27 June 2005
End Oil in a Declining Economic Environment
Equity, commodity, real estate, and bond market valuations grow to
buying saturation points and then decay to selling saturation points in a
fractal, deterministic and mechanistic fashion. Was last week's 280 point
2 day decline in the Dow caused by a sudden change in psychology? Did
Friday's oil price valuation which was the same as it was four days earlier
on Monday 'cause' the decline? Or more reasonably was it the natural decay
fractal pattern that normally follows a buyer's growth saturation asymptote
'for the money currently available and circulating in the US equity game'
that was operative in the two day devaluation? Just like a fully charged
capacitor that reaches its peak capacity and discharges its voltage in an
exponential decay fashion and time curve, so does the saturated equity
markets behave and decay. A broad look at the NASDAQ valuation curve from
March 2000 to the nadir in 2003 or the Dow from 1929 to 1932 suggests a
picture of a discharging capacitor with intermittent recharging to lower
capacitor voltage (saturation) points and thereafter with recurrence of
exponential decay with serially less acute slopes. Instead of volts lost
from an ever weakening capacitor, money is lost from ever weakening market
The money supply 'available for the equity et.al. asset game' grows or
contracts dependent primarily on the prevailing lending interest rates.
Rates below the true nominal inflation rate discourage savings and cause
money to be created through accelerated borrowing. The greater the disparity
between the inflation rate and lending rate, the greater the rate of
borrowing and the greater the rate the money creation. Both money supply and
economic activity grows. But without the growing money supply flowing into
investments for the production of real and useful items that can be sold in
a competitive manner to the global markets, the generated economic activity
may be malinvested into cul de sacs of domestic services, speculative
financial assets, military misadventures, and purely domestic production
items such as housing construction. With excessively low interest rates
domestic forward consumption and overproduction occur in a lumped fashion
sapping future needed consumption and needed production that would be
distributed more evenly over the long term for sustained economic activity
and importantly ongoing consumer job viability.
The markets' daily valuations and internal fractal patterns are integrations
and composite pictures of both the available money supply and
'market optimal' buying and selling saturation points. As interest rates
rise the money supply decelerates in the rate of growth rate actually falls.
Those dependent market valuations will likewise have both lower growth
valuation saturation points and lower decay saturation points. Although the
Federal Reserve can increase the money supply by repurchasing its own
securities as it did in a massive fashion from 1930-1933, money is not
really created until an individual, corporation, or federal government
borrows it from a lending source and gives it to a recipient for real goods
or services putting the borrowed money into the real play of the active
economy. With the narrowing spreads between the fed fund rate and the ten
year note limiting potential profit, lenders become more wary to whom they
lend, and the ample liquidity that the fed can potentially generate through
their repurchase procedures as during the early nineteen thirties may remain
unlended, stagnant, resting in banks.
Every great economic cycle has a recognizable -usually in retrospective-
apogee inflection point or day where markets peak and begin their primary
descent. While the primary cause of this inflection point in major economic
cycles is a decelerating rate in the growth of money supply(prior to an
actual contracting money supply), the inciting composite elements of that
decelerating money supply are a combination of fundamental evolving feedback
conditions occurring in the real economy at the consumer level. At the
consumer level - ongoing wages, consumer debt load, forward consumption
status, and projected job status dependent on near term production needs all
factor into the deceleration of borrowing and hence money supply. As that
point approaches consumers, relative to their wages, have over-consumed and
over-borrowed, and have taken, ironically, away the need for their long term
job status by their collective large short term overproduction and
overconsumption. Lenders in synergy have difficulty in finding new credit
worthy debtors with both the prevailing and changing conditions of narrowing
interest rate spreads, inflating asset cost, saturated debtors' market with
smaller numbers of wage earners in the bell shaped curve of gross personal
wages meeting lending requirements.
At the inflection point these fundamentals are operating at the breakpoint
consumer and lender level. While sophisticated computers may not be able to
capture all the data needed to accurately predict an inflection point,
fractal analysis of the daily, weekly, monthly, and yearly market valuations
which represent the integration of all of this data may provide a powerful
predictive tool for determining directional changes of the market.
The valuations of the commodities like the equities are based both the money
supply supporting them and their supply/demand ratio. While the monthly
average of the CRB has increased by 50 percent from 1998 levels to 2005,
there has been a great disparity in the valuation changes of individual
components of the index:
From 1998-2005: Average monthly valuation change: .
Oil/gasoline 430-450 percent .
Propane/natural gas 180-225 percent .
Copper/platinum 100-115 percent .
Cattle/gold/silver/oats 40-50 percent .
Lumber/hogs 35 percent .
sugar/cocoa 0 percent .
barley/coffee/corn 5 percent .
butter/OJ/soybeans 10 percent .
cotton 15 percent .
palladium 30 percent .
Because the valuation of commodity prices are directly related to the
underlying money supply that supports them(and the demand/supply ratio), it
is not surprising that the CRB nadired nearly at the identical time that the
equity markets nadired in 1932. As the money supply decelerates, economic
activity will likewise decelerate. While oil high valuation prices
rightfully - with current global economic activity - reflect a current ratio
of demand/production of close to one; that ratio will fall rapidly below one
if the global money supply and global economic activity fall precipitously
in a major recession or depression. In such a scenario with production
capacity remaining relatively constant and demand falling in a recessionary
environment, oil prices and all other commodity prices will rapidly fall in
concert with declining equity valuations.
All of this background information becomes more interesting on review of
oil's monthly, weekly and daily valuation fractals which are reflecting a
probable peak. Since the winter of 2001 two separate lengthy monthly growth
fractal patterns are at or nearing completion. A weekly pattern of 21/52/42
of42 weeks was completed last Friday. This is in concert with an ideal daily
terminal fractal pattern of 13/33/26 with Friday being 13/33/31 of