The FORECASTER in Germany
COMMENT:
Hi Marty,
I just flew from Germany this week on Lufthansa. Looking for movies in the movie section, I found the The Forecaster movie. To my surprise, it was listed under the Lufthansa recommended movie list! I was so pleased to be able to watch the production.
Sad that I had to be in Europe to view it. I thought the producers did a good job, although I wish they would have spent more time on your model and the pending crisis facing us now. Thanks for your continuing help deciphering for all of us, our current murky financial dilemma.
Best regards,
MG
REPLY: The two countries it is not showing is USA and Switzerland. Since they are the main nations with banks, I guess we can figure out why. The White House made such a big deal out of Korea and that movie. Looks like the USA does the same.
The European Bond Crash
The turmoil in the European bond market has demonstrated that the theory interest rates will not rise and are in control of central banks is dead wrong. Despite the ECB’s policy to buy in government debt to inject cash into the markets, one would think that the bonds would have a firm floor of support. The price action is starting to show that the Emperor has no clothes.
Our Energy models clearly peaked in February both on the Weekly and Monthly levels. February was the highest monthly closing while intraday the high formed in April, but not on a sustainable level.
The heavy losses in the Bunds are most significant for this was the market the European money was focused on assuming the Euro would break the holder would get Deutsche marks. The Euro is not going away easily because if it fails, tens of thousands of bureaucrats in Brussels will be out of work. Merkel wrong thinks Germany needs the Euro and is prepared to sacrifice her own country for a failed idea that should have stay as a simple trade/economic union rather than a political one.
While the prices of government bonds dropped sharply sending yields upwards,the interest rate on German government bonds rose to just below the level of one percent. At the April high, the German ten-year government bonds were traded with a yield of almost zero percent. This was insane and clearly the peak in a bubble that suggested selling the bunds and buying 10 year US Treasuries would be a great trade.
Some observers see the price falls as a result of controversial monetary policy of the ECB. In the fight against an assessment by the ECB to low inflation, the central bank had launched a number of measures. Most recently, the ECB in March bought a total of billion in government bonds. They made the April high. The ECB proudly thought they conquered the market achieving the desired objective of an inflation rate of just under two percent.
Many assumed that with the ECB buying bonds, they shoud rally and that produced the April high. While many investors followed the ECB buying bonds, there was no one left to take the market higher. With everyone long, they only path was now clearly down.
What is happening everywhere is that liquidity is drying up. It is this “lack of liquidity” that makes such extraordinary price movement possible. Mario Draghi on Wednesday had told investors after the last interest rate decision: “One lesson is that we must get used to periods of greater price fluctuations.” That was a clear statement that actually admitted his policy has failed.
This is how Big Bang starts to unfold. This is the Bubble in Government and what we are seeing is the market place (free markets) will take interest rates higher even against the policies of the central banks. Government debt is uncontrollable from the central bank level. They do not create the debt, governments do that and there is no rational management concern within the political mechanism. Consequently, we have seen the peak in government both in markets as well as confidence.
We may yet see the rush to the short-end in the classic flight to quality driving the short-term interest rates very negative as we move into October, but that should then be the final rally. What comes after will be interesting patterns that require the majority to be wrong for that is the fuel that propels the economy and markets. This may be the most difficult period to trade for many people.
So no worries. The majority of people will never follow this site. The majority will read what they want to believe,never to try to challenge accepted beliefs like if the ECB is buying how can bonds decline. They will read the popular news sites, and listen to the talking heads of TV mainstream. Traditionally, they will lose their shirts and that will contribute to the rising civil unrest. It was like when they introduced Prohibition. They said outlawing booze would eliminate crime and make jails obsolete. That was up there with the sales pitch to sell the Euro – no more foreign exchange fees will make Europe boom.
VOD Screening Open June 5th-15th Available in Switzerland Now
The VOD Screening is now open for the next week for the first time in Switzerland and Austria. It is now blocked only in Germany, Italy, and France.
Money – Credit – Debt & Derivatives
QUESTION: Mr Armstrong;
Reading through you blog it seems the chronology of money begins with derivatives, credit/debt, and barter with coinage coming in much later in the historical record. You have traced the workings of the business cycle back further than anyone else. Am I correct in what I have pieced together reading your blog entries.
Thank you for your enlightenment
GR
REPLY: Correct. Our concept of money is generally incorrect. Babylonian records clearly demonstrate that derivatives in the form of futures contracts date back to the earliest recorded records in history. Hammurabi Legal Code 1780BCprovides an early account of trying to control the business cycle for what you see contained therein are price and wage controls. This is evidence that they had business cycle swings and to solve the problem they invented contracts where people would buy or sell and it required a witness to secure the transaction. We find prices defined in terms of grain and silver further illustrating the first attempt to monetize barter.
Clearly, those that yell about derivatives fail to grasp that they predate money so we have credit, debt, and futures predating even the formal monetization of barter meaning assigning some standard unit of account to a commodity as in Hammurabi’s Code. Grain and cattle appear to be the first commodity based barter system which makes sense insofar as money was first and foremost utilitarian in that it had to have been widely accepted as a usable commodity.
Barter appears to have come first followed by the development of credit systems whereby someone did something for someone else to be paid upon completion and then derivatives. Urban life does not appear to have emerged until around 8,000 BC. This development marked the idea of creating domesticated animals and agriculture. This effectively ended the nomadic life style where there may have simply been a communal group living rather than individual barter economy.
It was about 6700 BC when the earliest city began to appear known by the nameCatal Huyuk located in Turkey which covered about 30 acres. The buildings were mud and brick construction, but inside there appeared plastered walls. No doubt, this was the latest modern invention, for it illustrates two important developments. First, this confirms the birth of a urban trade skill and secondly, homes were found with paintings on the walls suggesting the flourishing development of art, one of the last skills to develop within urban life reflecting good economic times. This demonstrates that there were barter systems as well as credit that predate Hammurabi by thousands of years.
We can look at the Bible in Genesis 23:16 where it says that Abraham listened to Ephron; and Abraham weighed out for Ephron the silver which he had named in the hearing of the sons of Heth, four hundred shekels of silver, commercial standard. We have the development of a weight system in grains and silver. This invention of standardized weights emerged became a unit of account – a measure of a commodity. It was not until the 7th century that standardize weights of coinage first appear
Silver would form the common commodity for transactions. It was traded in typically wire or lumps. Gold would exchange in the form of jewelry until it became much more common following discoveries in Turkey.
It was the kingdom of Lydia in Turkey that began the first formal state currency. The king took the standardized coinage by weight and then impressed the symbol of the city on the coinage. There were clearly different weights appearing and this was the first creation of a monetary system with denominations.
The metal was natural and unrefined. The gold was an alloy mixed with silver we call today electrum found in the rivers. The color varied depending upon the gold content. This obviously introduced people differentiating based upon color and must have attributed a higher value based upon color.
It was king Croesus who refined the metal and began the first bimetalic monetary system with a ration of silver to gold being 12.5 to 1. This does not take place until the 6th century BC.
Coinage began to spread in Turkey and then the invention spreads to Greece, but there the natural metal was silver not gold. Coinage merely enhanced the credit and debt systems that predates going back to the Stone Age.
Here is an electrum coin of Lydia with nine counter-marks demonstrating that there was a viable forex exchange and banking industry at that point in time.
Therefore, credit, debt, and banks predate the formalization of money issued by a government. Barter clearly existed before money and it was Hammurabi’s code which seeks to control the business cycle and establish wage and price controls.
Congress Should Proudly Display Who Owns Them
China Office
COMMENT:
Hey Marty,
After spending several weeks in China I am now in Hanoi. I was not able to use any American e-mail service in China.
Also, any western websites I could access were super-slow… an obvious deterent strategy… except for one website… armstrongeconomics.com, which worked super-fast no matter where I was in China.
There is no doubt they are listening closely to you. No western websites can work so well in China without extremely powerful people intervening.
Cheers,
Scott
REPLY: Yes, our site seems to be one of the few that is not blocked. We are in the process of opening our site in Chinese with staff working there in China.
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