from a major institutional portfolio, which limits that type of investment into directing it into gold stocks for some yield.

 

All of that said, you are also correct about retail participation. That remains at historic lows for a bull market. So many people were hurt in 2007 to 2009, that they are reluctant to step back in. There can be ABSOLUTELY no major crash of 1929 proportion despite the choir of analysts all claiming “SELL” for it will go to anywhere from 50% to 10% of current value. Such a move just does not seem plausible.

Nonetheless, our accumulative Energy Models reached the overbought stage that nearly matched our next target objective. That warned that we were getting toppy and a brief correction was likely. Likewise, the accumulative energy in 2009 at the low went seriously negative also warning this was overdone on the downside.

 

We will be issuing a special report because 2016 is 7 years up and that warned we could indeed see even a slingshot type of move. That means you have excessive bearishness and the pros will short the market. They are typically trapped and will then panic to get out.

 

Despite the claims that the bankers are too big to fail, too big to jail, and too politically controlling in Washington, keep in mind if Trump wins, we may see reality hit the bankers in the face. Without Hillary, they are in big trouble for the next loss may be their’s to keep. The “pros” are not the star traders, they are the political manipulators. The entire Glass Steagall Act was proposed BECAUSE of Goldman Sachs.

 

Goldman Sachs got caught up in the whole bull market just like everyone else. Under the leadership of Waddill Catchings who led the firm into joining the hot market by now creating an “investment trust” where he saw that a giant fund could maximize profits by buying and selling stocks. He promoted this as a business that was professional and the profession was investing.

The “investment trust” was sort of the domestic “hedge fund” of its day. Everyone was jumping into the game. Catchings just got caught-up in the whole thing and was very bullish going into the high of 1929. He gave this new entity the name: Goldman Sachs Trading Corporation. The deal was that Goldman Sachs would be paid 20% of the profit and the stock was offered at $104 per share. It jumped to $226 per share, that was twice its book value. This would be the very same mistake that became exposed in the Crash of 1966 when shares in mutual funds were then traded on the exchange allowing them to be bid up well beyond their asset value.

The whole bullish atmosphere was very intoxicating. Just three months into the fund, Goldman Sachs arranged for a merger of the trust fund with Financial & Industrial Corporation that controlled Manufacturers Trust Company that was a giant group of insurance companies. This doubled the assets of Goldman Sachs Trading Corporation taking it up to a staggering near $245 million. This was huge money in those days. The trust now, exploded and the assets under control are said to have exceeded $1 billion back then. Goldman Sachs expanded the leverage going right into the eye of the storm that was about to hit starting on September 3rd, 1929. In the summer of 1929, Goldman Sachs launched two more trusts Shenandoah and the memorable Blue Ridge. The shares were over­subscribed and Shenandoah was offered at just $17.80 and it closed on the first trading day at $36 per share. Blue Ridge was even more leveraged and the partners at Goldman Sachs put pressure on everyone to buy as a sign of support. The leverage was astonishing for with just about $25 million in capital, now there was more than $500 million at stake.

The disaster was monumental to say the least. Goldman Sachs Trading Company, whose shares had stood at $326 at their peak, fell during the Great Depression to $1.75. They fell to less than 1 % of their high value. The loss suffered at Goldman Sachs on a percentage basis was far worse than at any other trust. In fact, of the top trusts, Goldman Sachs had lost about 70% of everyone else’s losses combined.

So sometimes the bigger they are, the harder they fall.

 

Merkel’s CDU Party is now also poised to be defeated badly in Berlin. Protesters are around the city with signs saying “Merkel Go Home!” and yet politicians in Europe refuse to wake up to see what they have done. In France, the latest polls show the French do not want any more refugees. You would think that these people would respond and admit to the grave mistake.

T-shirts and signs are appearing in Germany, calling them not refugees, but “rapeugees”. It does not matter. They cannot admit what they have done. The general feeling is they are either terrorists or rapists. Those who were legitimate refugees with families have a lot to be angry about with the single men pouring into Europe.

Meanwhile, some say a candidate for the next Pope is Cardinal Christoph Schönborn of Austria. Last Sunday was the church festival known as the “Holy Name of Mary,” which was first introduced in 1683 (333 years ago) in gratitude for the victory over the Ottomans in the Battle of Vienna. At that mass, he said, “Will there be an Islamic conquest of Europe? Many Muslims want that and say: Europe is at the end.”

Cardinal Schönborn said he was asking God to have mercy on Europe and to show mercy to its people. He said that Europe was “in danger of forfeiting our Christian heritage.”

The number of people who are outright terrified of what is taking place in Europe is growing significantly. The polls are clearly showing that the dissatisfaction with government is widespread.

 

Luxembourg’ Foreign minister Jean Asselborn has demanded that Hungary must be kicked out of the EU because they constructed a 110-mile-long fence to stop migrants crossing the continent.  He said that the Hungarian government had disregarded the “values of the EU” with its anti-migration policies. What is most interesting here is that it was the Austrian-Hungarian Empire that was attacked in 1683 by the Ottoman Empire targeted for conquest. There are deep running memories that have prevailed for centuries. When I was there one time, I was reminded that they massacred 600 Christians. When I thought I had missed a major event and asked when was this, I was told about 300 years ago.

The strong US session ran into Asia resulting in strong performances for both the Nikkei and Hang Seng. Both closing around 0.75% higher the main pull was from financials but this is just a rebalancing from the losses they suffered earlier in the week. China remains on national holidays and so we wait until Monday to see how the Shanghai exchange deals with recent movements. In late US trading the Nikkei futures have given back todays cash gain (-0.75%) whilst the HSI trades just 0.35% lower than the close. China 300 was last seen trading at 3135 but obviously the liquidity has been extremely poor. BOJ meeting next week and there is much talk surround additional QE so worth keeping an eye on the JPY and the month end reversals levels.

European markets were dominated by the news storey around Deutsche Bank and the US DOJ’s request for $14bn for the settlement of miss-selling of Mortgage Backs Securities. DB shares opened down 7%, which obviously hindered the DAX performance throughout the day. By the close of the weeks trading DB shares were 8.5% lower, with the overall resulting in a 1.5% decline for the DAX. The implications of the DOJ request hit other European bank shares with RBS closing -4.5%, Commerzbank -2.5%, UBS and Barclays also down 2.5%. Other core indices saw CA and IBEX close 1% lower, whilst the FTSE lost 0.3%. What was interesting today was that the currency failed to act as the pressure valve today as both the Euro (-0.85%) and GBP (-1.75%)both lost ground against the USD. There were rumours this was US position liquidating purely from the time of executed orders.

US stocks traded heavy for most of the day but did manage to close off of the lows. The sentiment feels bearish which was probably not helped by today sentiment index (US Mich) was expected at 90.8 but was released at 89.8. Many were talking about next weeks FED meeting and the will they/won’t debate but meanwhile the DXY continues to rally; closed this evening +0.9% higher on the day at 96.08.

US Treasuries saw support at the long end flattening the 2/10 curve by 5bp (2’s closed 0.77% and 10’s at 1.69%) at +92bp. German Bunds closed marginally better bid at 0.01% which closes the US/German spread at +168bp. Italy 10’s closed 1.34% (+1bp), Greece 8.45% (+1bp), Turkey 9.55% (+3bp), Portugal 3.39% (-1bp) and UK Gilt 10yr 0.87% (-1bp).

 

 

With each peak in the Economic Confidence Model, a different sector becomes the focus. The peak in interest rates occurred on 1981.35 and was the peak of the Public Wave that followed the 1929.75 Private Wave. The Public Wave bottomed on 1985.65 during the summer of 1985. This event marked the birth of the current Private Wave as well as the birth of the G5 at the Plaza Accord. Private Waves are marked by more aggressive government attempts to control everything for they feel the power beginning to slip from their grasp.

That first 8.6-year target in this current Private Wave peaked in 1989.95, which was of course the peak in Communism and the Japanese stock market bubble beginning their long-depression. The mid point was 1987. That first 8.6-year wave bottomed in 1994.25, which marked the peak in emerging markets (South East Asia) and the precise low in the US share market to the day.

The next peak was 1998.55 (July 20th) and that marked the temporary peak in the US share market again to the day, as well as the peak in Russia and the subsequent Long-Term Capital Management debacle. The Pi target from the high pinpointed the World Trade Center attack also to the day (911).

The next bottom was 2002.85, which marked the low following the DOT.COM Bubble. The next wave peak was 2007.15, which marked the very day of the high in the Case-Shiller Real Estate Index and the start of the mortgage crisis. The next low was on 2011.45 and from there the stock market took off once again. We then reached the high at 2015.75, the peak in government this this time.

The negative interest rates implemented to bailout the banks post-2007.15 have set the stage for the next crisis — the Pension Crisis. With Public and Private pension funds unable to make ends meet, we are now looking at the collapse of socialism post-2015.75 going into 2020.05, which was clearly the peak in government.

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Historically, families and marriage provided the security needed to support the elderly prior to the proliferation of pensions. As the population became more industrialized, private annuities rose in popularity with pensions resembling disability insurance. With the rise of socialism, pensions not only grew in popularity but replaced the family as support for the elderly. Unfunded pensions combined with poor demographics in which the elderly comprise a greater portion of the global population are leading to a situation that could cause the collapse of governments globally. The future for retirement is seriously in danger. The central banks are trapped and are unable to reverse course without admitting they have been dead wrong.

Explore the origin of pensions and how their mismanagement has destroyed civilizations throughout history. This 87-paged report also discusses the various factors that have contributed to the crisis, current fiscal policies, as well as why your 401(k) may be in danger.

Purchase “The Pension Crisis” Report: $395

Germany has arrested three young Syrian men who are members of the Islamic State. These men came into the country through the same network that smuggled militants into France to carry out the deadly attacks last November. This is the entire problem. Refugees should be limited to families with children. Allowing young men in who claim to be under-18 to qualify as children is insane. If anything, the age for children should be 10 or under.

COMMENT: You are wrong. The SDR will destroy the dollar as of October 1st when they include China. You will see. China will sell all its US Treasurys and buy SDRs.

REPLY: Your very statement is totally absurd. The SDR is calculated simply by a basket of currencies including the dollar, yen, pound, and euro (see IMF calculation). So please explain to me, when the SDR is just a basket of currencies that have all declined against the dollar, just how the SDR could destroy the dollar when it is its largest component?

The SDR against the dollar has declined as has the euro, pound, and yen for starters. Now let’s look at the Chinese yuan. This too has declined against the dollar. So I fail to see how the SDR will destroy the dollar without a magical recovery in Japan, China, Britain, and Brussels. The dollar has been rising against the yuan since 2013. So why would you sell all treasury bonds when they have made a fortune on the currency and swap into something that depreciates?

 

QUESTION:

Is there a correlation between the GDP rate and interest rate ?
Best regards,

BL

ANSWER: No. What central bankers fail to take into consideration is that the interest rate is the OPPORTUNITY COST of money as reflected into the future. This is why interest rates naturally decline during a recession because of the future expectation of what money will buy when it returns. If inflation is say 10%, then lenders demand at least that much back plus a profit. Interest rates reflect the inflation rate (opportunity cost of money) plus a profit.

Deflation is when the purchasing value of money rises and tangible assets fall in value. This is also reflected in the drop of interest rates. Often, rates have gone negative for brief periods when people are parking money while expecting it to buy more. They are willing to pay to park their money just to know it will buy more tomorrow.

 

Private Blog Dow Update for Closing 9-15-2016

The Clinton email scandal keeps moving along. Despite the FBI and Justice Department refusing to indict Hillary, her staff continue to take the 5th Amendment before Congress. Both Paul Combetta and Bill Thornton just repeatedly invoked their 5th Amendment privilege not to incriminate themselves during about 10 minutes of questioning before the House Oversight and Government Reform Committee. Still a third technician, Bryan Pagliano, who was granted immunity and could not claim a 5th Amendment Privilege, is in outright contempt of Congress and could be sentenced to 5 years in prison for refusing to even show up despite a subpoena ordering his testimony. Pagliano is not officially guilty of obstruction of justice and should be prosecuted.