This weekend we had the elections in Australia. Of course, they were not on our list for the year of political hell. They sold off in the wake of Australia’s weekend election and in parallel fashion with about 5bps of cheapening across the curve. The election vote count will continue on Monday with a few seats left undetermined. This rather dramatic Australian federal election has utterly failed to produce a clear winner, further showing the rising discontent with career politicians in general. This result will merely prolong political and economic instability as the clash continues between the left, who always want to raise taxes, and the right, who hope to grow out of the deficit. After all, Australian politics has been in this clash mode and chewed up four Prime Ministers in just the past three years.

Now the ratings agencies are threatening to review Australia’s AAA rating because of political uncertainty, which seems to be a new criteria. But let’s get real here. No nation is paying off debt. They all just add to the pile of debt year after year. So why would any government is considered AAA to begin with is a mystery.

Nonetheless, the exceptionally close vote leaves Prime Minister Malcolm Turnbull and his center-right Liberal Party-led coalition in a very tenuous position. He may actually need the support of independent and minor parties to reform government. So far it’s a dead heat with 64 seats each for the Labor Party and the ruling coalition of the Liberal Party (39), Liberal National Party (16), and the National Party (9) with four fringe parties capturing one or two seats each.  This falls well short of the 76 seats needed to form a majority government. It is unlikely to see any real political directional change Down Under.

While Turnbull said on Sunday he remained “quietly confident” of returning his coalition to power for another three-year term, the fiscal problem remains that Australia simply followed the crown in 2008 and ran fiscal deficits for every year from 2008 onward. The Labor Party’s solution is to raise taxes and wipe out small business, which would certainly throw the Australian economy into a serious decline. Nevertheless, Australia does remain among the least indebted of the relatively mature economies. They have suffered with the decline in commodities helped by the reduced demand for commodities from China, which has its own debt problems right now.

The whole meeting between Lynch and Bill Clinton calls into question the judgment of both people. Lynch should have declined the meeting and Bill should never have asked to meet her. Why? Sources from Hollywood say Bill is losing it. He is not as sharp as he used to be and he may be on medication, which does not help. Clearly, nobody seems to believe this meeting was to talk about his grandchildren. He was late and held up his flight to meet with her. She should have declined. This was a stupid meeting for they will not indict Hillary, and now it will clearly give rise to a conspiracy since others have been indicted for less.

The unlikely event of an indictment would mean Hillary would have to step aside. So there is no possible way the investigation can continue, and the Democratic Party has way too much invested in this not to have assurances that there would be no indictment. Then Obama has begun to campaign for Hillary, proving there is no indictment to come. The meeting is a disaster and Lynch should resign just to clear the air for this will remain as part of the ongoing conspiracy with no end.

Let me make one thing very clear. The conduct of the Clintons has been outrageous over the years. As soon as they won the White House, Hillary fired the White House travel staff and gave it all to a personal friend. That became Travelgate in May 1993. There has always been just a question of friends and deals that have gone hand-in-hand. But make no mistake, the Clintons are not unique, they just have done more than most. This is all about career politicians, which is why Paul Ryan and Mitt Romey continue to publicly work against Trump. They would rather have Hillary in place so Washington remains the same — the playground to get rich for career politicians of both parties.

QUESTION: Marty
It looks like Carney and Osborne are talking the pound down in order to frighten people.

Only one of their prophesies have come true – the lower value of sterling.
But it is unhelpful that they continue to be negative – even though they’ve proved to have been wrong on all the other things [cost of borrowing, asset prices, the UK deficit, cancellation of investments].

I fear [being a Brit] that too much unwarranted negativity from their position of power will take the pound down too far. Do you agree that can achieve that and that they, representing the establishment, are trying to win back some of the lost ground? I would say that is treason [not to carney as he’s a Canadian. I’d tell him to go home].

Thanks
JF, Manchester

ANSWER: The reason “value” investing and “fair value” theories fail is because markets ALWAYS over shoot and under shoot. Our next real zone for the pound is in the mid 120 level. However, ironically, European concepts of currency value is SERIOUSLY WRONG. Post-World War II, European politicians used the rise in their currencies as proof that they did a good job. That installed this concept that a strong currency was good for the economy which in fact if you are concerned about trade, you want a weak currency. The entire reason the Swiss put a peg on to the euro was because the rise in the franc was reducing exports and major companies threatened to leave.

The decline in the pound will BOOST British exports and have exactly the opposite effect helping the British economy. The EU is doomed. Over taxes, over regulated and it has no meaningful democratic process. Worse still, just as Merkel by herself tried to help her negative image because of her harsh dealings with Greece wanted to appear reasonable, she invited the refugees in without any right of other countries to object. She made a decision as Germany, but it automatically impacts all of Europe. Under the EU, no such power should be allowed if all governments must suffer because of one leader.

The pound will drop to penetrate the $1 par level probably no later than 2018. With the political chaos of French and German elections next year, that decline can take place sooner than later. But this is what will force a monetary reform as early as 2018. The rise in the dollar will reduce US exports and that will put political pressure in the States for reform not to mention a debt crisis in emerging markets.

The peak in bonds appears to be in place. We are seeing the rates rise already in the peripheral markets. This will spread from the peripherals in toward the core. So Southern European rates will rise faster than German but when capital figures out the crisis is the EU, then German rates will rise. The Federal rates in the USA will be the LAST to rise because the initial shock will be foreign capital fleeing to the States.

The remarks of British politicians are to be seen in their context of this false perception that a strong currency is good. You hear Trump criticizing China as a “currency manipulator” implying they lower the value of their currency to increase trade. As the pound declines, this will save British jobs – it’s a good thing; not bad.

“British anti-terror police found a mini-arsenal of weapons when they raided a London mosque linked to a number of key terrorist suspects,” CNN reports. They discovered an arsenal of at least 100 weapons, including war-grade automatic firearms and a huge amount of ammunition. Similar caches linked to mosques are now suspected throughout Europe. This is starting to shape up as highly dangerous. The United States has placed all of Europe on a travel advisory list.

American tourists have been warned of possible terror attacks in Europe: “The large number of tourists visiting Europe in the summer months will present greater targets for terrorists planning attacks in public locations, especially at large events. This Travel Alert expires August 31, 2016.”

Happy 4th of July

The King is Dead – Long Live Career Politicians Also for Life

(Note: Not so sure we actually won something. Back to taxation with no representation)

The talk behind the curtain is that the fix with the Justice Department and Obama is in. Proof that the whole EMAIL scandal with Clinton is already fixed will be that the the FBI will clear her by the Democratic Convention the week of July 25th. Once that takes place, this will  confirm this is a political decision if the FBI times it with the convention. It is pretty obvious the whole thing is disgusting. You will also see a deal with Lynch remaining as Attorney General and that is not just a pay back, but it will cover herself by preventing any subsequent attorney general from investigating Lynch.

QUESTION: Dear Mr Armstrong.
I attended the Berlin conference and already enrolled for Orlando as well. I have a question regarding the EURO. It is obvious that the EU cannot be sustained as is. I think, so far, I do understand the decline of the EURO. We see it happen. But Germany and France are vigorously protecting their dream. However voices are louder for Italy to abandon the EURO, with probably more countries to follow and but with Germany and France clinging on. With weaker countries leaving, isn’t Euro starting to look more and more like a Deutsch Mark?
My question is; is the anticipated decline in the EURO to below par to the dollar the only scenario, or can the EURO recover once the weaker countries are out?
Thanks you for all you do.

FB

ANSWER: The Euro cannot become the Deutsche Mark for at the end of the day there are also conflicts between Germany and France. As I have stated before, the Federal Reserve was set up with each branch maintaining its own interest rate. That enabled a single currency to survive. The pressure was then contained in the interest rates. It was FDR who seized the Federal Reserve and imposed a single national interest rate. That was OK to work through World War II, but ever since, the pressures have not been offset in interest rates but in local economies. We always called it the New York/Texas arbitrage. The Fed would raise rate to fight speculation in stocks in NYC while putting farmers into bankruptcy. The original design was proper. What FDR created was merely copied by the EU. Hence, we see that the promises of the Euro creating one interest rates for all failed. The rates have been rising in the peripheral members.

The negative interest rates are undermining pensions throughout Europe. This will start to lead to failure in 2017. There is just no possible way these people even understand what they have done. For the Euro to survive, that would still mean the subordination of some economic conditions in one member for the benefit of another.

The pound has remained in a sideways band and is trading near the low of the decline. Our Weekly Bearish Reversals were 13540, 13507, 13340, and 13044.  After that, we have reversals in the 128-127 level, 125, and 120. We have elected the first three closing Friday at 132.75. Technically, we have support down below 130 for now. The pound should continue to press a bit lower this month.

Meanwhile, Germany proposes to allow Brits who want to leave the UK EU passports. This is one way Britain can reduce those who really think living in a non-democratic environment is preferred.