	Generational Dynamics
	Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 1-Dec-04
U.S. and Japanese economies show unexpected warning signs

Web Log - December, 2004

U.S. and Japanese economies show unexpected warning signs

With the jobs report due out on Friday, America's consumer confidence index fell for the fourth month in a row, according to a report from The Conference Board.

Consumer Confidence Index, March-November, 2004. <font size=-2>(Source: Conference Board)</font>

Consumer Confidence Index, March-November, 2004. (Source: Conference Board)

The Consumer Confidence index is computed from several different components that measure the economy in several different ways. For November, the most ominous components were expectations of future job growth, which were the lowest in more than a year, and measures of future buying plans, which also fell dramatically. These measures indicate that employment and retail sales are likely to be weak in coming months.

The fall was unexpected, as analysts had expected it to increase

Analysts had also been forecasting improvements in Japan's economy, but Japan's industrial production, employment and household spending all fell in October, an unexpected result.

As usual, you can't determine long term trends from one month's figures, but analysts have been predicting for over two years that both the Japanese and US economies would be growing robustly by now, since the recession ended in 2001. At least, that's what's happened "historically," with recessions in the 1960s through 1990s.

And Japan's econony has been in the doldrums since Nikkei (Tokyo Stock Exchange) index fell 80% in 1990.

No analyst has provided any explanation for why three major world economies -- America, Japan and Europe -- are all foundering, and can't seem to break out as they always have "historically."

<b>S&P 500 Index, 1950-present, with long-term trend line</b>

S&P 500 Index, 1950-present, with long-term trend line

This is the only web site that gives the complete reason. As we've said before,

The stock market spiked sharply upward in 1995, at exactly the time when the risk-averse generation of senior financial who had grown up during the Great Depression (as "depression babies") all disappeared (retired or died), all at the same time, and were all replaced by the generation of risk-seeking baby boomers.

As a result, stocks rose far above their long-term adjoining trend line (as the adjoining graph illustrates), creating a stock market bubble. The Fed's near-zero interest rate policy since 2001 has maintained the bubble, with the result that stocks are still overpriced by 100%, as measured by standard price/earnings ratio index values.

Looked at another way, the 1930s Great Depression forced most businesses into bankruptcy, and they all had to begin again from scratch, as "lean and mean" startups. But now, after over 70 years, the vast majority of American businesses, government agencies, colleges, labor unions, and non-profit organizations have all become so bureaucratic that they've become too slow and ineffecient to survive. Most would have gone bankrupt since the Nasdaq crash of 2000, but they've held on by borrowing money at near-zero interest rates to keep their bureaucratic oranizations in business. However, they're not selling products, because they're not producing the products that people want.

When we wrote about Japan 1 1/2 years ago, we quoted a report that said, "The glue holding stock prices together in Japan has been copious lending by banks at ultralow rates, allowing even nearly insolvent companies to survive for years." In other words, America is following the same path that Japan did starting in 1990. However, Japan has done well by exporting to the American economy. As the American economy slows down, Japan's string runs out at the same time America's does.

That leaves China's ultra-hot economy to be the engine of growth for the entire world. But China's economy itself is so overheated that it's being cooled down by force.

Generational Dynamics predicts that we're in a new 1930s style depression. My expectation is that stock prices will fall by more than 50% in the next 3-4 years. To people who disagree with the analysis that I've been giving on this web site since 2002, my question is this: What's your explanation for why the economy has been doing so poorly?

The November jobs report is due out on Friday. It will be closely watched. (1-Dec-04) Permanent Link
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Generational Dynamics Web Log for 1-Dec-04 U.S. and Japanese economies show unexpected warning signs

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Generational Dynamics Web Log for 1-Dec-04
U.S. and Japanese economies show unexpected warning signs