The strange case of the jailed market genius

published 21 March 2007

Investors may have been at a loss to explain the panic that befell financial markets at the end of last month, but one man saw it coming from a mile off. Financial forecaster Martin A. Armstrong predicted the beginning of the current jitters to the very date, 27 February and it's just the latest in a long line of spectacular predictions.

But Armstrong is in no position to benefit he has been imprisoned without trial in the US for the past seven years. He is accused of defrauding Japanese investors of more than $700m, but the case cannot come to trial. Armstrong is currently being held in contempt of court after refusing to turn over $15m in gold bars and coins he is supposed to have hidden away, which he insists he no longer has. This impasse means he has now served the longest sentence in US history for a prisoner held in contempt.

His imprisonment and forecasting abilities have made him a cult figure among conspiracy theorists. Armstrong's predictions are based on a model of economic confidence that he developed in the 1970s. He reckoned that there is an intense turning point in financial markets every 51.6 years, with investor confidence churning on a smaller 8.6-year cycle. Armstrong came to believe that this 8.6-year cycle was related to pi 8.6 years is equal to 3,141 days, the result of multiplying pi by a thousand. He claims he developed a 32,000-variable super-computer based on the model, with "perhaps the largest economic database in the world". The claims may seem far-fetched, but the model has made some uncanny predictions (see below).

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Armstrong himself has seen his fair share of boom and bust. He claims to have made his first million by the age of 15 selling rare coins, telling Noelle Knox of Associated Press that he "lucked out" on a batch of rare Canadian pennies. He turned his hand to writing a commodities forecasting newsletter, and founded Princeton Economic Consultants (no affiliation to the university) in 1983, aged 34. The business flourished as confidence in his pi-cycle model grew. The Wall Street Journal described him as charging clients "$2,000 an hour for private consultations".

But he soon ran into trouble he was accused of mail fraud and failing to collect sales tax on gold bullion sales. Armstrong fought the case to the Supreme Court, but lost and was ordered to pay more than $600,000 in back taxes. By September 1987, his debts totaled $4.4m, including $2.7m in unpaid taxes, and he had to file for personal bankruptcy just a month before the October 1987 crash which he and his clients claim he also predicted.

But as another 8.6-year cycle rolled around, his model threw up another forecast, and he called the collapse of the Japanese Nikkei in 1989. The celebrity he achieved allowed him to expand into Japan, avoiding US scrutiny by managing offshore investments for foreign clients, even as his personal estate in the US was still in the process of being liquidated. Armstrong preyed on Japanese investors who had lost their shirt in the crash, offering a "repair bond" opportunity for investors to recoup their losses.

Unfortunately, he lost a fortune (almost $500m) making risky bets on the yen, then hiding his losses with proceeds from new investors. The losses came to light in 1999 as banking giant HSBC scrutinised the books of his brokers, Republic Bank, prior to a takeover. Republic repaid more than $600m to Japanese companies, notes Gretchen Morgenson in The New York Times, and Armstrong was thrown in jail, where he has languished ever since. Another hearing for his contempt case is due this month, but even if his fraud case eventually goes to trial he may not serve any more time if convicted of all 24 counts against him, he would have received a sentence of around six and a half to eight years, says Morgenson.

What the pi-cycle model predicts now

Recent events in the world's stockmarkets show the stunning accuracy with which Armstrong's pi-cycle model can forecast markets, with investors panicking right on cue on 27 February. But what stage of Armstrong's 8.6-year cycle are markets at now, and what does he forecast for the years ahead?

According to the Princeton Economic confidence model, markets peaked on 27 February and can't be expected to perform strongly in the year ahead. Armstrong is bullish for 2008, however, seeing a rebound for markets, housing and especially physical assets, such as commodities, that year. He notes that the fact many commodities peaked last spring shows capital flows are currently focused on the stockmarkets worldwide, and that after the panic selling clears, commodities will resume their bull market for the "next major leg up", with oil going above $100 a barrel and gold well over $2,000 an ounce. The next major slump is forecast for 18 June 2011. Over the longer term, the next 51.6-year confidence cycle will end in 2032, plunging markets into a 1930s-style depression. He believes that the next 51.6-year cycle will be kick-started by a return to big government' economic policies, whereby governments intervene much more extensively in the economy.