In a recent provocative interview with Financial Sense, well-known market forecaster Martin Armstrong at ArmstrongEconomics.com makes the case for continued dollar strength during a global sovereign bond crisis. While he is very much in the deflation camp, unlike many in this group Armstrong believes sovereign bonds are actually set to lose most of their value moving forward as interest rates and defaults begin to rise. Consequently, Armstrong expects capital flight out of global bond markets to send US stocks to new highs over the next few years.
Looking around the world, Armstrong mainly sees economic stagnation, with the “only thing holding up the world economy [being] the United States.” But even this country’s recovery has been unimpressive and is on the verge of contracting, thus signaling powerful deflationary forces afoot in the world.
Armstrong sees many countries skirting depression with global capital flows acting increasingly like a "loose cannon on the deck of a ship in the middle of a hurricane," paraphrasing Herbert Hoover's 1931 memoirs. Capital, he says, is under attack by bankrupt governments; most people don’t trust their leaders and are more than ever voting for anti-establishment politicians. For the US, he cites the popularity of Donald Trump as a case in point.
Continuing with his theme of deflationary crisis, Armstrong sees pension funds going broke due to a lack of income from the zero interest rate policies of many central banks—including the Fed. Because of the threat of pension insolvency, Armstrong asserts that the Fed has to raise interest rates: “the Fed is telling everybody they possibly can, if you just listen, that they have to normalize—to bring rates back to where they were...around 4-5%. Rates have been kept too low for too long,” and Armstrong points out that interest rates are currently sitting at a 5,000 year bottom. There is nowhere to go but up, he says.
Because interest rates have to rise and bonds prices fall, it is only natural that the Chinese recently sold Treasuries. But Armstrong dismisses the views of those who claim that these sales signal a collapse of the dollar: “People create these crazy conspiracy theories...They have no concept of what the world economy is about.” When it comes to other currencies, he asks, “Where are big institutions going to put their money? Can you put it in the renminbi, rubles, or Canadian dollars? You can’t pick up the phone and say, ‘buy 100 billion—I need to park it someplace.’ The only game in town is the dollar. The people who say the dollar is going to crash are out of their minds.”
Given his bullish view on the greenback, Armstrong predicts that “we are probably going to see a retest of the 1985 high in the dollar, if not exceed that level” [a roughly 50% increase]. Armstrong sees the Euro going lower to 80 cents versus the dollar and sees the Pound at parity.
Coupled with a stronger dollar, in Armstrong’s mind, will be a very strong US stock market. Only adding to this strength is that money will have to go somewhere as interest rates rise and bonds fall. Armstrong points out as well that when you have financial crises or even hyperinflation in peripheral countries, stocks often go up, not down, as people look for places to preserve capital. In many ways, stocks are a better way to defend against currency collapse than perceived monetary safe havens like gold. Even as he admits stocks may trade down to 13,000 on the Dow during this current correction, Martin feels this a “shakeout move” and believes the Dow could soar to over 30,000 in the years ahead as capital flees the bond market.
For Armstrong, most people are in the dark regarding many aspects of the global monetary system. People claim to want a store of value that does not change in value, but then complain about things like austerity and deflation which have historically been linked to inflexible currency exchanges or things like a peg to gold.
And on the subject of gold, Armstrong reminds any goldbugs out there that the “noose is tightening” around private sources of wealth that are difficult to tax. It is not as easy as it once was to move bullion around the world and he feels that governments will do everything in their power to make ownership of gold illegal. Other assets—like high-end art, real estate, and above all the stock market—are the real stores of value during the fallout from a declining global bond market.
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