By FS Staff
Martin Armstrong at ArmstrongEconomics.com is not a perma-bear or a perma-bull. If you had to put the well-known financial forecaster and creator of the pi-based Economic Confidence Model in a box, you might say he's a "cycles guy" with a profound appreciation for history and historical rhythms.
In his most recent interview with Financial Sense, Armstrong covered a lot of ground, projecting a Trump win over Hillary, an eventual collapse of the euro, global monetary reform between 2018 and 2020, and, perhaps the most controversial, a "phase transition" in the stock market (like going from liquid to gas) as global capital escapes low or negatively yielding government bonds for corporate debt and equity.
Years back on our show, the initial target Armstrong gave to know whether the phase transition was underway was 18,500 on the Dow. We just hit that about a week ago as the market pushed to new record highs in an almost vertical fashion.
Though he's hoping for a pullback in the short term, Armstrong's next target is 23,000 on the Dow and, if we go that high, he says we could end up as high as 40,000, which would likely rival the tech bubble in terms of epic bubble-like overvaluation.
This won't all happen at once, he told our audience, but could unfold over the next couple of years.
Armstrong has such a fascinating and intriguing past, complete with a list of uncannily accurate predictions, that he's been the focus of countless articles and, as of 2015, a full-length documentary called The Forecaster.
Armstrong's predictions have gained him a wide following and his global conferences are quickly sold out each year. Needless to say, there is a strong demand to hear his often controversial and contrarian views on what's driving global markets.
Here's some of what he had to say on our podcast last week:
Germany has now sold 10-year bonds at a negative yield, which is a first for a eurozone nation. Why does this show, as you believe, that a real crisis is brewing?
"In Europe, what you have is some people buying the dollar; the other side of the coin is that there is this popular belief that if they buy the German bund, when the euro crashes, they are going to get deutsche marks. So, it's just been a very prevalent view in Europe and if you look at the various debt yields throughout the eurozone you'll see that capital is concentrating into Germany..."
A collapse of the euro would be a very momentous event. When do you think this could happen and what would be some of the ripple effects?
"The net effect at least initially is to push up the dollar, and the dollar is the only place to go right now for world capital. You have to look at this from the perspective of major institutions-pension funds, insurance companies, and the like. If they want to say, 'I'm concerned here; I want to move a billion dollars.' Where can you move it to? You can't go to China; you can't go to Russia; and economies like Australia, Canada, and even the UK-they're too small. So although the US has a big national debt in the $19 trillions, it's big enough that world capital can concentrate into it...so the dollar going up will probably spark the next round of world monetary reform and we're expecting that as early as 2018 but certainly no later than 2020."
Scroll down to read more of his comments or click to hear an excerpt of his interview below.
Martin, a lot of your thinking on the market and where it's headed is related to capital flows. Explain if you will this idea of a phase transition in the stock market and how this is related to capital flows as you see it.
"Well, largely, what you have is a lot of institutional money [that drives the market]. Before, we were talking about the German bonds going negative. Most of these pension funds need 8% to break even. You're talking about interest rates being negative! There is no more opportunity, effectively, to buy bonds. We have some clients that are major institutions like pension funds and they've had no choice but to follow what we've been saying. They're shifting out of government debt, selling it off and buying corporate-they need some yield. You can't be negative… so, the traditional idea of the stock market going up and looking at the P/E ratio, a company's income, etc.-no, at this stage in the game it moves to 'I just want to park my money.'"
What is your Economic Confidence Model and what is it projecting?
"It's effectively the business cycle and the business cycle runs about every 8.6 years. What differs is that with each one of these peaks, it happens to be one particular sector that has the focus. So if we go back to the last one on October 1st of 2015...you've seen nothing but rising tensions against government, the Brexit...we have Trump who basically beat out every career politician on the Republican side and on the Democratic side you had Bernie...so everything we've seen since October is more or less a crash and burn in the confidence in government. If you go back 8.6 years from that, it takes you right to the day with the peak in the Shiller real estate index...1989 was the peak in Japan, 1981 was the peak in interest rates at 17% and so each business cycle happens to be something else. I would say humanity simply wants to speculate or concentrate and whatever happens to be the fad for that particular time is where they go...and this last one is government. So we are in a crash and burn basically into 2020."