Article / 29 September 2015 at 11:30 GMT

Is Martin Armstrong's debt crisis upon us?

Editor / Saxo Bank
Denmark
  • Forecaster Martin Armstrong calling for start to debt crisis this week
  • Prediction has been in place since the 1980s, based on business cycle model
  • Sovereign debt crisis a real risk, but calling the catalyst is impossible: Boye
  • Late-2015 sentiment forcing investors to make difficult decisions

Telling the future
Forecasting and fortune-telling are not exactly the same things, 
but they spring from exactly the same impulse. Photo: iStock 

By Michael McKenna

There are few areas of modern life where the old art of prophecy is as prominent as in finance. As analysts and investors seek to gain insight into the broader trends that govern market behaviour, they create and employ a whole raft of symbolic tools that might, on first glance, appear better suited to a medieval text on alchemy.

Think, for instance, of how we speak in terms of Evening Stars and bull flags, Dojis and candlesticks. These are abstract patterns whose forms hover in the space surrounding movement and which are only treated as things that actually exist because, for our purposes, they have historically worked.

From divination to analysis

It is in this sense that finance belongs to the most antique class of human activities, and it would follow, then, that analysts whose data stores and models extend furthest into the past might have an advantage in extracting future events from past behaviours and the patterns that have contained them.

Forecaster Martin Armstrong has long claimed to possess just such a model (the “Armstrong Economic Confidence Model”), and among his claims to fame or notoriety is his prediction, to the day, of the October 1987 stock market crash.

Armstrong’s analyses routinely invoke cycles stretching back to 13th-century Venice and beyond. One recent post employs a graphic created in 1990 to measure world interest rates stretching back to 3000 BC, when the Sumerian city of Ur was likely the world’s largest centre of trade. 

They contain extrapolations such as an 8.6 year business cycle which relates to the mathematical constant of pi (365.25 days x 8.6 = 3141.15 days) and Armstrong claims that the world’s governments have offered to pay him fantastical sums in exchange for his model.

Ancient coinage
The model includes elements such as the annual production of coins in ancient Rome 
and the charted collapse of the Byzantine monetary system. Source: iStock

He has also claimed that the CIA approached him for access to his model shortly before he endured 12 years in prison for contempt of court and fraud.


The 2015.75 crisis

Like stars of the evening and invisible hanging candles, these things sound crazy until they work. Presently, Armstrong’s model is calling for a sovereign debt crisis whose earliest beginning will occur this week, with the new cycle beginning at what he terms “2015.75” or in layman’s terms, Thursday.

In October 1997, the forecaster said that “the creation of the euro ‘will merely transform currency speculation into bond speculation,’ leading to the system’s eventual collapse.”

"As we approach 2015.75, you can see this trend changing. This 5,000-year low in interest rates shows the excessive hoarding and concentration of capital in the West. We can also see the debt crisis is unfolding, which is no longer just with Greece; France and Japan experienced downgrades just last week. The trend is so obviously concentrated in our debt problems as emerging markets have issued since 2007 dollar denominated debt, which is about half that of the entire debt of the United States. We are seeing economic chaos unfold in Brazil and Venezuela as well. The insane construction of the euro has undermined the entire European banking system; the solution of the European Central Bank: hide the truth. "

Recent months have seen no end of doomsaying and negative prophecy. As Chinese demand unwinds, commodities collapse, and investors run for safe havens, the temptation to call crisis has at times been overwhelming. 

On August 24, or “Black Monday” in Cassandra-speak, the breakdown of correlation between equities and bonds (and equities/gold) briefly produced an environment in which nobody wanted to buy anything; as Saxo’s head of commodities Ole Hansen asked on August 25, "investors want to get out of this or that asset, but where can they go except for cash?".

Today’s markets, of course, are reeling in the wake of the collapse of the world’s largest commodities trader, Glencore, and the factors that produced that collapse appear to be intensifying. China’s August industrial profits were down by nearly 9% year-over-year and the US Federal Reserve, despite hawkish noises of late, does not seem able to commit to even the minscule rate hike that investors so desperately seek as a sign of recovery.

Are we there yet?

Though all of the macro factors underpinning today’s widespread loss of confidence have been in place for some time, it is difficult to avoid the perception that August and September are the months in which normality’s engine started badly sputtering and risk-on went from difficult to seemingly impossible. 

These months, of course, represent the eve of Armstrong’s “2015.75”, the point at which he believes one era will end and another will begin.

So is there something to it?

Alchemical symbol
Charting technology, c. 1574 CE. Photo: iStock 
 
“You can always find someone who is calling for a crisis around the corner”, says Saxo Bank bond trader Michael Boye; “the upside to being the one who called it when nobody else did is simply too large”.

Boye’s specific concern relates to the “Minsky moment”, or the moment at which asset values suddenly collapse, signalling a turning point in the business cycle. In Boye’s view, very-specific calls for this inflection point are rarely accurate due to the event’s unpredictable nature.

“Those who called the subprime crisis in the US talked about it from 2004 and onwards, meaning they were wrong for three to four years before they were right”, he says. “They knew the bubble would pop, [but] they never knew when.”

Debtor's prison

More specifically, however, Boye does state that he agrees in principle with Armstrong’s debt crisis thesis. “What we have done since the financial crisis”, he says, “is move all the debt problems from the balance sheets of individuals, banks, and corporations onto governments on the fiscal side, while massive central bank liquidity injections have kept the system afloat in the monetary side”.

This, of course, mirrors Armstrong’s view that “the trend is so obviously concentrated in our debt problems”, and Boye points to the raising of interest rates as the point at which “all of the bad investments are uncovered again and the debt load becomes unserviceable”.

(It is worth noting at this point that Boye has long held that the US Federal Reserve will not raise rates in 2015 for precisely this reason.)

Ultimately, however, while Boye says that the worst-case scenario is a violent reaction that could create another financial crisis, “the timing and trigger of such a reaction is impossible to predict.”

While Armstrong’s model very specifically calls for a September 30-October 1 “start date” for the soverign debt crisis, he also maintains that the new cycle will not necessarily be inaugurated by a flash crash of the Black Monday variety. In his view, this week’s trigger may potentially be more apparent in retrospect than it is on the day.

“A developed market debt bubble is not a new theory, and neither is an emerging markets bubble, although that is a more recent projection”, says Boye. Ultimately, however, it would require a trigger, and as Boye notes, issues from the US government shutdown to the Greek crisis have not been able to ignite such a crisis.

“Brazil could be a [contender] as well,” says Boye, “but it remains uncertain. A lot of the factors we have seen in markets of late had [the same potential] and the crash has not materialised”.

According to Boye, the sovereign debt crisis is a risk, and it’s one that will be “constant for many years”. As for this week, however, he says “I would bet against that.”

So far, so... something

This morning, Martin Armstrong published a short update in which he claimed that “The fact that we have the stock markets crashing into the 2015.75 turning point rather than making a major high is indicative of the future we should expect to unfold”. He adds, more ominously, that – in terms of his model, at least – this is “so far so good”.

“We may yet shake the tree and send money running into the waiting arms of government,” he concludes. “Then look out for the aftermath.”

For most people, the current bout of risk-off sentiment and the risk of a sovereign debt crisis is something close to invisible. It may have manifested in a few red lines on a balance sheet, or in the worried countenance of a pension adviser, but it may not have expressed itself at all.

For the scryers of the financial world, however, the air is heavy with symbols and portents. There are bear flags, Harami formations, and evening stars hanging among the invisible shockwaves of our behaviours. Do these foretell a material change that will manifest in the mundane, will become “real” for even those who do not observe the omens?

This depends on the relationship between symbols and reality, the study of which is perhaps the most ancient of human arts.

Martin Armstrong claims to have the inside track on this. The world’s central bankers are paid handsomely to be at least a half-step ahead of the rest of us. Michael Boye calls the hunt for a catalyst “pure guesswork” while broadly agreeing with the risk posed by sovereign debt.

In such a clash of voices and beneath such a haze of symbols, it can be difficult to know where to put one’s money. For the active investor, however, it certainly does appear to be decision time, Minsky moment or not.

Astronomical clock, Prague
Sovereign debt crisis or not, world markets are announcing to investors that it's time 
to make a call on future sentiment and the macro environment. Photo: iStock 

Michael McKenna is an editor at TradingFloor.com
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