15 May 2005

The Original September 2004 Synchronization Theory

The original synchronization theory developed in September 2004 had an out
clause at its conclusion regarding the possibility of an extension of
further credit growth based on the United Sates preeminent military and
nuclear capabilities. While wrong as to the final lower top of the equity
market and the major nonlinear break point, it was correct in terms of a
nodal low for the equities within a day of the October lows.

There was still enough credit expansion, i.e., enough borrowers, within the
complex system to increase market valuations to the lower high (lower than
the 2000 highs). saturation areas in January 2005 and again in March 2005.
That was then this is now.

GM and Fordšs recent junk bond status, AGIšs debt and accounting problems,
the GSAšs growing massive mortgage debt and weekly liquidity issues, further
rising interest rates, high sustained average oil prices and its
accompanying long pipeline of inflation consumer product multiplication
effects, the cresting and ebbing of British property values, the growing
weakness of the European economy, the recent decline of the Chinese equity
markets to 5 year lows, the pension default of major airline with a set
precedent for other US airlines and automotive manufacturers, the 32 year
equity low for Delta airlines which is looking at increasing future losses
with high fuel prices, stagnant American wages below the nominal inflation
rates, record consumer and credit card debt, continuing massive federal
budget deficits, continuing current account deficits, the collapse of a
major British automobile company, hedge fund debt derivative problems
related to rising interest rates and new junk status of over 500 billion
dollars of US automobile manufactureršs debt - have all transpired since
October 2004.

Synchronization as a concept using nodal equity valuation points and the
maximum time length value of 2.5 x for the second fractal did have value in
predicting the nodal point in October 2004. The newly revised
synchronization theory uses rolling fractals and integrates a portion of the
preceding decay fractal into the first base fractal of the next first major
Fractal base. As the time frame for the conclusion of multiple harmonic 2.5
X, Y, Z fractals in the revised synchronization hypothesis is approached,
the original September synchronization hypothesis is now republished for
review in the following paragraphs.

14 September 2004 G Lammert on Macroeconomics - behavior of the bond,
housing, commodity, and equity markets.

Basic hypothesis: The day to day value of the equity, bond, commodity, and
housing markets represents a dynamic function involving primarily two key
components: the amount of credit available for investing in each of the
areas and the buyer's application of that credit to various investment
opportunities resulting in periodic market saturation with subsequent
devaluations and credit contractions. While application of credit involves
in a major way the psychology of the buyers, there is a point in time for
every permutation of credit availability when consumers and markets become
overbought and saturated. At this point the absolute number of buyers
diminishes, borrowing lessens, and credit contracts.

Consumer model: Because the majority percentage of the GDP, which correlates
to total investment credit availability, is based on consumer spending, the
automobile industry represents a model for the above hypothesis. Credit is
broadly defined in this paper both as the amount of income money received on
a periodic basis through employment and the amount of borrowing allowed
based on that periodic income, savings, and other interest related
parameters. Wide application of credit availability to borrowers in the late
1920's saturated the automobile (and housing) market relative to the number
of available consumers with income. The number of potential consumers
diminished, the amount of borrowed money transferred from banks to
automobile companies diminished and the available credit and income
generated by this market contracted. Major saturation points in consumer
over buying with credit expansion represent the fundamental inflection point
where major trends in the economy and e.g., equity markets, change, i.e.,
from an expanding credit environment to a contracting credit environment.

Unlike the Elliot wavers who have conceptualized market periodicity
primarily in terms of herd psychology, I believe the very recognizable
periodicity represents a combined function of transient market saturation
and the relative amount of credit available to be invested over the cycle of
time. When available credit expands the valuations increase, leading to a
saturation point, followed by credit contraction, e.g., less money
temporarily coming into the market. Stated otherwise the integration of area
under the pricing curves of the composite major indices of the equity
markets represents principally the amount of credit available over that time
with recurrent devaluations caused by periodic market saturation. In the
last great major correction typified by the period from September 1929 to
June 1932, the valuation of the equities and commodities and housing
decreased, not primarily because of herd psychology, but primarily because
of saturation of consumer markets relative to total consumer income based on
antecedent over borrowing and relative excessive possession of goods. This
resulted ultimately in less credit and money coming into the market. The
similarities in1929 to the current US economic consumer position are

Interest rate dependent borrowing, consumer income, and saturation of
markets represent the primary determinants of the total credit availability-
credit ultimately available for investment in bonds, equities, commodities,
and housing.(et. al.) While the Federal Reserve and other world banks can
increase the amount of credit available through the well known means of
lowering Fed fund rates, purchasing their own bonds and treasuries,
and lowering the percentage of required reserve deposits at banks,
saturation of markets will occur eventually at any level of credit
availability based on total job numbers and income from those jobs. The
federal and state government likewise can increase the total amount of
credit available via deficit spending. Foreign countries can increase the
amount of investment credit available via US consumer deficit spending and
redeployment of that foreign asset credit into investment areas, i.e.,
treasuries, bonds, commodities and equities. The housing industry can
increase the amount of credit via homeowner deficit spending. The recipients
of this deficit-spending, the contractors and real estate developers, can
invest this newly-created credit investment on a day to day basis in the
above markets.

Saturation of markets appears to have periodicity of a fractal nature in
terms of minutes, hours, days, weeks, months and years. The periodic
significant collapses of equity markets roughly every 70 years and lesser
periodic sudden collapses about every 17-18 years, 4 years and lesser time
length cycles are related to the periodic saturation of markets, resulting
in the transient paucity of buyers and lower valuations. Intuitively the
periodicity of cycles may be primarily based on the average interest rates
for that cycle which primarily determines the general rate of credit
expansion and periodic market saturation. At an average 4-10 percent
long-term interest rate, credit may be expanded at a pace that culminates
in overvaluation and saturation of the markets with the above periodicity.
The major collapses at roughly 17-18 years and 68-72 years may represent
more fundamental consumer saturation points and rapid credit contraction.

There appears to be a very curious and interesting temporal mathematic or
time relationship in the periodicity of market saturation points, with
subsequent devaluation and credit contractions interrupting the utopian
process of uninterrupted smooth credit expansion and increasing equity
valuations. See 'periodicity' relationship below.

The recent six years since October of 1998 represent a unique time period of
study of a possible simple mathematical relationship of cycles. During the
latter two-thirds portion of this time frame the Federal Reserve has
produced an anomalous situation in attempting to stimulate the economy by
lowering the interest rates to circa Great Depression levels to foster
maximal credit expansion. This stimulation was required after the relatively
orderly credit contraction caused by the saturation of the internet market
which was ultimately created by over borrowing and over investing in
computer related consumer products - both software and hardware e.g. fiber
optic cable. Interestingly the Internet bubble developed during a time of
relatively normal interest rates. The Federal Reserve has progressively
lowered interest rates in an honest attempt to stimulate the economy and
prevent further credit contraction. The extreme low interest rates were
rightfully intended to provide low cost loans available for maximal US
business and entrepreneurial expansion. This ultra low interest rate credit
has caused significant credit expansion via 1.increased homebuilding and
home ownership, 2. increased use of home equity loans through historically
unusual increases in valuation of real estate caused both by the extremely
low interest rates and new credit instruments such as LIBOR loans, 3. record
level federal deficit spending 4. record current account trading deficits
with returned invested credit from foreigners receiving US currency for
oversea manufactured goods and 5. credit growth through derivatives
trading, valued at tens of trillion of dollars. Because the United States of
America at this point in world history represents a nation unprecedented in
world power in terms of nuclear capability, organization of military, and
projection of power, inflows of funds for investment from countries with
rapidly expanding economies based on relative cheap labor income cost, e.g.,
China, might reasonably be expected to continue to a relatively extreme US
consumer debt level and saturation point.

What is interesting is that during the last 3 year time period of extremely
low interest rates the majority composite equity pricing indices have not
reached their previous 2000 levels. What would have happened had the Federal
Reserve lowered fed funds to only 4 or 3 percent? Based on the lower
valuations, the total available credit for equity market investment would
appear to be less today than in 2000 - a troublesome notion.

Saturation Periodicity: There appears to be periodicity in saturation
points, where buyers become scarce, and valuations suddenly decrease, and
credit contracts. The length of periodicity of the credit cycles in many
commodity and equity markets empirically show that in a series of saturation
and credit cycles, the second cycle from low to low valuation point is 2-2.5
times the length of the first cycle. There are recurrent fractals that show
the same periodicity in sub cycles in minutes, hours, days, weeks, months
and years. Intuitively it is possible that lower interest rates extend the
maximum length of the second cycle to the long end of the cycle length or
2.5 times the first cycle length.

Just like the superimposition and synchronization of waves in the ocean
produce result in amplification and much larger periodic waves, the
superimposition of contracting credit and synchronization of sub waves may
be expected to amplify or extend the length of saturation points resulting
in relatively sudden and massive devaluations in credit contractions - if
the down cycles are in synchronization.

A most interesting potentially synchronized weekly pattern of contracting
cycles has occurred since October of 1998. The SPX, DJIA, and NYSE composite
indices all show the same pattern. The beginning of the second cycle is
defined by drawing a slope line along the bottom of equity composite prices
from about June-July 2000 going forward to September 2001.
This slope defines the first credit cycle starting from October 1998 to be
91 weeks.

2.5 times 91 = 227.5 weeks, the maximal length of the expected end of the
second cycle of the credit contraction.

The first sub cycle of the second wave is 65 weeks long from June 2000 to
September 2001.

2.5 times 65 = 162.5 weeks, the expected end of second sub cycle of the
second wave.

Notice that 162.5 + 65 = 226.5 weeks. (*one week is taken off because of the
double counting of the last week of the first sub cycle and the first week
of the second sub cycle.)

From September 2001 there is a lower low of 45 weeks. A new base of 34weeks
then occurs, with credit expanding and equity valuations rising.

2.5 times 34 = 85 weeks (the expected low of the second cycle with a first
cycle base of 34 weeks).

Notice that 65 + 45 +34 +85 -3(for double counting see above*) = 226 weeks.

All of the expected superimposed credit contractions end within 1 and
1/2weeks of each other - from 226 to 227 and 1/2 weeks.

13 September 2004 begins week 221 of a potential 226-227.5 week cycle. There
are 6-7 more weeks in this credit cycle with a superimposition of the ends
of all second cycles of the identified three separate credit cycle

If this model is correct a mathematical possibility exists for a sudden and
massive stock market devaluation. With consideration of the roughly 70 year
consumer saturation cycle and the current fundamentals of a highly saturated
overbought US consumer market, i.e., houses and cars, especially in light
of weakness in new reasonably paying job creation, this could mark the
beginning of a credit contraction period similar to the period from 1929 to
1932. Because of the United States' current unique military position in World
history and its perceived safe haven status, it is possible that the 70-year
(2nd half of the 140 year cycle since 1858)credit cycle may be further

G. Lammert