The deliberate killing of police in Baton Rouge, Louisiana has been the subject of much propaganda. President Obama did not address what is obvious to everyone and tried to cover up the root cause behind this new wave of violence. “There is no justification for violence against law enforcement. None.” Obama said. “These attacks are the work of cowards who speak for no one. They right no wrongs. They advance no causes.”

These words show that he is either plainly stupid or he is in a complete state of denial. Innocent, decent police will now have to pay the price for protecting the bad apples unless an honest reflection is taken on the root causes of these recent incidents. The code whereby police protect police, judges protect judges, and politicians protect politicians of their own party is the real problem. If the crazy police who kill people without just cause are not prosecuted, this WILL lead to the perception that ALL POLICE are evil.

When a friend would come here to visit from Ukraine before the last revolution, the mere sight of a policeman would cause intense fear. They were conditioned to know that the police were the government’s mafia who were not there to protect society, but to protect government from society.

The Catholic Church protected priests who were sex offenders. The natural thought is that exposing one bad apple taints the whole, but not doing so leads to more and more events coming to light and then the very thing they tried to prevent unfolds. Many people now look at priests as potential sex offenders. Of course, it is not true about the majority. Nevertheless, you foster such an image by protecting the few. We are accomplishing the same final result with the police and turning this into a war of them against us that some will perceive and act on with increasing results.

Refusing to prosecute police who have simply crossed the line is creating that same image in America. The police are on edge now and look at citizens as potential threats. I was pulled over a few months ago and I opened my door so I could get to my wallet. Immediately, the policeman yelled, “Stay in the car, close your door!” If they perceive us as a threat, then this will only further the same feeling on the opposite side. Do you have to ask permission to get your wallet out of your back pocket?

Obama said, “We need to temper our words and open our hearts — all of us.” He went on to say, “Nothing justifies violence against law enforcement.” These meaningless words are very elitist and deny history.

This issue was precisely one of the causes of the American Revolution and Thomas Jefferson included it in the Declaration of Independence. In the Declaration of Independence, Jefferson included protecting agents of the government for murder. “For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States.”

Sorry, but unless the government abandons this policy of protecting their own at all costs, they are feeding the very human discontent that leads to violent revolution. They are incapable of understanding the root causes of political unrest. This is seemingly an inevitable part of the cycle we are in — the escalation of civil unrest.

QUESTION: Mr. Armstrong; You have been warning that we are in an upward trend now for civil unrest which includes coups to revolutions as distinguished from a foreign war or invader. At the Berlin cocktail party last year you said Turkey was a risk for the risk in civil war. You said it should begin next year. Was this failed coup attempt what you were referring to?

ANSWER: Turkey has a history of military coups— 1960, 1971, and 1980. It has had two cycles running through its political history since the fall of the Ottoman Empire in 1920. The two cycles are 8.6-year based frequencies. The armistice of October 31, 1918, ended the fighting between the Ottoman Empire and the Allies. However, it did not bring peace to the region. The Sultan, Mehmed VI, feared he would be deposed, but the Allies knew he was a figurehead and hoped that his retention would ensure post-war stability. They did not want to cut off his head in fear that his replacement would be far worse.

In November 1919, the Ottoman government did nothing to stop the Allies. The Allies delayed the signing of the peace treaty known as the Treaty of Sèvres (1920) with the Ottoman Empire only because they were arguing among themselves over who would take what countries. The treaty was not signed until August 10, 1920, confirming French and British possession of Syria, Lebanon, Palestine, Jordan, and Iraq in the guise of League of Nations mandates.

Sharif Hussein ibn Ali was rewarded for his leadership of the Arab Revolt with international recognition of the Hejaz as an independent kingdom. The treaty effectively gave the Greeks possession of eastern Thrace and ‘Ionia’ (western Anatolia); the Italians got the Dodecanese Islands and a ‘zone of influence’ in southwestern Anatolia. To the east, the Armenians were given an independent state, taking in much of eastern Anatolia, while the Kurds were granted an ill-defined autonomous region and promised a referendum on independence, which has yet to take place. The Ottoman state’s army was limited to 50,000 men and its navy to a dozen coastal patrol boats with no air force whatsoever.

It was at this point that Mustafa Kemal emerged as a leading figure in Turkey. His rule brought a form of Turkish nationalism that was very different from the pan-Turkic ideals up to that point. Kemal believed that the once-great Ottoman Empire had become a dead weight on the Turkish people who needed a homeland of their own. Keep in mind that the Turks invaded that region and took the territory from the Greek Byzantine Empire when the last emperor, Constantine XI (1448-1453), died on the walls of Constantinople in 1453, ending more than 1,000 years of history.

Kemal and his supporters sought to establish a new Turkish state based on Anatolia, where most of the empire’s Turkish population had traditionally lived since the fall of Byzantium. Kemal and other nationalists began hiding weapons from Allied disarmament teams and encouraged the formation of local Turkish civilian militias and political alliances between nationalist groups. They also attempted to divide the Allies through political intrigues, which was rather easy to do.

The greatest military threat to the Turkish nationalists came from the Greeks, whose claims to western Anatolia, eastern Thrace, and Constantinople were reinforced by the large ethnic Greek populations in those regions. The Greeks occupied Ionia for thousands of years and fought against the Persian invaders ever since Cyrus the Great. It was here that coinage was invented by the Greeks, first with the standardization of weight, and then by impressing a design to guarantee its authenticity by the king of Lydia. On May 15, 1919, Greek troops occupied the ancient port city of Smyrna (modern-day Izmir). More Greek forces arrived in the following months, gradually extending their control deep into the west Anatolian countryside. Clashes with Turkish civilians dogged their movements and greatly increased nationalist sentiment. Meanwhile, the Italians landed troops in south-western Anatolia to reinforce their claim on that region. This also played into the hands of the Turkish nationalists and fueled their movement.

As Turkish attitudes began to rise toward nationalism, the interim Ottoman government came under increasing pressure from the Allies to suppress these nationalist groups. In the end, they were reluctantly forced to act, but this backfired. On April 23, 1920, the nationalists convened a Grand National Assembly in Ankara. They elected Mustafa Kemal as its first president, establishing what was essentially an alternative government. This triggered a civil war.

The British and French had demobilized so there was no military support available for the Ottoman government. This civil war ended only when the details of the Treaty of Sèvres were publicized in August 1920. The harshness of the terms in the Treaty of Sèvres destroyed all credibility of the Ottoman government and exposed what they had agreed to that ended the Ottoman Empire. Turks of all political persuasions began to unite at this point behind the new Grand National Assembly, which completely stood up and rejected the Treaty of Sèvres. A showdown with the Allies seemed at this point inevitable.

Only the Greeks could muster any troops, but they saw this only as an opportunity to gain more land in Anatolia. This set the stage for what the Turks call the Turkish War of Independence. The Greek Army made rapid progress and advanced from Smyrna in June 1920, capturing much of western Anatolia. The Greeks initially outnumbered the Turkish nationalists and were better equipped. Kemal agreed to help Bolshevik Russia destroy the newly independent Caucasus states in exchange for restoration of most of the territory they had lost in the 1877–78 Russo-Turkish War. This secured eastern Anatolia and extinguished any chance of independent Armenian or Kurdish states taking emerging there.

American President Woodrow Wilson supported the Armenian bid for independence in that area and condemned these actions. Kemal knew the USA would not intervene with Russia on their side. Kemal’s government also bought off the French by promising to support their rule over Syria in exchange for tacit recognition that all of Anatolia was Turkish territory. Kemal was smart and played one side against the other. Kemal then struck an agreement over the Dodecanese Islands with the Italians, who in turn withdrew their troops from Antalya in June 1921. It was through such diplomatic maneuvering that the Turks gained access to the international arms trade. Kemal effectively isolated the Greeks. British support for the Greeks was a personal passion of Prime Minister Lloyd George whose cabinet did not share. Kemal has isolated the Greeks by playing the Allies against each other.

Kemal’s strategy was to render Greeks their only military opposition. In March/April 1921, the new Turkish Army turned back the first major Greek offensive. The Greek Army in Anatolia was increased to 200,000 men. Kemal assumed direct command at the Sakarya River and ended a three-week battle resulting in Turkish victory. Finally, in August 1922, the Turks carried out a large, carefully prepared offensive that threw the Greeks into a headlong retreat to the coast. All Greek troops were evacuated from Anatolia by September 16, 1922. The war was over and Turkish Independence was won.

On October 13, 1922, Ankara officially became the capital of the new Turkish state. On October 29, a republic was proclaimed with Mustafa Kemal as its first president. Turkey’s Grand National Assembly abolished the Sultanate on November 1, 1922. Mehmed VI and his family sought refuge with the British military authorities in Istanbul. They were smuggled out of the city and eventually went into exile in San Remo, Italy, where the former monarch would later die in 1926.

1960 Turkish coup d’état
1971 Turkish military memorandum
1980 Turkish coup d’état
1993 alleged Turkish military coup

Interestingly, the relationship between military coups and civil wars are tightly linked. The first 51.6-year cycle from 1920 brings us to the 1971 coup. The 1960 coup d’état incident took place at a time when there was social, economic, and political turmoil. The United States’ aid from the Truman Doctrine and Marshall Plan was running out. Prime Minister Adnan Menderes was planning a visit to Moscow in hopes of establishing alternative lines of credit. The coup was staged by a group of 38 Turkish military officers acting outside the Staff Chiefs’ chain of command to prevent the political leadership from realigning with Russia simply to get aid. The incident took place on May 27, 1960. However, as the 1960s wore on, the economic conditions worsened and many Turks migrated to Germany at this time.

Turkey was engulfed in violence and economic instability. An economic recession as Bretton Woods was in trouble sparked a wave of social unrest marked by street demonstrations, labor strikes, and political assassinations. This is when left-wing workers’ and students’ movements rose up, which were countered on the right by Islamist and militant nationalist groups. The left carried out bombing attacks, robberies, and kidnappings that began in 1968 and intensified moving into the economic decline that bottomed in 1970. The left-wing violence was matched and surpassed only by far-right violence under the Grey Wolves. Then on the political front, Prime Minister Süleyman Demirel from the center-right Justice Party was re-elected in 1969. The party experienced internal disputes and split to form splinter groups of their own. This essentially reduced his parliamentary majority and brought any political processes to a halt.

Finally, by January 1971, the state of the political-economy in Turkey descended into a state of chaos. The students began to embrace Latin American style, urban-guerrilla warfare by robbing banks, kidnapping US servicemen, and attacking American targets as they became increasingly Marxist. Neo-fascist militants bombed the homes of university professors who were critical of the government and factories went on strike, bringing all services and production to a near standstill during the first quarter 1971.

The Islamist movement was rising inspired by the books of Sayyid Outb (1906-1966) who was executed in 1966 for plotting the assassination of the Egyptian President Nasser. The Islamists formed the National Order Party, which outright rejected Atatürk and Kemalism, putting them in conflict with the armed forces. The government appeared too weak with defections and squabbling. This resulted in the military coup to save the country. This event became known as the “coup by memorandum,” whereby the military delivered in lieu of sending out tanks. This was the major event on the 51.6-year cycle as the government and economy fell into chaos.

The September 12, 1980, Turkish coup d’état followed the continuing conflict between right-wing/left-wing armed conflicts, which reflected the proxy wars between the United States and the Soviet Union. It has been argued that the military allowed these conflicts to escalate to provide justification to seize control of the government outright, but this is always with hindsight. However, the violence did abruptly end afterwards the coup. For the subsequent three years, the Turkish Armed Forces ruled the country through the National Security Council before democracy was restored.

Nonetheless, our models have identified interesting correlations that suggest some government officials will often resort to “regime change” as a tactic to prevent civil war from occurring. A military coup can often provide a mechanism to avoid a dynamic escalation of conflict that would otherwise lead to civil war. Hence, sometimes the means to avert an outright civil war necessitates a coup.

The leading indicator is typically the fractionalization of political parties, which results in a breakup of political movements that then enter into conflict when the economy turns down. That economy remains the most powerful driver in the global model, and it is unquestionably the most powerful driver at predicting regime change at the polls as well as within the civil unrest cycle. For the former to evolve into the latter, we need the fractionalization of political parties. For example, we are seeing that with the hard-line Republicans refusing to support Trump. This is all part of the process of taking a step toward civil war and the break-up of countries.

Considering that the driving force to set the stage is always economic, the fiscal mismanagement of the political state is critical. We are witnessing the process in Europe as a whole. This “fractionalization” is creating heated, opposing groups at the very top of the political ladder that ultimately lead to autocratic regimes as political elites try to protect their power base. This increases the danger of political instability that leads to civil unrest and can brew into military coups or go all the way to revolution. Hence, during regime changes, whether at the hand of the people with a right to vote or by military coups, the actual revolution phase is a process that can be forecast within a global model.

In the case of Turkey, this particular failed coup was either orchestrated to fail as a means to solidify ultimate power or we are witnessing the coming clash between Islamic and freedom of region rule in Turkey. That ultimate confrontation is due in 2023 (two 51.6-year cycles from 1920).

QUESTION: Mr. Armstrong, why are Italian banks in worse shape than most other countries. What happened to the bail-in program of the ECB? Can you explain why Italy is threatening the entire banking system of Europe?

ANSWER: The bail-in policy of the IMF and ECB was directed at the idea that the rich would pay, even if that meant paying for pension funds. But in Italy, stock ownership is distributed predominantly among individuals. Therefore, politicians were unwilling to deal with the crisis. Forcing bank holders of shares and bonds to take a haircut meant the middle class would be scalped, and that meant political unrest. Italy never cleaned up its banks, and as such, it has been a growing problem with about €360 billion in underperforming loans. This is nearly 18% of all loans in Italy. They are dealing with this in the typical manner of forcing haircuts on those who have been stupid enough to invest in banks in other countries that amazingly go back for more pain and suffering. In Italy, this may lead to a pitchfork revolution.

This is not unusual. This was also the core crisis that created the Great Depression. In that case, foreign governments issued bonds in dollars in small denominations and the New York bankers sold them to the general public. The crisis emerged because this was a Sovereign Debt Crisis in 1931. Hence, there could be no bailout domestically within the United States to protect foreign bonds sold to domestic mom and pops.

As the economic depression deepened in the United States during the early 30s, which also was when the Dust Bowl unfolded, farmers had less and less money to spend in town and could not pay their loans. Banks began to fail at alarming rates in the Mid-West as farmers could not repay, and in the East, the default on foreign government bonds wiped out savings and caused depositors to withdraw funds. During the 20s, there was an average of 70 banks failing each year nationally. During the first 10 months of 1930, 744 banks failed. By 1934, 9,000 banks had failed in all. It’s estimated that 4,000 banks failed during the year of 1933 alone. By 1933, depositors saw $140 billion disappear through bank failures.

This is what made the Great Depression so great. Banks saw bad loans soar and mom and pops who bought foreign bonds were wiped out. The combination of these events led to the massive collapse in the capitalization of the economy. More than 200 cities had to issue their own money for there was a shortage of money and banks.

When mom and pops hold the bonds and shares of the banks, the option of a haircut is greatly diminished. The risk that we now see in Europe is the further deflationary pressure of the collapse of capitalization of the European financial system. This is not something that can be resolved by the ECB. When a country surrenders its currency, it is indistinguishable from a gold standard if they lose the ability to devalue to offset the crisis. The pressure would normally have been offset by the collapse of the Italian lira. That being extinct, the pressure becomes a contagion that will spread throughout Europe.

This is the price of a single currency, but without full federalization politically. This combination of events renders the crisis insurmountable and the outcome can only be the destruction of the euro and the single monetary system. The danger here is that the politicians in Brussels will fight to save their personal power at the expense of the entire continent.

Everyone knows these people just read whatever they are handed from the teleprompter. Trump himself has been more rouge when it comes to that. It seems that the Republicans took their shot and tried to make his wife look really bad by handing her a script that was obviously plagiarized from a speech Michelle Obama had made in 2008.

Neither one spoke about anything personal. Someone writes these speeches for them to read. This was obviously a plot by the establishment to ensure Hillary wins to maintain the status-quo. One has to wonder how low these people will really go. I am sure Mitt Romey is enjoying himself. These career politicians, in all parties around the world, are desperate to shut the people down. They are losing their rich playground and everyone can feel it.

Some say the Nikkei is close to ending its bull run after seeing some impressive gains recently. However, after the long weekend we have seen yet another 1%+ gain, but that has yet to halt dealers still trying to call the top. A better performance than its peers as Shanghai and Hang Seng returned loses of -0.3% and -0.6% respectively. In late trading, the Nikkei has returned some of the cash gains whilst China 300 and HSI remain little changed.

Ahead of much data releases we heard that Moody’s downgraded their UK’s GDP growth target for 2016, and then, mid-morning, we saw the UK CPI release 0.5% marginally better than the 0.4% expected. However, despite a brief rally in GBP, it was only short-lived and we were back with the sellers very soon after. At 10 AM we had Eurozone ZEW Sentiment release a big miss on expectations of 9 we actually saw a -6.8 print; forward expectation is very pessimistic. Early afternoon, we heard that the IMF had, for the third time this year, downgraded its Global Growth estimate from 2016 and 2017. The initial estimate (in April) was for 3.2%, but today’s assessment is for 3.1% and for 3.4% in 2017. BREXIT a major concern says the IMF.

Turkey’s rate decision at noon saw 25bp cut. Moody’s put it on review for potential downgrade (already low) more importantly is portfolio flow out of the country. The big concern is the amount of Turkish corporations that borrow outside of their core currency, so this is something we shall comment on again soon. The Turkish lira lost 2.3% against the USD in today’s trading.

The US market was in comparison a reasonably quiet session with core indices closing little changed on the day. Another major focal point today was the DXY. Having recently broken the much-watched 200d, moving average dealers are baffled by the flow into the US markets.

Dealers were discussing that Morgan Stanley is calling for 10yr yield to be around 0.75% by year-end, which certainly helped sentiment, and the curve. 2/10 closed +86bp with 10’s the performer closing -3bp at 1.55%. German bunds were bid, but in quiet trade, despite DAX closing down 0.8%. Italy closed 1.23% (-2bp), Greece 7.71% (+4bp), Turkey 9.63% (+16bp), Portugal 3.05% (-5bp), and UK Gilts 0.795% (-2bp).

The horror of refugees getting away with raping European girls because politicians do not want to admit what they have done is just insane. However, this self-serving police is starting to give way. A 24-year-old refugee asylum seeker from Iran, not Syria, made an initial court appearance on Monday to face charges of having raped a 19-year-old woman over the weekend, as reported by the Danish news. Denmark may go down as the first country to actually criminally prosecute these people who just see young girls as sluts for the taking at their own desire. I cannot image the outrage of fathers and how these politicians have the guts to try to cover up this behavior.

(Note: The blue labels mark the change in the issues we used to create this perpetual index for long bonds)

Germany sold 10-year debt at a negative yield on Wednesday of last week, becoming the first Eurozone nation to do so and setting a further milestone in the relentless fall of government bond yields around the world. However, there is a real crisis brewing. Bonds with negative yields, which are now about one-third of the bonds in Europe, are NOT eligible for the ECB to purchase in its program. This means that when the sentiment changes, the bonds will crash unbelievably.

This is similar to the US bonds during World War II when the government ordered the central bank to support the government bonds at par. When that directive ended in 1951, the bond market crashed. This is what awaits us, for even the ECB cannot buy negative yielding bonds. Right now, the negative yield on 10-year German bonds is actually a bet against the euro as players are betting that the euro will collapse and they will end up with Deutsche marks once again.

Angela Merkel has finally admitted that she essentially invited terrorists into Germany, and thus to Europe, in the obvious wake of the Nice attack. Besides security, this will have a major impact upon the economy of Europe as tourists are frightened away. Even prior to the Nice attack, the US State Department put out a travel alert for Americans traveling to Europe this summer.

An attack similar to that of Nice directed at tourists will be the final straw in breaking the back of the tourist trade for Europe. If we look at Italy, its economy has a large portion dependent upon tourism. Italy is famous for its archaeological and artistic heritage and it ranks number one in the world with 51 sites inscribed on the UNESCO list of World Heritage Sites. The historic, artistic heritage of Italy is comprised of literally hundreds of archaeological sites and over 3000 museums. In all, tourism is extremely important in the Italian economy with tourists spending almost 36 billion euros in 2015, which amounts to 7.2% of the total value of exports. Tourism in Italy accounts for 11.8% of the total national GDP and 12.8% of all jobs are directly tied to tourism. That accounts for 171 billion euros and 3.1 million jobs. Extremist attacks on the tourist trade will devastate the European economy.

Merkel’s personal policy to boost her polls in the wake of her hard-line tactics on Greece has torn Europe to shreds. There is no EU dream when one leader can make a decision that rest of Europe has no say in, yet it devastates their countries. This is precisely what Thatcher warned against – a political union by default. Merkel has shocked the political world for finally admitting that her own policy on refugees allowed extremists to invade Europe. The fools who welcomed the refugees are simply sublime idiots. They only looked at the situation from a lofty perspective and failed to consider that government was incapable of managing anything, no less the massive influx of people with no background checks.

The refugee crisis in Europe saw, at first, over 800,000 migrants who traveled to Europe by sea in 2015, according to the United Nations refugee agency. A little over half have come from Syria. About 62% of all migrants that have traveled to Europe this year, however, are MEN! A little under a quarter (22%) are children and only 16% are women. The New York Times reported in October 2015 that the mass exodus of men to parts of Europe could cause problems in both the countries they leave and the countries they enter. Anyone speaking out has been labelled a racist. If a white or black person kills someone of the opposite race, it rarely turns on race as an issue alone.

Tensions in Europe have exploded against the refugees and this is now threatening European civil war. In Germany, the backlash against refugees has soared since Merkel opened the door to Middle Eastern and African migrants. There has been complete incompetence in screening who these people were and a huge number were just young males with no children, wives, or family.

The pro-establishment, anti-Trump effort failed on the floor of the Republican Convention on day one. They were trying desperately to stop Trump as if they have any viable alternative other than some career politician to help keep the status-quo. John Kasich is an example of a career politician who really needs to be driven from office to save the country for he is clueless about what people are angry about. His arrogance in refusing to support Trump only highlights the entire issue of these elections — anti-establishment and how they refuse to actually represent the people. To them, it has always been just, “Show me the money!” as Hillary exemplifies.

Despite the best efforts of the elite pro-establishment, anti-citizen crowd to sell the country down the river and keep the status-quo, they were defeated. This is going to make a very interesting election come November. The computer still favors a Republican win, it is interesting to watch this process unfold. Little by little, the steps are being taken to show what took place with BREXIT was not a fluke, but a global trend.

Despite weekend press of Turkey, BREXIT and a small early CPI miss for New Zealand (0.4% against an expected 0.5%) and with Japan on a national holiday, all of this resulted in a rather lacklustre start to the week. Shanghai saw a fairly tight trading range (<1%), closing off the days lows but still down 0.4%. Hang Seng managed a better than expected performance as mood improved after confidence settled compared to late Fridays US trading.

A similar session in Europe to what we saw in Asia. With the lack of any major economic data and a reasonably quiet Sunday Press, markets meandered into the week with a mixed performance. One piece of news that many dealers were discussing was Softbank’s purchase of ARM Holdings. Paying a huge premium for the semiconductor giant was talked helped GBP a fraction but did surprise the market that the bid came from Softbank! One may have expected it from Apple but an interesting acquisition for sure. All core indices closed little changed with DAX, CACA and IBEX all small lower whilst the 40+% rally in ARM helped the FTSE secure a positive close.

Record highs were seen (again) in what must still be the most unloved rally in recent memory! Many market analysts continue to feed the news that with bond yields so low retail buys dividends but the flow of money into the USD continues as we see a combination of USD assets perform. All core US indices closed positive with the S+P almost hitting all-time high (as it did last Wednesday) but did close at an all time high. The DOW did create a new high and held it into the close – much is still expected despite the street trying to ignore it!

US Bond market steepened a little (+1bp) today with 2/10 closing at +90bp. US 10’s closed 1.58% which is 3bp higher than Fridays close. In Europe we did an early attempt at positive yield but this had been rejected by late European trading. Eventually closing at -0.02% the US/Bund spread closes at +160bp. Italy was unchanged at 1.25%, Greece 7.68% (+4bp), Turkey lost much foreign appetite loosing 59bp to close 9.47%. Portugal closed 3.10% (u/c), and UK Gilt 10yr closed 0.82% (-1bp).