Beware a Parabolic Rise Culminates in Market Crash
Interest-Rates / Financial Crash Mar 15, 2008 - 04:19 PM GMTBy: Brian_Bloom
If I have learned one thing in the 40 odd years that I have been watching the markets, it is this: Parabolic rises culminate in crashes. It's a biological phenomenon. The crowd stampedes, or the population explodes, or prices rise with geometrically increasing rapidity – to the point where the rate of increase can no longer be sustained. Because thought paradigms don't change readily, behaviour at the individual level does not adapt appropriately to circumstances and, therefore, behavioural modification is “forced” by the environment. The environment is not able/prepared to tolerate the excessive growth – and the growth collapses in on itself.
History will look back on the United States Federal Reserve System and conclude that it was one of the most ill-conceived, nonsensical concepts ever to have been concocted by a bunch of testosterone addled egomaniacs who were lunging to become Masters of the Universe. Their game of monopoly is drawing to a close and, whilst there may be a few who are sitting with most of the cash, they will come to discover that the other players have left the table. When the game is over, monopoly money offers no tangible benefits. A new paradigm of values is emerging.
Over-the-top harsh words?
Well, maybe so. But, when you look at the first three charts below, bear in mind that it was the Masters of Universe at the United States Federal Reserve System who facilitated the parabolic rises in the ratios of the long dated yields relative to the short dated yields. They did this by “forcing down” the short dated yields when the market was saying that this was not the way to go.
The following charts are courtesy stockcharts.com. They show, respectively, the ratio of:
- 30 year vs 10 year treasury yield
- 10 year vs five year treasury yield
- 5 year vs 2 year treasury yield
- 2 year treasury yield vs 3 month T Bill discount rate
Note that the “action” began to manifest around July 2007.
Chart 1: 30 year vs 10 year yield
Chart 2: 10 year vs 5 year yield
Chart 3: 5 year vs 2 year yield
Chart 4: 2 year yield vs 3 month Bill discount rate
The reader's attention is drawn to the red arrow in the top chart, and then to the various blue arrows which reflect “spikes” flowing from the Fed's attempts to force the short rate down when the longer dated yields were saying “uh uh”.
So where does this leave us?
Well, in context that a parabolic rise typically culminates in a collapse (in this case the charts of the various yield ratios) either the short rates have to start rising strongly, or the longer dated yields have to begin falling strongly. Alternatively, the longer yields can rise but the shorter rates can rise more quickly.
So let's look at the Point and Figure (3% X 3 box reversal) chart of the 30 year yield
The most recent signal given was a “buy” signal given on February 20 th 2008 (indicating that long dated yields might be expected to rise; or at least had stopped falling). Note the strong support at 4.17%
Chart 5: Point & Figure – 30 Year Yield
Chart 6: Point and Figure 5% X 3 Box reversal 3 month bill discount rate
Technically speaking, the discount rate might fall by a further 0.25% which, in turn, would probably manifest as an exponential “blow-off” in the ratios reflected in charts 1-3.
This begs the question: What's likely to happen thereafter?
According to the chart below, we might expect the price of gold to “explode” up to $1400 an ounce
Chart 7: Gold Price – Point and Figure
One problem is that this rise in the gold price is occurring in context of a parabolic rise of commodity prices in general, as can be seen from the chart below (courtesy Decisionpoint.com).
Chart 8 – Commodities Index
But the real worry is that all of this is occurring against the backdrop of the 88 year chart below of the Dow Jones Industrial Index which looks like it might be preparing to break down.
Chart 9 – 88 Year Chart of Dow Jones Industrials
The reader's attention is drawn to the fact that the red “parabolic” trendline has been penetrated on the downside. The Dow Jones Index is still above the support of the dashed trendline A-B but, if this trendline is penetrated on the downside, the support line C-D is currently standing at around 3,000.
I am not suggesting that this is where the Index will land up. Merely that this is where it “could” land up if prices collapsed; and the Ultra Long Term uptrend would still remain intact.
The reader's attention is also drawn to the 8,000 level. It can be seen that rise since 1994 has been so strong in recent years that “support” at the 8,000 level is relatively modest.
Conclusion
It would be irresponsible to make any forecast given that this would be tantamount to crystal ball gazing. However, there is a technical argument which can be put forward to support the following possible conclusions:
- Short term rates spike downwards one last time as the Federal Reserve moves to use up the last silver bullet in it arsenal of weapons.
- This downward spike could be short lived, and a credit crunch might manifest despite the Fed's efforts. The market might take a “stuff-you” attitude (or panic), and short dated yields might spike upwards very soon thereafter.
- 1 and 2 above could cause the parabolic trends of the ratios in the first three charts to collapse – which would be consistent with historical experience of parabolic rises within biological systems.
- Velocity of money would contract savagely if a credit crunch manifested that was beyond the Fed's ability to control.
- This would cause the US economy to tank – thereby causing mayhem in international markets
- The Dow Jones Industrials Index would break below the support of line A-B and might stop anywhere between 8000 and 4000.
- The parabolic trends of the commodities charts might collapse as the wheels come off the world economy and the debt mountains implode.
Author's Note
Readers should understand that I am not making the above as a forecast. However, I am prepared to make the following statement:
1-7 above are the risks being faced by those participating in the world economy because of the aspirations of a few testosterone addled, egomaniacal, power hungry individuals who moved to circumvent the United States Constitution in 1913 and to establish the US Federal Reserve System.
Right now, we are witnessing a three ring circus as the US Presidential Election Process unfolds. Notably absent from the discussion is anything tangible that the candidates might be contemplating to address:
- Peak Oil and the necessary move to appropriate new energy paradigms which will drive the world economy going forward.
- Global “Cooling” from 2012 onwards (as opposed to Global Warming) and how we might feed the world's 6.5 billion people should this manifest
- The so-called clash of civilisations.
- The redundancy of a two party political system where the candidates of both parties have the financial backing of (and are therefore ultimately accountable to) the same corporate/banking power base.
Yes, its time for change, but the change needs to be structural as opposed to cosmetic. For starters, we need to head the egomaniacs off at the pass.
We need to clip the talons of the corporate and banking hawks by whose dubious grace the candidates are being “allowed” to offer themselves to the electorate. We need to dam the rivers of cash that flow into the bank accounts of those oil producing countries that are funding terrorist activities.
How?
The various new electromagnetic energy technologies which are waiting in the wings should be placed in trust for the benefit of all the peoples of the world.
By Brian Bloom
March 15 th , 2008
Since 1987, when Brian Bloom became involved in the Venture Capital Industry, he has been constantly on the lookout for alternative energy technologies to replace fossil fuels. He has recently completed the manuscript of a novel entitled Beyond Neanderthal which is targeted to go to the printers within 4-6 weeks.
Interested parties will be emailed with a personal invitation to place their order/s for Beyond Neanderthal – which will be processed and delivered by Austr ali a 's largest independent book distribution group. To avoid disappointment, please register your interest to acquire a copy of the novel at www.beyondneanderthal.com
Copyright © 2008 Brian Bloom - All Rights Reserved
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