Saturday, August 31, 2013

2013.08.30 DJIA Cycle Chart

Historical price cycles for the DJIA have converged so that there is an unusual steep decline predicted to last until early 2014, with a target price level of 7700 +/-. The major caveat is that the Fed may continue its unprecedented policy of constructing a mirage of liquidity in the desert of insolvency. Hence, the best way to interpret this chart is that there are extremely strong historical factors pointing to a large drop in the DJIA. Whether or not it comes to pass in this time frame depends on whether the historical cycles resume on time, or whether the Fed can continue to put off the day of reckoning, with a historically low ratio of assets backing the liquidity which it has, supposedly, temporarily created via its bond buys.


beetlejuice said...

Paolo, the Fed may be de-railed by conflict with Syria and just maybe they have underestimated, or as George Jr would say, misunderestimated, their target.

Your model may very well yet prove valid.


Paolo said...

You might very well be right, beetlejuice. Most of the recent conflicts entered into by the US seem to have occurred in the Fall. Hence, the model may be capturing some of that historical information. What I find interesting is that back in April the bond market in US securities seems to have already alerted the Fed that it does not believe the Fed can continue asset buying without a realistic exit plan.

beetlejuice said...

Mate I am convinced that at some point, just as a star grows too large and implodes, that the Fed balance sheet will begin to pull down the whole monetary system,ie. fall in on itself.
In fact that point, may have been reached as you point out above.

Paolo said...

Indeed, like that nice red one, Betelgeuse. QE is nothing new for the Fed, as it engaged in a similar program of bond buys during WWII. However, they were reversed in the next few years, and since there was only one manufacturing game left in town, it was easier to reverse. Another key difference, I think, was that the bond markets also knew that monetization was not an option because of the pesky gold standard.

Mr. Lawrence Summers was a key architect of the repeal of the Banking Act of 1933, amended in 1935, also known as the Glass-Steagall Act. The firewall between investment and commerical banking stood the test of time until Mr. Summers, Mr. Robert Rubin, and Mr. Alan Greenspan convinced a financially clueless president that its repeal would further enhance the creativity of the markets to seek out new funding in previously unknown places. The implosion of 2008 was a direct result of this repeal, and Ms. Brooksley Born, the head of the CFTC at the time, who warned of the possible dire consequences, was summarily dismissed by Mr. Summers. One of the more depressing things in US politics is that Mr. Summers, who also almost bankrupted Harvard University as a result of misguided swaps bets, is now being considered to head the Fed. The total capture of both the US Fed and the US Treasury, along with the US government organizations charged with financial regulation by the financial industries explains this anomaly. Normally, Mr. Summers would have been forced to exit public service, so-called. Putting him in charge of the Fed is like putting a firebug in charge of the Fire Department! I don't usually vent too much spleen on this blog, but once in a while it feels good.