25 August 2005
Saturation Curve Fractal Analysis - A Real Science?
In order to qualify as a true science, the subject entity must be
testable by scientific method and have underlying laws that operate in the
real physical environment. These laws must be repetitively provable and have
reasonable predictability for different applications. Scientific testing in
college biology, chemistry, and physics laboratories usually results in
experimental values that roughly support the underlying mathematical
equations and theoretical constructs. If indeed complex economic systems
travel by the simple quantum laws that observational fractal analysis
suggests, a similar validity should be testable and provable in the great
laboratory of readily obtainable asset valuation saturation curves.
Valuation fractals represent a composite integration of primarily six
elements in the complex economic system: cash and savings; total private,
corporation and governmental debt load; ongoing wages; assets; lending
practices; and prevailing interest rates. Each of these six broad parameters
has its own complex internal dynamics and summation characteristics. In a
very mechanistic fashion, following simple near-quantum and near-quantum
related Fibonacci numbers, valuation fractals 'grow' to buying saturation
levels and thereafter 'decay' to lower selling saturation levels. The
fundamental point to this new potential economic science is that the daily,
weekly, monthly, and yearly valuation fractals represent the sum total
integration of those six elements and their complex interactive
relationships. Pour into the economic vat: cash for daily transactions,
savings available for money to be borrowed at given interest rates using
prevailing lending practices for both major purchases and minor credit card
purchases, balanced by on-going wages and debt servicing obligations,
balanced by relative valuation of assets and their relative state of
consumption, mix it up on a daily, weekly, etc. basis - and - from the vat
flows forth the daily, weekly, etc. summation saturation curves dancing to a
rather precise near quantum fractal tune. While lower order time unit
fractals such as minutes and hours represent trading valuation saturation
points, intermediate fractals represent the larger picture of on going
velocity of money growth percolating through the system. The higher order or
4-yearly, 17-18 yearly and 70 year fractals represent both business cycle
and asset and debt saturation levels at the basic consumer level.
There are three sequential identified ideal growth fractals followed by a
decay fractal. The near quantum number time units for the three cycles are
x, 2-2.5x and 2x, respectively. A nonlinear devaluation typically
characterizes the second growth fractal somewhere between the 2x and 2.5x
time period. The third growth fractal which ideally is 2x in length can have
an extension to 2.5x. This extension of the third growth fractal has
characterized both the current US equity and heavily invested commodity
areas, particularly oil and gold, for the entire 128 week duration of the
March 2000 secondary growth period.
Just as the complex system is an integrative process, valuation fractals
which exactly represent them are likewise composite integrations with
nonlinear capacitor like decay devaluations. Fractals incorporate the
terminal portion of the preceding decay fractal into the beginning of the
follow-on growth fractal. An elegant pristine example of this rolling
integration was the 40/100/100 day cycle exactly x/2.5x/2.5x that resulted
in the March 2005 top for the DJIA. The first two fractals were 'declining'
growth fractals with a very characteristic nonlinear break at the end of the
second fractal in August 2004. That second fractal was likewise elegant in
its evolution in that it was composed of a 29/72 day x/2.5x sub fractal
sequence. The probability that these precise sequences are random numerical
sequential events approaches zero and elevates fractal analysis,
reciprocally, to a high probability real science descriptive of the complex
The subsequent growth fractals dating from August 2004 likewise have
followed the same very precise fractal growth evolution with a 52/130
(x/2.5x) day first and second fractal growth sequence with the typical
nonlinear drop between 2x and 2.5x of the second fractal. Anyone can verify
this pattern using any of the major US or European indices. The third
fractal US equity sequence has been a 12/30-31/28 day sequence, approaching
the extended ideal form of x/2.5x/2.5x growth pattern. The major European
indices ,e.g., the FTSE, DAX, and CAC have a slightly different mix of the
six aforementioned underlying elements and have extended their growth - but
are still confined within the 52/130/104 theoretical maximum and the
theoretical Fibonacci maximum of 52/130/(1.62 X 52 = 84-85)
days. These recurrent numerically ideal patterns since August 2004 once
again lend substantial credibility to the notion that the complex
macroeconomy operates according to some relatively precise laws of fractal
What are the rate limiting factors that result in growth saturation points
or asymptotes, decay selling saturation points or asymptotes, and the
general nature of fractal patterning? Each of the six controlling
parameters- assets, ongoing wages, lending practices, prevailing interest
rates, debt load, and cash and savings - contribute to the saturation areas.
Some are more important than others in determining cycle lengths and
Assets have two important elements: relative valuations and saturation
ownership. If the valuation becomes too high or too overly consumed, demand
will decease. The timing for this decrease is exactly represented by an
asymptotic valuation saturation level or a single high valuation point
followed by lower valuations. The valuation curves provide precise
'barometric' information on instantaneous demand relative to valuation level
and relative to the consumption level. Some assets such as gas and oil must
be purchased to maintain livelihood. As global consumption for the this
finite resource increases, resulting price increases squeeze the null saving
US consumer, far too many living from paycheck to paycheck, to the
financial breakpoint. Unnecessarily expensive US healthcare, 25 percent of
the value of which goes to third party insurers and the non-value added bill
collection system, can be considered yet another consumable asset, that,
like 'uninsured equivalent' gasoline prices, is driving many to insolvency.
Ongoing wages and just as important the jobs that support those wages are
perhaps the most important rate limiting factor in determining valuation
saturation points. In the US jobs sphere, high paying manufacturing jobs
with the exception of the housing industry have been significantly
outsourced. As the housing bubble crests, overcapacity will become evident
and high paying home construction jobs will contract. A considerable subset
of jobs in America have questionable value-added real economic worth and
will be lightened during consumer retrenchment. It is easy to image using
the 1930's as a template of a positive feedback contracting system, whereby
decreased ,e.g., construction jobs lead to decreased consumer spending which
leading to further job contraction in other nonessential service areas which
leads to further spending contraction and so forth.
Lending practices and prevailing interesting rates, the latter a Federal
Reserve controlled parameter, work in synergy to foster money creation and
asset inflation. Fractional reserve lending practices amplify the bank and
money market savings used as a reserve base for lending. Extremely low
interest rates, i.e., a Fed fund rate of 1 percent coupled with a lending
practice of LIBOR type loans, no money down and interest only payments
creates the interesting situation in which the interest cost of money is far
below the real asset inflation rate. Not to borrow is to lose money that
would be made with the expected inflation. Conversely, saving money under
these interest rate and lending practice guidelines results in loss of
purchasing power. Credit card interest rates reflect the needed higher
interest rates to overcome the default rate. The last year of higher Fed
Fund interest rates have resulted in both increased mortgage payments and
decreased bank profitability secondary to the contracting spread of long
term verses short term interest rates.
Ongoing debt load and the requirement to service that debt diminishes cash
available for asset consumption and investment. Percentage wise the total
debt load relative to wages and GDP has had relatively small incremental
increases - a fact which has mistakenly reassured many linear thinking
economists. Debt load becomes very important and a primary factor in the
fractal decay process, where assets are liquated in an attempt to pay down
debt. Because debt is in a major way based on the value of the asset, debt
load becomes relatively greater with ongoing declining asset values. This
process also represent a positive feedback system and is self perpetuating.
It results in a mechanistic devaluation and deflationary process, lowering
the value of nearly all non cash or non-cash equivalent assets.
Cash is the money that is represented by greenbacks in circulation and
greenback equivalent readily convertible debt instruments such as
treasuries, notes, bonds, bank deposits, and money market funds. In short
cash represents the dollars in circulation and savings. The savings rate,
which the Federal Reserve has bemoaned to be dangerously low and was
reported to be zero in July, reflects the competition of the the various
Investment areas. With interest rates below the real(which includes
housing) asset inflation rates, deposited money in saving instruments loses
its purchasing power value each week that it is malinvested in the bank or
interest bearing cash equivalent instruments. Deposited money in saving
instruments has been generally a bad investment in the last few years.
During the decay fractal process, this scenario will be reversed with money
from ongoing asset liquidation flowing into cash and cash equivalents, whose
purchase power value will increase relation to asset devaluation.
These are the lumped six broad elements that are dynamically interacting
with each other to create the summation valuation points, curves, and
saturation asymptotes. The evolving integrative fractals that appear to so
well describe the real instantaneous state, the trending state, the
saturation areas, and importantly predict the expected fractal
nonlinearities of the complex macro economic system, have the fundamental
characteristics of a real science.
Last Week Prediction - On Target.
From last week's post: ("The
Consumer-Debt Driven Speculative Global Economy .... Saturated ....")
'In the next nine weeks, data - which has always been there - will be
re-recognized. GM's and Ford's junk bond status and the high probability of
default on their collective 450 billion dollars of debt will reappear.'
From Bloomberg Aug. 24:
GM, Ford Motor Debt Ratings Cut to Junk by Moody's
General Motors Corp. and Ford Motor Co., the two biggest U.S. automakers,
were lowered to junk by Moody's Investors Service following two quarters of
losses at both companies' North American auto operations.
Moody's lowered GM's senior unsecured credit rating two levels to Ba2 and
the rating on its General Motors Acceptance Corp. unit to Ba1.
The high probability possibilities for the daily first decay fractal base
which includes the 3 August apogee day for the Wilshire 5000 ranges from
10-12 days. X/2.5x/2.5x represents the high probability quantum decay
pattern for the first primary fractal decay evolution.
While the initial monthly decay fractal base is slightly longer for this
asset economic devolution as compared to 1929, George Ure's Urban Survival
title 'Replaying 1929' may be a very close prophetic rhyme to the current
longer term decay pattern.
Because the current US and world imbalances are so very much greater than
1929 and the composite US fiscal situation - private, corporate, and
government - is so heavily burdened with debt and pension and medical
insurance requirements as compared to 75 years ago, global rebalancing for
this millennia will be proportionally more difficult.
An ideal Fibonacci growth sequence would yield a lower high at day
52 x 1.62 or about day 85 of the current 52/130/83 day sequence.
Expect some sharp rebounding growth days in the coming asset devolution