Martin Armstrong has his latest report out entitled ‘The Next Wave’ but I think ‘Perception of Risk Matters’ might have been a better title. One of the key points he notes in the context of sovereign debt is “it’s the perception of risk that matters. The sky need not actually fall. It only has to appear as if it will collapse and that is enough to wipe your family out for generations”. He provides a history lesson on debt, Federal, State, Municipal, and Corporate and how the preferences and relationships to each have changes thru time. He believes corporate paper will again become the preferred safe harbour.
The Double Near the End
Martin continues with a review of the Economic Confidence Model and how it applies the Business Cycle based on average intensity vs extreme intensity. He notes that business cycles marked by extreme intensity are preceded by a period doubling effect, Speculative interests and interest rates tend to double quite aggressively and warns of a steep decline approaching. He noted this wave hit in 1929, in Tokyo in 1989, and in gold in 1980. He noted that gold rallied from $103 to $400 between 1976-1979, then gold blasted from $400 to $875 between Dec. 1979 to Jan 21st 1980. He refers to these as Phase Transitions. He also reflects on his predictions of longer term trends and notes that they are easier than short term trends due to the fact they are self-referral and you can’t change the long-term consequences accumulated over decades.
Consequences of QE2
He notes that the consequences of QE2 could be the same as those that lead to Japan’s lost quarter century. Governments believe they, have the power, and obligation to intervene. They miss the fact this can’t be done on a long term basis. He noted that direct intervention appears to prolong the upheaval. At some point QE must end and the concerns are will markets decline due to doubt if we actually hit a bottom or not, secondly the bond markets, will there be buyers indefinitely and what about rates? It should be noted that after Japanese intervention was removed real estate continued its decline. He also notes that shifts in the current debt situation have pushed the real crisis off till 2016-2020. An interesting comment he makes is that given the zero interest rate policy it allowed money that would have been used on national debt interest rate payments to be transferred into TARP, hence deferring the crisis but not removing it.
He concludes with the following: “The big breakout in GOLD still does not appear to be now. The PHASE TRANSITION to exceptionally high prices will be in the NEXT WAVE, not the conclusion to this wave. We still face the readjustment in the economy and it will take some time yet for the DEBT crisis to explode.”
See full article here. (15 Pages)