Sunday, July 18, 2010

Martin Armstrong – Other People’s Money, What Happens Now?

Martin is now running the same special market update at the front of all his papers. In it, he calls for a change of trend in August. I am very cautious about turn dates, they are nebulous at best and with a little hindsight we’ll certainly have a turn of one type or another during that month. I will say, however, that the trend for now is DOWN and we just made what appears to be another significant new lower high. So, it could be that we complete waves 3, 4, and 5 (target SPX 860ish) of the larger wave 1 by some point in August, bounce in a larger wave 2 until fall, and then begin the larger wave 3 down. That, however, is just one of many possible outcomes.

When evaluating possible market outcomes, I have learned that it pays to completely ignore people who discuss one outcome or another in absolute terms. Those who do will be right on occasion, but they will be wrong on occasion as well – of course they will only brag about the occasions that they were right. In his forecast, Armstrong says that we will not make new lows below the March lows – an absolute statement. Personally, I give the odds of making a lower low below the March low greater odds than 50% - I acknowledge that I don’t control and cannot predict the actions of others. What I do know is that the debts have not cleared and that fundamentally most “assets” in America are vastly overvalued relative to the income available to support them.

In this paper Martin boldly states that those comparing now to the Great Depression are wrong, “…Not only was there a Sovereign debt crisis in 1931, but there was an advancement in technology that was eliminating jobs in the agricultural sector, the dust bowl, and the fact that the dollar was NOT the dollar but it was de facto gold! Most such events are NOT present today!”

Umm, let’s see – sovereign debt crisis then and now, check. Advancement in technology eliminating jobs then, and I certainly think that jobs are being massively eliminated now both by advancements in technology and via off shoring (not to mention wage arbitrage), so double check on that one also. Dust bowl then was an environmental disaster caused by pushing the boundaries of growth and understanding that definitely impacted the economy – today we have an oil environmental disaster from pushing the boundaries of growth and understanding, again definitely impacting the economy hugely, so check again. And the dollar rising because it was gold then is a complete misread of history in my opinion – gold has NEVER in the history of mankind worked to keep the total quantity of money under control, it certainly did not during the “Roaring Twenties,” a time of tremendous credit expansion – credit dollars that had NOTHING to do with gold! In fact, when banks issue CREDIT dollars and get repaid with gold certificates, what is transpiring is the consolidation of gold into the hands of the banks! The deleveraging of CREDIT necessitates a MECHANICAL (temporary) demand for the currency in which debt is issued.

So, Martin is flat out wrong in his depression comparison on all counts! From my point of view, the similarities are startling and would require a book they are so vast. The largest difference from my point of view is the sheer scale of the debt today which is far greater than it was then. Another area of difference is the free floating of currencies and the speed at which capital can now traverse the globe. Also, the layers of obscuring financial engineering make seeing the game that’s being played all the more difficult now.

The largest overlooked SIMILARITY between now and the time of the Great Depression is the fact that WHO controls the money has not changed! It is the same central bankers now as then – gold standard then, no gold standard now.

All that said, there is still much value in reading and digesting Martin’s work, that is why I continue to present it to you… BEWARE ABSOLUTES, and beware of over generalities like, “Some nations will suffer inflations and others will suffer deflations.” No kidding… and a great example of why investing in this environment based on the “genius” of any single individual is strictly caveat emptor.