The nightmare is finally beginning. - 17-Aug-07 - Generational Dynamics

Generational Dynamics Web Log for 17-Aug-07

The nightmare is finally beginning.

After Thursday's events, there can be little doubt: A generational panic and stock market crash has begun.

When I say "Thursday's events," I don't mean the fact that the Dow went from 0 to -350 to -150 to -200 and then, in the last few minutes of the session, became positive before settling at slightly negative. That plays into it, but it's not the main factor.

I'm talking about dramatic and overwhelming changes in attitudes that have occurred in just the last two weeks.

Remember the rules about Generational Dynamics: It's not the events that matter; it's not the attitudes and behaviors of a few politicians that matter. What matters is the attitudes and behaviors of large masses of people, entire generations of people.

There was a big stock market nosedive for a while on Thursday, but a stock market nosedive happens all the time. As with everything else in generational theory, it's not the "spark" that matters, but people's reactions to the spark.

There has been an enormous change in attitudes and behaviors of the masses of investors around the world in just the last two weeks.

I made up my mind that generational panic had begun this afternoon, because of the total panic in the faces and voices of everyone who was speaking on CNBC. They were babbling total nonsense, and it was obvious they had NO IDEA what was going on.

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It seems like years now, but it was just a month ago that bad economic news would push the market to a new high. That was totally irrational.

It was just a week ago that I first felt I was sensing the "smell of panic."

That smell of panic has been growing every day since then, and on Thursday it was a stench. Every little bit of bad news is enough to cause the Dow to fall 100 points almost immediately.

And all the commentators, executives, financiers, analysts and journalists who comment on the situation are baffled and desperate. It's in the eyes and voices. This sense of panic has been growing quickly the last couple of weeks, and this is what generational panic is.

As if to prove my point, the market gained about 200 points in the last few minutes of Thursday's session. When the Dow went positive, there was a huge cheer from everyone on the floor of the stock exchange, as if a soccer team had scored a goal, and if I'm not mistaken, Maria Bartiromo was so giddy that she jumped up and down like a schoolgirl.

So you have a situation where literally no one has any idea at all what's going on. NO IDEA AT ALL. All they can do is hope and pray that things go their way, and they all know in their hearts that they won't.

The panic is fully justified. Most investors are oblivious to the CDO (collateralized debt obligation) problem, but this is a huge problem as I've described several times in the past. And what we're seeing is that the worst-case scenario is turnout out to be the truth. CDOs are everywhere, in every kind of portfolio, every investment class. And they're backed by a mortgage industry that's collapsing, and bringing down everyone with them.
Think of the world economy as a huge, enormous bloated mansion made of wood, with all kinds of additions tacked on all over the place. Think of the CDOs as millions of termites that are eating away at the insides, so that another piece of the mansion falls off into the ravine almost every day, and it won't be long before the entire house falls into the ravine.
As readers know, I've been following this thing with CDOs closely, and it is BEYOND BELIEF what's happened. I remember in the 1950s hearing my teachers telling me how foolish everyone was in the 1920s. Well, people are going to look back at this time, and the acronym "CDO" will live in infamy.

Everything happening now is what happened just before the 1929 crash, as described in John Kenneth Galbraith's 1954 book, The Great Crash - 1929, which I've quoted many times on this web site: The mania for mergers and acquisitions, the drying up of liquidity, the central banks injecting funds to stave off disaster. They even had hedge funds in those days -- only, they were called "investment trusts," and they were just as abused as hedge funds are today.

There have been HUGE changes in attitudes and behaviors in just the last couple of weeks, and that's why I'm saying that the nightmare has begun. A month ago, investors ignored bad news and continued as before. Today, investors are panicking, and each new piece of bad news causes them to panic even more. This is a change that's occurring VERY RAPIDLY, and it cannot be stopped.

I want to emphasize as strongly as I can that the supposed experts have NO IDEA what's going on. You cannot understand what's going on unless you understand generational theory, and everyone I try to explain it to simply rejects it. They'd rather stick with the "experts," who have gotten EVERYTHING wrong since the 1995 bubble started, and they won't even consider generational theory and this web site, which has gotten every prediction right for the past five years.

A couple of days ago, I listed some of the really stupid things that "experts" were saying on CNBC, like "You just have to ride it out," "There's still plenty of money sitting on the sidelines waiting to come back in to the market," and "Fundamentals will soon come back in to line."

Here are some additional things I've been hearing:

"What we're seeing is hedge fund unwinding -- and that's certainly very constructive."

"This is a big buying opportunity -- stocks are very cheap now."

"We've wiped out any excess optimism - that's a good thing."

"We're finally seeing people panic, and that's always when we reach the bottom, and stocks start going up again."

"There's a lot of value out there."

"Today's theme: This is a big opportunity for investors."

"What we're seeing is 'capitulation selling' - everyone is throwing in the towel. This is a clear signal that we're near the bottom."

"The bulls are finally out of the woodwork. We have the setup for a rally, since we've been going down all week."

These are statements that were made by "experts." Keep in mind that they have no idea what they're talking about.

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

Over the years, I've given many reasons why a stock market crash MUST occur, using such things as exponential growth forecasting methods and mean reversion techniques with price/earnings ratios.

The above graph shows the P/E ratio index since 1871 (stock prices divided by trailing one-year earnings). If you look at it, you see that the ratio has been above average (the blue line) since 1995, and has been as low as 5 several times in the last century, most recently in 1982. If you look at the right hand side, you can see that it appears about to fall that low again. In fact it MUST do so, by the law of mean reversion. When the P/E ratio falls to 5, stock share prices will fall to 1/3rd their current value.

If you still don't believe me, then show this graph to an expert with analytical experience. Don't show it to a stock broker or other salesman -- those guys flunked 4th grade math, but they can sell ice cubes to Eskimos. Show it to the nerd in the back room. Ask him to tell you what it means for stock prices.

A few days ago I posted a chart comparing 1929 and 2007 after the stock market reached the respective peaks. This is purely speculative, but here's an update of that table:

    1929   % of peak (381.17)
    -------------------------
    Tue 09-03 ( +0.22%) 100%              2007   % of peak (14000)
    Wed 09-04 ( -0.41%)  99%              ------------------------
    Thu 09-05 ( -2.59%)  97%              Thu 07-19 ( +0.59%) 100%
    Fri 09-06 ( +1.76%)  98%              Fri 07-20 ( -1.07%)  98%
    ------------------------              ------------------------
    Mon 09-09 ( -0.36%)  98%              Mon 07-23 ( +0.67%)  99%
    Tue 09-10 ( -2.04%)  96%              Tue 07-24 ( -1.62%)  97%
    Wed 09-11 ( +0.99%)  97%              Wed 07-25 ( +0.50%)  98%
    Thu 09-12 ( -1.23%)  96%              Thu 07-26 ( -2.26%)  96%
    Fri 09-13 ( +0.14%)  96%              Fri 07-27 ( -1.54%)  94%
    ------------------------              ------------------------
    Mon 09-16 ( +1.51%)  97%              Mon 07-30 ( +0.70%)  95%
    Tue 09-17 ( -1.04%)  96%              Tue 07-31 ( -1.10%)  94%
    Wed 09-18 ( +0.65%)  97%              Wed 08-01 ( +1.14%)  95%
    Thu 09-19 ( -0.25%)  97%              Thu 08-02 ( +0.76%)  96%
    Fri 09-20 ( -2.14%)  94%              Fri 08-03 ( -2.09%)  94%
    ------------------------              ------------------------
    Mon 09-23 ( -0.84%)  94%              Mon 08-06 ( +2.18%)  96%
    Tue 09-24 ( -1.78%)  92%              Tue 08-07 ( +0.26%)  96%
    Wed 09-25 ( -0.01%)  92%              Wed 08-08 ( +1.14%)  97%
    Thu 09-26 ( +0.96%)  93%              Thu 08-09 ( -2.83%)  94%
    Fri 09-27 ( -3.11%)  90%              Fri 08-10 ( -0.23%)  94%
    ------------------------              ------------------------
    Mon 09-30 ( -0.41%)  90%              Mon 08-13 ( -0.02%)  94%
    Tue 10-01 ( -0.26%)  89%              Tue 08-14 ( -1.57%)  93%
    Wed 10-02 ( +0.56%)  90%              Wed 08-15 ( -1.29%)  91%
    Thu 10-03 ( -4.22%)  86%              Thu 08-16 ( -0.12%)  91%
    Fri 10-04 ( -1.45%)  85%
    ------------------------
    Mon 10-07 ( +6.32%)  90%
    Tue 10-08 ( -0.21%)  90%
    Wed 10-09 ( +0.48%)  90%
    Thu 10-10 ( +1.79%)  92%
    Fri 10-11 ( -0.05%)  92%
    ------------------------
    Mon 10-14 ( -0.49%)  92%
    Tue 10-15 ( -1.06%)  91%
    Wed 10-16 ( -3.20%)  88%
    Thu 10-17 ( +1.70%)  89%
    Fri 10-18 ( -2.51%)  87%
    ------------------ -----
    Mon 10-21 ( -3.71%)  84%
    Tue 10-22 ( +1.75%)  85%
    Wed 10-23 ( -6.33%)  80%
    Thu 10-24 ( -2.09%)  78% Black Thursday
    Fri 10-25 ( +0.58%)  79%
    ------------------------
    Mon 10-28 (-13.47%)  68% Black Monday
    Tue 10-29 (-11.73%)  60%
    Wed 10-30 (+12.34%)  67%
    Thu 10-31 ( +5.82%)  71%
    Fri 11-01  (Closed)
    -----------------------
    Mon 11-04 ( -5.79%)  67%
    Tue 11-05  (Closed)
    Wed 11-06 ( -9.92%)  60%
    Thu 11-07 ( +2.61%)  62%
    Fri 11-08 ( -0.70%)  62%
    ------------------------
    Mon 11-11 ( -6.82%)  57%
    Tue 11-12 ( -4.83%)  55%
    Wed 11-13 ( -5.27%)  52%
    Thu 11-14 ( +9.36%)  57%
    Fri 11-15 ( +5.27%)  60%
    -----------------

This is purely speculative, but if we continue to follow the 1929 pattern, then we should expect to see enormous swings, such as the huge swings that occurred on 10/3 and 10/7/1929, and we should expect to see a real generational panic and crash in about six weeks.

This is one of the saddest and most dreaded days of my life. This is the day that I reached the conclusion that the nightmare has now begun. We're now in the beginning stages of a classic generational panic and stock market crash. I don't think I'm going to sleep much tonight. (17-Aug-07) Permanent Link
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Generational Dynamics Web Log for 17-Aug-07 The nightmare is finally beginning.

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Generational Dynamics Web Log for 17-Aug-07
The nightmare is finally beginning.