report

8th April 2009

Financial markets

Anti-mainstream media

Economics

This issue:
Convergence and the global end of normal - It’s Just Time (part 1)

Covergence and the global end of normal - It’s Just Time (part 1)
If you go to work in a suit, the date of 21 December 2012 may carry little significance. In contrast, if you attend outdoor rock music festivals and/or anti-globalisation protests and wear “grungy” clothing, it is likely to strike a chord. This is the nature of asymmetric information, which I find fascinating, especially in the field of financial markets. The date mentioned above is the end of the Mayan calendar. Some people believe it will herald the start of a more spiritual age for humanity, others that it will bring some kind of catastrophic event. Many people are unaware there is a debate, despite the vast body of literature (e.g. thousands of hits for “2012” on Amazon UK’s book section and only 5 of the top 100 are about the London Olympics!). Continuing the theme of asymmetric information, if you look at the intraday chart of the gold price (green line) for 18 March 2009, it might be hard to explain why gold, having been trading sideways during the afternoon in Asia and morning in London, is knocked down almost US$30/oz after trading began in New York. Gold in US$/oz on 18 March 2009 (green line)

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Source: Kitco

Gold (US$/oz)

This was the day the US Fed announced it would print US$1.15 trillion, so called quantitative easing (QE), to buy Treasury and agency bonds. This was going to be bad news for the US$ and great news for the gold price which roared back more than US$60/ oz. With the knowledge that the US authorities are (illegally) suppressing the gold price to defend their worthless paper dollar, the rationale for the gold price fall just before the Fed announcement is obvious. This will hardly ever be discussed by the mainstream media although representatives of the Gold Anti-Trust Action Committee have appeared on Bloomberg Asia, Fox News and Russian TV in the last two weeks - progress. During 2006, I was studying the gold market, the Kondratieff Cycle and the work of Ludwig van Mises (on credit cycles) and each one was pointing to an imminent financial crisis. The inspiration for this well-timed study came from reading commentators ALL of whom were on the fringes of the investment world - more asymmetric information. Martin Armstrong, whose latest work, “It’s Just Time”, I discuss below falls into the same category – and not just on the “fringes”. He has been in prison for almost a decade for contempt and commingling investment funds. Before this, however, Armstrong had REFUSED to hand over his financial model to the US government which may explain his unfairly harsh treatment. His analysis, however, borders on the “mind blowing” even more so if his calls continue to be correct.

Dow Jones Industrials

Footsie 100

Looking ahead, my expectation is for a massive convergence of economic trends and cycles in the 2011-12 period and beyond. There is no way that the vast majority of people or, indeed, current prices in financial markets, are expecting so many cycles and challenges to converge in the space of several years - this is aymmetric information now. The major trends heading towards convergence in my view include: B The peak in global oil supply; B Severe pressure on global food supply due to a rising world population and potential shortages of fresh water; B Massive debasement of paper currencies and the “Crack-up Boom” predicted by Ludwig von Mises;

Crude Oil (US$/barrel)

B The eventual bankruptcy/default of the US government; and B Increasingly volatile climactic conditions. Besides the Mayan calendar, there are other cycles of a more esoteric nature peaking during the 2011-12 period. The next peak in sunspot activity, Solar Cycle 24, is expected between November 2011 and August 2012. Three of the biggest stock market crashes in the western world during the last 200 years, i.e. 1836-37, 1873 and 1929, were all preceded by peaks in sunspot activity. I could also argue that there will be a resurgence in spirituality in the western world – although how do you play that in financial markets?

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Copper (US$/lb)

Another major (ongoing) trend, which represents a convergence in itself, is the global broadband “network-ification” of the world’s population. I discussed the attraction of the network infrastructure sector in the last Thunder Road Report – especially the dominant players like Cisco Systems and Juniper Networks, and niche players like EZchip Semiconductor. The inter-relation between these trends is dynamic. For example, let’s assume for a minute that the global economy shrugs off the current crisis, begins recovering steadily from 2010 and that my worst fears about rampant inflation and the bankruptcy of the US government are averted. In this scenario, the other major trends are likely to kick in sooner and with greater impact: B Stronger economic growth means that peak oil is likely to occur sooner rather than later, especially now that many oil companies have cut back their investment programmes; B Resurgence of growth in per capita GDP in Asia is likely to reaccelerate urbanisation and drive up demand for protein-based and higher added value foodstuffs putting greater pressure on the agriculture and farming sector; B “Network-ification” will proceed at an even more rapid rate (HDTV over broadband for all?); and B Greater short-term wealth creation might also increase the already rapid worldwide birth rate and decrease the death rate adding pressure on all resources. If I’m even close to being correct, we are facing the convergence of series of challenges and cycles in the period 2011-12 and beyond - although some of these trends, e.g. the massive debasement of paper currencies, are already apparent – it’s just that the end game has yet to play out in my view. This covergence will have major economic, social, political and geo-political impacts – and that’s even without an escalation in the ongoing conflict in the Middle East. I hope I’m wrong but my worry is that things aren’t going to go back to the “normal” (ish) that we have known during the last 2530 years. This is a subject that I want to address in future Thunder Road Reports. Maybe Martin Armstrong is right when he says “It’s Just Time” and notes that: “Far too often, the majority thinks only in a linear fashion, rather than dynamic.” I also think there is a generational bias that assumes that when we exit the current crisis life will be pretty good and, minus a few of the excesses, will go on as before. I disagree and the sectors and commodities which I like in the face of the these challenging years as we approach convergence are: B Gold and silver B Energy;

Aluminium (US$/lb)

Silver (US$/oz)

Platinum (US$/oz)

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Corn

B Agriculture and food; and B Network infrastructure.

Martin Armstrong and “It’s Just Time”
In this Thunder Road, I want to highlight Martin Armstrong’s recent work (see here) “It’s Just Time”: B Like me, he expects a massive convergence of cycles in the next few years. He has identified cycles in his own proprietary work and is very specific on the timing of their convergence the second half of 2011;

Wheat

B I can’t remember reading a more thought provoking work for a long time, if ever; B His model has had some stunning results in predicting turning points in markets AND world events (sometimes even to the day); B His analysis embraces the non-linear aspect of financial markets; and B He is the first financial analyst I’ve seen who has made reference to the Mayan calendar. Martin Armstrong has made a very bold claim which amounts to nothing less than a holy grail for investors and market commentators – he believes he has found the hidden order that runs through financial markets and the world economy. Not only is there evidence which, at least in part, seems to back up his claim, but we can also test his forecasts since he is expecting either a top in the current bear market rally and/or evidence of a further leg down in the economic crisis later this month and, looking further out, a major convergence of several cycles in the second half of 2011. Amongst past correct calls, Armstrong claims that his model predicted the stock market crash in 1987 (to the day) and the peak in the Japanese Nikkei index in late-1989 (within 18 days). These were certainly turning points in his Economic Confidence Model (see below) when he projects it back. Furthermore, Armstrong

Rice

Cotton

published a paper in 1999, “The Business Cycle and the Future (Part II)” in which he outlined new forecasts for his Economic Confidence Model. His forecasts predicted: B A major turning point low for 2002.85 (i.e. 365 days x 0.85) which was 28 October 2002; and B A major turning point high for 2007.15, i.e. 27 February 2007. In terms of the former, the Dow Jones bottomed on 9 October 2002 at 7,286, less than three weeks before the major turning point low in the model. The major turning point high perhaps raises a bit more of a debate - although it coincided closely with the recognition that “something had changed” and that the world

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US$/Euro

economy had peaked. February 27 2007 did see Asian markets crash with the Shanghai Composite index falling 9% on fears that China would raise interest rates to curb inflation and clamp down on excessive speculation. There was also a knock-on effect elsewhere with the Dow Jones, for example, falling 3.3% on the day. That said, world stock markets didn’t actually peak until October 2007. However, his call was remarkably close to the first signs of a severe crisis in the sub-prime mortgage sector, the initial catalyst for the current global crisis. On 7 February 2007, HSBC had announced an earnings shortfall in its US subsidiary, HSBC Finance Corporation, due to rising delinquency trends in sub-prime mortgages.

US$/£

Introduction to Martin Armstrong’s cycle work
In his latest work, “It’s Just Time”, Armstrong lays out the longterm forecasts for the Economic Confidence Model which, because of its unchanging nature, reaffirms two key short and mediumterm forecasts: B An interim top on 2009.3, i.e. 20 April 2009, despite what is obviously a mistake (deliberate?) in the document identifying 2009.3 as 19 March 2009; and B A major turning point bottom for 2011.45, i.e. 14 June 2011 – implying that Armstrong sees the world economy and stock markets continuing to decline for another two years.

Yen/US$

The chart showing these turning points is shown in simplified form on the front cover. Please note that Armstrong wrote his report on an old fashioned typewriter in prison so quality is poor: Economic Confidence Model: the next 2 turning points
Source: Martin Armstrong, It’s Just Time, October 2008

Euro/£

The motivation for Martin Armstrong creating his model dates back to the 1970s when he claims to have identified cycles in stock prices that exist on all time levels, i.e. intra-day, daily, monthly and yearly etc, that occur in the run up to major changes in

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Natural gas

trends. Armstrong believes that what he has identified - repeating cycles of collective human behaviour (worldwide) through the movement in stock prices and economic events - is akin to what Benoit Mandelbrot discovered, i.e. that the universe functions mathematically according to FRACTAL GEOMETRY. This quote by Armstrong perhaps best encapsulates in a qualitative way what he thinks his work shows: “What the model is reflecting is a natural tendency to limits in the behaviour and ideas of mankind to defined and distinct periods. It is like holding your arm in the air. It is no problem, but keep it there. Suddenly you cannot hold your arm up any more – it is just too heavy. This model reflects a similar nature that no matter what it is, there is a limit to sustaining any trend. This is what Margaret Thatcher said to me – the Conservatives would lose (in 1997) because ‘It is just time!’” Armstrong believes that cycles in financial markets and the world economy move through time in a similar way to waves moving through the ocean and other media. Some of these waves are relatively straightforward, but there are also more complex multidimensional waves having two or more components – like light waves which carry both electric and magnetic fields. The individual and multi-dimensional waves not only create their own effects on financial markets but can also join together causing “rogue” waves that cause exponential rises in markets and, of course, the reverse in the form of crashes.

Gasoline (US$/gallon)

CRB Continuous Commodity Index

Economic Confidence Model - the core 8.6 year cycle
The core of Armstrong’s work is the Economic Confidence Model and the 8.6 year cycle on which it is based. The starting point for Armstrong was an analysis of the financial panics which took place between 1683 and 1907. There were 26 panics during this 224 year period giving an average of 8.6153846615 years between each one. Each 8.6 year cycle breaks down into an upward leg of 4.3 years and a corresponding downward leg of equal length. The upward leg consists of an upward wave of 2.15 years, a retracement lasting 1.075 years followed by a further upward wave of 1.075 years to a peak. The 4.3 year downward part of the 8.6 year cycle is the exact reverse, or mirror image, of the upward leg. Below is Armstrong’s chart of the Economic Confidence Model. I have used this one from 1997 because of the higher picture quality, but there has been no change to the predicted turning points.

Goldman Sachs Commodity Index

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Soybeans

Turning points in the 8.6 year cycle

Sugar

Source: Martin Armstrong, 1997

Note both the interim top at 2009.3 and major turning point low at 2011.45 which I mentioned earlier. In relation to 2009.3 (20 April 2009), Armstrong notes that interim turning points like this one sometimes don’t work with the same degree of precision as for the major turning points: “This is due to the fact that internally there is yet another layer of activity, the 8.6 month cycle that constitutes 6 waves within each leg of the 8.6 year cycle…There is yet another layer beneath this calculated in 8.6 week intervals, followed by still another, 8.6 days, hours, minutes and believe it or not seconds.” So we might have to give him a degree of latitude on this one. That said, there just might be more to this period in late April 2009 than initially meets the eye in “It’s Just Time”. Armstrong refers to the 20 April 2009 turning point as nothing more than a “reaction high” – which might fit with a top in the current bear market rally. However, I wonder if he is holding things back with regard to April 2009? In fact, from my deeper study of Armstrong’s work, the period 15-30 April 2009 could be quite significant – and disturbance in the financial markets may only be part of it – has anyone else spotted why? Here’s a clue - end of December 2004. I’m very interested (and slightly concerned) to see how stock market and world events unfold during the next few weeks. Back to the Economic Confidence Model and Armstrong illustrates the twelve 8.6 month cycles (6 up and 6 down) within the 8.6 year cycle as follows - taken from the original document so apologies for the quality:

Coffee

Live Cattle

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US$/Swiss Fr

The twelve 8.6 month cycles within the 8.6 year cycle

US$/Aus$
Source: It’s Just Time, Martin Armstrong, 2008

From the information he gives, you can work out all of the cycles from years through to months and then down into weeks and days: B 12 cycles of 8.6 months in each cycle of 8.6 years B 4.333 cycles of 8.6 weeks in 8.6 months B 7 cycles of 8.6 days in 8.6 weeks B 24 cycles of 8.6 hours in 8.6 days Armstrong argues that the 8.6 year cycles build into groups of six waves forming major waves through time of 51.6 years – which is almost exactly the length of long wave economic cycles discovered by Kondratieff, to whom “It’s Just Time” is dedicated. Ironically Kondratieff suffered for identifying the hidden order in economic events by being jailed too, by Stalin rather than the US Government. The last two highs of the 51.6 year cycle were 1929.75, less than a month before the Great Crash, and 1981.35, which coincided with an interim peak in the stock market and in Armstrong’s view was the “…peak in the New Deal with escalating inflation and perpetual deficit spending”. In the same way as six 8.6 year cycles build into a 51.6 year cycle, the 51.6 year cycle builds in units of six into a 309.6 year cycle and, as Armstrong notes “At this level, I began to notice the rise and fall of civilisations” although I wonder if “empires” is perhaps a better word. This is shown below.

South African Rand/US$

US$ Index

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S&P 500 Index

The 8.6 year and 51.6 year cycles build in group of six

NASDAQ

Source: Martin Armstrong, 1999 If we assume that Armstrong’s model does have powerful predictive ability, my initial questions regarding the Economic Confidence Model were: B Why 8.6 years? Was it just luck in dividing 224 years by 26 financial panics between 1683 and 1907? That’s very lucky!

Russell 2000 Small Caps

B Why didn’t he include 1929 among the financial panics – the most famous of them all? Armstrong shows that dividing the seventh and eighth numbers in the Fibonacci sequence, 8 and 13, gives 0.615384615, i.e. the same decimal as his 8.6153846615 year cycle. The Fibonacci sequences is of course: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc. As has been extensively documented, nature (and the cosmos) appears to be based on the Fibonacci sequence so why not the timing of financial cycles and major world events which have always seemed to occur randomly. Armstrong doesn’t label it as such but he is delving into the realm of “Sacred Geometry”. Dividing successive numbers in the Fibonacci sequence eventually tends towards the “Golden Ratio” of 0.6180339887 (to 10 decimal places). Funnily enough, when I was designing the layout of this report last year, I divided the page up according to the “Golden Ratio” to make it more aesthetically pleasing (and red, white and black are the colours of medieval alchemy, so beloved of depth psychologist Carl Gustav Jung). Maybe Armstrong is right and 8.6153846615 years has something to do with the Golden Ratio – it certainly seems plausible given the ubiquity of this ratio. While he has shown the similarity with the numbers after the decimal point, I don’t think he has justified the 8 years. He does point out that 8.615 years is 3,144.5 days which

Nikkei 225 Index

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Nickel (US$/lb)

is very close to Pi x 1000 days = 3,141.6 days and maybe this is the answer, but I just haven’t grasped why yet. I was playing around with combinations of numbers like the Golden Ratio, Pi and e (where e is the natural logarithm 2.718) and various powers and roots and the closest I could get was Pi x e = 8.54. My next question was: B Why are 8.6 year and 51.6 year cycles combined in groups of six? Armstrong acknowledges that he will explain this for the first time although he still doesn’t sufficiently address the issue of “Why six?” in my opinion. He argues that waves are multi-dimensional and alongside the 8.6 year wave there is an: “organising parallel wave that creates the grouping and produces the intensity (volatility).” This is an independent “intensity” wave which comes in units of six which build up into a larger 72 year wave. The 72 year cycle plays a key role in tandem with the 224 year cycle of Political Change and is discussed below. Armstrong goes on to say that the unit of six is transferred to the 8.6 year wave which is what causes it to group in formations of 51.6 years. Yes Martin, but why six? I spent some time looking into why 8.6 and 51.6 year cycles should be combined in units of six. My assumption was that it must have something to do with fractals or sacred geometry – and I think I might have made some progress via the work of the scientist and esoteric researcher Drunvalo Melchizedek in “The Ancient Secret of the Flower of Life, Volume 1”. I detect an overlapping approach between Armstrong and Melchizedek albeit heading in completely different directions. Melchizedek’s argument goes back to the beginning of the universe and the six “motions” which brought about creation – this is represented by the “Genesis Pattern” or “Seed of Life”, i.e. six circles or spheres inside a seventh. The Seed of Life

Zinc (US$/lb)

Lead (US$/lb)

Tin (US$/tonne)

Source: Wikipedia

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Steel - Mediterranean (US$/tonne)

The implication here is that Genesis 1 and 2 about God creating the world in SIX days and resting on the seventh is an allegory of how creation arose from the void (I don’t have a view). Crosschecking with Wikipedia: “According to some, the Seed of Life is a symbol of depicting the seven days of creation in which God created life.” Proceeding from the Seed of Life is the Fruit of Life, then Metatron’s Cube, the five Platonic solids and ultimately everything in existence – and possibly Martin Armstrong’s cycles? In Melchizedek’s opinion: “I’ve spent many years studying sacred geometry, and I believe you can know everything there is to be known on any subject whatsoever just by focusing on the geometries behind it.” Funnily enough, traders and technical analysts are often using sacred geometry, although may be unaware of it, when they plot Fibonacci retracements in price movements. Back to Armstrong’s work and starting from the last peak on the 51.6 year cycle in the Economic Confidence Model, he illustrates the current six year intensity wave: The six year “intensity” cycle

Steel - Far East (US$/tonne)

Baltic Dry Index

Source: Martin Armstrong, It’s Just Time, 2008

Note that 1981.35 was the high in inflation and 1985.65 was the formation of the G-5 to “coordinate global economic manipulation” as he describes it. The interaction of the intensity wave with the 8.6 year wave can lead to “…a ‘giant’ or ‘rogue’ wave insofar as it may appear to be coming from nowhere.” Armstrong argues that it was the interaction of this 6-year intensity wave with an interim high on the 8.6 year cycle that led to the 1987 Crash and the 1999 low in gold, amongst other significant events. It is interesting to see that 2011 also features on this intensity wave – pointing to this 2011 convergence running through Armstrong’s work. I’ll save my 2017 story for a later issue.

CBOE Volatility Index (VIX)

The 224 year cycle of Political Change
Armstrong’s 224 year cycle is a function of the 8.6 year cycle, i.e. 224 = 26 x 8.615 years, the latter being the “base core” of the Economic Confidence Model as he describes it. There is also a related 72 year cycle which regularly follows the 224 year cycle. Armstrong notes that it is not a harmonic of either the 8.6 year or

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LME Copper Stocks (tonnes)

224 year cycles, but is part of a multi-dimensional cyclical wave formation. Fortunately, there is more of an explanation regarding the significance of 26 than there was for 6, although those who are sceptical of occult (i.e. hidden) knowledge may find it unsatisfactory – Armstrong notes that it is the number for God in Hebrew. Indeed, he argues that the number 26 runs powerfully through his cycles as a “separate and distinct core frequency”. Remembering the origins of the Economic Confidence Model, there were 26 financial panics during the 224 years from 1683-1907. The 13 year phase shift mentioned below is half of 26, while 13 and 52 are building block numbers in the Mayan calendar. Armstrong mentions that the number 72 figures in the Mayan calendar but others consider it to be a sacred/mystical number. For example, there are the 72 Names of God in the Kabbalah and Drunvalo Melchizedek points out there is 72 degree angle rotating in our DNA. I would note that it takes 72 years to move every one degree in the astronomical “Great Cycle” of 25,920 years which is the Precession of the Equinoxes (the “wobble” of the earth on its axis) which also ties in with the Mayan calendar. The validity of the 224 year cycle in terms of historic events is initially outlined by Armstrong in relation to the rise and fall of the Roman Empire. In Armstrong’s view, the peak in the Roman Empire was 180AD coinciding with the death of co-Emperor, Marcus Aurelius. Wikipedia agrees describing Aurelius’s death as “the end of Pax Romana”. This date was exactly 224 years after the end of the Roman Republic with the death of Julius Caesar in 44 BC. Moving forward 72 years from 180 AD, Armstrong notes, takes us to 252 AD – the collapse of the Roman monetary system took place during the reign of Gallienus beginning in 253 AD. Turning to the latter stages of the Roman Empire, moving forward 224 years from 180 AD gives 404 AD during the reign of Honorius (395-423 AD). Wikipedia describes him as an exceptionally weak emperor and the Empire was divided into western and eastern sectors during his reign. Adding 72 years to 404 AD gives 476 AD which marked the end of Romulus Augustus’s reign – he was the last Roman Emperor - and the end of the Empire! After discussing the Crusades, Armstrong moves on to the 224 and 72 year cycles in relation to the US. His starting point is the Revolutionary War of 1775 - adding 224 years takes us to 1999 which was followed by the theft of the 2000 Presidential election by Bush/Cheney and the 9/11 attack the following year. He questions whether historians will look back and view 1999 as the peak for the US as a superpower? He might be right on this – I think the Bush Administration did serious damage to the reputation of the US, terrible damage to its finances (and Obama is only making the latter even worse) and Chinese influence is rising. However, we know that empires decline over long periods of time. The

LME Aluminium Stocks (tonnes)

LME Nickel Stocks (tonnes)

LME Zinc Stocks (tonnes)

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US Treasury Yield Curve

implication from Armstrong’s work is US influence will effectively be over by 2071.

The 37.33 year Turning Point cycle
Armstrong’s argument is that cycles operate on all time scales from minutes to hours, days, weeks, months and years. Since the core building block of the Economic Confidence Model is 8.6 years, there must also be a cycle of 8.6 months, albeit a less significant one. There are 37.33 weeks in 8.6 months which implies that there must be a 37.33 week cycle – and therefore a 37.33 month cycle and also a 37.33 year cycle and so on. Armstrong comes to the 37.33 year cycle from a different perspective, i.e. dividing 224 years by six (that number again) gives 37.33 years. Beginning with 1775, which he also used as the start of the 224 year cycle of Political Change for the US, Armstrong derives the following dates on the 37.33 year wave: 1775 – 1812 – 1849 – 1887 – 1924 – 1961 – 1999 This time series throws up some other interesting dates in history, e.g. the US Congress declared war on Britain in 1812, Hitler was jailed in 1924 and began writing Mein Kampf and 1961 was the inauguration of JFK. Between the start of the Revolutionary War in 1775 and the ratification of the US Constitution on 21 June 1788 was a 13 year period which Armstrong calls a “Phase Shift”. If we start with this latter date and move forward in 37.33 year cycles we get: 1788 – 1825 – 1862 – 1900 – 1937 – 1974 – 2011.98 More interesting dates are thrown up during this period, e.g. 1900 saw the formation of the Labour Party in Britain, 1937 saw Neville Chamberlain (the appeaser) become UK Prime Minister and Japan invaded China in the same year (effectively the start of World War 2 in Asia) and Nixon was impeached in 1974. The last date of 2011.98, i.e. 24 December 2011, is also interesting – Armstrong’s model is throwing up this convergence in 2011 with regularity. While many of the years thrown up by these two series contain significant events, they are a long way from containing all of the most pivotal historic events of the last 220 years. However, Armstrong’s argument is that the 13 year phase shift is “a critical time duration in-and-of itself” and is half 26. He believes that the 1775 time series often begins with war and is closely related to events of that nature while the 1788 series is more influenced by political changes. It might be more valid to argue explicitly that these phase differences, e.g. 1775-1788, 1812-1825, 1849-1862, etc, are significant in terms of shifting political ideas and philosophies which subsequently impact future events. Indeed, Armstrong argues that 1775-1788 saw the swing towards the liberal DemocraticRepublicans, besides the struggle for independence. Attitudes

US 10-Year Treasury Yield

US 2-Year Treasury Yield

US 30-Year Treasury Yield

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Gold Lease Rates

to slavery were a big issue during 1812-1825 with Armstrong identifying the Missouri Compromise of 1820 between the pro and anti-slavery factions. This also represented a battle for power between the northern and southern states. Arguably, the debate over slavery was more important during 1849-1862 as it was the catalyst for the American Civil War of 1861-65. Armstrong doesn’t mention it, but I would argue that 1924-1937 was critical to the rise of the Nazis as well as Japanese expansionism which led to the Second World War. Nor does he analyse the 196174 period in any detail. I would argue that it was crucial to the economic and political mess that we are in today. In brief, we saw the US default on its obligations under Bretton Woods with the move to unbacked paper currencies and away from the gold standard, the assassinations of JFK, RFK and Martin Luther King, the Watergate scandal, the Vietnam War and the first oil crisis. At the same time, there were positives to come out of this period like the civil rights movement, Bill Shankly at Liverpool FC, radical cultural developments (especially in music and film) and the rise of computing with IBM at the forefront. I’m very sympathetic to Armstrong’s idea of these phase transitions, although the subject certainly requires more research. However, I’m totally in agreement with his claim regarding the current 13year time that:

Silver Lease Rates

Palladium (US$/oz)

“We are therefore looking at 1999 and 2011 as a very critical window in time.” Having already experienced much of this period which has included 9/11, the Patriot Act, election stealing, a war started on a false premise and a dire worldwide economic crisis, it would be hard for any objective observer to disagree. Unfortunately, I think this period also represents the transition to even more serious challenges in terms of energy, food, weather and the financial system in the years ahead (and possibly even greater challenges).

The 37.33 year Monetary Crisis cycle
Armstrong adopts the second of the 37.33 year time series beginning in 1788 as the major one in terms of cycles of monetary crisis. He goes on to argue that each of the 37.33 year waves has a very important peak slightly over three years before it comes to an end. He shows this graphically - although apologies for the quality again:

Rhodium (US$/oz)

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Pork Bellies

The 37.33 year monetary crisis cycle

Source: Martin Armstrong, It’s Just Time, 2008

Lumber

Since there are 12 cycles of 37.33 months in each 37.33 year cycle, he is suggesting that the latter consists of 11 upward waves of 37.33 months followed by a powerful 37.33 month downward wave. The last four of these peaks, in Armstrong’s words, reveal a “shocking degree of order” in terms of monetary crises and economic upheaval. The last 4 peaks cited by Armstrong are: 1896 – 1934 – 1971 – 2008 In 1896, J.P. Morgan organised a bank bailout of the US Government. This had developed from a badly planned attempt to create inflation by revaluing silver upwards relative to gold. It led to massive selling of silver to the US Treasury and an equally large outflow of gold – threatening the US’s ability to meet its obligations in international trade. Roosevelt confiscated gold from US citizens in 1933 and devalued the US dollar versus gold from US$21.66/oz to US$35.00/oz. Moving forward to 1971, Nixon “closed the gold window” and ended the convertibility of the dollar into gold – as Armstrong argues this ushered in “a new type of world currency system by default” based on un-backed paper currency that is doomed to abuse and ultimate failure. Armstrong then questions what the cycle implies for 2008? I agree with his view: “Unfortunately, this is a monetary crisis cycle of major proportions. When it comes into play, we somehow end up with changing the monetary system itself. We will be headed straight into the world of a one-currency system based upon the recent model – the Euro. The spread of the economic chaos around the world will provide the incentive to make things better.” It is also worth noting that the 2008 crisis led to the gold price breaching US$1,000/oz for the first time and unprecedented demand which refiners couldn’t keep up with. I think Armstrong might have inadvertently missed a couple of things here, or chose not to mention them. Firstly, he may be right that the current financial crisis is the catalyst for a better world financial system – I certainly hope so, but it could go the other

Orange Juice

Ethanol

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way if (we the) people aren’t vigilant. He did hint at this though, and he is spot on: “We are staring into a future where the political economy and capitalism are at risk in a merky (sic) cloud of uncertainty articulated only by George Orwell and Ayn Rand.” I got some push back from the first issue of the Thunder Road Report when I cautioned that the crisis could be used by the Dark Global Brotherhood as I call them (or the “Powerz” as the threatened, but not imprisoned, analyst Jim Willie calls them), to create a world currency over which they have absolute control. Secondly, it was noticeable how gold played a prominent role in each of the four years cited by Armstrong. If we take his 37.33 year cycle back in time from 1896, it could be argued that this time series has as much to do with events in the gold market as monetary crises – and the latter have often been by-products of disruption in the gold market. For example, the two dates prior to 1896 are: B 1859 – marked the official end of the Californian Gold Rush according to some commentators and was the peak of the Colorado Gold Rush. B 1821 – beginning of the era of the Classical Gold Standard.

The Convergence according to Martin Armstrong
Martin Armstrong describes the great convergence predicted by his work on cycles as: “one of those moments that Hegel viewed as ‘necessary’ and Thomas Jefferson perhaps viewed as a natural event where the blood of patriots is needed to feed the Tree of Liberty.” He shows this graphically in “It’s Just Time” as follows: Martin’s Armstrong’s great convergence of his cycles

Source: Martin Armstrong, It’s Just Time, 2008

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This shows the convergence of: B The major turning point low for the 8.6 year cycle of the Economic Confidence Model on 2011.45 (14 June 2011); and B The 37.33 year Turning Point Cycle at 2011.98 (24 December 2011). In the background is the peak of the 224 year cycle of Political Change for the US in 1999 which is now on a steady downward trend. However, for some reason, he has not included the 6 year “intensity” wave which runs parallel to the 8.6 year wave and can have “collateral effect”. With all of these cycles converging, the year 2011 could truly be a BIG ONE. Later in “It’s Just Time”, Armstrong grasps the key point about the current crisis - in my mantra, “IT IS ALL ABOUT THE DEBT” and what the US and UK authorities (in particular) are doing – borrowing and printing trillions. Armstrong highlights an important difference between the US and Europe during the Great Depression: “what is not looked at closely was that ALL OF EUROPE WENT INTO DEFAULT (my emphasis).” This is important – the US was the world’s biggest creditor during the Great Depression and it could afford the massive deficit spending of the New Deal, European countries couldn’t. Now the US is the world’s largest debtor and Federal spending is out of control, partly because it is trying to spend its way back to prosperity. Armstrong again: “The Government cannot be the stationary “disinterested” observer in Einstein’s theory of relativity. It cannot see its own actions because it is so busy trying to attribute blame to everyone else. This is the fate of our nation at stake. This is the future of our children. Are we to be so irresponsible like a drug addict who steals today with no regard for the consequences just to obtain that quick fix?” I totally agree with him when he argues: “When there is a Debt Crisis, capital will travel around the globe for security. This is also furthered by the floating exchange rate system where capital travels also due to expectations not of profit in a particular investment, but solely within the currency. A Debt Crisis combined with a floating exchange rate system will lead to the most volatile outcome perhaps we have seen even since the Tulipmania of the 1600s.” So where does Armstrong think that markets are going? He lays out the knife edge we are walking between a prolonged deflationary depression and a hyper-inflationary collapse of the currency. I have alerred on the hyper-inflationary outcome and have to admit that so far it has not come to pass.

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In Armstrong’s thinking, the direction of the stock market will depend on confidence – public sector versus private sector. If people continue to trust the US government (it applies equally to the UK - and note the recent failed bond auction) then funds will continue to flow into Treasury Bonds and away from the private sector. However, if confidence swings the other way for fear of an oversupply of bonds, it could lead to hyper-inflation if confidence in the government completely collapses: “The Dow Jones could fall to 3,500 if confidence swings to the government, or it could go through a phase transition and reach 35,000 if the swing is back to the private sector.” Place your bets...for me it’s Gold & Silver, Energy, Agriculture & Food and Network Infrastructure.

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Author: I started work the month before the stock market crash in 1987. I’ve worked mainly as an analyst covering the Metals & Mining, Oil & Gas and Chemicals industries for a number of brokers and banks including S.G. Warburg (now UBS), Credit Lyonnais, JP Morgan Chase, Schroders (became Citibank) and, latterly, at the soon to be mighty Redburn Partners. Charts: Thanks to barchart.com, LME, timingcharts.com, kitco. com, kitcometals.com. Disclaimer: The views expressed in this report are my own and are for information only. It is not intended as an offer, invitation, or solicitation to buy or sell any of the securities or assets described herein. I do not accept any liability whatsoever for any direct or consequential loss arising from the use of this document or its contents. Please consult a qualified financial advisor before making investments. The information in this report is believed to be reliable , but I do not make any representations as to its accuracy or completeness. I may have long or short positions in companies mentioned in this report.

© Thunder Road Report - 8 April 2009

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