In "Money Printing's Biggest Show Of All Time" I looked at some characteristics of the quantitative easing mania beginning to grip our global central bankers. The bull market in creative debt we are witnessing in our day can be studied with fractals the same as other historic bull markets. I've written a series of articles on this, "The 64-Month Bull Market Fractal" and others, as it relates to gold. I can't go over that here, but I recommend you look at these articles to better understand this one. I also show some examples in "The Bull Market In Money Printing" at my blog. I would just like to present here a generic example of the 64-month fractal that is presented by David Nichols, a pioneer in this emerging science of market study. He came across these fractals as it relates to gold. But it is a pattern that is common in a variety of bull markets.
This fractal is basically a repeating growth pattern seen in run-away, historic moves that begins with a sprout point, a change from a sleepy trading action to parabolic growth. The fractal is composed of 3 elements - twin parabolas separated by a downtrend consolidation between them running about 1 year. The fractal runs for about 64 months plus or minus a couple months or so. For example, the housing boom's Toll Brothers (TOL) stock:
(Click charts to expand)
Nichols marks out the month count here 1 thru 65 at the top. I have added the 3 elements in orange. This same 64-month run shows up in the Nikkei of the '80s, the Nasdaq of the '90s, the Dow of the '20s, and oil up to the '08 top. It doesn't happen in every bull run, and it doesn't always mean the end of the bull run. It is just a very prevalent fractal growth pattern.
This 64-month or roughly 5 1/2 year scale of the fractal is the most common. But it does occur in other scales. There is a 3-year size and a large scale that usually runs 7-9 years. I show several examples of these other sizes in my articles, most notably the example of gold. In both the '70s bull market and the one we are in now, gold exhibits the large scale, which is marked by the downtrend separator being more developed and running more than a year to more like 2 years in length.
If we view this issue of money printing as a bull market, may we not apply this fractal growth pattern to the things attached to it - like historic episodes of hyper-inflation? One does find an abundance of this fractal describing the money printing blitzes of the past. I'll show just 3 examples here. First is the bout of inflation Brazil suffered in the early '90s. This was a 3-year scale with the very mild, small separator between the twin parabolas running less than a year:
Perhaps the most well known case of money printing was the Weimer Republic of 1920s Germany. They removed the currency link to gold in 1918 to help pay for WWI expenses and were then faced with having to pay for more war damages as part of the Treaty Of Versailles.
The resultant money printing as shown here in Figure 5 followed the 5 1/2 year fractal, before the collapse of the currency in 1923. Again it has the 3 components, 2 parabolas with a separator downtrend, running a year for the 5 1/2-year scale.
You could say that post WWI Germany was far removed from today's problems. But consider a closer-to-home example of this fractal. That would be Israel of the '80s. It's not a high profile case of hyper-inflation, but Israel went through a major banking crisis and money printing problem to do some frenetic financing of the two things it does best, agriculture and military.
...the Israeli government, in 1983, rescued all of the country's large banks. This action by the Israeli government was necessitated when the disclosure of widespread share manipulation in publicly traded bank stocks caused bank stock prices in Israel to crash...During the 1970s and the early-1980s, Israel's banks engaged in reckless lending practices. A high proportion of the volume of these loans went to Israel's collective farms, which the banks believed the government would never allow to fail. The banks, however, had to write-off approximately one-quarter of the loans...
Does this sound familiar? It sounds much more like our Ben Bernanke world of today than ancient German history. Here is the money printing that resulted in Israel:
It was another case of the 5 1/2-year growth fractal, even under vastly different macroeconomic conditions than Germany. But the two fractals, 1920s Germany and 1980s Israel, are like two peas in a pod with the same basic DNA growth instructions. That was the basic assumption when researchers first began looking at financial markets to see if per chance they grew like other natural growth. They found that they were indeed very fractal.
Our current money printing differs from the past cases in that it is a global binge, not just a country or an empire. It first manifested itself in the U.S. with the mortgage mess. But it is not just a U.S. thing. It is, in fact, mainly a rest of the world thing with just the European banks alone having four times the assets of the U.S. banks. Keith Springer wrote an article "It's Raining Money" at Seeking Alpha where he graphed the recent composite balance sheet history of the 8 large central banks of the world, U.S., UK, ECB, Japan, Germany, France, China, and Switzerland, adding together each major country's money printing efforts to get a picture of the global phenomena. In this way, you view our present age money creation as being from a collective global "Fed." I go over this in "The Bull Market In Money Printing" (see Figure 6 discussion).
We are repeating history - another pea growing in the pod. Because the downtrend separator between the twin parabolas is 1 year, it is likely to be the usual 5 1/2-year scale. Global money printing is now being described as "going parabolic" and a "race to debase" is setting in on global policy. In Figure 6, I've shown the fractal components in orange along with two projections out to the terminal phase. The earlier one gets us there at the 5 1/2-year fractal target, the later one allows for some prolonged agony, but about any conclusion of this pattern has some sort of, shall we say, significant change happening within just a year or so.
As you can see, the chart has some kind of end and destabilization occurring at a total printed amount of around $25-$30 trillion. Is there something special about this $30 trillion area that the fractal seems to be pointing to? Some well informed people think so. The fractal is pointing to the same number that others, who know nothing about fractals, are pointing to. In November, there was an article featured at Finance Examiner by Kenneth Schortgen Jr. "European Liquidity Crisis Has A Number: $30 Trillion According To Sarkozy." This is the total liability estimate of Olivier Sarkozy, brother of the French President. The article comes to this sobering conclusion:
The liquidity and debt crisis of 2011 is quickly turning out to be much more catastrophic than the debt crisis of 2008, and today, there are fewer tools for central banks to use to stem off the coming destruction. The only thing left in both the US, and in Europe is to monetize and print money, and to this point, both central banks have held off this plan because of the massive inflation that will follow once its implemented.
I don't know about the inflation part. In our modern age, we seem to have learned how to create too much money without too many bills. Maybe we won't need wheelbarrows to go to the grocery store as in Weimar Germany. Today, they are talking in terms of "stabilizing" that $30 trillion with incremental printing. But when you consider that the $30 trillion has had all manner of creative derivative tinkering attached to it in a complicated web surpassing anyone's understanding, you have to look at what level of leverage they're up against. With the estimated $900 trillion in derivatives now in the world, you get 900/30 or about a 30:1 leverage ratio between the basic deficit of the eurozone and all the holdings either strongly or loosely attached to it.
These derivative instruments are not all directly based on debt, but as we have seen lately, the debt problems bear greatly on all the other markets which all the derivatives are tied to. It is more or less a levered, unmapped web at 30:1. And that is also a key number. It seems to be a destabilization level that typically turns boom into bust. MF Global ran to this leverage before its collapse, and in "MF Global Was Leveraged Thirty Times Measly Capital," Robert Lenzner of Forbes said this about John Corzine "... he let MF Global operate with leverage of 30 to 1- precisely the ratio of debt to equity that sank Lehman Brothers, Bear Stearns..." and a whole host of other too-big-to-fails. At this leverage, you only need about a 4% reversal in the primary boom item to precipitate the downside fireworks. Oh, for the simple days of Glass-Steagall.
So should we all plan on the end of the world by mid-2013? If the Mayans don't get us, does money printing accomplish the same thing? I don't know. But I think there are some reasonable assumptions we can take from the history and the projections we've just seen. First, we know that heavy quantitative gifts usually result in heavy stock market rallies. And if this is to be a mega-blizzard, maybe we should plan on an equal mega rally. The market's technicals are saying that now. Even if the economy in Europe slips into recession and the U.S. recovery cools, stocks may accentuate the positive. They have tended to do just that in past rounds of liquidity.
But I think the main conclusion we should be pondering is the reform that's going to be needed to avert the end of these trends. To put it bluntly, I think the trends point to some kind of Jubilee/hard currency reset being a real possibility. And they may not have 5 or 10 years to fool around with this solution. Jubilee is whole 'nother essay, but suffice it to say here that it is not a new concept. Just google "Jubilee debt" and you see many related searches pop up and a wide array of discussions about our modern problem, not ancient Israel. Part of the reset will hopefully be the end of the central bank as we know it (or should I say loath it). The Israeli Jubilee was a reset of land to the original owners or their heirs every 50 years. How nice it would be if we did just such a reset of all the created money, giving it back to the main street original owners - as it was in 1962. This was a time before the Great Society vision of government and the fiscally reckless policy that ensued. It was a time before Nixon removed all hard currency discipline. After seeing the greatest money printing show in history, we may all want to go back there.