Europe is in the midst of a political nightmare and may be facing a hard landing, according to forecaster Martin Armstrong of ArmstrongEconomics.com.
Martin just held a widely attended World Economic Conference in Rome with Brexit Party's Nigel Farage and explained how capital in search of yield is fleeing Europe in favor of the U.S. and emerging markets. Here's what he had to say in an interview on Financial Sense's FS Insider podcast (see Martin Armstrong on Hard Landing, 2020 Political Nightmare for audio).
Negative Rates
Because European investors are charged to park money at the European Central Bank via negative interest rates, they are desperate for returns on capital.
Through the first quarter of this year, global capital flows of at least $300 billion came out of Europe and went into the U.S. equity market, he added, which is what caused the Dow to rally from December.
Additionally, large European banks are opening branches in the U.S. so that they can move capital here and park it at the Fed. These same banks are also lending money to themselves to avoid the ECB’s negative interest rates, and some have entered high-yield emerging markets.
The situation in Europe continues to worsen. In his recent visits to Europe, Armstrong noted that officials are stopping train passengers to check for cash. It seems that everyone is hunting for money and confiscating it in some situations, he added.
Juxtaposed against this totalitarian behavior, Armstrong stated, we see central banks lowering interest rates to stimulate the economy and induce people to borrow, and it isn’t working.
The result is complete stagnation, he added. Modern monetary theory isn’t having the intended impact because capital flows are hindering its effectiveness.
“The global economy is too porous,” Armstrong said. “Theories of quantitative easing are all predicated upon a domestic isolated economy, and it does not exist. … The liquidity crisis in Europe is monumental. It's not even going to take a stiff wind. A slight breeze may blow this whole thing over. Then we'll only see even more capital coming this way.”
Capital Flows Bolstering U.S.
An expansion in U.S. economic data will likely come next year, but the U.S. is soft right now. This isn’t the real problem, however, because U.S. equities are supported by these capital flows seeking yield.
This is creating a big problem for the Fed. It isn’t going to lower interest rates, Armstrong noted, but rather pause on raising rates because of the pain it is causing around the world.
The Fed has become the de-facto central bank for the world, Armstrong stated. When pension funds and other investors need 8 percent to breakeven over 10 years and European bond yields are negative, they are forced to move money to the U.S. and elsewhere.
As a result, foreign investors are buying U.S. Treasuries, dividend-paying stocks, and even farmland in a bid to find yield.
“It’s one giant money-laundering machine going on everywhere,” he said. “Governments cannot manage the economy properly. All of these economic theories are bogus. How can the Fed raise interest rates to reduce demand when the government is the biggest borrower? You then raise the interest costs for the government, which blows out the entire budget process, which then makes them come back and say they want more taxes. You can’t borrow and at the same time use interest rates to affect demand when they are the ones that are the demand.”
For full audio interview, log in and go to Martin Armstrong on Hard Landing, 2020 Political Nightmare. Not a subscriber? Click here for more information.
