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Measuring the Effects of Central Bank Intervention: 27/50 of 68/54/41-43 Days

The October 1998 Wilshire's Terminal 25 May 2010 27/50 of 68/54/41-43 Day :: 49/100 Month Second Fractal Series.

When the global macroeconomy is in viewed in terms of its asset class valuation curves and the macroeconomy's debt dependent optimal self-organizing growth and decay quantum patterns, there is clarity.

The vast amounts of macroeconomic data and apparent trends in data subsets have confused  most economists. Few predicted the current economic straits.  One, two or thirty items are followed and trended with an intent to predict a future macroeconomic pathway, only to fail.
What caused the October 1987 equity crash? What caused the  6 May 2010 minicrash? Both are highly predictable events by nonlinear nonstochastic saturation macroeconomics. The 11 October 2007 nominal Wilshire high was predicted by the elegantly simple  patterned science of saturation economics.

The linear exnihilo purchase of Treasuries debt by the Federal Reserve starting in March 2009 supported equity growth.
But to what degree? This question can be answered by the quantitative science of Fractal Saturation Macroeconomics by review of the Wilshire's weekly valuation saturation curve.

The Wilshire's monthly pattern 18/42 X/2-2.5X starting in March 2003 is followed by a declining third 36 month fractal 2X with an initial fractal sequence as a  y/2-2,5y/2.5y decay fractal of 9/18/19 weeks. This is followed by a 3+/8/7-8 week decay fractal y/2-2.5y/2-2.5y ending in March 09.

This 3+/8/7-8/ decay fractal was followed (and coupled) with a 4-5/8/8 week decay fractal y/2-2.5y/2-2.5y that without the Federal Reserve's massive interventional support in the treasury market  would have resulted in a lower low with a slope line connecting the low of the first week of the 3+8/7-8 week decay series and the last week of the 4-5/8/8 week decay series. The total length of these two decay series  y/2-2.5y/2-2.5y was 34-35 weeks.

From March 2009 to October 2010 over 300- billion dollars were electronically produced by the Federal Reserve, steadily pouring into and supporting  US Treasuries debt instruments. Instead of a slope line resting under all valuations of the Wilshire from 21 November 2008 until 8-10 July 2009, the slope was bent at the 6 March 2009 Wilshire low with a 19 week growth period thereafter in the fractal form of a classic decay fractal.

The technical lower low gap occurring on 6 October 2008 was the target area to be filled by a naturally operating market system sans central bank money creation. In a natural system without money creation a competing debt market and equity-commodity market would allocate money flow into  long term debt causing a precipitous fall in long term interest rate levels and sufficiently low to cause and inflection point with money flow  reversing into composite equities and equities' lower low valuation point.

The US long term bond valuation saturation curve in terms of interest paid to bond and ten year note ongoing buyers  benefited by the Federal Reserve's support of the US Treasury Market. Beginning about 14 November 2008 a 34 week 5/14/10/8 week fractal is identified. In a natural market without the Federal Reserve's massive intervention long term 30 year interest rates on the final day of the 8th week (8-13 July 2009) would have rested significantly below the 19 December 2008 low of 2.519 percent.

The Federal Reserve's massive ex nihilo support at the short end of US debt instruments distorted natural money flow causing a caricature of quantum fractal progression and paradoxically supported higher interest rates of long term bonds and higher equity valuations.

The Federal Reserve and its partner central banks in Europe and Japan have nearly an unlimited capacity to borrow from each other whereby the Federal Reserve can potentially borrow one trillion Euro's and then buys 7/10's trillion Euro bonds and 3/10's trillion US short term debt with a reciprocal arrangement of the counter party.

The reciprocal money creation effect on the counterparty's bond markets is minimal.

 Because this is a period of asset deflation, debt liquidation, retrenchment  and high unemployment, the exnihilo mutually created money can be  used to stabilize employment, maintain debt repayment to private banks,  stabilize asset valuations, and in general stabilize the geopolitical  interconnected macroeconomic global system.

All parties are ultimately winners by this central bank intervention and sleight of hand money creation.

 Central bankers would do well to support an international rule prescribing the taxation on both the buying and selling of asset derivatives (equities, commodities, debt futures) and the gains made by those trades.  Taxation on profits from making money on money by buying and selling at growth and decay valuation saturation areas should be 2.5 to 3 times the amount that is weighed on real labor, real production of goods and services, and real investment in useful new enterprise.  All nations would benefit from this type of mutually agreed upon global taxation scheme. Central bankers could show their good will to the world's citizen by taking the strongest possible advocacy lead.

A  central bank sponsored global rule on speculative trading and profit taxation  could change the entire character of the global macroeconomy promoting useful economy activity.

Both the debt market and the composite equity have a 34 to 34-35 week first fractal that has been  caricatured by Central Bank intervention into the US short term debt market. Gold and silver future markets well demonstrate the 34-35 week first fractal. The expected 2.5x end is 85-87 weeks and fits exactly with the 27/68/54/41-43 day final fractal series concluding a 49/100 month Wilshire fractal starting in October 1998,

The 'filling'  of the Wilshire's 6 October 2008 gap was expected as very low long term interest rates would redirect money flow with a natural inflection point and occurrence in July of 2009. The fractal sequence since that time has been 13-14///35///6/11 of 15/12/9 weeks.

After the low in early October 2010 which while identified with a nonlinear break should not fall significantly below the 27 day first fractal slope line, a 12 week growth period will occur with a probability of the largest delta growth/delta time periods in the last two years as the 67-68 day low in early October will end   on week 66 of a 34/68 :: x/2.5x week fractal. The Wilshire's October 2008 gap will be filled again forth the third time. And the first two weeks 67 and  68 weeks will likely be explosive. There after lateral to higher price movement is expected for 10 additional weeks with a final high for the Wilshire before the December holidays.

The effect of the central bank monetization in the US treasury market can be measured as the Wilshire's delta valuation beyond filling the October 2008 nonlinear lower  gap.

The Wilshire 'crash' will come in January 2011 with final low in February 2011.

The power of the Central Banks are unparalleled. Over the next year the Federal Reserve will buy an additional 300 billion more in short term debt instruments to support the equity and long term markets. So many private pensions and insurance instruments  are denominated in the valuations of those markets. On the other hand, exorbitant state, city, and local pensions whose payouts are so divorced from the reality of entry level worker's compensation will not be significantly supported by central bank action. There will be no direct money flow from federal funds to states to maintain absurd pension entitlements. These entitlements and other state programs will undergo revisions appropriate to the individual state's finances.

The individual states have an equivalent status of Greece for which the Euro central bankers have mandated austerity.

Rather than implode, central bank interactive money creation will permit the global economy to contract in a controlled manner.  

Saturation Macroeconomics and quantum asset valuation curve analysis have the unique ability to exactly and quantitatively define the  effects that central bank money creation has had on composite asset class valuations. Unlike the old economists and their murky abilities for economic  prediction,  the new patterned science of Saturation macroeconomics  provides illumination of the future.