Martin Armstrong Is Free

You know you’re facing desperate times when an old man, wrongfully imprisoned for over ten years becomes a financial prophet on the Internet using just an old Remington typewriter.  Ironically, the man was tried in court for a financial fraud that could not be proved, while the entire financial world crumbled from the multitude of frauds committed by bankers, lawyers, mortgage brokers, central bankers and government officials.

But that’s exactly happened during the financial crisis of 2008.  Martin Armstrong’s story couldn’t be written in a Hollywood script because it’s just too unbelievable.

As tragic as it has been, hopefully his story will turn out to have an acceptable ending as Mr. Armstrong was released from prison early and is now serving the remainder of his sentence under house arrest.

Here is his letter published yesterday by a friend:

 

And Martin has also published his first piece of March 2011:

Contrahour wishes Martin Armstrong all the best and sincerely hopes that his typewriter gets upgraded to a new MacBook Pro.

If you have missed any of Mr. Armstrongs writings, they can be found here (http://www.scribd.com/kzuur58) and here (http://armstrongeconomics.com/).

Bond Market Lessons From The Days Of Yore

Facts do not cease to exist because they are ignored.
—  Aldous Huxley

Before theglobe.com IPO, talking trader babies, moral hazards and internet bubbles…before 0% interest rates, option-ARMs, house flipping hair dressers and housing bubbles…before TARPs, 10% unemployment rates, QE 2.0s and commodity bubbles, the United States had a stock market would generally rise and fall with the normal ebbs and flows of the business cycle.

In these days of yore, bond yields directly competed with stock returns for the attention of investor affection.  In those days, the bond market was thought to be smarter and more attuned to the business cycle.  And since stock prices followed the business cycle, bonds could often fore-tell the future for stocks.  Old, grizzled stock pros who had survived the 1970s bear markets, would often look to the bond market for guidance on the future of stock prices.

These veterans knew that falling interest rates were bullish for stocks as they were in 1982, when after several false starts, one of the greatest bull markets in history kicked off.


Souce: Stockcharts.com

Likewise, these veterans understood that rising interest rates would have the opposite affect and generally spell trouble for stocks.  For instance, in October of 1993, the veteran stock investors got a well-telegraphed warning when bond yields suddenly began rising as interest rates anticipated a Fed tightening.  Stocks continued higher on their merrily way for  several months until they snapped to attention and promptly fell four months after bond yields had bottomed.

Source: Stockcharts.com

And again, just a year later, bonds again telegraphed highs and lows in the stock market.

Source: Stockcharts.com

The grizzled veterans also understood what would happen if the stock market ignored the message of the bond market too long. They had gone through the October 1987 crash, when stocks closed their eyes, covered their ears and started yelling LALALALAL!, launching themselves to the sky.

Source: Stockcharts.com

Most of these veterans are long gone now, having been ridden out of town by high flying internet stocks, gravity defying home builders or other phenomenon that they could no longer understand. But just because they aren’t around to warn young gun hedge fund managers or high frequency trading computers of the risks of rising interest rates, doesn’t mean bonds won’t have an affect on stocks.

As the veteran stock traders learned so well in 1987, the stock market can only ignore the bond market so long.   And stocks have ignored the bond market for five months now as investors plowed back into the risk trade.  But those rising rates will bite at some time.  And as the wiley veteran would say, it will probably happen sooner than anyone expects.

Source: Stockcharts.com

The lessons of the bond market have long been lost among the circus of high frequency trading, put-selling hedge funds, activist Fed chairmen and single stock ETFs but they have not been forgotten.  The bond market might yet show the stock market a thing or two about forecasting the the future.

Windows Was Counterfeited: Why Steve Ballmer Needs To Go

Lee Ainslie of Maverick Capital recently pitched Microsoft (MSFT) as a good investment at the Value Investing Congress.  Unless Whitney Tilson has changed the name of the conference to the Value Trap Congress, I can’t imagine why you would be enamored with the stock right now.

In Texas Hold’em, when you have a leading hand on the flop but don’t play your cards right you can often be “counterfeited.”  For instance, if you hold 9-10 and the board flops 5-9-10 you will be leading against even a pair of A-A.  However, if you don’t protect your hand and get your opponent to fold with a big bet, you might end up losing.  If a 5 falls on the turn, your winning hand will have turned into a losing one.  You will now be holding middle two pair vs top two pair.

Microsoft let its winning hand, Windows, become counterfeited because of its poor management.  The only two business lessons Bill Gates preaches are

1) always hire the best lawyers you can afford (a reference to the contract which gave Microsoft control of the operating system it wrote for IBM personal computers in the 1980s) and

2) always control the ‘choke’ point of a system.  The choke point in the computing world is the operating system.  Hardware is a commodity because it is worthless without an operating system to run it.

When Bill Gates ran Microsoft, the company owned the choke point of the computing world with Windows.  Gates was ruthless in defending his turf.  When Netscape threatened to own the internet access choke point with its browser, Microsoft dropped everything to destroy its upstart competitor.  When PDAs became all the rage in the late 1990s, Gates created an operating system for PDAs to combat Palm OS.  Palm never recovered after Microsoft entered the PDA market because Microsoft always had the best hand – the company owned the PC and the PDA had to integrate with the PC to be useful.  When Sony threatened to invade people’s living rooms with Playstation and control their entertainment flow, Microsoft backed the Xbox.

But now, under the leadership of Steve Ballmer, Microsoft has lost the choke point.  The choke point has moved from the PC to mobile devices.  Microsoft’s winning hand has been counterfeited by both Apple (AAPL) and Google (GOOG).

Apple has been a thorn in Microsoft’s side for the better part of the past decade but never a huge threat because most businesses and many consumers would never dump their PCs to buy slower, more expensive Apple computers, no matter how good the user interface.  Steve Jobs was selling Lexus compared to Microsoft’s Camry.  It was basically two different markets.

The iPhone, however, was a direct threat to Microsoft’s control of the ‘choke’ point.  The iPhone was revolutionary not because of it’s interface, which was brilliantly designed, but because Apple opened up the code to allow third party developers to create new applications outside of the traditional Windows platform. Microsoft should have seen the threat immediately because it was a direct copy of the threat Palm posed with its operating system.  Yet Microsoft’s response was slow and disorganized.  It didn’t introduce a phone until 2010 and the KIN was a weak response to Palm’s phone, not to the threat Apple was posing.

So weak, in fact, that it allowed the unimaginable to happen.  It allowed another dominant competitor into the market: Google (GOOG).  The Android operating system, which was introduced in late 2007, should never have gained as much traction as it has.  Android was open design developed by a consortium of companies  specifically aimed at combating both the iPhone and any future Microsoft entry.  However, Microsoft should have been able to use its clout, cash war-chest and expertise to muscle into the market, just as it had with its PDA operating system.

Both the iPhone OS 4.0 and the Android are now working themselves backward to the PC from the newly introduced tablet computers.  Both allow third party developers to create applications that basically mimic the dominant Windows Office environment. Not only that, but in many cases, the targeted applications are easier to use than Microsoft’s increasingly bloated software.

Microsoft is now running behind with the introduction of Windows Mobile 7.0.  To continue the poker analogy, while Ballmer was trying to beat Google’s hand in search with his pursuite of Yahoo, Google hit an set on the turn with Android.  Microsoft didn’t bet big enough and fast enough on Mobile and Google stole the pot from under its nose.

This is clearly management’s fault.  Allocating resources and putting in place the correct division managers are strategic decisions that need to come from the CEO.  While KIN management was clearly incompetent, Ballmer should have realized this much earlier than 2008, when work on Windows Mobile 7.0 began.

Unless the Board replaces Ballmer with more competent management, I believe Microsoft’s stock will always trade at a discount to its competitors.  On paper, Microsoft looks like a value investors dream.  The company trades at a steep discount to Google and Apple, even though Microsoft’s margins and growth stack up equally or better.

         Click image to enlargen
In addition, Microsoft’s earnings have been growing steadily over the past two years.  In the chart below, you can see that the forward estimates indicated by the dotted line have been rising even though the stock has been stuck in the mud.

           Source: Baseline

And the stock’s Price/Earnings ratio is basically at the lowest level ever.


Source: Baseline

Since the introduction of Windows 7.0 and the resultant earnings boost from it the stock has basically gone nowhere.  I believe the market realizes that Microsoft has lost its dominant hand.  It no longer owns the choke point since that point has moved from the PC to mobile devices.

If the introduction of the biggest software upgrade since Windows XP in 2001 can’t move the stock higher, what will? Will it be Windows Mobile 7.0, a hopelessly late, fourth-place entry into the wireless market?  Will it be the rise of Bing, which costs Microsoft about $1 billion in losses every year to operate?  Will it be the Xbox which saw no growth and represents only 12% of Microsoft’s revenues?  Will it be the corporate upgrade cycle in PCs, which is being cannibalized by the introduction of tablet computers?

My answer is none of these will make the stock move higher.  Microsoft has relegated itself to a dying utility through its slow and inept management.  They have lost their dominating starting hand of pocket aces to a couple of upstart players that were playing a much weaker cards.  I believe much like IBM, which lost the operating system to Microsoft in the 1990s, Microsoft’s stock will trade at a forward P/E of the mid to low teens for the foreseeable futures.  The stock is, in my opinion, a value trap.  There’s no doubt the stock is cheap at 11x earnings and could move back to the high $20s.  And an increase in the dividend could make it more attractive to yield hungry investors.  However, I don’t see a sustainable advance back to $30 or higher until the Board cuts its losses and replaces the CEO who played his cards so poorly.

Disclosure: Contrahour is long Microsoft (MSFT) but for the life of it can’t figure out why.

What Fundamental Factors Make A Stock Move

A lot of investors are confused because of the extreme volatility in the stock market.  However, the fundamental factors that actually make a stock move up or down over the long term haven’t changed despite the advent of high-frequency trading, the ‘great recession’ or government intervention.  They’ve just made stocks more volatile in the short term.  In the following presentation, I’m going to get back to basics and try to explain what fundamental factors actually make a stock move. You’ll need the Adobe Flash player to view the video.

 

 

 

Martin Armstrong Updated Market Outlook

I received a very nice note from Martin Armstrong which I wanted to share.  Now that every central bank in the world as managed to re-flate itself out of the economic collapse, Martin's work might fade into the background.  However, it shouldn't.  His work is all about cycles and we will find ourselves back were we came from soon enough.   

In his note, Martin writes that he believes a market top could arrive after Labor Day with a retest of support in 2010.  New highs could follow by 2015. 

Letter From Marty082309   

Martin also notes that he continues to wait for a response from the Supreme Court on his case.  However, it sounds like little progress is being made.  Please contact Martin with any thoughts or well wishes at armstrongeconomics@gmail.com

Cash For Clunkers: A Shining Example of How Government-Run Programs Work

Joan McCullough, the incomprable market analyst at East Shore Partners, has a great riff about the government managing health care.  If you were on the fence about this issue, McCullough will shove you over to her side with her description of how the "Cash For Clunkers" program is going:

Hey. Are you sure you really want the government runnin’ healthcare? You do? One trip to any US Post Office oughta’ relieve you of that sentiment. But if that didn’t “cure you” and you need further evidence of why the last place Uncle Sam oughta’ be pokin’ his nose is up a proctoscope, how about considering the Mongolian Bluster Duck they’ve made of the cash-for-clunkers program before coming to such an ill-fated decision?

Ahem. You probably won’t believe what’s goin’ on with this puppy. Nevertheless, here goes:

We’ll start with the bottomline. There is a fixed amount of do-re-mi to be doled out by the NHTSA (National Highway Transportation Safety Administration). It’s $1 bil LESS $50 mil for “administration”. That $50 mil, I guess, is to pay for the 30 employees being hired by the new agency the NHTSA has created, the Office of the Car Allowance Rebate System. And also for the 200 “contractors” to whom most of the work will be farmed out.

*contractors: There is something unclear here. The press all talks about “contractors” in the plural, all 200 of them. But the text issued by the NHTSA, cited below, talks of “the contractor”, singular. I can only find reference to one contractor so far. And it’s none other than Citigroup. Perhaps Citi’s division handling the request for  reimbursements is 200-workers strong. We’ll find out eventually, I guess.

Perhaps you will be as edified as I was to learn that this new agency with the clever acronym CARS is, like “All Gaul”, divided into three parts.

Like so (highlighting is mine):

The Transaction Oversight Division which will work closely with the outside contractor NHTSA has retained to review incoming request for payment from dealers to ensure that those requests are reviewed correctly and in a timely way.

The Data Analysis and Reporting Division will review data generated in connection with the program to help ensure the system's efficiency and detect problems with the process or indications of potential compliance issues.

The Compliance Division will work to detect and deter problems related to the program and coordinate closely with NHTSA's Office of Chief Counsel when possible violations are found. It will also work with the Transportation Department's Office of Inspector General on allegations of fraud. [Ref.: www.cars.gov/files/TheRule.pdf This is the 136-page handbook released Friday.]

Lemme stop right now and ask you a question. Do you have a headache just thinkin’ about this bureaucratic nightmare or what? I thought so. Take an Excedrin and keep readin’.

Compounding the Bluster Duck, the program ends on November 1. Or until the money runs out. Whichever comes first. Got that? Okay. For starters, customers were comin’ into the dealerships starting on July 1 which was the official kick-off date. But the government wasn’t ready to allow any dealers to “register” with the program until July 24 which is the date that CARS finally published its 136-page handbook. Thus, right off the bat, there is a bottle-neck and a lot of uncertainty. And guess what else? They changed some of the original parameters that Congress had cobbled together.

Isn’t that amazing? Dealers had been accepting trade-ins since July 1 and on July 24, they made alterations! If you really wanna’ go nuts, go here:

http://www.edmunds.com/help/about/press/153567/article.html

Car buffs are familiar with the above website, Edmunds. On Monday, they put out a press release, part of which reads like this:

… “As if Cash for Clunkers wasn't complicated enough, Edmunds. com has learned that the qualifications are a moving target. The EPA confirmed with Edmunds.com that last Friday the agency "refreshed" its combined mileage ratings for older vehicles and that the new data often gives potential trade-ins a higher mileage rating. Edmunds.com learned of these changes over the weekend from consumers who had checked that their trade's mileage rating qualified for the program up until Thursday. When shopping for a new vehicle for new vehicle over the weekend, they learned they no longer qualified.” …

Isn’t that a hot, steamin’ deal from the government? J, M and J. They didn’t notify anybody. They just changed some numbers on the website. I guess you hadda’ be there when they did it or you were left in the dust. Meanwhile on balance, the major glitch goes like this:

Joe SixPack goes into the dealership and they accept his trade-in and sell him an upgrade at the discounted amount. This puts the dealer on the hook to collect the $4500 back from the government. Sounds easy enough, right? Here’s the problem: at the time the dealer passes the discount to the consumer, he does not know how much if any clunker money is still left in the kitty or if his paperwork will be rejected (some times for ridiculous reasons) or accepted … or when he can expect to get his money back.

Some dealers are already complaining that the paperwork is next to impossible to complete. That sounds about right, eh? And that given the time and the myriad of BUREAUCRATIC STIPULATIONS, there are thousands of cars that could be sold but which cannot be, owing to the frustrations of the process itself. … “"I have over $300,000 outstanding," says Gordon Stewart, who owns Chevrolet and Toyota dealerships in Michigan, Florida, Alabama and Georgia. Stewart has sold close to 80 vehicles to customers under the program. Despite many efforts, his staff has been successful in applying for rebates on only three sales. “ … [Ref.: Autonews] That kinda’ says it all, eh? 80 request for reimbursement; 3 approvals.

The government spokesperson said that there was “not a huge backlog”. However, he had no idea how many reimbursement applications were waiting in line for approval. Typical government baloney. He did promise, though, that “eventually” on the website they have set up for the dealers to register and submit paperwork, they will have a “ticker” which will show how much money is left of the $1 bil. Lemme ask you something: If you don’t know what the request pipeline looks like or the time it takes for an average reimbursement to be approved, what the heck good does it do to signal how much money is left in the kitty?

Last, lemme lay this one on you; consider it the “icing on the cake”:

Also on an as/of basis, the government is now demanding as follows:

… “Dealers will have to remove the engine oil from the crankcase, replacing it with a 40 percent solution of sodium silicate (a substance used in similar concentrations in many common vehicle applications, including patching mufflers and radiators), and (run) the engine for a short period of time at low speeds (rendering) the engine inoperable," NHTSA said. "Generally, this will require just two quarts of the sodium silicate solution." … [Ref.: Detroit News]

Unfortunately, nobody so far has made any provision to pay the dealers for this work. Isn’t this hot stuff?

Are you sure you want this crew handlin’ your request for an MRI? I thought you’d come to your senses. Good show.

If you’re bearish: 1991 Nikkei Redux

The last great hope for the bears is that the US is actually just like Japan in the 1990s after that country's real estate bubble burst.  The chart of the current NDX and the Nikkie in 1991 look very similar.  After a strong 23% rally off the bottom, the Nikkie looked like it would run higher after piercing the 200-day moving average.  However, the breakout failed. 

NDX vs Nikkei 

That breakout in the Nikkei turned instead into a head and shoulders top.  The Nikkei subsequently retested the lows later that year. 

Nikkei 1991

GM Went Bankrupt Years Ago

Although the headlines today all proclaim today as the day that General Motors declared bankruptcy, the company has actually been bankrupt for years.  Much like a small private company, General Motors has been run for the benefit of the management and employees, not shareholders.  Shareholders have not been the actual owners of the company for over a decade, as management and employees have staked claims to the companies future cash flows through pension and medical claims. 

In 2005, I published a post about an "imminent" GM bankruptcy.  I republish the post, not to congratulate my clairvoyance but rather to point out two key lessons that investors can use to analyze any situation.  First, the markets are not "efficient".  As late as October 2007, you could have sold short the stock of General Motors at over $40.  Even in the past several weeks, when bankruptcy was all but certain after Chrysler's announcement, you could have bought puts on the stock (you couldn't have sold short because there was no more stock to borrow.)  This opportunity arose because the market is made up of many investors who are hopeful, uninformed, conflicted, unsophisticated, or just plain lazy.  Therefore, securities are often mispriced, not the other way around.  It takes time for information to be disseminated and understood by the market.  If you can get ahead of the mass of investors in your understanding of a company you already have a huge advantage.

Second, you didn't need any insider information to conclude that General Motors was bankrupt years ago.  All you had to do was do some homework and read the footnotes of the financial statements.  Understanding the company's pension and medical liabilities made it clear that equity holders had virtually no chance of seeing any of the company's cash flows return to them.  Reading footnotes and listening to conference calls is tedious work and even most professional investors don't do it.  However, that's how you can get an advantage over most participants in the market. 

So with that, I bid adui to some great American classics – the Chevy Malibu, Buick Lucerne, and Pontiac G5 - three stupid cars with all the style, panache and innovation of a washing machine.   You won't be missed. 

Chevy malibu  

Buick Lucerne

Pontiac G5 

From Contrahour, March 21, 2005

(Scene: At Play Now – in the bosses office)

Thomassoulo: George, I’ve realized we’ve signed a one-year contract with you, but at this point I think it’s best that we both go our separate ways.
George: I don’t understand.
Thomassoulo: We don’t like you. We want you to leave.
George: Clearer

(Scene: At Monks Café)
Jerry: So you’re staying at Play Now?
George: Why not? Pay is good. I got dental, private access to one of the great handicapped toilets in the city.
Jerry: But they not you aren’t handicapped, aren’t you ashamed?
George: They’re the ones who should be ashamed. They signed me to a one-year contract. As long as I show up for work every day, they have to pay me.

(Scene: At Play Now – in the bosses office)
Thomassoulo: You win George. We’ve had it. If you leave right now, Play Now will give you six months pay. That’s half of your entire contract. Please…just go.
George: You see if I stay th e whole year, I get it all.
Thomassoulo: Want to play hand ball huh? Fine. (calls on intercom) Attention Play Now employees, George Costanza’s handicapped bathroom is now open on the sixteenth floor to all employees and their families.
George: Well played.
Thomassoulo: I’ll see you in hell Costanza.

— Seinfeld Episode 158 "The Voice"

General Motors CEO, Richard Wagoner, probably never watched Seinfeld regularly but if he had, he might have been able to save his company.  His strategy of appeasing the union and waiting for employee attrition to reduce the company's payroll has backfired.  As it stands, I believe that employees will be able to outlast GM's precarious liquidity position.   The company is currently being run to fund current and former employee benefits, not for shareholders or creditors.  Therefore, I believe GM will have to file for bankruptcy to restructure the company's crushing pension and healthcare obligations. 

With the GM fiasco on the front pages, it's an opportune time to look at how I analyzed this situation.   At first glance, GM might seem to be a reasonable speculative bet.  The stock is trading at about 1x trailing EBITDA, 2x trailing cash flow, .09x sales, 4.5x trailing earnings and has a 7% yield.   

In other words, the company's horrible fundamentals are probably priced into the stock at these levels. Among the well know problems are the company's short-sighted strategy of providing 0% financing and additional incentives for new car buyers.  This pulled demand for the company's cars into the present, leaving future demand very low.  The company's line up of brands and cars also gives you an insight into the company's problems.  Aside from Cadillac and Hummer, none of the company's cars offer a distinctive marketing angle or economic benefit.  If you want reliability you buy Japanese, and if you to show off, you buy German, if you want cool, you certainly don't buy a Pontiac.  In fact, 4 of the company's 10 brands should probably be killed – Pontiac, Oldsmobile, Buick and Opel – because they are so tired and have no cache left.   

These problems could be resolved by aggressively managing the company's operations.  If the operational issues were all that plagued GM, I would probably be tempted to buy the stock rather than run for the hills. 

The real problem is the company's onerous expense and liquidity position which is the result of the financial obligations owed to current and former employees.  There are several aspects to this problem. 

First, the company is not capable of cutting expenses aggressively because of its union contract.  According to the Detroit Free Press, the big three U.S. auto makers and the largest auto-parts supplier are paying about 10,000 hourly workers in the U.S. and Canada full wages and benefits not to work, despite falling U.S. market shares, shuttered plants and production cutbacks.   These workers are essentially in a holding tank for hourly employees who are off work a long time, a system devised by the auto makers and the United Auto Workers union.

While most of the companies refused to say how much they are spending to pay these workers, a Free Press survey suggests it is likely well over $1 billion this year, given the number of workers and typical union wage-and-benefit packages. Auto supplier Delphi has told Wall Street that it will spend $300 million in 2005 to pay the salaries and benefits for about 2,300 union workers who currently don't have jobs, and it says that cost is "as high as it has ever been for us."  GM's 2004 10-K states that the average hourly wage for its employees is about $74/hour.  I'm guessing few employees are actually getting paid that but once you add in the healthcare expense and "excess" workers, it's probably close.

Second, closer examination of the footnotes to the company's pension and other obligations, reveals that the company cannot survive with its current expense structure.   The obligations due to current and former employees are a drain on the company's resources. 

This table from the company's 2004 10-K from Footnote 16 reveals many of the issues.  The colored items represent areas of interest:

Gmpension

Lets first analyze the pension plan, which is actually in reasonable shape. GM has historically had an underfunded pension plan but it is currently overfunded by $1.9 billion in the US. The plan is in good shape because the company funded it with a $10 billion contribution from the largest corporate debt offering ever in 2003. This essentially shifted the risk from employees (who might not get their pension), to creditors (who might not get full value of the bonds if GM goes into bankruptcy).

The foreign pension plan, which the company inherited when GM bought Saab, is in worse shape as it is underfunded by about $9 billion. This could cause a problem since GM will have to fund it from ongoing operations or existing cash on the balance sheet. And the company will probably be unable to raise capital at a reasonable price unless investors become more comfortable with the operations.

A minor side note is the company's assumption on the discount rate used to calculate its pension plan obligations. The company looks like it makes a slightly aggressive but still reasonable assumption that the pension plan will return 9% over the foreseeable future. That's down from 10% in the past year – which was clearly too aggressive. I think a more reasonable assumption would be 8%, and which would make the plan look underfunded again, but I can live with 9%.

The real problem for General Motors comes in the form of the Other Post Retirement Employee Benefits lines. These amounts refer to the retirement benefits provided by a company to its employees other than those from its pension plan – for the most part "healthcare expense". A look at the Other Post Retirement Employee Benefits from the table shows why this is the key issue for GM – the company's future obligations in this segment amount to $77 billion, while the company's plan to fund those obligations only contains $16 billion – leaving the company on the hook for about $61 billion in future healthcare expenses.

CSFB analyst David Zion, who has done an outstanding job analyzing retirement obligations, succinctly explains the problem with the Other Post Retirement Employee Benefits for existing and potential shareholders – "In many cases, in particular among large companies, the risk of rising benefit costs is absorbed directly by the company if the OPEB plan is self-insured. Investors need to take this risk into account when valuing a company with an OPEB plan, as they are not only investing in an operating company, but they may also be purchasing a healthcare insurance company, and, for those with pension plans, an asset manager, all rolled into one."

The Company paid out $3.8 billion in 2004 for expenses related to retiree healthcare. In addition, GM used $5 billion to fund the OPEB plan in the hopes that one day the plan will be fully funded and the company will no longer have to use cash from operations to pay for retiree expenses. I believe the $3.8 billion expense will probably rise at a faster rate as employees continue to retire and grow older. It seems unlikely that GM will be able to get the OPEB plan fully funded at any time in the near future.

The under-funded OPEB plan is essentially a cash flow problem. The $3.8 billion in expense and $5 billion in plan contribution is a high price to pay for a company that will only be breakeven on a "cash from operations" basis according to its own forecast.  This is cash flow that could be used to pay down debt or pay a dividend is essentially diverted to paying for retiree healthcare.

There are two ways out of this predicament for GM – 1) fund the obligations with outside capital, as it did in 2003 when it issued $10 billion in debt or 2) renegotiate the extent of its obligations.

Given the state of GM’s balance sheet, I don’t believe the company will be able to float additional debt at reasonable rates to fund its obligations. The company’s balance sheet has deteriorated significantly in the past 15 years as the company has relied more on finance operations to boost the auto division’s results:

That’s right! Debt has tripled while stockholder’s equity has actually gone down over the past 15 years. Again, this is not a company being run for stockhoders – its being run for current and former employees. In addition, GM has $56 billion of debt coming due between now and 2007. It seems unlikely to me that the debt market will allow the company to issue additional debt on top of the existing amounts it already has to roll over. Therefore, it seems that the company could issue equity at these prices but I view that as unlikely given that the stock would collapse even further. I believe the only other choice for GM is to try to renegotiate its obligations.

However, I believe the company will be unable to negotiate with much leverage given that GM is locked into its current union contract until 2007. Therefore, the only way I see for GM to remain a competitive force in the auto industry is to enter into bankruptcy.  From bankruptcy the union should feel pressure to come to a more reasonable compromise on healthcare obligations to help the company exit bankruptcy. Otherwise, neither the shareholders nor the employees will have anything – just like Play Now –

(Scene: At Monk’s Café)

Jerry: Gee, Play Now is filing for bankruptcy. I guess you’re not going in anymore.

George: Yeah.

Jerry: So they’re not paying you your…

George: No.

Jerry: So you’re pretty much…

George: Yeah.


Economic Confidence Model Turn Date Is At Hand

Economic Confidence Model Close UP 010909A turn date in Martin Armstrong's Economic Confidence Model will be upon us on April 19th or 20th, depending on how many days you use to calculate a year.  The graphic shows that the model is predicting a top at this turn date before heading down into a long-term low in June 2011.  As Martin explains in the essay below, the model does not necessarily mean that a top in the Dow Industrials is at hand.  For instance,  the 1989 turn date forecasted a top in the Japanese Nikkei.  The Economic Confidence Model was created with inputs from around the world and therefore is not limited in scope to just pinpointing stock market tops and bottoms.  Personally, I am looking at the US Dollar, the Treasury market or the Shanghai market for signs of a top.  All these markets have experienced strong rallies off of recent bottoms and might be ready to turn lower.

Martin Armstrong sent the following essay in February.  It provides a broad overview of how he built his model and how to interpret its signals.  He also provides thoughts on how government could use the model to better affect policy.   While it doesn't contain any specific predictions, it is a fascinating read.  Once again, I have taken the liberty to edit portions of the essay to make his ideas a bit clearer. 

You can also access most of Martin Armstrong's recent essays at Scribd.com.   

Why Models Are Our Only Hope?

Should we create a model to manage our social-economy?

In the real world, experience counts as the primary attribute in any field. The question we face in the middle of this economic crisis is simply this: "Is there anyone at the helm who has any experience at all?" Can we disregard gathering the experience of those who have gone before us by constantly re-inventing the wheel for every crisis? Wouldn’t it be nice to have gathered a database so when an economic panic took place, and we tried a particular stimulus, the result was a particular effect. Yet for every economic crisis, we seem to start at the beginning retaining no knowledge or experience from the past assuming in our arrogance that that was then.

It is time to start taking advantage of the collective progress of man that has particularly developed during the last Century. We have not merely landed on the Moon, we have developed sophisticated computers to get us there. We have even conquered many forms of disease, also through the process of scientific learning.
 
Science has revealed that our greatest form of knowledge comes not from book learning, but from hands-on experience. We have even begun to unravel how the human mind works. Now we understand the difference between "book smart" and "street smart" is based upon the simple fact that when we learn only from study, we do not acquire the deeply seeded and critical knowledge base that our mind constructs through all the senses we refer to as experience. When we actually do something, we use all our senses and construct a knowledge base recording all the little nuances that are not always self-evident as being either important or relevant. I could read every book on brain surgery, but would you like to be my first patient? Just as a medical student might have perfect book scores, they must still then start at a teaching hospital working with those who have actual experience.

The Importance of Experience

What has emerged from the study of the human mind is that it takes practical experience in a field to truly comprehend what to do. There are two broad categories of memory as explained by Eric Jensen in his excellent work, "Teaching with the brain in mind."(ASCO – Assoc for Supervision and curriculum Development (2005)). The two primary types of memories are: (1) "explicit" (clearly formed or defined) that is constructed either learning in a semantic manner (words and pictures) or more episodic (autobiographical or personal experience rather than learning about it second or third hand through books); and (2) "implicit" (implied by indirect means) that includes the reflexive memories and procedural physical or motor type routines like riding a bike, burning your hand, love, and other various experiences. Jensen points out that students that are taught by merely data dumping facts, rarely retain such knowledge id. /pg 132. Jensen pointed out that studies have shown that students who attended class knew only 8% more than those who skipped class. Consequently, this semantic method of knowledge gathering is highly limited. We need something more, to strongly bond within our minds critical knowledge. We need also to invoke the ancient method of apprenticeship of involving other sensory input. It is now understood that episodic memory process "has unlimited capacity" id. /pg 134. This puts flesh on the words "book smart" and "street smart" illustrating that it is highly dangerous to trust the operation of anything to someone who has no real world experience.

Gathering Experience

This is why we need to collect the experiences of mankind and record them to a database that allows human interaction to query "why" events take place and "when" an event should take place, as well as "what" should be the correct response, and "how" should that response be implemented. History repeats because as a society we do not learn for we lack the capacity to acquire real knowledge predicated upon the best possible form of wisdom – experience. If we are afraid to construct a model that incorporates the total global experience of mankind to better manage our society and our economy, then we will be doomed to the insane notion that the economy and our very lives are unpredictable constituting nothing more than a "random walk" like following a drunk down an alley and trying to predict will he bounce-off the wall on the left or right next.

There is no "random walk" through time. Everything is event driven, and history repeats largely due to the fact that given similar events, mankind will react within a set parameter of reactions.  Stick your finger in the flame of a candle and it matters not what culture you are from or the language you speak. You will still pull your finger out of the flame.

Understanding there is a Business Cycle

VariousCyclePatterns As I have stated many times, there is always a cycle within everything, and that includes the boom and bust swings within our economy that have caused so much political unrest, that it has fueled even the birth of Communism & effected the lives of mankind throughout recorded history. Economic swings have led to wars when a king’s finances were running low, and caused dreams of utopia that influenced Karl Marx (1818-1883) whose ideas have cost the lives of many millions of people.

Cycles may come in different patterns and are at times driven by a convergence of many individual events each functioning separately according to its own cyclical nature. This is simple the very essence of how everything functions throughout life and the entire universe. It is the cyclical nature of life from the beating rhythm of your heart, the cyclical events of the seasons, weather, movement of planets, to even how artificial gravity is created by the cyclical spin. Even the music we listen to must have a cycle or rhythm. Our social interaction we call our economy, is no different.

What Eric Jensen points out is critical to our understanding of our very ability to learn and advance as individuals. This method of acquiring knowledge applies to us as a society. Jensen explains there are differences between how our brain processes either "verbal or spatial information." When we process written or verbal words in an 8 hour session there was an 80 minutes cycle for cognitive performance while the spatial task of locating points cycled at 96 minutes on average, id./pg. 49.

While there is a genetic foundation for being smart, this accounts only for about half of our intelligence. In fact, part of the brain that deals with discrepancies and is automatically activated when the outcome differs from our expectation.  This is known as the anterior cingulate and is the hard-wiring that enables us to learn from trial and error. Jensen also makes it clear that we learn through social interaction. The case in point is the nut-case who is a loner and becomes the serial killer. Social isolation is devastating to one's health as well, id./pg 95. Even in prisons, solitary confinement absent the social contacts is intended to inflict punishment that is devastating and mentally forces the subject to comply with the demands of the jailer. We are also familiar with the problem of mob behavior that can take the form of peer pressure upon the youths in school or among adults as Communism demanded – turn in your neighbor if he says anything derogatory against the government. These are forms of mental torture imposed by all forms of governments to varying degrees.

Applying Experience to Managing Government

Our knowledge has expanded tremendously in the past 100 years. Yet for whatever reason, we have yet to apply these advances to our social collective economy and to the management of government. We have incorporated computers into science. We now rely upon computers to control traffic in cities, in the air above us, and we even trust computers to land a plane. We can trust computers to create a knowledge base of disease whereby one inputs the symptoms and the computer will give you the likely disease. We rely on Expert Systems in computer programming to record the knowledge base of experience. For example, one could input all the loans ever given by a bank. They can create detailed criteria from social status to job skills and income. A new loan applicant could fill out the same form, and the computer can generate a "more-likely-than-not" analysis of whether the borrower will default.

In medicine, we can map your DNA and more-likely-than-not even tell you that you will develop a particular disease. In fact, laws have been enacted to prevent Insurance companies from using such data, for then they could sell insurance against a heart attack to only those who they know are not likely to have one.

Yet for all our advancement in every field right down to smart bombs, we run our government and our economy as if the Puritans were still in charge and characterize any effort to understand the future of our society as devil worship. The SEC takes the position articulated by its Chairman Mr. Cox when he testified before the House Oversight Committee arguing we should not seek to create any such model; "That is probably an aspiration that we ought not to have." Why? Should we disconnect all computers from traffic lights, air traffic control, go back to carpet bombing and tell our astronauts to don't worry about it, you’ll figure out how you get there on your way? What is so wrong about trying to apply technology to run our government and economy? If a doctor can input your symptoms into an expert system and generate a dispassionate list of possible diseases, why can we not do that for society?

We view government like God. We assume someone is in charge. We know not what their master plan might be, but require pure faith to assume everything will work out in the end. We handed out $700 billion to help Investment Banks due to their speculative losses without any explanation of why or how this money was even lost. We are now about to hand out $1 trillion (the total amount equal to the national debt of the United States in 1980 from inception). This trillion dollar expenditure on infrastructure has been dreamed up with no empirical evidence that if we do (x) then the "more-likely-than-not" result will be (y). We cannot afford to act like this in today's complex world. This amounts to "trickle down" economics that was the basis of arguing against the Reagan tax cuts. We are hoping that spending all this money into economic areas that had nothing to do with the cause, will somehow make the cross-over like a virus and infect the whole economy.

This effort to spend $1 trillion on infrastructure is merely supporting the pork self-interests of government. Just because Roosevelt created the Work Progress Administration in 1935 in response to the Dust Bowl, does not mean that this solution will have any positive effect at all. The government did not have the power to make it rain and unemployment rose from 8% to 25%.  Today, many professionals expect a huge wave of inflation – not economic growth. We are coming up with ideas that someone dreams UP, there is no model, and it is "Gee. Let’s try this!"

Economic Confidence Model One Hundred Years 

No serious business would dare run its operation in such a cavalier manner. Is this any way to run the world economy? Unfortunately, others follow our lead. So if the USA makes a major mistake, we will find other nations blindly follow. The proposal to spend a trillion dollars on infrastructure to make the debt bubble disappear is insane.  Milton Friedman warned about it and took place during the 1970s – we called it "stagflation."  There was a general increase in prices from the sharp rise in oil, but this "inflation" did not in any way produce economic growth.

To the left, is the last 100 years of fundamentals that are overlaid upon the major Economic Confidence Model. There will always be a boom-bust rhythm. Joseph Alois Schumpeter (1883-1950) observed the business cycle and attempted to explain it by waves of innovation. The invention of the railroad was the internet of 19th Century allowing the efficient movement of goods.  The invention of the automobile and the airplane created new waves of innovation sparking scores of other industries to expand as well. The dot.com boom in 2000 was the beginning of another new wave of economic growth. As they do often say, "necessity is the mother of all invention." As we have economic declines, we often adapt and create new forms of innovation.

We have no idea what we are doing

We have no idea what we are doing. We call upon professional politicians who have learned only in a semantic manner lacking the episodic real world experience. Worse still, we reach back in time to drag forward the Work Progress Administration as a self-serving answer as a solution today, ignoring the context in which it was created, and with no model to see what is the "more-likely-than-not" outcome.

What if we spend all this money and it fails completely to restore economic growth? Confidence in government will collapse. Other countries will hate the United States more.  Those people will then be led to blame the US rather than their own governments.  This is how war is unleashed. With such serious implication for our children, you would think we just for once tried to stop the nonsense and put our collective knowledge to good use.

With all the billions of dollars being spent, you would think there would be at least someone who had the courage to stand up and say – hey! Maybe we should create our own expert system of government and show every time they raised or lowered taxes, interest rates, regulation, or money supply, this was the result. We do not need partisan claims to support this program or another. We need empirical evidence. One cannot claim he made a scientific discovery by saying "I think!" It either is or it is not.

We can no longer afford to run our social-economy by trial-and-error as if we were some doctor in the Middle Ages yanking out body parts to see if that cures the patient. We cannot afford to manage our social-economy on pretended "book smart" claims while throwing away the collective experiences that forms the real knowledge, wisdom, and intelligence or the human experience. At best, half of human intelligence is genetic. This is why innovation has not always arisen from a single class. We have reached that point in the evolution of mankind where it is time to make that next leap. We cannot afford to throw away the experience of generations that is the essence of all human knowledge as if they never existed. This is like burning down the famous Library of Alexandria in Egypt. This is a profound crime against all of humanity.

Why Models Fail

The very same presumption built upon arrogance that we know everything, creates the inherent reason that causes most models to fail. When we ask a question, there are often two reasons. (1) There are those who are genuinely interested in acquiring real knowledge, and (2) there are others who need to boost their ego and argue that someone is wrong and therefore less intelligent than them, but have no practical experience to offer empirical evidence to support their argument. If we try to create a model under the first approach, we will succeed. If we rely upon arrogance to try to pretend we know of what we speak, we will fail.
 
There is a middle ground we might classify as (1.5). This is where we may be interested in accumulating real knowledge, but we still deceive ourselves for we begin with a presumption that is not true. A classic example is Heinrich Schliemann (1822-1890) who was a German untrained archaeologist and a rich son of a German Industrialist. He believed that Homer (9th-8th Cent. BC) wrote about actual history in his epic tales of the battle against Troy. At that time, all the academics at the leading Universities in England and elsewhere, had argued that Homer wrote children’s fiction. No one bothered to go out and actually test their theory until Schliemann. They presumed a fact that had no empirical evidence. If you begin from an unsupported presumption, you will fail. It may be unintentional but the motive matters not, for the result will be the same whether it is produced from ego or mistake.

There is a third reason why models fail – (3) the economic evolution process. I have often written that perhaps the father of the Business Cycle is Nikolai D. Kondratieff (1892-1938). At the time that he was investigating long-term economic trends, Kondratieff discovered huge waves of booms and busts in economic activity. He relied upon the economy as it stood at that moment in time. In the 18th – 19th Centuries, about 70% of the economy in the United States was agrarian. This was a much higher number in the Third World and in Russia at that time. Therefore, Kondratieff fell into the third category of error. He started with the presumption that the economy in the future would be driven by this commodity cycle of booms and busts. If the economy evolved and it was primarily moved by a different component, then the model would no longer predict the main overall economy, but only the commodity sector. Therefore, we must understand that a model can still fail by the failure to be able to adapt to changing conditions.

Not to slight anyone, it should be also noted that Kondratieff may have been influenced by another Russian of little fame. In 1922, Professor A. L. Tchijevsky actually published a book: "Investigation of the Relationship Between the Sunspot Activity and the Course of the Universal Historical Process from the Fifth century B.C. to the Present Day." Tchijevsky established that the 11 year cycle in sunspot activity effected society by gathering evidence from 72 nations between 500 BC to 1922, demonstrating a human excitability defined as migrations, riots, wars, revolutions, and various changes in magnitude. His work may also have influenced Kondratieff insofar as looking at the economy from a cyclical nature. The low in sunspots was 2008.

Designing the Model

Now that we understand the first set of errors that will doom any model, we need to ensure absolute objectivity.  To build a scientific model takes absolute clear understanding that separates the dangerous ego inherent in so many people who need to prove themselves right because they lack personal confidence in their own ability. We also must define the scope of the model for that will determine what we can and cannot forecast, understand, and manage. We must keep that personal ego in check and that means surrendering not just the contest to be proven right, but to surrender that temptation to assume anything. It is extremely hard to get to this zone of total objectivity. But this is the only place where a model can be designed. Ironically, it is man’s ego that prevents so many from crossing that line into this state of pure objectivity. This is not a contest or a child’s game.  This is a serious matter where we accept that we know nothing and allow the real knowledge to manifest by observation. So few have embraced this state in modern economic times.

Adam Smith (1723-1790) achieved this state, but he did have the Physiocrats to compete against. Smith's competition, however, was not by argument. He established the understanding of human nature and capitalism by observation creating empirical evidence, not mere criticism. Those who criticize but have no experience bring nothing to the table. Smith observed the real world, how it operated, and produced the findings. Smith did not just offer words of disagreement like the scholars who never spent one day in the field to prove any substance but argued against Schlieman.  We need substance and empirical evidence to support words, otherwise it is just rhetoric.

The Scope

Perhaps the first misconception about the Economic Confidence model that I discovered is that it is a model for stocks, or the United States, or gold, or real estate. The truth is something quite different. There is a natural cyclical rhythm to everything in life from nature to mankind himself. The financial instrument that we may be using at the time matters not. Mankind will invest in anything and when there is a shortage of toilet paper, he will run out and hoard it, no different than gold. Therefore, we must realize that the scope of what we are dealing with is not limited to anything in particular, but is the collective behavior of mankind in all nations around the world.

We tend to be also very self-centered. We assume that people see what we see and that leads to great confusion. In other words, the business cycle is not all about "us" or "them" for it encapsulates everything and everyone. For example, the US panic of 1857 was also not a local event. It was an outcome attributed to several local developments, including the defaults of railroads on their bonds that led to the collapse in their stock prices. Many banks had invested money in railroads and subsequently failed.  The analogy is not so different than investment banks today. This was one reason that led to the separation between commercial and investment banks. As the railroad bonds were hit, the stocks fell sharply. This caused assets of banks to decline, and people lost their trust in private banks causing runs and widespread bank failures. This led to the first real sharp increase in unemployment that was a rather new product of the age known as the Industrial Revolution. Where under the pure agrarian model, labor was typically slave, indentured servants, or serfs, the Industrial Revolution caused a cycle in employment. 

What is overlooked, however, is that the Panic of 1857 was also a global force manifesting as a contagion. The Panic of 1857 in the United States also led to a money-market crisis in Europe. Europeans had been eager to invest in the New World and with major gold discoveries in California in 1849, visions that the streets of America were "paved with gold" was a popular slogan to fuel investment overseas. So, the financial Panic of 1857 became the first real "contagion" that infected Europe after the South Sea & Mississippi Bubbles of 1720.

The next major US panic was also related to worldwide events.  The Panic of 1873 began in Vienna, Austria during June that year just eight years after it lost the war with Prussia in 1866. The Austrian financial crisis spread like a contagion causing European investors to sell American assets to cover losses. This led to the collapse of a major Investment Bank, the Goldman Sachs of its day, Jay Cooke & Co on September 18th, 1873. This set in motion a major collapse dubbed "Black Friday" that resulted in the stock exchange closing its doors for 10 days starting September 19th, 1873. By the end of 1873 in just three months, over 5,000 businesses failed in the United States. Tens of thousands came close to starvation. This is where we find the first Soup Kitchens appearing in New York City.

Likewise, the 1929 collapse and the Great Depression were also worldwide events. Herbert Hoover’s memoirs provides the historical documentation for the Currency Crisis of 1931. Virtually all of Europe defaulted on its debt causing the dollar to rise to historical levels because it was still on a gold standard. This led to the collapse in exports and the cries for greater tariffs. This culminated in Roosevelt's famous confiscation of gold and a near 60% devaluation of the dollar in 1934.

In defining the scope of the model that needs to be created, we cannot ignore the world any more than the world can ignore events in the United States. We must input all economies and markets and realize that every person in every country will respond according to Smith’s Invisible Hand. Currency is like a language. We think and measure everything in the currency of our origin. That means we will invest in China if we can see a profit in our home currency, not the local currency of China.

The 1987 Crash took place because of the formation of G-5 (Group of 5) in 1985 that was organized to force the dollar down, no different than Roosevelt accomplished with his 1934 confiscation of gold and the devaluation of the dollar. The problem was, those in charge had no practical experience. They knew not the repercussions within the global economy. The Japanese had been buying nearly 40% of new debt offerings and they were heavily invested in US real estate. Once the politicians stated they were banning together to force the dollar down by 40%, they failed to realize the complex nature of the economy. They assumed that lowering the dollar value by 40% would allow the US to export more by devaluing the costs of its production. However, that also meant that those who had purchased US debt would lose 40% as did those who purchased US real estate and stocks. Thus, the stock market crashed. People called the brokers asked why people were selling, and they could not articulate why when there had been no domestic change in fundamentals.  It was the lack of fundamental news that caused the panic!

Price over Wave Perhaps this helps to understand what is truly necessary to construct a viable model. There is no individual who is capable of making so many major calculations within their head. This is beyond the human capacity only from a standpoint that while the mind could function subconsciously, we lack the ability to query the mind independently on a sustained basis.

Now, hopefully, we can see in our mind how such a model can function. The primary wave structure I have named the Economic Confidence Model is a composite of the entire world economy. This is why we see global markets in fact rising and falling in line with this model. For example, the Japanese market peaked precisely with this model on the 1989.95 peak. We also witnessed the collapse of communism also in 1989.  At the 1998.55 turning point we saw the collapse of Russia that also caused the collapse of long-Term Capital Management. We also have now a global crisis that unfolded with 2007.15 that market the high in US real estate and the Japanese markets.

The model is extremely complex. A wealth of national and market data is brought together under the Economic Confidence Model running separately and independently behind this model. It is the convergence with the overall wave structure of 8.6 years that enable one to see what economies and markets will be affected. As illustrated above, there are then two separate wave structures that also filter into the model quite independently – volatility and Schema.

Economic Confidence Model Schema Frequency adn Volatility Model 

The First Wave Structure is the volatility models. This also runs on the main collective structure of the Economic Confidence Model. However, clients were quite familiar with the forecasts we provided at Princeton Economics that called for "Panic Cycles" in specific individual markets. Thus, the illustrated component wave of a base unit of six, built into a major wave of 72. However, we also had separate volatility models on each economy and each market. Again, it would be the convergence of markets and economies as well as currencies that drives the complexity both in trend as well as volatility.  The Second wave Structure is the "Schema Frequency Composite" that tracks the global complexity and projects the patterns of development. It is this pattern base that affords the source for technical analysis and other pattern based forms of analysis.

Economic Confidence Model 72 NationsThe overall Structure of the Economic Confidence Model is dynamic with 72 nations represented and every sector and market included.  We then filter that through a country’s currency, combine that into a regional perspective, (Asia, North America, South America, Europe, Russia, Middle East, Africa. Australian and the Pacific Island Nations), and the global model begins to take shape. This is how capital moves, from one region to another. When the Americas were discovered by Europe in 1492, it sparked an age of empire building. But it also led to capital investment. The first economic boom became the Mississippi Bubble and the South Sea Bubble that led to a bust in 1720. By the mid 1800s, we see regular European investment capital flowing to US/America.  This trend was affected by the first and second World Wars.  By the end of World War II and the start of the Bretton Woods meeting in 1944, the United States had 76% of the world's gold supply. That is why the dollar became the reserve currency.

The formation of the G-5 in 1985 and the talk that they "wanted" to see the dollar decline by 40%, began a capital withdraw from the United States back to the second largest economy, Japan. As that capital contracted, both the yen rose in value globally as did its real estate and share prices. This attracted capital worldwide causing a capital concentration in Japan forming the Bubble top. As the foreign capital began to leave, it stayed in Asia, and then turned its focus to Southeast Asia. That led to another boom and followed by another bust. We then see the capital flows headed back to Europe in anticipation of the coming Euro. The US stock market also bottomed precisely with the Economic Confidence right to the day 1994.25. 

Capital moves around the globe like a herd of wild animals. We must understand that this inherent characteristic is what also causes the rise and fall of nations. For example, Italy and Spain were the dominant economic forces in the 15th Century. The wealth of the Americas was pouring into Spain. But Spain borrowed heavily and squandered its vital wealth through poor government management. Spain defaulted on its loans to its bankers, who were Italians. That default ruined both nations. The extremists emerged and the Spanish Inquisition was authorized in 1478. The Spanish were so severe, that the Pope Sixtus IV had to interfere. The Spanish Inquisition was a state tool, and it was so powerful, even the Pope was unable to restrain it. In 1483, the Spanish Government became the grand inquisitor for Castile. It was used to hunt out Jews and Muslims. This led to the demise of Spain and, eventually Italy, reducing both countries to third world status. The persecution of the Jews led to their flight to Amsterdam. This migration gave rise to the Dutch, for the Jews took with them their skills in banking and risk. We find the migration of banking to Northern Europe and the birth of insurance. This eventually migrated to London.

The same pattern is emerging in the modern world.  Following World War II, New York emerged as the new financial capital of the world. But where the US had 50% of all global IPOs in 2000, the number fell to below 5% after the prosecutions of ENRON and WorldCom. The insane new criminal penalties attached to corporate events, has driven capital out of the United States in the same manner as the Spanish Inquisition destroyed Spain.  If the Chinese make the transition to a free market without the political unrest, China will become the new center in the years ahead taking capital from the West and Japan.

Freedom To Think

While it took me the better part of two decades to construct this model, it became obvious that in order to create a worthwhile model, it had to be able to freely adapt. The failure of Kondratieff's Wave in forecasting the overall economic trend was due to the fact that the economy evolved. Kondratieff had based his model upon the price movement in commodities. This made sense when commodities had accounted for between 40% and 70% of all employment and economic growth. However, the Economic Confidence Model had to be able to also forecast the migration of capital (capital flows) as well as the evolution of economic growth dependent upon the component structure of the economy.

The model had to "think" like a human. It had to learn from "experience" and not ignore the ability to accumulate knowledge, not just data. To accomplish this goal, I had to design a system that had no predetermined rules. It had to be able to learn like a child and construct its own "knowledge base and experiences." It would have to be taught only how to think and how to analyze. This required a new method of programming. But it also required allowing the creation of skills, but without the predefined rules.

There could be no presumption that if interest rates rose, stocks would fall. No such relationship rules could be created. This would defeat the ability to create a free thinking model. It would analyze and compare azuki beans in Japan to crude oil in the Middle East. If there was no relationship, the computer had to discover that on its own. This dynamic structure was the only way to create a model. It would be the only way to survive the pitfalls and establish a collective artificial means of acquiring true knowledge – that is "experience" not the mere possession of data nor the creation of massive predetermined rules based upon assumption that could easily change with time.

In this manner, the model would be able to see the migration of capital and the evolution of economic trends. Like the precession of the equinox where the earth completes about one cycle traveling back to the same point against the full scope of the universe every 26,000 years or so, this movement is only about 1 degree every 72 years. One generation can barely notice such movement. It takes generations to discover such trends.  The economy of mankind is no different. The rise and fall of civilizations is linked to the migration of capital and people. The population of Europe in 1900 was about 400 million compared to 76 million in the United States. Things change dramatically and it takes the collective observations to even ascertain such trends as they are developing. We can look back and see what took place, but rarely can we foresee the trends extrapolated from subtle movements.
 
Universal Bank of Lebanon was one of my clients in the early 1980s. They found a ledger where someone had written down all the prices of the Lebanese pound for decades. They asked us to build a model to be able to forecast their currency. The data was input and a correlation with the global economy established. The model correctly forecast that the currency would collapse in a matter of days. I did not understand that a war was about to start and that is why the computer was correct. How could it see such events? It did not know of the war at that time. But those who do know could take financial positions to profit from the news. Those who knew moved capital in advance and that flow registered on the model.  The model understood the economic result, regardless of the fundamental cause.

This event led to the gathering of data on Rome and ancient times so that the computer could expand its knowledge of how political-economic events also have a precursor. Those who know a war or a terrorist act is about to take place, move funds and take positions that can be ascertained. Building long-term models then allowed the computer to accumulate knowledge of events that could be read no different than tree rings. It was the patterns that emerged from the fall of the Roman economy in 3rd century AD that reflected not a steady progression of trends, but a sudden shock that appeared to form out of nowhere. This database allowed the model to evolve a "generational knowledge base" unprecedented in human history, "collective experience."

It became obvious that trends emerged as a "contagion" even in ancient times.  A historical example of a “contagion” was the overthrow of the Tarquin king in Rome 509BC which created the first Republic. This "contagion" of Democracy spread as far as Athens in 508 BC. The bold new idea of “Democracy” created a trend toward an elected government and swept the ancient world within one year. The exact same trend emerged in 1989, with Tiananmen Square (June 3-4, 1989).  This was closely followed by the fall of the Berlin Wall by November 1989; Russia also withdrew from Afghanistan in 1989. This was the first Peak on the 8.6 year cycle into a Private Wave that had begun in 1985.65.  To the model, these trends may be separated by thousands of years, but they are as similar in nature and appearance as identical twins.

Collapse of Roman Silver Monetary System

For those who might question the model’s accuracy, I gave a lecture in London in the summer of 1998, within sight of the high of the next wave on 1998.55. The model was projecting the collapse of the Russian currency and economy. The London Financial Times was at my lecture and ran an article on the front page of the second section stating that I had made that forecast in London.  I gave Russia about 30 days before the meltdown. By September 1998, Russia collapsed. The Fed had to bailout Long Term Capital Management. After these events, the CIA approached me and wanted me to construct the model for them. However, they were not interested in the real economic capacity of the model and how to improve our management of the economy.  They suddenly realized the model had major intelligence value.

I was also invited to fly to China to meet with the Chinese Central Bank after the correct forecasts for 1989 and the Asian Crisis. China did come to an agreement to contract with Princeton Economics to do all its economic forecasting. The seizure of Princeton Economics in 1999 by the US Government put an end to that deal.  The computer had also correctly forecast in 1999 that crude oil would rise from $10 to $100 going into 2007. The US Department of Energy came in and wanted us to create a model of energy for them. One of my employees, James Smith, showed up before Judge Owen on October 3rd, 2000 with the proposal from the Department of Energy. It was given to the court, but the SEC objected and wanted the Princeton Economic Institute closed and all forecasting stopped.  So much for free speech. The record in court shows they would not even allow James Smith to testify.

Ability To Communicate

Still, it was cumbersome to communicate with a computer by just looking at printouts of data and relationships. It was critical to be able to communicate with a computer in the same manner as a human being. In the early 1980s, it dawned on me that I needed to teach it English and how to utilize natural language. This structure differed from imputing data of 72 nations and every market. Where in one forum I could not create any rules fearing contamination or bias, here I had to create the rules of language that would be hard-wired for form and to establish definitions of words. That was not something I found extremely difficult. That was the easy part. Giving a computer essentially a dictionary was not that hard. The tricky part was how to make it understand the words, articulate those words to describe what it discovered, and relate to a human being. I was now venturing into the world of SciFi and everything I had learned in computer engineering back in the 1960s was vital to visualizing the possibilities.

I used my two children as test pilots. They were born in the late 1970s, so they were young enough to participate without prejudice. I created a knowledge base of the English language with all the words linked as in a thesaurus. Thus, it was simple for a computer to relate one word to another and understand their meaning. I merely divided the language into subject, verb, and object, with the computer then comprehending that the language was no different than a math problem. It understood the subject and the object. What to do with them was determined by the verb.

Now I needed my children to help put a face on the computer. By this I mean I had to teach it how to communicate. I initially established a type interface. My children would type on the computer interacting with the computer. What I designed was for the computer to learn who it was talking with. It would ask intimate questions that were related to what my children liked, disliked, what they ate, who their friends were, and what sort of pets or animals they liked.  It would record answers and thus acquire knowledge like a human.  It learned from experience. This allowed the computer to have a conversation. It could renew a conversation by asking how your friend was feeling, keeping track of all relationships. It could both respond as well as initiate a conversation once it could understand who was there.

One day, my daughter came home from school and saw I had the computer apart installing voice capability. She got upset and thought “he” was dead. I assured her he was fine. But this system was able to befriend 9- child, and converse with her to the point that it began to create a working knowledge base of who she was and what she dreamed would be their future. It communicated & understood her.

Former employees have corroborated that the computer could talk. The voice modules were successful and this interface that my children helped me create was the key to real communication. Like the best SciFi movies, the computer model was now fully functional. I could talk to it and ask how it arrived at a particular forecast. The weekend before the 1987 Crash, we had a seminar in Princeton. Clients who were there knew the accuracy of the model. The target date was 1987.8 – that was precisely October 19th, 1987. I gave that seminar explaining that the computer forecast was that the S&P 500 futures would drop by 10,000 basis points. It did precisely that. It was my job to state what the computer concluded. It was not my personal opinion, it was the computer and it did an amazing job. 
 
Manipulating the Cycle

I believe I am a political prisoner no different than Kondratieff. Others have dubbed me "John Galt" of Atlas Shrugged. Whatever I am like, no one can manipulate the world economy – not even the Government or all of them together. At the very best, if everyone followed the model, one of two possibilities emerges. (1) The amplitude may be increased, or (2) the wild amplitude could be reduced. Like John Maynard Keynes postulated, Government could indeed help the economy by manipulating spending, interest rates, and taxes to indirectly effect an economic decline by lessening its degree of magnitude. But never would it be remotely possible that highs could be turned into lows by the sheer will of man himself. This would be up there with inventing a pill that defeats death.

Manipulating the Cycle

Illustrated above, the best we can hope for is taking a natural wave (A) and then having a experienced government apply calculated stimuli to reduce the amplitude of the wave to a lesser contraction (E). Our problem is the refusal of government agents to understand what is taking place and blaming high salaries of CEOs.  High CEO salaries have nothing to do with economic reality any more than overpaid sports figures.  It is the politicians same rash behavior that leads to political loss of freedoms. It was the hatred of Marx that led to communism and socialism. Government begins a war against the free markets and human nature itself.

This is the real casualty of what is going on. It is not a collapse in capitalism; it is the collapse in socialism. The same way government defines "inflation" as the rise in the price of goods and services. The government is shifting the blame to the private sector rather than defining "inflation" as the decline in the purchasing value of the currency.  That would place the blame upon fiscal policies. "Inflation" in the price of goods or services is only a private sector issue when it is isolated for one particular item for an identified reason, such as a hurricane that wipes out an entire sugar crop. Otherwise, when price increases transcend the entire spectrum of goods and services, it is not the greed of corporations, but the decline in the purchasing value of the currency.

The driving force behind the business cycle is what we call the bullish/bearish consensus. In other words, the majority must be wrong. Why? The fuel behind the cycle is the imbalance in supply and demand. There is no equilibrium, any more than there is an Easter bunny laying chocolate eggs in your garden. If there was the utopian idea of equilibrium in reality, we would be in the dark ages. No nation would become rich for it would be impossible for one nation to gather greater wealth than another.

The cycle requires that the majority is always wrong because that is the fuel that then makes it work. With every stock market crash, government tries to find the culprit who overpowered the market and forced it down. Shorts are attacked as if they were sane sort of traitor. Short selling was even declared a criminal act with the 1907 Crash.

The Senate investigations in the 1930s turned into a witch hunt. The Senate demanded to know who was short. Many people were destroyed. Mr. Fox, of 20th Century Fox, ended up with so many lawsuits against him because of wild accusations made in the Senate without any evidence, that he went virtually bankrupt. Willy Durant who began General Motors ended up with a job in a bowling alley. The Senate even summoned Rockefeller. No one was beyond their reach. The net result, the grand¬standing destroyed the free markets causing the w Industrials to fall by nearly 90% into 1932.

But it is never the short sellers that cause a decline. A major decline only occurrs when the majority are all on one side. If you reach the point that 85-95% of investors are bullish, you have sucked in the last guy. All you need is to spook that herd, and it will turn and run collectively. When you scare the majority, you have 85-95% sellers and no buyers. Never will you find that many shorts at the high. Those who sell the high against a bullish consensus of 85% – 95%, are a slim minority. 

In 1990, I was giving a lecture and small conference for our corporate clients in Tokyo. A high net worth individual bribed his way into the conference to ask me a question. Unbeknownst to me, this was the man who bought the exact high in 1989. He was in his late 60s and explained that he had never purchased stock in his entire life. He had always been conservative and did not approve of such speculation. But on the last trading day of December 1989, he bought about $50 million worth of Japanese shares. That was the precise high, and the market crashed very hard within months.  I was curious and I asked him why he purchased stock on that day? He explained that every year brokers called him and explained that the Japanese share market went up in January 3-5% like clockwork. After 6 years of watching this event, he decided to give it a try. He bought the high of the Nikkei 225. When you suck in that last guy who raises the flag and joins the herd, it is over. There is no new source of buyers to keep the cycle going. Just hold your arm straight up in the air. See how long you can keep it there. The weight of your arm will become so heavy and your energy will flee like the wino. Suddenly you will be forced to let it go. The markets function on that same principle. This is why no one can manipulate the business cycle or the world economy. This is not like picking some particular market such as silver, platinum, rhodium, or an agricultural and manipulating supply to force prices higher. This is the business cycle we are dealing with that embraces the entire economy. Not even government can manipulate that as we are watching right now.

The Biblical story of Joseph warning the Pharaoh of a coming drought for 7 years enabled the society to survive. The forecast could not stop the drought cycle, it merely enabled society to ride-out the cycle. This is the optimum achievement that we can expect. If we understand the business cycle, then we too can survive it. This is so critical, because it is this business cycle that causes even politics to swing back and forth. The Democrats are back in Washington just as FDR won in the Great Depression and Hitler came to power also in 1933. Society reacts blindly and wants retribution for its pain. The Panic of 1869 resulted in dragging the bankers out on Wall Street and hanging them causing the government to send in the troops to suppress the riot. There is always a witch-hunt. Those in power need to blame someone in the public to divert responsibility.

The dark side of the business cycle is the perpetual loss of civil rights. With every crisis, we lose more and more of our freedom, no different than it was in the primitive ancient times. The reason for this is quite simple. If you do not under¬stand how and why the business cycle works, then individuals can be misled easily into a witch-hunt to grab someone and punish them. When Rome burned, Nero (54-68AD) blamed the Christians starting the Persecutions that lasted until Constantine. But after Constantine, the Christians got even and Persecuted pagans under the same principle of being a non-believer called "heresy" punishable by death. Virgins were sacrificed to the gods to make crops prosperous or to volcanoes to quiet their spirits. We may believe we are modern, but we act the same way as countless generations before us.

How or why the majority is always wrong lies within our nature to be social insofar as we need peer acceptance. If everyone is doing something, it makes it ok. Just as we have the economic meltdown now, the Investment Banks who should have known better looked around the landscape and saw how much money was being made on the unbacked derivatives. Because one house is doing it, others begin fearing they will lose market-share. Next thing you know, they are all doing it.  Had they made a rational decision based solely upon facts alone, they would not have gotten involved.

Next time you see a flock of geese in a field, watch what happens. There is no communication between them. Yet, if something startles one and causes that bird to take flight, others will follow and soon the whole flock is in the air. They do not act by individual communication, but by following each other with no comprehension why the first bird took flight. There is no immediate danger they can see. Nonetheless, they will flee – not understanding the original decision to take flight. All flocks or herds of animals act the same way.  We too respond the same way like any other animal.

Following the 1987 crash, we did our own survey asking why professionals sold. Knowing that we were not interested in publishing individual names but in the group study, the result was interesting.  Very few professionals followed their computer models which were designed to protect against such a scenario. The stock market had closed Friday on the low down sharply.  Everyone thought there would be a bounce on Monday.  However, it did not arrive. When the S&P 500 futures fell nearly 10,000 basis points, even the professionals were in total shock. The computers were correct, but they did not follow them. Newspapers were blaming computer models. The truth was the lack of such experience overrode the models. The professionals froze and did not sell when they should. As the market began to make new lows, they panicked like any first time trader. They sold with no understanding why. They called brokers asking why there was such massive selling? The brokers had no news. This led to wild rumors and the presumption that something huge took place, someone must know what it was, so they started selling.  No different than the flock of birds. There was no news – that was the problem!

The 1987 Crash illustrated that it can be the lack of news that causes the herd of bulls to transform into a pack of bears all running for cover. Just like the birds will take flight without personal individual knowledge, humans will do the same. The events of 1987 demonstrated that all the talking heads on TV who try to give some fundamental explanation for every move create confusion and misunderstanding.  When they use the same story and the opposite effect takes place, confidence is eroded. My secretary use to have one of those stick-figures holding a sign. It had a slogan that said it all – "Shit Happens!" Sometimes there is no change in fundamentals. The business cycle will come into play and the fundamentals will strangely follow. It is like Joseph and the Pharaoh. The weather is changing. Yes we can blame ourselves, but there has always been global warming and global cooling. The ice core samples show there is a 300 year cycle. We may increase the amplitude perhaps more than in the past, but we do not create the cycle. Reducing carbon in the air will perhaps cause the cycle to be less pronounced. But it will never alter the cycle preventing ice ages in the future as they existed in the past. The Business Cycle is no different.

Why Does The Government Hate Models?

Why the Government as a whole does not fund the construction of a model for managing our social-economic world remains a mystery. But why the Executive branch seems to go out of its way to prevent any models from being created is even stranger. At hearings before the House Oversight Committee, a very interesting exchange took place, illustrating how the SEC for one deliberately obstructs technological advancements regarding the managing of our economy and nation.

When the SEC Chairman Cox was called before Congressman Waxman’s Oversight Committee, he was asked about models and remarkably gave the precise and very clear definition of the core structure of the model I devoted my life to create. He stated precisely the broad scope of what was necessary. Mr. Cox pointed out that the model would have to incorporate all economies and map the complexity of the global economy.

"With respect to modeling all of the risk in the system, I suppose at some point you run up against the problem of trying to create such a level of exactitude that you rebuild the whole world in all of its complexity. That is probably an aspiration that we ought not to have. II

Transcript, House Oversight Committee, testimony SEC: Chairman Cox, 2008, p124, 12999-3003

Congressman Snow asked a perfectly logical question that should we not have some sort of a model?

"I share the basic thrust of your question here, which is can we do better? Can we find ways to do better? It seems to me, and this is retrospective, the question is leverage in the system. When loans and debt gets to be some fraction of GDP, it probably ought to send off some signals, because GDP represents the earning power, the debt represents the obligation.

Congressman Cooper talked to us, about future obligations that vastly — that rise at a very significant rate relevant to the GDP of the United States. That sort of thing in rough and ready terms we should 'be able to model and have signals go off."

Congressman Snow, p125, L3016-3027

Congressman Snow has made a serious point. Why do we fail to collect experience and build a knowledge base and learn from that experience? Must we constantly make the same mistake dooming ourselves to repeat the same events like Bill Murray in the movie Groundhog Day? If we have no books that show if- you-do-this-that-will-happen in order to run government, then would a monkey flipping a coin do any worse? We cannot stumble through the most important aspect of government, managing our social-economy, hoping that when the lights go on, somehow a miracle will appear.

As Eric Jensen has explained, we do not do very well learning by just reading books. We need experience to create deeply seeded knowledge. If we throw away all our collective experience, we might as well burn all the books as well.

As bizarre as this sounds, the Executive branch hated the model I created and viewed this as some sort of covert means to control the world. I believe they watch too much James Bond. The Commodity Futures Trading Commission ("CFTC") even issued a subpoena demanding I turn over a list of all clients of Princeton Economics around the world accusing me of "manipulating the world economy" like some character out of a movie. My lawyers defended against that, and the CFTC lost. Yet still, their insane reasoning seems to be akin to the Puritans and their Salem Witch Hunts. They viewed that because of my experience and worldwide travels lecturing on every Continent, that the accuracy of the model proved not that the model was correct, but that I was so powerful and influential, that I could make the world shake. They even tried to get the renown Forensic Psychiatrist, Professor Paul Stuart Appelbaum of Columbia University, to testify that I was some sort of genius capable of manipulating the court and no doubt the world economy as the position of the CFTC.

Mr. Tancred Shiavoni of O'Melvany & Myers LLP conducted the interrogation attempting to solicit this image before the public.

SHIAVONI: Dr. Appelbaum, did you find Mr. Armstrong to be smart and intelligent?

APPELBAUM: My impression is that he was quite intelligent.

SHIAVONI: And do you have any way to rate his intelligence or is there any rating that you would give to his intelligence?

APPELBAUM: Well, I think without formal testing, one couldn't put an
IQ number on it, but I found him — my impression at least is that he is quite bright.

SHIAVONI: And did you find him to be rational?

APPELBAUM: I did largely find him to be rational, yes.
 
Transcript, 99-Civ-9667 (SDNY 2007), 4/27/07, p33, Lines 1-10

It is one thing to have the Government try to claim you are nuts or insane. It is something completely different when they try to portray you as Gold Finger from a James Bond movie capable of controlling the world.  The fear the Executive branch has seems to be akin to what Kondratieff experienced with Stalin. If the Executive doesn’t like what the model says, they literally try to kill the messenger. On May 10th, 2007, an inmate was allowed in my cell who attacked me from behind, strangled me from behind, beat me with a typewriter and after I passed out, jumped up and down on my chest trying to cave it in. Others yelled for the guard, but he waited until the inmate was finished and came out proudly announcing he had killed me. To the best of my knowledge, no one was prosecuted and I was taken to Beakman Hospital at NYU.  To the Government's dismay, I survived.

I am the first corporate officer in history since 1641 who has been denied all rights post-indictment claiming that since a corporation has no rights, neither do I. To think that the United States has the power to just imprison citizens, denied counsel, resources, strip you of any right to appeal, and hold you can be so imprisoned without ever being afforded a trial for life, gives pause to any claim that there is either
a Rule of law or even the potential for justice. (see Wall Street Journal 1/8/9)  .

I believe that the idea of any model seems to invoke such hatred and fear by the Government I cannot explain it. I believe I am a political prisoner and I do not believe that there is any rule of law to suggest that I will ever be released no matter what. I found this entire situation extremely bizarre because even the courts seem to be involved and have gone out of their way desperately trying to rewrite history in order to discredit the model. Judge John F. Keenan accused me of creating the model coming up with the idea after watching an Australian film named "Pi" that came out after I was in prison on contempt, and after I revealed in 1999 the relationship to Pi I discovered after the 1987 Crash.

This accusation made by Judge Keenan ignored the time-line, and took the exact opposite in the parallel SEC & CFTC civil cases. There, the notorious Mr. Shiavoni rejected allowing Martin Weiss to rent the Princeton Economic Institute to keep the forecasting going. Shiavoni sent an email to his lawyer demanding and insisting that the Institute would be closed and all staff fired unless I agreed to turnover to him the source code to a model they hated. The email was addressed to his counsel in New York, Charles Hecht. I provided a copy of this email to Gretchen Morgenson at the New York Times. Mr. Schiavoni was the counsel to the Receiver Alan Cohen from the lawfirm Q'Melveny & Myers, LLP. The Receiver Alan Cohen, had been a partner at Q'Melveny & Myers, but then was hired to be internal counsel at one of the very firms we had been investigating, Goldman Sachs. How does the internal counsel of a major Investment Bank end up running Princeton Economics? Judge John F. Keenan treated me no better, and revealed the bizarre attempt by the Judiciary to try desperately to rewrite history entirely on April 10th, 2007.

JUDGE KEENAN: Listen to me a minute, because I got a letter from somebody in Australia, it seems to me, which will be part of the record here, and there was another letter about Pi. I have a very bright and well-rounded young law clerk, turns out there was a movie called pi and it was all about cyclical developments. Did you know about that movie.

MR ARMSTRONG: Someone in Australia made the movie, and I think it was based on me, yes.

JUDGE KEENAN: It was based on you; are you sure you weren't based on it.

MR ARMSTRONG: No, it predated.

JUDGE KEENAN: No. I wanted you to know I know about the movie, I know about Pi. Unless I am completely mistaken, this was included in the material that I received and I have read it and that's what led me to discuss Pi and cyclical changes with my young law clerk who is over there. That's what led us to find out, led me to find out, thanks to her, about the movie

MR ARMSTRONG: This has nothing to do with the model, your Honor.

 Transcript 99-Cr-997 (SDNY) 4/10/07 (pg 45-46)

The courtroom was crowded with press from around the world. Judge Keenan went out of his way to try to discredit the model. It mattered not that this movie that was based on my 1999 revelation that the number of days in the 8.6 year cycle was equal to Pi (3. 141592654 x 1,000). The mere fact that they used that as the idea to create the movie in Australia where the model was capable of forecasting cyclical activity after my case began was just detail. The Judiciary was desperate to try to pretend there was no model, yet all the time keeping me in contempt of court and secretly behind closed doors, demanding I produce that what they were telling the world was created after the case began when I was in prison on contempt. I find the complete breakdown in the Rule of Law really amazing. You have no right to any-thing in federal courts and the burden is yours to prove you have any right. Then they demand others respect whatever they decree because they are judges.

Why is any model so threatening to the Government? Why do they publicly try to denounce any model would have validity, yet secretly demand to control anything that is valid and works? I cannot explain it. But I do know, when you are pushed to such extremes by ruthless tyranny, you have two choices. You sell your soul and your integrity in hopes they will keep their word and let you go, or you realize you are dealing with people who have absolutely no morals at all, and will never honor any promise they make anyway. You are staring in the face of absolute corruption.  The game is so rigged, there is no one to help or to vindicate any rights at all. You are dealing with the dark-side of humanity where the Constitution has lost all meaning.

I simply don’t trust the American legal system any more. The presumption is that the government can do whatever it wants, and the burden is always now upon the citizen to show they have any rights. Meanwhile, procedure is used to deny your access to any court or hope of a fair trial. So if the United States wants something, it is no different than any other Government. Judges just rule in favor of their boss.

I write now, because I do not know if I will ever be released. What I have learned from experience is knowledge that is too valuable to waste. So it is time that I explain the best I can before it is too late.  Why the Government hates models and refuses to allow any scientific method of understanding our social-economic environment I am not sure. I can only assume that they view it the same as Joseph Stalin – a threat against absolute power. We can presume that we have a democracy. But we also presume that when Congress calls the Executive before them, they get the truth. There are no checks and balances. This was illustrated by calling former Attorney General Gonzalez. The number of times he answered questions "I do not recall" would have been punishable by contempt had he been a mere citizen. Because he is a Government officer, there are two very clear standards – one for them – and one for us.

The Executive branch is in charge of both the military and the civil legal institutions, right down to managing the Bureau of Prisons. The power of the Executive branch is truly unlimited. We may elect the President, but we do not elect anyone else in charge of any Executive department. We can change the President, but the President does not control the Executive branch. Like Mr. Gonzalez, who is to say that the President is even made aware of what is going on in the Executive departments? No one has to tell the truth about anything for there is no one to prosecute them if they lie. Frank Sinatra sang a song "Send in the Clowns" and the punch-line is "don't bother" because they are already there. We can vote all we want. Does this really change anything when the people who run the Executive branch are not elected and are already there regardless who is President?
 
We need to create an Expert System that records all events, the response taken by government, followed by the result. Why do we respond always the same, when the result is never tracked? We cause history to repeat and amplify the boom bust cycle causing more pronounced swings. Why do we constantly repeat the same mistakes?

Book smart is not "street smart" because it is like reading about sex, but never having sex. One cannot write about that which he really knows nothing for he has never experienced it. It is time we make the next advancement. It is time to build the model that will better manage how we operate government. This model would have prevented the economic meltdown. It cannot alter the cycle turning highs into lows, but it can modify the amplitude. In other words, we can apply stimulation like a smart bomb that will not create stagflation and provides essential targeted policies.

We can preserve the real knowledge built from the experience of society. We need to collectively learn and grow the same as we do individually – from experience! We must stop the nonsense. This is not the Middle Ages. We must stop killing the messenger and just once try to gather our experience and acquire real knowledge. We are throwing away the best of those that went before us. In every science, we build upon the research of others except in how we live and manage government.