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Armstrong EconomicsForecasting t.he World

By: Har tLn A. Armstrong COpyright An Rights Reserved Mlrch 1st, 2011Please Register For S\lecial Updates A t A r m s tr o n g Ec Q u Q mi . c $ .. C O H

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By: Martin A. ArmstrongFormer Chairman of Princeton EconomicS International, Ltd.

and the Foundation For The Study Of Cycles

RYING to comprehend the global economy seems sometimes difficultfor many perhaps because they are so hard wired into looking atthe world through only their own perspective, it appears that itis often hopeless to advance to the next level of knowledge. Inall reaLi.ty , there are two SEPARATE forces within all markets andeconomies that must be approached individually - HOW & WHEN! Thismeans that TIME never changes, but the patterns as to HOW the eventwill unfold is a different analysis altogether. The first can bescientific, where the latter can at ti.mes become an art form andgoverned by SUBJECTIVE analysis that embraces experience. Therefore,

understanding the difference between H O W & W H E N analysis is very critical for tosee the future, requires the comprehension of both. Then there is the internationalunderstanding of capital flows that broaden the horizon altogether. In the e.ady80s,we opened an office in Geneva. That was the place to be back then. OPEC was the centerof the world. After 1985, the action began to shift to Japan. By 1987, the very TOPbrokers of all the firms who I had met in Geneva, migrated and were now working inTokyo. After .Japan exploded from its Bubble Top in December 1989. theyrnoved toSingapore. What I was \vitnessing was the natural fLow of capital on a globallevel. Honey migrates like a herd of wild animals. This is the essence of the: Ec on om i. c C on fi de nc e M od el . I have stated many times, this .isNOT the model basedupon any individual market. It is the model that tracks the ebbs. an4 flows ofoapi.t'al on a global scale. The interesting aspect of this model is that each andevery market has its O W N model. It may be attracted to the turning points in ageneral sense, but O N L Y when it lines up with the model does this suggest thatthat PART ICULAR . market is go i.ng to be the target of capital fLows ,People who either do not understand the

global economy or are desperate to try todiscredit cycles in general, always point tothe E C M . and then try to map it against aparticular market to claim it does not wor k ,It was NOT derived from a market and it istracking O N L Y t h e H O T m o n e y G L O B A L L Y !

Each and every market has its own puretiming frequencies. Some are shorter whtleothers are extremely long. This is the casewhen looking at agricultural markets thatswing in price dramatically for they aremore closely correlated to "Feather than saythe real estate cycle. The ECM tn no wayalters the individual frequencies of anymarket, and that includes gold.

The real importance of the E C M is itsability to pi.npoint the H O T M O N E Y. Anymarket will become hot and then it 1-lEl behighly popular and that attracts capitalconcentrating in that sector causing a surgein prices. This is standard in all countri.esbe it the bubble in Tokyo for 1989.95, therailroad stocks of the 19th century. theDOT.COM for 2000, or the auto stocks forthe Great DepreSSion. Capital acts like aherd of wild animals. It runs together intrends, an d it will suddenly panic andchange direction in a stampede. T H E I M P O R T A N ' lA S P E C I' O F T H E E C M IS T O S E E W H A T C O R R E L A TE Sw r m : IT, FOR ' 1 ' H E N CAPITAL WIll. R E V E A L THEN EX T H OT M AR KE T, S E C'i'O R , C O UN T R Y, OR R E G I O N !It is N O T mapping a single market to the ECH.

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As we move into the next major targetsuch as 2011.45, (June 13th/14th, 2011),what will be most important is the factthat this becomes a S T R A N G E A T T R A C T O R that. markets will revolve around. Not all marketswill do something on that day. But thosethat do, tend to become the new favor forthe next cycle.

Take gold for example. THE BEST OF ALLW O R L D S F O R A B U L L M A R K E T shall be for goldto make a low on that day. This will be thebest possible signal that the next 4.3 yrswill be very interesting indeed.

As I have said previously, there doesnot appear to be a likelihood of any realBEAR MARKET with a profound crash. Thekey support lies in the $1,000-1,100 zone.Because the important support is so high,it is not likely that there would be a bigV t yp e b ot to m.

A C O R R E C T I O N can be like a decline,crash, or a side-ways trend that fails tobreakout to the upside or decline sharply.From a very broad perspective, the DowJones Industrials firsi hit 1,000 in 1966.It tested that level 3 times. Finally, in1985, the Dow began to take off and thenrally decisively through it into 1987. Ifyou step back and look at the yearly c h a r t ,you see a broad sideways consolidation.This is what we call B U I L D I N G A B A S E . Itwas a base defined by the top at 1000.

Looking at gold on the monthly level,it just exceeded $1,000 in March 2008. Itthen corrected (declined) falling back toabout $680 over the next 7 months. From thehighest monthly close in Feb 2008, it wasa 8 month decline.

Gold then rallied back to $1,000 injust 4 months. The decline thereafterlasted 6 months where the low was madein just 2 months and and the next 4 monthswas sideways with neither a new high nora new low. It remained within that range.The market finally made a new high in the7th month (Sept 2009) and it then ralliedsharply into December 2009 exceeding $1200intraday. Thus, a decline NEED NOT BEa steady decline with each month lower.A sideways pattern that does not reallymake sustained new highs, qualifies asa c or re ct io n.

The second type of pattern is the realbreakout. Gold could be in a P H A S E T R A S I T I O Ntype period. That raises two possible typesof patterns. (1) the March high with the Junelow, or (2) the June high with the Oct/Novlow.There is a risk that the Middle Eastmay get everyone really excited and we justblast out to the upside. I warned that therewas a possibility of seeing $1700 level byMarch and a fall back to $1400-1509 for theJune low testing the TOP of the Primary

Channel. The extreme projection for a Marchhigh is $1775 but a June high would be $2010.The two patterns are either we stay inthe P RI M A RY C HA NN E L for right now and testthe support at the 1150 or 1250 level atworst, or we blast out the top of this mainchannel, fall back to find it providing

support, and then we will be on our way toat least $5,000 and may be $12,000 by 2015/16.The Middle East is not the big issue. Weare facing a global famine and food crisis

that is behind the political unrest. This iscoming at a time when governments are broke.We have state and local governments in a debtcrisis and that meltdown is VERY REAL!!! !!1!Government is collapsing. That is the issue!

Gold actually peaked on January 21st,1980, not 1981.35. The interest r~tesihadpeaked with the 1981 turning point, whilegold peaked on its own model 64 years thatwas the turning point before the major highon the E C H . Gold crashed for 2.15 years into1982, rallied into February 1983, and thendeclined into 1985 when G5 was formed. At notime did it perfectly line up with the E C H .Gold bottomed on August 25th, 1999, and thatwas after the high on July 20th, 1998 andthe collapse in Russia & LTCM - 1998.55.

Gold has managed to start whatwe called a CYCLE I N V E R S I O N . Where it wasrising when the ECM rose in the 1970-1980sand decline with it . in general, by the '90s,its relationship was inverting. We got a lowwith the general high in 1998, and began todecline with the rallies. This realignmentstarted with 2002 where from that low goldrallied into 2007.15. It traded sidewaysuntil August '07, then rallied sharply ona flight to capital into 21.5 months fromthe 2006 high in gold.

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Gold crashed and burned for 7 monthsafter the200B high bottoming in October 'OB.Gold rallied into February '09 as everythingwas crashing. But it had not yet made newhighs. It then fell back into April as thestock market bottomed in March. By September'09, the Dow Jones Industrials were back to.10,000. Gold was trading sideways, and thenin September it began to rally peaking inDecember 2009.

The Dow began to build a base movingsideways and then gold' rallied into December'10 reaching the 1431.10 level on December 7th.What is taking place is that gold is goingthrough a C YC LE I NV ER SI ON and this is a goodthing for it is starting to realign with themajor purpose of gold - not the hedge thatis claimed about inflation, but the hedgeagainst the unsound finance of government.There is a DIFFERENCE. Steady inflation thattakes place when confidence in government isstill respectable, does not truly translatein a steady proportionate rise in gold. Justplot the national debt since 19BO along sidegold and you will be hard pressed to explainhow the debt can rise 1400% from 1 trillionto $14 trillion and why gold is .not $12,250matching the progressive rise in the debt.Everything is a matter of perception.

This is what the ECH is all about. Ifcapital is widely distributed, then there isno "hot" investment, for to achieve thatstatus, one must have capital attracted toa singular sector of investment. Once thatcapital becomes concentrated, the bubblebreaks, the crash appears, and capital isoff and running to the next great investmentidea.

Declines in a market can be sidewaysmovements in general. From a cyclical view,the sideways move instead of a rally is thesame as a decline. WHATWILL NOT GO DOWNGOES UP!

The key to gold.is its flipping or theC YC LE I NV ER SI ON so it begins to rise withthe ECM rather than with its decline. Thisis indicating that there may yet prove tobe that day where gold becomes the objectof EVERYONE'S affection. It is this periodof what is a P HAS E T RAN SI TI ON that is thenrequired to produce the big rally.

The Gold Bugs want their cake and beable to eat it too. They are mad I havewarned that gold would take a pause. Ihave received letters claiming once againthat simply because I warned that we wereapproaching this high, that is what made ithappen. That is just NONSENSE. There is noperson be it an advisor or a trader, whocan manipulate a bull market into a bearmarket. It just cannot be done.

The market is the only thing that issimply never wrong. For the bull marketahead in gold, a simple pause is NECESSARY.This is how bull markets are sustained. If wesee gold rally blasting to new highs.passing$1500, we are in trouble. This would be aserious development. warning that '....e are nowcompleting a PHASE TRANSITION that could thenlead to a low 2015.75 and the rally thereafter

It is not even the geopolitical eventsthat are really the meat and potatoes thatdrive gold. They are good for the short-livedrallies. What we are facing is a collapseof the global debt structure. That is verydifferent from anything else. Even afterthe fall of Rome, all the silver and coppercoinage effectively vanished. The only cointhat was accepted was gold. Silver did notreappear until around 800AD. For about 309years, gold became the ONLY form of moneyonce Rome collapsed. This is not likelythis time insofar as we face a Dark Ageof 309 years (6 x 51.6)(6 x B . 6 ) .

Nevertheless, what we are facing is acomplete collapse in government debt forthe interest expenditures to keep rollingthe debt are growing displacing normal typesof spending. The interest is consuming thetotal expenditure, and this is causing thetotal collapse in government debt.

THIS IS the big 800 pound gorilla in theroom. Gaddaffi is noise. Inflation is noise.It is the DEBT DEFAULT that is the reason whygold will become exponential. These big typeof exponential, moves last no rma.lLy about 11months where markets may explode 3 to 5 timesthe starting value before the PHASE TRANSITIONThus, a pause at this time is VERY bullishlong term. So do not cheer gold to rally tonew highs just yet. Patience will be the keyto the real big bucks.

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So far we have an 11 year high asof December 2010. We got a sharp reactionright away into a January low that was sofast, it tends to warn more of a base typeformation. This is highly likely giventhat the support is not really drasticallylower. Even if gold tested the bottom ofthe channel, we are only looking at thevery most, a retest of 1100.

The December high was 26 months fromthe October 2008 low. It is possible fora high in June 2011, but that would be onthe P I cycle from that 2008 low - 31.4months. The top of the P RI MAR Y C HAN NELwould stand at 1600 area. It would takeTW O H ON TH LY C LO SIN GS C ON SEC OT IV ELY A BO VETH E TO P O F TH E CH ANN E L TO H IN T A T A B IGP HAS E T RAN SI TI ON .

So far, gold is in a sideways phasethat can build a significant base fromwhich an extended bull market remains areal potential. The WORST IS YET TO COMEinsofar as the sovereign debt crisis. Yes,this entire global economy could be fixedin 30 days or less. However, the govern-ments of the world would never take suchaction and would rather see society crashand burn before they would ever listen andrelinguish any power. So yes, there couldbe that extraordinary spike up that wouldbe devastating forcing reform sooner thanlater. But I would not count on that justyet.

The monthly closing BELOW 1372 didwarn that we are in a pause/consolidationtype phase with no maj or change in trendjust yet. Everything is STILL in a normaltrading pattern as long as we remain inthe PRIMARY CHANNEL .

ONLY a monthly closing BELOW 1150would signal a bear market. This does NOTappear to be in the cards. To extend thelife of the bull market, we really needa pause. It is like taking a sleep at nightand you wake up all refreshed and ready togo. This is all we are talking about. Ahigh in June is going to be problematic tosay tne least.

In the J a nu a ry 5 t h, 2 0 11 r e po r t I v a rn e d that"[ilf Janua rye xceed ]s] the D e c e m b e r high and thencloses lower, this would also indicate apossible temporary high." Id./p5. That didnot happen. January reached only 1424 thatleft the high of 1436 intact. January didclose lower at $1333.80 on the spot. Theweekly closing support lies at 1325-1331.This has held on a WEEKLY closing basis,yet the daily level reached 1309 intradaywith a close down at 1318.40. So there wasno sell signal just yet.

The major support for 2011 remains at1045-1032. The technical support lies at1100 going into June. O NLY A YEARLY CLO SINGBELOW $ 60 0 would signal a bear market. Thatjust does not appear likely. The MonthlyChart provided is still the showing we haveNOT broken out yet into any abnormal typeof rally. This suggests that while goldhas moved to test the top of the P R I M A R YC H A . N N E L , we have yet to really break-outinto a P RAS E T RAN ST IT ON style bull market.

Silver, on the other hand, made aspectacular rally for 11 months from theFeb '10 low 14.55 to reach 31.275 on Jan3rd, 2011. This was the typical PHASETRANSITION that requires a minimum of adoubling in price in 11 months on the mini-mum. January closed lower than December,but it would require a monthly closing backBELOW $17 to signal a change in trend fornow.

Looking ahead on a weekly timing basis,the key weeks appear to be 3/14, 4/4, 4/25-5/2. 5/23-5/30 and 6/13. The most importantaspeCt will be if gold c an .produce a low theweek of June 13th. This is no guarantee.The closer we get to it I will be able tofine tune the dates and price projections.The most important aspect is to get a LOWrather than a spike high for the formerwill be the start of an extension whereasthe latter may prove to be an exhaustion.

MONTHLY timing targets are still Marchfollowed by June, followed by Oct/Nov. TheP RI MAR Y C HAN NEL stands at $1531.19 for MarGh.This is the MAJOR resistance at this point.

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T H E SP IKE H IG HThe primary danger we face is a rally

to MAJOR new highs above the top of theP R IM A R Y C H A N N E L . This would signal a breakouta nd n ay be a e xp on en ti al P H A S E T RAN S I T I O N . Ifgold blasts out to new highs, we are indanger of a premature exhaustive move. Theextreme resistance for March stands at$1,775.6. This is what would become possibleif we see a break'above $1531.19.

It would be possible if gold blastedup to the $1775 level in March, then wewould see a retest of support into June.If that came during the week of June 13th,this would signal an amazing rally maythen develop with a high at least at the$5,000 level and perhaps even $12,000 by2015.75 if v .e held the $l.: rolev el in June.

I cannot stress enough that this isjust NOT about the Middle East nor aboutinflation. There is a lot more to thistype of forecast than either of thesetwo fundamentals alone. Yes they can bethe short~term reason to support a spikerally. But these are not SUSTAINABLE anymore than the inflation scenario wasgoing into 1980.

The real key in the SOVEREIGN DEBTCRISIS. This is not about inflation inthe traditional sense. This is about thecollapse of the monetary system on a truewholesale basis.

A former client Erwin sent in the FTarticle from June 1998 when we were thenwarning about the collapse in Russia. Itwas far more profound than the traditionalthoughts at the time. This forecast is whythe CIA came in and wanted U s to build themodel for them when it was proven to beible to forecast geopolitical events.

The failure to comprehend the totalcapital concentration in Russia going into1998 was fatal. It was driven by insideitrading by NY Banks & hedge funds usinginside info from the IMF to play the debtin Russia at high rates supported by theIMF. This led to a CONTAGION worldwidethat resulted in the FED bailout of LongTerm Capital Management that was anotherback-door rescue of NY Bankers. Gold fellbecause of liquidation to raise cash thatmade the 1999 major low.

This was the real issue that finallyled to the low forming in gold on August25th, 1999. It was this fundamental shiftin the debt structure of the world that wascausing gold to reverse its 19 year declineon an intraday basis,

Inflation really had nothing to do withthe reversal of fortune in gold. It was ashift in the economic conditions behind theglobal government structure. It was 1989that' markets the beginning of the end forCommunism. The coup in Russia of August '91marked the acceleration point and by 1998,the initial corrupEion had exploded takingdown most of the sound ideas behind Russia.The IMF was a turned into a fool.

Therefore, jUst as the t'al.kwas allabout the traditional nonsense fundamentalsback in 1998, they missed the point of howunsound the investment structure was goinginto Russia. That failure to grasp the truenature of what was taking place back then,caused most' to come to the shock of thecollapse of LTCM that forced the Fed tobail them out to save the banks.

What has taken place now, gold hassurged higher post 2007 thanks to the samebanks requiring yet another bailout - TARP.This is not just inflation. We are on theverge of a currency meltdown this time.

Instead of holding the December 2010high, gold will exceed it in March 2011.If we do not surge beyond $1531.19, thenwe can still pull back at the very worstto 1040-1150. Getting ABOVE that level to$1775, on the Middle East stuff, then thebase support will simply move higher intothe $1400-1500 level.

The price is not the big issue. It isthe PATTERN that unfolds. \ve d od NOT wantto see just an exhaustive P H AS E T R A NS IT IO N .This may be more likely in silver right nowthan gold, only due to the fact that silverhas always been highly volatile.

Nevertheless, What we want to see is aJune low regardless of the support levelinvolved. A June high would be on the P Icycle and that would be much higher in the$2,000-$2500 level, with the puul back thenin the fall (Oct/Nov). The proj e cted resistancein June stands at $2010.6

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I It

B E A R F L A G B U L L F L A G PENNANT B RE AK OU T T EST

H O W

H O W markets actually develop aspatterns is also important. The WHENare fixed points in TIME so it willnot change that the week of June 13this the key week to watch to see whatmarket lines up with this point inT I M E . Nevertheless, it is H O W we alsoapproach that point in time that helpsto determine the events that follow.

There are two types of F L A G S thatare sideways base building patterns athigher levels. These are scaled by thetiming level one looks at. For example,the Dow Jone Industrials rallied totest the 1,000 level three times, inthe 1960s, 1970s, and 1980. Some madejust slightly higher highs and then fellback to retest support. The fourth timecame in 1985 and it blasted through toa new trading range. This was a long-termF L A G where it is a sideways market inprice that is equivalent to a declinethat goes nowhere. That base becomesthe platform for the next advance andthereafter it becomes support. It wasa B E A R F L A G for the final test at theTIME target (WHEN) was a low.

A B U L L F L A G would be more dangerousfor the last thing it produces is a highfrom which a decline is likely. So a high6/13 week warns of a retest of supportin Oct/Nov 2011. We would have to thenlook very carefully for it would warn ofa possible postponement until 2016.

The PENNANT is the triangle formationthat narrows until it reaches a point from

,which it will then explode in the oppositedirection of the pattern ,inside the point.

The B REA KO UT T FST pattern can unfoldeither by a retest of the 1000-1150 levelwhere that low comes in during the week of6/13, and then it would flip to the upsideand begin to move sharply higher as did theDow Jones coming out of 1985. The secondpossible pattern is you do exceed the TOPof the P R I M A R Y C H A N N E L at 1531, and thatmeans you could rally to reach the 1775level, fall back to retest the the 1500level, and then proceed to rally to newhighs.

This is the SUBJECTIVE area of analysisthat will often fall into more of an art formthan a concrete science. There are other toolsto help qualify this and remove the humansubjectivity that leads to error regardlessof who is the analyst.

The KEY is to see if G O L D begins toat last line up with the E C H . If that indeedtakes place, this will signal more thananything else that we are in fact at thethreshold of a serious economic event thatwill change the world over the next 8,6 yrs.This is not a question of if gold is tradingup or down for speculative purposes. We arefacing something FAR MORE significant thanjust a bull market in gold. This is the realleading indicator to watch at this time. Itis a window to the future that we need tosee what develops. Short-term, we have thelow or SPIKE HIGH. Long-term, a low the weekof 6/13 is a warning for the next 8.6 yrs.

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http://www .lexisne:ds.~om/lna~ni2api/delivel'1/Pri ...

Is Eu rope threa tened? T he trade im pac t of a R ussian m eltdow n w ou ld be serious for som e east E uropean cou ntries for w hichR u ssia , o n a vera ge , a cc ou nts fo r a te nth of ex po rts. w este rn E uro pe's in vo lv em en t is fairly n eg lig ib le, h ow ev er, ex cep t fo rG erm any w here R ussia represents abou t 5 .5 per cent of overa ll trade . G erm any also is the m ost heavily involved financ ia lly,w ith so me $ 30bn lent to R ussia ; indeed M oody's, the rating agency, dow ngraded C om merzbank this w eek becau se of risingE uro pe an ris ks.T he se e co no mic a nd fin an cia l h az ards lo ok c on tain ab le. R eg ardless, G erm an y's DAX in de x h as b ee n h ittin g a ll-tim e h ig hsthis w eek. T he politica l risks are m ore w orrying, thou gh: it could turn ou t that w e are only a B oris Y eltsin heartbea t aw ayfro m th e c olla pse o f th e e co no mic re fo rm pro ce ss.T he A mericans are bu sy w ith trou ble spots elsew here. H aving diplom atica lly lost a t soccer to I ran, they are now w ooingC hina and addressing the problem s in A sia , w hich is so m uch m ore im portant to them than R ussia. W ithin the past w eek orso , ithas a pp ea re d th at sa fe h av en flo ws in to th e d ollar h ave stre ng the ne d, h elp ing to se nd W all S tree t sh arp ly h igh er de sp iteth e im min en ce o f a p oo r s;c ond -qu arte r c orp ora te re po rtin g se aso n.Eu rope 's bu ll m arke t is intact, bu t it has very m uch depended on flow s from the U S, w ith A m erican investors convinced tha tslu gg ish E uro pe m ig ht so me ho w e mbrac e U S -sty le re stru ctu rin g. I fm ore A m eric ans c orn e to p erc eiv e, lik e MartinA rm strong, tha t w este rn Eu rope is threatened on its doorstep by a kind of I ndonesia bristling w ith nuc lear w eapons, theym ight take their money hom e, or perhaps send it back to a restabilised Asia .T hose su itcases stuffed w ith R ussian m afia dolla rs a re u nlike ly to provide an adequ ate su bstitu te , bu lging thou gh they arereliably sa id to be .LOAD-DATE: June 27, 1998LANGUAGE: ENGL I SHTYPE: Columns

Copyright 1998 T he F in anc ia l T im es L im ited

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