On Tuesday, Market Anthropology posted a fractal study, which shows the 2007 SPX & XLF daily charts resembling the 2010-12 weekly charts (to date). They pose an important question:
Whether the time differential [2007’s peak-to-trough compared to today’s] is the efforts of our monetary handlers perceived and new found dexterity in dealing with the tentacles of a global credit crunch the second time around, or just the consequence of a slowing financial contagion… I can attest to the similarities in sentiment, the charts and the degree of hubris now being dispensed from both traders, the financial media and central bankers themselves – in curtailing the effects of the crisis.
To restate that, the chart patterns and mouthfeel are the same, except: what was conveyed by a daily price chart in 2007 is being played out in a weekly chart today. Hence, the “time differential.” Essentially, Market Anthropology asks why today’s blowoff top is taking so long to form, when it took only a few months in 2007? I would suggest the market is still under the influence of its long memory of initial conditions. A natural market must complete its cycle length before it outruns emotional demons of the last cycle. (So goes the lesson transmuted from quantum physics & chaos theory.) Of course, baked into this rhetoric are the underlying biases of policymakers & market participants, who today are both still smarting from the lessons of the 2008-09 crisis; whereas they had grown complacent in 2007, when time and credit creation had buried the sting of the tech bubble.
Given the context of this 2007 v 2010-12 analogue, I started thinking about today’s alleged [prolonged] topping process; the can-kicking, the resistance of reckoning, the deferral. It struck me as ironic, since the Great Moderation as a whole seems to have met exponential decay in the frequency and duration of “moderation.” In other words, every subsequent period of expansion lasts half as long as the former… and every subsequent collapse lasts twice as long.
I’m going to segue here. I don’t often employ the Fibonacci sequence in my technical analysis, but the aforementioned irony motivated me to tinker around with it this evening. Part of my problem with Fibonacci levels/time zones/fans/arcs is that they’re imprecise in marking inflection points, and they reinforce cognitive biases (more than most technical tools). Knowing all this full-well, I started by aligning a Fibonacci time zone with the Crash of 1987, the US’s first fumble during the Great Moderation. I overlaid the S&P 500 (SPX) with the Fed Funds Rate (FFRE), and the Fibonacci sequence exhibits interesting results:
I’d accept the conclusion that every time zone marks an inflection point, as annotated therein. I then looked at an overlay of SPX and Gold (GC/), with an insert at the bottom that charts the SPX/Gold ratio–in other words, the SPX priced in Gold, or the “real price” of SPX sans fiat (some say):
As the Fibonacci levels guide my eye, I can’t help but notice that the Gold price of SPX has almost completed a round-trip, 100% retracement to its 1980 low of 0.15. I also can’t help but notice (perhaps intuitively) that the ratio’s trough to peak looks like the inverse of every macro long-wave I’ve previously discussed. For example, CPI or the 20-year US Treasury yield:
I do find a major discrepancy in the inverse relationship: yes, SPX/Gold troughs in 1980 when inflation, interest rates, and a host of other macro factors hit their peak; but SPX/Gold peaks in 2000-01, while macro factors were mid-stride in their secular downward trends. These macro factors are still sliding down to their troughs today, and in this past decade, SPX/Gold has quickly moved from its own peak back down to its trough. What was an inverse relationship through the Great Moderation has become positively correlated since the Tech Bubble burst:
SPX/Gold has fallen from that peak of 5.4 to 0.797, not far (or further than we think?) from the 1979 low of 0.15. 1979: before Volcker, before the Great Moderation, before disinflation became the wind at our back. I explain the quick descent from SPX/Gold’s 2000 peak as the beginning of the end for the fiat economy. Complete with the flip to positive correlation with Treasury yields, the chart above is an artist’s rendering of a liquidity trap, wherein our economy has passed its sustainable growth rate and incremental liquidity yields decreasing marginal growth. The secular wave ends with a period of deleveraging, which I’d have to say our modern policymakers have handled famously, compared to historical precedents.
Since our economy has achieved substantial real & organic growth over the last 30 years, SPX/Gold shouldn’t logically return to 0.15, but I suppose that depends on the growth outlook. I’ll continue to track this ratio, because I’m convinced that a bull widening in the SPX/Gold spread (i.e. equity multiple expansion) will lead the coming bull market and policymakers’ reaction. Re-employing the Fibonacci time-zone, I’ve used that 1979 secular low as our starting point:
Again, Fibonacci falls upon legitimate inflection points… including the European crisis lows from 4q2011. With all these macro waves troughing at the same time, maybe this is the start of something?