Thursday, May 20, 2010

Commenting on the Armstrong Analysis

Taylor Conant writes on the Martin Armstrong analysis:
Would you mind giving us some thoughts, perhaps in another post, about this piece and what you agree with/find to be significant along with what you disagree with/find to be confused thinking?

I have read about 30 of Armstrong's various PDFs (about 150pgs in total at this point) and I have noticed he is an interesting, diverse, well read and eclectic thinker lacking a particular "dogma" theoretically speaking, that he nevertheless believes in market primacy combined with "smart" regulation but that he also seems to contradict himself, bask in his own martyrdom a bit (I give him a break on this after what he's been through) and occasionally make a big deal out of developments or ideas that to me seem minor in detail.
Here goes.

First, I must say he has packed much analysis and observations into his report. I wonder how he finds the time.

I agree with his key point that the decline of May 6 was a typical waterfall event and not something that needs a scapegoat, fat finger or otherwise. In this sense, Armstrong and I are on the same page (See my Fat Finger Error?).

I like his thinking on tracking global capital movements. That is very important, although, to some degree, by watching the markets and the money printing activities of the Fed, the ECB and China, you will have a pretty good idea of what is going on.

I like this observation of his: "Capital is confused because of all the bullshit spun by the various news services." Indeed! I also like his comment that international capital can effect the money supply by 25%. I'm sure he is just using the 25% as a rough idea rather than a hard number, but I agree with his general thought here.

He then writes that confidence is the key. I happen to think it is confidence in the dollar, rather than debt, specifically---but I generally agree with his point.

This then brings up the point which he says the U.S. is just like Greece as far as the debt trouble. It is, but the very important difference is that the U.S. through the Fed can print money to buy the debt. Greece can not. It must count on the reluctant money printing services of the ECB.

He may fully mean that is why he thinks gold and the stock market will rise (because of money printing) but he is not clear on the point. I do agree with him that gold and the stock market could both rise at the same time (but for me only if the Fed is very aggressively printing money). The stock market and gold rise is something I think I have in common with Armstrong, unlike many believers in gold who see diametric price movements for gold and the stock market.

His discussion of how market makers withdrew during the 1987 crash, which thus resulted in much greater volatility, sounds an awful lot like my discussion on why naked short selling is an important function of market making.

His point nthe Euro acting like gold did in 1931, forcing defaults, is an interesting one and has some merit. I also can't argue with him that this could lead to civil unrest.

One place where my view does differ from his is that because he sees this as a debt crisis, he expects the dollar and gold to act stronger. I do see the dollar acting stronger, but because I see the crisis as readjustment from central bank printing to non-printing, I see the current trend as not necessarily bullish for gold, although I do acknowledge there may be some panic buying into gold from Europe, but I don't think it will be enough to support gold with the overall liquidity dry up.

That the crisis is of international proportions, I can obviously not argue with.

Armstrong is also probably correct that the stock market and gold will both start climbing rapidly at some point. But, I see this event occurring only if the Federal Reserve starts printing and I see no evidence of such at this point. Thus, I must maintain a bearish posture on gold and the stock market until I see the Fed doing some serious money printing.

1 comment:

  1. i don't really get what he's saying either. "this is a debt crisis, THEREFORE gold and stocks will climb" -- did you skip a step or two there, pal?