23/02/2010

The Stock Market Inflation Periodicity Theory

(Click the image below to enlarge)
*Model by: Joé Thierry Arys Ruiz © Traders & Analysts C.O. 2010 - All rights reserved
 




Phase A) Apocalypse: Crisis, Panic and Drastic Monetary Policy
After a Crash, Central Banks starts to lower interest rates drastically to stop the panic and incite investors to invest in the stock market motivating risk appetite with a low revenue in bonds. The problem is that confidence is gone and there is panic everywhere, the stock market plunges with short term picks/highs each time there is a drastic move to the downside of interest rates.

Bottom: Bottom in interest rates, Undervaluation and hope

Once interest rates can't go lower i.e near 0% , and the stock market has completely crashed. An undervalued stock market opportunity is pointed out and hope is feeding risk appetite. "Interest rates can't go lower, companies are fundamentally undervalued and the risk/reward worth it."

Phase B) Bounce:
Despite an economy still fragile, the stock market rises sharply principally because of two main factors:
The first is the tendency of the market to oversold a situation in advance in case of a further crash. The equity market often being used as a future indicator for the economy, oversold and overbought situations remain based on discounted future events. Equity is trading near par value and fundamental investors start to raise the buy flag.
The second and probably most important factor is the anticipated inflation who begins to surface, due to a weak monetary policy. Strong hands (Big Bankers, Institutional Investors, money managers...) enter the market: "If it doesn't climb for the economy it will climb because of inflation".

Phase C) Commercialization: Consolidation
Stimulated by a first intensive bounce of the equity markets, weak hands (non institutional investors, buy and hold public funds...) start to enter the market motivated by a strong marketing from institutional sales. Meanwhile, fears of inflation surge and uncertainty for the economy remains, strong hands take some profits and part of the paper is transferred from strong hands to weak hands. A short period of sideways/down fluctuations is the effect of these fears. Sales forces says: "Every drop is an opportunity to buy".

Phase D) Duration:
1-Monetary Management:
This is where Central Banks have to dose between inflation and growth. Central Banks have to prepare an exit strategy to remove the surplus of money that has been injected trough low interest rates. The whole strategy consist in slowly raise interest rates to fight inflation without stopping economic growth.

2- Deficit Management:
From a government perspective they have to deal between economic growth and budget deficit. After rescue plans, Keynesian policies, bailouts and stimulus packages, the budget deficit has exploded and the whole issue is to restore a balanced treasury by both reducing public spending and raising taxes; all without impeaching economic growth.

Phase E) Exhaustion
*Monetary bubble and the monetary inflation prime:
If both monetary and deficit management is well done then a relative long period of sustainable growth is possible. Meanwhile, by repeating the process from phase A to D over and over again, we notice that the monetary mass has been growing exponentially while the economy has had its ups and downs in a linear fashion. Failing partially in both removing the money that has been "printed" and restoring a government treasury balance simply leads to the effect of adding a monetary bubble to another. The consequence is that each crisis becomes stronger. The same happens for private and public debt, part of the debt and monetary surplus is cumulated as the process is repeated. Precisely this remaining cumulated monetary mass constitutes  what we can call a "monetary inflation prime".

*Slow Growth:
While the effects of the several monetary and government stimulus becomes more or less effective. The stock market has been pushed in phase D by general confidence a better shape of the economy, and the consequent inflation generated by growth.
However the previous inflation prime, the inflation created by the quantitative easing, can reduce economic growth.

Top: Interest rates are too high and the share of the interest payment in the annuity is higher than the amortization of the good itself. The investment for example mortgages becomes unattractive since the situation could be similar to a perpetual debt.  In this situation, credit delinquencies and default in payment surges resulting in another credit crisis. Bond market yields are high and risk appetite is reduced driving equity down.

*Model by: Joé Thierry Arys Ruiz © Traders & Analysts C.O. 2010 - All rights reserved

Next Crisis:
If the monetary inflation prime is low, then we can barely notice it's negative effects on the economy. Then, the inflation rate released is published and promoted as "a purely natural effect of a strengthening economy". The problem Surges when this "monetary inflation prime" is high enough to entirely compensate nominal growth. This leads to a void or negative effective growth (inflation adjusted GDP) then we could see a Monetary  and/or Government Debt bubble explosion.

Click the image Below to enlarge the forecast:
Updated Forecast as of : 12/07/2011


        (Click the image above to enlarge)

1 comment:

  1. The Video : http://www.youtube.com/watch?v=PGfQzgX3e0w

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