9 October 2005

55 or 65 Days to the Primary Bottom - the Current Fractal Interpretation

There appears to be a better solution for the primary decay
pattern that would involve 55 more trading days rather than the
previously cited 65 day evolution which still serves as a good
alternative second best fractal hypothesis and solution. At some point
in either of the two proposed decay fractal sequences, a one day
percentage drop of greater than or equal to the 1987 nonlinear drop is
very likely.

A look at the last 11 weeks of the Wilshire (TMWX) on a 4 year chart
shows the simplicity of the asymptotic saturation concept of fractal
saturation macroeconomics. Unlike the better cash supported Nikkei
and top Euro sister equity indicies, the US composite Wilshire has
been feeble in its two unsuccessful and sequentially weaker attempts
to best the 3 August 2005 peak. And the reason for this feebleness is
simple. With the ongoing American macroeconomic integrative picture -
(as exactly represented by the valuation fractals) with its 4 times
national GDP debt, the cresting or actually declining housing market
valuation, the overproduction of housing units, the saturation of
credit worthy buyers, the recent inflationary(albeit transient) cost
of energy hitting the strapped US consumer, the inadequate growth of
wages, and the ongoing collective US zero savings rate - there is
simply not enough money in the US macro system to best the 3 August
2005 high. It is really that simple - very very simple.

The cash reserves in US equity mutual funds are at a historically low
level, lower than immediately before the peak of the Wilshire in March
2000, and equalling the low in 1972 before the 50 percent steady
decline in equity valuations into 1974. The difference between 1974
and now is the additional massive siphoning effect that a declining
housing market will soon have on the monies available to the equity
market and the impetus to liquidate equities in order to futilely
continue mortgage payments on houses with growing negative worth
during a rapidly developing economic and money contraction.

It is this positive feedback system of re enforcing declining asset
values that very conceivably could easily lead to an exaggerated and
accelerated 1929-1932 type of collapse. There is a decided difference
in the thought processes of many of today's citizens verses their
counterparts in 1929. So much of the linear thinking, somewhat
pervasive, today depends on a 'manana' belief whereby many people who
really do have an appreciation of how radically bad the US total
corporate, personal, and governmental debt and ongoing and future
entitlement situation is, believe, nevertheless, that the
come-uppance and the four wheels simultaneously falling off the big
bus will happen sometime in the remote future. The reality may be -
and by current equity valuation fractal analysis the reality is -
that America at this moment has began its reckoning slide down the
slippery(two p's, bro) primary decay process.

When an overwhelmingly leveraged system is wholly dependent on
continuous asset appreciation which in turn is dependent on continuous
credit expansion - when that unstable system changes to the dark side
- to the first one penny iota to credit contraction, the unstable
hydrogen filled dirigible will ignite, explode and implode as asset
devaluation and attempts for debt reduction by asset liquidation work
synergistically to combust the hydrogen oxygen interface which
spectacularly deflates and crashes the superstructure. Only water and
twisted metal will be left.

The Macroeconomy is an integrative and averaging complex system.
Millions of transactions, asset valuation fluctuations, interest rate
fluctuations, lending parameter fluctuations et. al. are ongoing
continuously. However, the total value of created money, i.e.,
borrowed money, on a daily basis is extremely - extremely small
compared to the totality of value of all existing money,debt, and
assets. This minuscule fraction of daily created money divided by
total asset valuation is precisely the cause of the predominant
linearity that represents the behavior of the macroeconomy system for
95-98 percent of its life cycle. The general population including fund
managers know and trust the continuity and apparent perpetuity of this
ongoing and seemingly constant linearity. The macroeconomic life cycle
occurs about every 60-80 years. But self correcting discontinuities in
economic activity do occur and occur likewise with constancy about
every 60-80 years at the end of these cycles. Economic discontinuities
have happened in the 16th century for the Spanish, the 17th century
for the Dutch, the 18th and 19th centuries for the English and
French, and the 20th century for the American and global community.
Similar discontinuities have been identified in the ancient Roman
macroeconomic system.

At the end of every 60-80 year economic life cycle, commonalities of
excessive debt load and/or asset speculation and overvaluation have
been evident. It is at a macroeconomic saturation point of debt and/or
overvaluation of assets where additional consumption and debt
acquisition cannot occur because of the rate limiting ongoing
production, wages, and consumption of the citizenry. This wage,
production, consumption load stone ultimately serves as an anchor to
the macroeconomic system and causes the turn at the top with a
relatively rapid devolution which operates in an efficient and
merciless feedback manner to reset an equilibrium comes into balance
with the ongoing wages and relative consumption of the masses.
Unfortunately the prior forward consumption at the top and the ensuing
declining activity result in requirements for far fewer workers and
production. Total wages tumble even further as a part of the
integrated feedback system. The absence of American savings is as
strong a telltale sign as to the point in this American economic life
cycle as is the two failed attempts to best the 3 August Wilshire high
and the historically low cash reserves of the Mutual Fund managers.
There is no good manana for this very old 73 year US macroeconomic
life cycle. Manana for the US was on 3 August 2005.

Now let's get back to the equity asset valuation lab. Some interesting
notions and reassessments of prior daily equity lab value entries
have occurred over the last 48 hours.
With the gestalt that the macroeconmic system is an integrative
process and the US federal reserve has progressively tightened short
term interest rate much greater than the central banks of other
leading countries, a very slight shortening of the fractal cycle since
August 2003 relative to the 75 week preceding second fractal, might be
ntuitively reasonable.

The ideal fractal growth and decay sequence x/2.5x/2x/1.5x from
August 2004 is 51-52/130/104/ day 11-13 of a expected 77-78 daily
decay fractal.

An alternative averaged pattern under the slight constraints of the
Federal Reserves' 11-12 short term interest rate hikes would be an
ideal fractal growth sequence of 50/125/100 with a subsequent 75 day
expected decay fractal.

From August 2004 the first fractal was 51-52 days in length. The
closing low of the second fractal ended on 20 April 2005 on day 123. A
nonlinear lower break, characterizing the end of second growth
fractals, occurred a few trading days before. Day 123 is clustered in
a set of 7 or so lower valuation days as compared to lows of the 3
days adjacent to either side of the inter day low on day 130, which
occurred on 29 April 2005.

101 days later on 12 September a lower high (compared to 3 August
2005) was made by the Wilshire with a good number of clustered days
at top suggesting breadth and a saturation asymptote that would be
difficult to subsequently overcome.

The newly recognized fractal growth sequence becomes 51-52/123/101
which can be reasonably relates to an integrated and averaged perfect
sequence of 50/125/100. This pattern was recognized for the NYSE in a
previous EF posting.

The ideal decay length for this sequence would be 75 day from the top
100-101 day occurring on 12 September 2005. As of this Monday 10
October, there are 55 trading days remaining in this idealized decay
This is mathematically and fractally intriguing because the top
fractal containing the Wilshire 3 August 2005 high becomes immediately
elegantly involved in a natural fractal decay sequence.

The final third growth fractal of the set of three that occurred since
August 2004 was made
of a 6-/14-15/11/9 sequence or x/2.5x/2x/1.5x. The first base of this
growth sequence was slightly less than 6 days and began on 27 June
2005. The second fractal of 14-15 days ended on 21 July 2005. The
total length of the first two growth fractals was 19 days (counting
first day of the base twice because of its daily behavior of starting
low and ending high.)

21 July 2005 would reasonably mark the beginning day for the 'x' base
for the x/2.5x/2.5x expected decay fractal. The base elegantly
includes the 3 August 2005 wilshire high. The x decay base is composed
of a 4/10/7 daily fractal sequence, or 19 days(2 days subtracted for
double counting). The 19 days matches the expected number of the sum
of a third growth fractal and ideal decay fractal , 2x and 1.5x
respectively which in turn equal the first and second growth fractals,
x and 2.5x of 5-6 and 14 days respectively in the cited pattern:

By this reckoning the base for the primary decay cycle started on 21
July and ended on 16 August 2005. Note that a bottom slope from the
lows from the first and last days of the base decay fractal includes
all the valuation lows of the contained set of intervening trading

This 19 day sequence as a proposed base for a primary decay fractal
of 19/47-48/47-48 days x/2.5x/2.5x has great appeal as a possible very
elegant fractal puzzle solution. Friday 7 October was day 38 of the
second decay fractal. There would be an expected 8-9 days more for a
low. Thereafter, the primary low would be completed in 47-48 which is
within a day of the ideal expected 55 days to a low using the
preceding 50/125/100-101/20 of 75 day larger ideal fractal pattern.

Likewise note that day 19 of this proposed second fractal was at a
high as could be expected day 38 on Friday 7 October. That day 38
produced such a weak valuation performance potentially provides
telltale fractal information regarding the paucity of cash reserves
in the Mutual funds supporting this aged composite equity market.
Technically this is very bad. The second fractal from 16 August 2005
is developing into a 9/19/12 of 21-22 pattern for 47-48 days(2 off for
double counting). The last fractal count is purely speculative at this
point, but in the attempt to validate fractal analysis as a science,
that is exactly what will be done. If the decay occurs from day 38 to
day 47 a ten day fractal base will be set up. From here a possible
9-10/23-25/23-25 decay pattern will most efficiently take the complex
system to a primary low and match the timing of the 50/125/100/75
ideal terminal fractal sequence.

As for the direction of bonds and precious metals, a look to the
equity valuation historical textbook is useful. Bond activity will
likely match the activity during the 5-10 prior months leading to
the October 1998 equity low. This time frame and also the time frame
of the months on either side of October 1987 will be a useful template
for the expected future valuation activity of precious metals and
precious metal related equities. With devaluation of assets, the
purchasing power of remaining debt free dollars will dramatically
increase. with the dollar's value transiently rising. There will be
market competition for the safest of perceived investment areas, US
debt instruments , driving interest rates at least transiently lower
-much lower.

But in the possible hopefully not probable grand perspective it is
prudent to remember what became of US Confederate bonds and debt
instruments shortly after Appomattox in 1865. 7 years after the end of
the first US grand fractal.

Gary Lammert