|
PureBytes Links
Trading Reference Links
|
------Begin forward message-------------------------
Return-Path: <august2@xxxxxxx>
Received: from saba.wwa.com ([198.49.174.36])
by mail00.dfw.mindspring.net (Mindspring/Netcom Mail Service) with ESMTP id
rpu8e8.hm6.33qs884
for <terese2@xxxxxxxxxxxxx>; Wed, 28 Jul 1999 11:29:12 -0400 (EDT)
Received: from WWA (157-238-67-034.il.verio.net [157.238.67.34])
by saba.wwa.com (8.9.0/8.9.0) with SMTP id KAA03212;
Wed, 28 Jul 1999 10:29:05 -0500 (CDT)
Message-ID: <379F215B.47D3@xxxxxxx>
Date: Wed, 28 Jul 1999 10:27:23 -0500
From: Ted Lee Fisher <august2@xxxxxxx>
Organization: PSD
X-Mailer: Mozilla 3.04Gold (WinNT; U)
MIME-Version: 1.0
To: ddequinz@xxxxxxxxxxx
CC: pre44@xxxxxxxxxxx, james.paterson@xxxxxxxxx, markmcinerney@xxxxxxx,
drw@xxxxxxxxxxxxxx, terese2@xxxxxxxxxxxxx
Subject: The New Paradigm and U.S. Interest Rate Analysis & Forecast
Content-Type: multipart/mixed; boundary="------------1FBB10122019"
THE NEW PARADIGM: While I may have been one of the first in the trading
community to identify that the market was operating on a new paradigm,
i.e. that productivity gains from technological advances would be
exponential in the long run, thus creating sustained long run GDP
growth. I never embraced the paradigm intellectually. I was adept,
however, in recognizing the paradigm as a force in the market to be
reckoned with and accordingly shaded my wave analysis, thus allowing me
to make significantly accurate interest rate forecasts in 1996, 1997,
and 1998. My interest rate forecst for 1999 diverged significantly from
anything the new paradigm would have implied at the time. I made the
forecast in Jan 1999 based upon my wave analysis and I forecast a
decline in Bonds and Euros. I did so not because I had abandoned the
new paradigm but because the wave structure implied such overwhelming
downside potential. Now in mid-year 1999, Bond and Euro prices have
started that decline, I feel it is necessary to adress this new pradigm
from the perspective of my proprietary analysis. There is little doubt
in my mind, as a cultural historian, that on some global cultural level
we are in the early stages of a Great Transformation in the same
magnitude as the shift from an agrarian society to an industrial
society. It is from this undeniable truth that the new paradigm is
extracted.
The extraction goes something like this:
The West (Free Market) fought a 100 year war against Totalitarianism.
Free Markets won so why can't we have a Golden Age? Why can't
productivity gains bring such efficiencies and surpluses? Why indeed?
The flaw with the first part of the new paradigm is that Free Markets
did not win, have not won and in fact, may not win. Currently 1.5
billion Chinese live under Totalitarian rule. This fact does not escape
the new paradigmists. In fact, they point to the conversion of China to
a Free Market economy as the fuel for the ever expending global GDP.
The problem with this thinking is multi-faceted.
1) A substantial proportion of the Chinese population never experienced
the first Transformation from an agrarian society, now they are expected
to engage in the great leap forward into a new world of information and
exchange. Unlikely.
2) The new paradigmists ignore the fact that the Chinese have been under
Totalitarian rule since the days of the Great Khan and while the new
Boss has replaced the old Boss and Imperial China has been repalced by
Red China, the level of individual freedom has been marginal to non-
existent for centuries.
3) Further, the new paradigmists ignore the lessons of Tiananmen Square
etc. where a reactionary new guard demonstrated a unique willingness to
repress the political movement to freedom.
4) Chinese leadership since Tiananmen Square has demonstrated an
awareness of the assault of Free Markets on their power base and have
responded with significantly higher levels of militaristic behavior
(i.e. espionage). If world power = population + resources then the
Clinton Administration has through incompetence or corruption allowed
the Chinese to acquire illegally the necessary technology (resources)
that shifts the balance of power to the Chinese.
The combination of a reactionary leadership and emerging domestic
pressures create a situation whereby imperial expansion legitimizes
power and distracts the domestic population. The emerging rhetoric from
Taipei becomes particularly alarming in this context as Beijing could
respond with surprise force.
The flaw in the second part of the new paradigm is technology brings
ever increasing productivity.
1) The greatest gain so far has been in agriculture. Crop yields are up
significantly through the use of bio-engineered seeds. Even here,
however, logic would suggest that Mother Nature is capable of destroying
the best laid plans. Drought resistant seeds in a Dust Bowl.
Contradictions do not always resolve themselves in the best interest of
the world.
2) As productivity rises through technological innovation, so too does
the destructive forces intrinsic to capital formation. As the time lag
between the formation of capital and its destruction becomes shorter and
shorter, the capacity for the creation of capital is more and more
offset by the destructive forces unleashed.
Now that the capital markets are fully invested in the new paradigm they
become vulnerable to shocks that contradict it. The possibility now
exists for the wholesale destruction of large blocks of capital should
events shock the new paradigm: a devaluation of the Chinese currency,
use of nuclear force on Taiwan or even worse, a collapse of central
government in China.
Due to the absence of a historical time series of prices from China i.e.
fixed fx, etc. it is difficult to apply structural analysis to my
thesis. The Hong Kong Equity Market does provide one surrogate index
market from which I might derive inferences. From the August 1998 low,
the Hang Seng Index has traced out a five wave advance, recovering a
substantial portion of its losses from the decline off the 1997 high.
In normal markets, a five wave advance would signal a change of trend
and should be followed by a series of impulse advances in price over
time. If the structure is not normal but IRREGULAR (which is what I
argued in Sept 1998) in its structure. Then the roll over of this five
wave advance should lead initially to breaking down in price out of its
up channel followed by a plunge in price to a new low, substantially
below the low of the August 1998. The overall pattern would then be
counted as follows:
The first break to an orthodox low occured in June 1998 followed by an A
wave rally to the April 1998 high followed by an irregular B wave low in
August 1998, followed then by a C wave rally above the A wave high
complete at the 1999 high. This count will gain credibility as prices
roll down through 12,000 to 11,000, taking down on an extreme downside
target of 185.00!!! (SEE ATTACHED CHART - HANG SENG WEEKLY)
Interest rates as I have forecast need not rise simply due to inflation
but can be driven to significantly higher levels by demand for money due
to liquidity needs arising from default or devaluation. They can also
rise sharply in response to financing an unexpected war. Whatever the
cause, the wave structure of Bonds and Euros continues to imply
substantially lower prices.
Structural analysis and updated forecast U.S. interest rates
July 28, 1999:
T BONDS -- the market response to the june FOMC decision to raise rates
was a short covering rally to complete a pattern we identified prior to
the meeting. While our expectation was for a much more aggressive rate
hike, a short covering rally was expected on the "news". Considering
the weak response by the FOMC (+25 hike) the retracement in price was
quite subdued with the market establishing a wall of resistance at and
around the 117^20 area.
The precipitous break initiated by the Greenspan H.H. testimony led
prices back to the bottom of the trading range. If this break were a
retest of the June 1999 low, then another rally could follow with an
equality target of 119^00 to an extreme upside potential of 122^00.
While the possibilty of a rally of this magnitude exists, its
probability is unlikely from a technical perspective. In fact, a break
in prices below 115^03 should lead to a substantial new leg to the
downside toward our longterm targets of 110^00 to 106^00 (SEE ATTACHED
CHART - USU9 WEEKLY).
EUROS -- The rally off the June low in Euros took the shape of a rally
break rally, forming what appears to be a bear flag underneath the March
1999 low (old bottoms become tops), and below its intermediate moving
average. This implies extreme weakness against the back drop of a short
covering rally. If the T bonds were to initiate another leg up, then
EDM0 would most likely come along kicking and screaming to 9427 as the
yield curve flattened. However, the most likely technical scenario
is a breakdown out of the bear flag formation which will be triggered
should prices cross below 9387. If triggered a substantial new downleg
should unfold to 9325. (SEE ATTACHED CHART - EDM0 WEEKLY)
Kind Regards,
Ted Lee Fisher
------End forward message---------------------------
Attachment Converted: "c:\eudora\attach\snapEDM0W.gif"
|