20 June 2005
US Equity Growth Fractals Running up Against the Three Year Saturation Curve
Equity fractal growth is directly supported by the exchangeable money under
its valuation curve. If the supply of money grows, the growth valuation
saturation asymptote is pushed higher by that additional money available for
investment. As the website's main explanatory page suggests, credit growth
and the money available is directly related to the prevailing interest rate.
Interest rates lower than nominal inflation rates will lead to asset
inflation. By its ability to lower interest rates the Federal Reserve serves
de facto as the both United States and the world's chief economic architect.
The Federal Reserve through its monetary policy is directly responsible for
all US asset bubbles since its creation in 1914.(Actually it was created on
paper in December 1913, but didn't begin to function as an entity until the
following year). The current housing bubble is no exception.
At any given level of interest rate there are consumer and investment
saturation points that are dependent on the abilities of debtors and
investors to service their ongoing debt loads and maintain day to day living
expenses. As well, forward consumption of durables during lower interest
rate environments causes a disproportional quantity of short term
consumption which would normally be distributed over a longer period time.
Like a python who has just ingested a small pig, no additional meals may be
required for quite some time. While this works for the python this very
large one time meal causes disruption in the steady state of macroeconomics.
Had the Federal Reserve maintained higher interest rates in the early
1920's, savings would have been encouraged and the speculative bubble in the
early 1920's Florida real estate discouraged and mitigated. In the later
20's, higher interest rates would have again boosted savings and again
discouraged and mitigated the extremes that occurred in both forward
personal consumption on credit and the speculation in the stock market.
Higher interest rates are the boron control rods which encourage savings,
control asset inflation of all types, discourage speculation, and moderate
and smooth out the macro economic nuclear reactor preventing economic
disequilibria and the subsequent meltdowns with severe recessions and
depressions that ensue from low interest related excess forward consumption
and inflation.
The current global macro economy is functioning as a great pyramid scheme
set in motion by the Fed's excessively low interest rates. Pyramid schemes,
illegal and begun by con artists, by their nature require an ever growing
population base and always end badly when the new entry level population is
exhausted. In the United States' current housing bubble environment this
base population limitation is occurring as both new lower wage prospects are
priced out of entry into the inflated market and as those recent buyers with
adjustable mortgages and LIBOR loans have their day to day living wages
squeezed to untenable levels by rising short term interest rates, rising
energy cost, rising real estate taxes, rising health care cost, and rising
nondurable goods cost. The deletion of housing cost from the government's
CPI figures has been a great accounting inaccuracy and disservice to the
delineation of the real picture of ongoing inflation.
The Fed has increased the fed funds rate from 1 percent to 3 percent over
the last 12 months, starting on June 30, 2004. This has put real pressure on
those many home owners with adjustable mortgages living on the fringe from
paycheck to paycheck and resulted in the recent higher percentages of
mortgage defaults. Had the Federal Reserve kept the fed funds rates at 1
percent, home prices, equity prices, oil prices, and real estate taxes might
have been 10 35 percent greater than they are presently. More equity would
have extracted and more forward consumption would have occurred with greater
imbalances and distortions to be paid for in the future.
Ultimately the overriding preeminent constraint that remains unrecognized by
the general world public is the reality of approaching End Oil. The timing
of End Oil has been misjudged by overestimated reserves at weary old oil
fields. More importantly, temporally, and with greater causality a very
probable near term consumption/maximumproduction ratio of greater than one
Is reaching threshold as evidenced by the oil futures pricing monthly
fractals since 1998 and the recent gains of nearly ten percent in the last
three weeks. This constraining predominant factor will not only limit
population growth for the 21st century, it will likely require a decrement
in the world's population with the dependency of food production and
transport on End Oil. Time that will be needed between the recognition phase
and the action phase to convert to a more sustainable and usable substitute
will be inadequate to deal with sudden world angst. Ultimately the 21st
century will not have the cheap energy source needed for sustaining a
growing population base and bottom buyers in the grand pyramid scheme
required for continuous inflation and ongoing servicing of mounting debt.
The piper will be paid.
Where does all this macroeconomic consideration take the finite scope of
fractal analysis of equity valuation? Total equity global worth is now
valued at less than 60 percent of the global housing valuation, the latter
of which has increased by more than 80 percent in the last six years. This
increase in valuation of the housing market relative to wages represents an
incredibly distorted unsustainable bubble of historical proportions with
frightening forward implications. Its creation and its consequences are a
direct product of Federal Reserve interest rate manipulation and policy.
A detailed fractal analysis of the Wilshire 5000, which represent 15
trillion dollars of equity and greater than 95 percent of US equity worth 
since the beginning of the third major fractal growth sequence in early
August 2004  is offered below with an estimation of a probable fractal
pattern for approximately the next 19 weeks. The weekly fractal pattern
beginning in March 03 after a preceding 23 week basing pattern is 22/54/
currently 45(one week over an ideal 44) x/2.5x/2x. Possible terminal
exhaustion gaps have been identified last week in RMS(with yet a higher high
exhaustion gap on Friday June 17), a real estate proxy, and on Friday June
17 in the Wilshire. The forward fractal projection and estimation is made
with expectation that the Federal Reserve will make two additional rate
increases of .25 percent, one during the 29/30 June 2005 meeting and one
during either the August 9 or September 20 meeting.
The first daily growth fractal sequence of the terminal primary third
fractal beginning 13 August 2004:
9/23/21 days or 51 days (x/2.5x/22.5x)
(52 considering the preceding day whose ending low was lower than the ending
low of the first day of the first 9 day sub cycle)
The first sub cycle growth fractal of the second fractal beginning on
October 25, 2004 (a perfect growth fractal)
9/23/1819 x/2.5x/2x to a reversal day on January 5,2005
The first subsequent decay fractal daily sequence of the second fractal
starting on January 5, 2005 was 3/7/7 (y/2.5y/2.5y) or 15 days(x) Precisely
30 days(2x) later the March top on March 7 was made with an intermediate low
at 2.5x or 37 days. 1.5 x or 23 days later with a minutely decay exhaustion
gap a new intermediate low was made for a second sub cycle fractal decay
sequence of 15/37/23 x/2.5x/1.5x. The subsequent ten trading days was shared
between the second and the beginning of final third fractal sub cycle base
resulting in an intermediate low at day 129130 of the larger fractal
5152/129130 pattern. The summation decay fractal sub cycle of the second
130 day fractal showing terminal exhaustion of sellers or otherwise stated
saturation of decay was 15/37/31 x/2.5x/2x. The growth portion of the second
fractal was 49 days in length 9/23/1819 and its decay portion was 81 days
in length 15/37/31 x/2.5x/2x.
Given the probable interest rate hikes on 2930 June 2005 and in either
August or September 2005 a reasonable estimation of the final fractal
pattern can be made. This estimation is given with a bias that the macro
economy is near the beginning of the nonlinear devaluation phase of the
140 year plus second grand cycle starting in 1858.
The final and terminal third fractal began on April 18 appearing to share a
portion of its initial daily sequence with the terminal portion of the
preceding second fractal cycle. The first sub cycle daily sequence is:
3/8/6/6 or a first fractal sub cycle base of 20 days.
The ideal growth and decay pattern with a 20 day first fractal base is;
20/50/40/30 x/2.5x/2x/1.5x Because half the first fractal sequence of the
third fractal is shared with the terminal portion the preceding second
fractal (of 129130 days) a reasonable final fractal sequence dating from
August 13 2004 and incorporating the fractal elements of the 20 day base
third subcycle would be 5152/129/129. The second fractal sub sub cycle
appears to have a base of 9 days. Friday June 17 is day 17 of a potentially
9/17 of 18 to top (Monday 20 June) then 5 down to 23, completing the second
sub sub cycle. 21 additional days would complete a second 50 day second sub
cycle fractal sequence with a 20 day base. Considering that the preceding
week was week 44 of a 22/54/44 week cycle and that the Fed is continuing to
raise fed fund interest rates, a strong bias exists that Friday 17 June or
Monday 20 June will be the final high for the 20022006 Wilshire and will
represent essentially a technical triple top made in January, March, and
June of 2005. While the subsequent tops have been a bit higher the ten day
moving average integrated apex areas under the equity valuation curves for
March 2005 was slightly less than the January 2005 top. This means that the
growth fractal pattern for the terminal portion of the 102103 day third
fractal sequence 5152/129130/103 x/2.5x/2x will likely convert to an
accelerating inverse growth of decay fractal pattern after topping out.
Although speculative this is a reasonable projection of the future daily
fractals patterns for the Wilshire 5000 with a initial low occurring during
the last week of October or first week of November in 2005.
Starting August 13 2004
First fractal: 9/23/21 (51 days) X
Second fractal: growth portion : 9/23/19 + decay portion 15/37(top day
30)/2331 (to a low with the last 9 shared with the next fractal) ending at
day 129/130 on April 28, 2005. 2.5X
Third fractal (ideal three fractal growth sequence and one fractal decay
pattern x/2.5x/2x/1.5x  if mortgage and housing credit expansion continues
unimpeded in spite of rising fed rates) : 20//5052//3334{1.62 Fibonacci
factor x base of 20} lower high of 40//30 with sub cycle projections:
3/8/6/6(20)//9/23(currently on 17 of 18 to top)/2123(5052)//8/18/9/8 with
lower high at 3334 of40 (40)//6/15/12(30).
Third fractal assuming breakdown and initiation of predominant inverted
growth of decay fractals: 9/currently 17 of 18 to top/initiation of inverted
growth of decay sequence: 17/43(lower high)/34. Note that the lower high
occurs at 20/9/18/17/43/ or at day 103 which is the expected day 2x of the
final high. The final low is at day 103 +34 9(shared days with terminal
portion of second fractal) or day 128 which would complete a x/2.5x/2.5x
5152/129/128 daily pattern).
G. Lammert
