Martin Armstrong on Capital Flows, Market Bubbles, and the Road Ahead

Mon, Jan 23, 2017 - 9:48am

This time on FS Insider, we spoke with Martin Armstrong of Armstrong Economics, a widely-followed market strategist, forecaster, historian, and creator of the popular Economic Confidence Model, which is also sometimes referred to as the Pi Cycle.

Armstrong is noted for having made numerous timely calls in the course of his career, including the 1985 low in the pound, the 1987 market crash, the Tokyo crash of 1989, and more recent events like Brexit and a Trump win. He gave us some insight into what he thinks is coming, and more importantly, what other models are missing.

Capital Flows Are Everything

Armstrong’s model relies on watching capital flows. By incorporating this into his model, it’s very easy to see where money is going to move, he stated.

“Most of it is currency driven,” he said. “The computer has been able to follow all the movements and has gotten about every turn correct.”

When investors lose money after a major collapse, they're unlikely to concentrate back into the same area, he noted. Thus, capital moves into new areas and new sectors, eventually leading to a new bubble somewhere else, which we see roughly every 8 years.

Here is a brief clip of what Martin had to say on our podcast:

Where Is the Dow Headed?

“The market right now is basically churning across the highs,” Armstrong said. “Everybody’s waiting to see what Trump does.”

Right now, we have capital trying to flee China, Europe is a basket case, and it looks as though Greece will probably break out of the euro most likely by 2018, Armstrong noted.

Because of the numerous structural problems around the world, Martin believes that a US stock market crash is unlikely as all of this money looks for a place to park.

His model is basically showing the next resistance area is at 21,000 to 23,000 for the Dow Jones Industrials. Once we get to the 23,000 level, we’ll likely see retail speculators come back in, Martin said.

Capital Flows and Phase Transitions

The real issue we should be looking at, Armstrong noted, is the movement of capital and currencies.

“It’s kind of like the (1989) Japanese bubble,” he said. “What made Japan go into this bubble, was that capital concentrated in Japan from everywhere.”

Armstrong calls events like these phase transitions because they’re not really driven by a fundamental force in the domestic economy.

“Right now, the dollar is the strongest currency, and we have the most open economy,” he said. “Capital will come here. If Trump lowers the tax rate, I would sell short any company that didn’t bring their money back.”

Essentially, we’re talking about repatriating $3 trillion back into the domestic economy. At the same time, foreign capital is likely to join the party because of the problems abroad. At some point, we’ll get a phase transition, Armstrong said.

Listen to this full 30-minute interview with Martin Armstrong on our website (or podcast device) by logging in and clicking here. Become a subscriber and gain full access to our premium podcast interviews with leading guest experts by clicking here.

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