Let’s just hope I’m wrong that inflation doesn’t go down with all the consequences this entails for interest rates.
A few months ago I informed some friends that I had yet to see American inflation fall below 3%. Unfortunately, this has come true given the increase in inflation to 3.5% in March. That was a shock, but one that was not perceived as too threatening.
Yet the danger has not passed, but first my thoughts on why inflation would not fall below 3%. As you know, I am involved in technical analysis, often in support of a fundamental approach. In that analysis I hardly use the many indicators that have been developed for chart reading. I look strongly at the Elliott Wave, the golden ratio and Fibonacci numbers.
Take US inflation. It started an increase of 9 points in May 2020 to top out at just above 9% in June 2022. What I do is divide such an increase by 3 and then in this case I calculate the resistances that amount to 6% and 3%. It sounds crazy, but pick up some stock charts and you’ll see that it works out more often than you think.
Of course I will look for a story and facts to publish such a calculation. This also applies to the reverse movement. After the decline in inflation of rounded 6%, resistances can be calculated that are approximately 2 points higher at around 5% and 7%. Time will tell whether this view will come true.
In any case, inflation will be fueled by the tension on the oil market due to the threatened escalation between Iran and Israel, and all the consequences that will have for geopolitical unrest. Brent is on the verge of a breakout, leaving room for a rise to $120. This will fuel inflation to rise to 5%. The community will certainly not applaud if I am right, but they will laugh along with me if I am wrong.
And if the interest rate bubble bursts, the yield on 10-year US government bonds could rise from about 4.5 to 5.0%. Let that be the first resistance to the decline in interest rates in the period 1981-2020. Time will tell, but the golden ratio is there for a reason. In 1509, the Italian mathematician Luca Pacioli published the book De divina proportione, together with illustrations by Leonardo da Vinci, focusing on the golden ratio, which had already been used 300 years before Christ.
Tree leaves and pine cones tend to grow in patterns that approximate the golden ratio. Spirals of sunflowers and other seeds also come close. So why not shares, interest rates and economic variables?
Eddy Schekman (Columns)
Eddy Schekman lives and works in China and is mainly concerned with explaining financial news for enterprising investors. Since 2008 he has mainly published for the CASH platform.
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