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Generational Dynamics Web Log for 27-Feb-07
Shanghai stock market index falls 8.8%, pulling down Hong Kong and Europe

Web Log - February, 2007

Shanghai stock market index falls 8.8%, pulling down Hong Kong and Europe

We're seeing more and more investor panic on the fringes.

The Shanghai Composite stock market index fell 8.8% on the February 27 session that ends at 2:30 am ET. This is Shanghai's biggest loss in ten years.

As we recently discussed, the Shanghai market has experienced an enormous bubble, especially since mid-2006, with the index almost doubling. Millions of people spending all day watching stock prices go up and down in crazy day-trading sessions, just like America in 1999. Even Chinese officials have expressed concern about a collapse.

With so much concern about a Shanghai bubble, everyone is nervous, and today's 8.8% fall may lead to further panic. Such things are impossible to predict with certainty, but this is certainly a time for caution.

The Shanghai results had a small domino effect. The Hong Kong index fell 1.8%, but other Asian stocks fell only slightly.

European stock markets are experiencing a greater effect. As of this writing (Tuesday morning Eastern Time), the European markets are still open, and have been falling uniformly 1-2%, to their lowest levels in over 4 weeks.

The reason given is that mining stocks are pulling the European market down. The reason that mining stocks are pulling the market down; the reason that mining stocks are falling is that investors fear that the Shanghai collapse will mean the end of China's meteoric growth and the concomitant demand for metals.

Wall Street hasn't opened as of this writing, but stocks are expected to open sharply lower, according to the according to the Wall Street Journal.

On Monday, there was an additional slight fall in the ABX index, that measures investor confidence in real estate mortgage repayments. This index fell at panic levels last week.

What we're seeing could be called "panic at the fringes." This panic might grow, or it might settle down again, as it has in the past.

From the point of view of Generational Dynamics, a total generational panic is to be expected.

As we've been saying since 2002, it's possible to prove that a major 1930s style Great Depression is coming, simply by noting that the stock market is overpriced by a factor of over 200%. Price/earnings ratios have now averaged 20 or more since 1995, and this alone shows that a crash is coming, since P/E ratios always fall close to 5 every decade or two, the last time in 1982.

Today, you can look at various variables -- public debt, trade balances, hedge fund market -- and note that these variables have been growing exponentially, with no sign of leveling off and falling, and no willingness in Central Banks to force them to level off and fall. You can show mathematically that this situation cannot continue.

So it's easy to prove that we're close to a major financial crisis, but it's impossible to know exactly when. When it happens, it will be triggered by a generational panic, the first since 1929. It will be a massive loss of confidence throughout the country and the world, total destruction of self-confidence, replaced by a corrosively growing fear, leading to panic, massive homelessness and bankruptcies. We're actually overdue for that, just as we're overdue for a flu pandemic.

It's impossible to predict when this panic will occur, or what will trigger it. There have been some times in the last couple of years when I've warned my readers to be especially cautious, since the markets seemed particularly nervous. This was especially true following the LiveDoor collapse a year ago, and again in May, when synchronized markets around the world fluctuated wildly. However, investors have always returned to their previous levels of starry-eyed giddiness, pushing the markets even higher.

That may happen again with the "fringe" panicking we're seeing right now. Perhaps the ABX index and the Shanghai stock exchange will settle down, and investors will return to creating an even more unbalanced and extravagant bubble than they have now.

So I'm warning my readers, once again, that this is a time for great caution. A major crash is coming sooner or later. The panic may begin tomorrow, next week, next month, or next year. The current "fringe" panicking should be watched closely. (27-Feb-07) Permanent Link
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Generational Dynamics Web Log for 27-Feb-07 Shanghai stock market index falls 8.8%, pulling down Hong Kong and Europe

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Generational Dynamics Web Log for 27-Feb-07
Shanghai stock market index falls 8.8%, pulling down Hong Kong and Europe