Why Martin Armstrong Predicts Major Sovereign Debt Crisis Beginning October 1, 2015

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Includes: DIA, TLT
by: Jason Tillberg

Summary

I'll attempt to summarize Martin Armstrong's long standing forecast of a sovereign debt crisis that has been predicted to begin in earnest on October 1st, 2015.

Why bonds will peak and yields will bottom heading into this date.

Why there could be very few places to hide and preserve wealth going into this crisis.

Martin Armstrong is an economic forecaster with a background in physics, history and computer programming. He built a computer model that helps predict turning points in market prices and events. He's attempted to uncover the cyclical nature of how the world works.

He claims October 1st, 2015, will be the date at which will start what he calls the "Sovereign Debt Big Bang."

By sovereign debt, he means debt issued by governments, be it municipal, state and local debt to debts of entire countries. The Puerto Rico default is one such example.

This is a slide from a presentation he gave in 1998 with other forecasts that have mostly all come to fruition.

He wrote on June 15th:

Since 1985, I have warned that the Big Bang was coming 2015.75. Here is the slide from our 1998 World Economic Conference. (above) This target is the culmination of 51.6 years from the first break in the Bretton Woods Monetary system - 1964.15.

So what was 1964.15? That was the end of silver coinage. The following year began the copper-nickel coinage.

Another factor that plays into this particular date is the 86 year cycle.

The number 86 comes from the number Pi which is 3.141. 3,141 days is 8.6 years and 86 is simply 8.6 times 10. Another way of putting it is 3.141 times 10,000 days = 86 years.

Armstrong wrote another blog post about the coming sovereign debt crisis on June 18th where he provided a good deal of history of such events.

He included this chart above and wrote this about it:

Some may take comfort in knowing that while previous defaults were dislocating to the market, the global financial system did not suffer any long-term damage because of these events, except following 1845 and 1931. These two major global defaults were interestingly 86 years apart. Adding 86 years again, curiously brings us to 2017. The whole sovereign debt crisis started to surface in 2009 which is two 86 units of time from when it began with Andrew Jackson in 1837. This is the Phase Transition on debt and we should expect the sovereign debt crisis to expand dramatically during the last phase into 2017.

So this is a long standing forecast that simply has not changed with regards to a sovereign debt crisis that is scheduled to go full steam ahead beginning on October 1st, 2015 and peaking in 2017.

The premise is that history repeats because the passions of man remain the same. Armstrong likes to say, "it's like a Shakespearean play over and over again, the characters just change."

My favorite economic history author is the late Peter Bernstein. In his 2000 book, "The Power of Gold, A History of An Obsession," he wrote in great detail about the events leading up to the sovereign debt crisis of 1931.

pg. 310

The fuses were in place. They were lit on May 11 when the explosive news of the failure of the Creditanstalt Bank in Vienna stunned the world. This was Austria's largest commercial bank by far, holding more than half of all Austrian bank deposits. Today we would call the Creditanstalt too large to fail. It was too large to fail in 1931, too, and the Austrian government had to bail it out. But to no avail. The Creditanstalt failure, in the words of the British Treasury official Ralph Hawtrey, "sent a terrible spasm of panic through the financial centers of the world."

That was how the sovereign debt crisis began in 1931 that proved horribly deflationary and is what made the great depression great.

Armstrong has a chart of the US dollar index showing how the dollar rallied substantially against other currencies in the initial aftermath of the Creditanstalt failure.

Armstrong wrote this past March 26th:

Then the dollar rose sharply during the 1931 Sovereign Debt Crisis. We are seeing this right now internally as well within Europe. As fear rises that the Euro will collapse, capital is shifting to Germany driving the bunds to historic highs and the DAX to highs.

What Armstrong Sees Happening Now

On August 6, Armstrong wrote this in a post about the next 2 months leading up to October 1st:

The next two months going into September will be both interesting and critical. The NASDAQ Composite made new highs in July, but the S&P500 and the Dow Jones Industrials failed to exceed May highs. The general consensus is that there will be a rate hike in September and another in December, so if we back-off from this point we may see the share market react in anticipation to the downside. This would help send cash running into the short-term government paper, making that final peak in price (low in interest rates). Thereafter, we may see the ultimate confusion as stocks rise with rising interest rates, as they did between 1927 and 1929.

What Armstrong sees happening by October 1st, is a peak in bond prices and a low in interest rates from that point forward. The correction we're now seeing in stocks is reflecting that exactly as forecasted as investors sell shares and buy bonds.

Here is the Dow Industrials (NYSEARCA:DIA) and the iShares 20+ year Treasury bond ETF (NYSEARCA:TLT) for the last 3 months:

If this all plays out as planned over the next 7 weeks, once the bond prices peak (yields bottom), as the defaults begin to materialize over the following 2 years, money may well run to stocks for safety and, as Armstrong suggests, interest rates will rise along with share prices in 2016 and in 2017 confusing many.

Humbly to us all, Armstrong wrote in the same post:

Keep in mind that this is going to be a very difficult period, for this is when we will see how worthless opinion becomes. What we are facing is something that has not emerged for nearly 300 years, so there is nobody alive who can offer an expert opinion.

As I understand it, especially from the last crisis, what really set off the rally in the dollar as a result of the subprime mortgage crisis, was the aggregate decline in debt instruments.

As of Q1 2015, there was $59 trillion in all sector credit market instruments.

It helps substantially for there to be new debt issuance to help rollover, service or pay off existing debt.

The chart below shows the year over year percent change in this aggregate debt level. Another sharp downturn in new debt issuance coupled with write offs could result in deflationary forces and a fierce rally in the dollar.

For the US economy in particular, I pointed out that age demographics are poor for growth. From July of 2015 - July of 2020, the total number of people in the US that will be aged 18-64 will only grow 1.17% in that 5 year period. Also, labor force participation rates are expected to continue to decline.

The civilian employment-population ratio has been in a healthy uptrend for the past few years. Age demographics and labor force participation rate forecasts suggest that this ratio is biased to go down again.

Post October 1st, I would be looking very closely for these two above economic data points to turn down and contribute to creating the conditions for what Armstrong believes will come to be:

A. A dollar rally

B. More sovereign defaults

C. Sell-off in bonds as risk is priced in

It does seem prudent now given this forecast to have some cash on hand.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.