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

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Generational Dynamics Web Log for 18-Jan-06
Tokyo stock exchange suspends trading to stem heavy selling of shares

Web Log - January, 2006

Tokyo stock exchange suspends trading to stem heavy selling of shares

The Nikkei index fell 3.94% on Wednesday, not enough to be called a "panic," but enough to raise concerns about a broader selloff.

Stocks fell for the third straight day, triggered by an investigation of a high-flying Japanese internet portal, Livedoor Co.

The Nikkei index fell 3.94% on Wednesday, and 6.22% for the week. Usually the term "panic" is reserved for selloffs of 10% or more in a short period. Because of the high selling volume, the Tokyo Stock Exchange (TSE) was forced to suspend trading and shut down early, for the first time in its history.

The concern is that the selloff will continue when the New York Stock Exchange opens this morning at 9:30 am.

As I've discussed many times, both I and other analysts have computed that the "true value" or book value of the stock market today to be around Dow 4500, which means that the market is overvalued by a factor of more than two -- at about the same level as just before the 1929 stock market crash.

The situation is complicated by two additional factors:

Housing prices have been leveling off since August, and the housing bubble finally appears to be bursting. As a point of comparison, housing prices began leveling off in Shanghai in March of last year, and prices in some categories have fallen 50% since then. That big a fall is not expected here, but even a leveling off could have important consequences, since the housing bubble has been fueling the credit bubble and stock market bubble for several years.

Corporate earnings are beginning to show weakness, for the first time in several years. Earnings have been exceptionally high for ten years by historical standards. Average annual long term earnings growth has been tediously consistent at 11% per year for close to a century, but has been at 18% since 1995. History shows that this exceptionally high earning growth will be compensated in the next few years by average earnings growth of 4% per year. If those lowered earnings rates continue to show up this year, then stock prices will have to fall to keep price/earnings ratios steady.

Investors are very nervous these days, because the stock market is so far overpriced. However, there hasn't been any real sign of panic until the TSE selloff today, and even that sign was muted. If anything serious is going to happen, it will probably happen in the next couple of weeks; otherwise, if things settle down again, then we may have to wait until the next crisis raises concerns again.

Since 2002, Generational Dynamics has been predicting that we're entering a new 1930s style Great Depression with the stock market falling to the Dow 3000 to 4000 range, probably by the 2006-2007 time frame. At this point I see no reason to change that prediction. (18-Jan-06) Permanent Link
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Generational Dynamics Web Log for 18-Jan-06 Tokyo stock exchange suspends trading to stem heavy selling of shares

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Generational Dynamics Web Log for 18-Jan-06
Tokyo stock exchange suspends trading to stem heavy selling of shares