Twin Peaks – The Past... The Future?

Reckless monetary policies of the past gave rise to predictable outcomes. The reckless fiscal policies which follow the reckless monetary policies are a matter of global historical record. The most recent modern example of the consequences of reckless monetary policy going sour in a developed economy is the tale of Japan. We take up the tale in the behaviour of the stock exchanges. The Nikkei 225 peaked on 29 December 1989 at 38913.

That is the recent historical lesson. The second tale is being written. It is the tale of the USA’s experience with reckless monetary policy following in the footsteps of Japan. The DJII peaked on 9 October 2007 at 14165.

Are these peaks twins? Yes, but they are not identical twins. Each will write its own tale while both walk a similar road. Perhaps you would question why they should be twins, as I have done many times. The inevitability of the outcome is in the political process. The leaders act as the voters want and the voters’ expectations give rise to an inevitability in behavioural patterns which favours extreme monetary and fiscal policies. Thus we travel on the same road.

Having a road map is useful. Let’s take a look at Japan and match the peaks. Then we can index both the Dow and the Nikkei to each other’s peaks and observe the parallels.


(Click on the chart for a larger image.)

It comes as a shock to observe the similarities of the unfolding tale of the Dow with the historical tale of the Nikkei. The date scale on the x-axis starting with 29 December 1989 is that of the Nikkei, for a look at the past. Identical twins they’re not but twins they certainly are. Perhaps the Fed can claim success for a delay in the big leg down but when it arrived it took the Dow further down than the Nikkei.

Then came the rebound. No surprises there yet but the Dow seems to be encountering heavy weather to match the Nikkei rebound in duration and relative move. The first phase took the Nikkei down from 38913 to 20222 by the 1st of October 1990. The rebound peaked on 19 March 1991 at 27007, about 6 months and 34%.

The Dow rebound, with preliminary top at 8574 on 8 May 2009 from a bottom of 6547 on 9 March 2009 is about 2 months old for a 31% rise. Perhaps the Dow can find the legs to match the Nikkei for a rise to 8773 with 4 months remaining, but they’re not identical twins so do not bet on it.

That was the past. We can take a glimpse at the future by changing the date scale to the Dow top of 9 October 2007.


(Click on the chart for a larger image.)

This look into the future is most unpleasant. Perhaps economic sanity will return but I cannot even find one little green shoot to indicate that the tough love policies of economic sanity is on any agenda. Thus we’re walking the Japanese roadmap of fiscal exuberance and the monetary madness of quantitative easing.

This unpleasant roadmap projects a Dow looking for a bottom some time after 2026. This road map says any buy-and-hold strategy between now and 2026 is bound to result in long term losses. This road map says a Dow 5000 interim bottom some time towards or after the middle of 2010 is likely. The long term bottom indicated by this chart is a Dow around 2600 but even that level is not yet “in” so to speak.

Looking at the next 17 years to gauge long term trending is useful for strategy but what about the near term?



(Click on the chart for a larger image.)

The micro view to October 2010 projects the following outcomes, painting in broad strokes:

 The next bottom to reach about 5000 in the Dow some time around or after mid June 2010.

 The current rebound top may be in on preliminary data (2 months and 31%) but the up trend can last another 4 months.

 The Nikkei bottomed about 8 months earlier than the Dow before the first rebound.

 Dow volatility to range between 9000 and 5000 but considerably less than the first stage of the down move.

 This is a traders market rather than an investors’ market.

 A relentless downward move into the interim bottom once the rebound top is in.

The future does not need to be a near repetition of the past yet humans are predictable in their behaviour. The inevitability of a similar outcome is based on similar macro monetary and macro fiscal policies. The thesis of this roadmap for the future can be broken by a change in the monetary and fiscal inputs which are the dominant variables in the current economic model. It is for you to judge the likelihood of a similar or dissimilar monetary and fiscal future for the USA as opposed to that which Japan has implemented.

The future is not foreordained nor does it belong to anyone. A future outcome based on dominant input variables has strong economic predictive powers. A continuation of current monetary and fiscal trends will almost guarantee a twin outcome with the Japanese experiment.

Trade with care and caution. Invest with even greater care and caution.



Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 May 2009


© Sarel Oberholster


Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .