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Generational Dynamics Web Log for 29-Aug-07
Wall St. markets fall over 2% -- just because the Fed publishes some meeting minutes

Web Log - August, 2007

Wall St. markets fall over 2% -- just because the Fed publishes some meeting minutes

Returning to anxious, panicky behavior for the first time in ten days, nervous investors drove the Dow down 280 points, or 2.1%. The Nasdaq fell 2.37%.

The market opened down slightly, fell sharply at 10:30 am when the "consumer confidence" numbers were released, and then fell even more sharply at 2 pm, when the Fed published the minutes of its August 7 policy meeting.

Consumer confidence figures fell sharply in August, after surging in July. <font face=Arial size=-2>(Source: Conference Board)</font>

Consumer confidence figures fell sharply in August, after surging in July. (Source: Conference Board)

At 10 am, a survey firm known as The Conference Board released the results of its monthly survey measuring consumer confidence. It had surged in July, and now fell sharply in August.

The Consumer Confidence Index is really no more significant than pop psychology, but it was enough to frighten investors into driving down the market almost 100 points.

Then, at 2 pm, the Federal Reserve released the minutes of the August 7 meeting that determines future interest rate policy. Apparently it's the following paragraph that spooked investors:

"Readings on core inflation had improved modestly in recent months. However, a sustained moderation in inflation pressures had yet to be convincingly demonstrated. Moreover, the high level of resource utilization had the potential to sustain those pressures. The Committee's predominant policy concern remained the risk that inflation would fail to moderate as expected. Future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

In other words, the August 7 minutes (from three weeks ago) say that the Fed believes that inflation is likely to continue, which means that they don't intend to lower the Fed Funds Rate from 5.25%.

Investors and journalists had been hopin' and prayin' that the Fed would reduce interest rates. Recall that it was just about three weeks ago that CNBC's Jim Cramer became hysterical, ranting that the Fed had to reduce interest rates by a full point (to 4.25%) or millions of people would lose their homes.

So this was the second event that spooked investors on Tuesday. The market started falling rapidly, especially in the last hour of trading (3-4 pm), resulting in a total fall of Dow 280 points for the day.

When I wrote, on August 17, that "The nightmare is finally beginning," I explained that what was important was not the ups and downs in the stock market, but the attitudes and behaviors of large groups of people, in this case, large groups of investors.

Some kind of tipping point was passed on July 23, a day of high volatility that followed the July 19 stock market peak. Up to that point, bad news made the stock market contine to rise. Since then, bad news is causing the market to make sharp falls.

On that day, Ben Bernanke's Fed lowered the discount rate, a move that had very little real effect, and was mostly symbolic. Still, it seemed to relieve the anxiety and panic that investors were experiencing.

Tuesday was the first day since then that the anxiety seemed to be returning.

Because of this change in behavior, I believe that a major stock market panic and crash is coming in a matter of weeks. The only thing that can stop this from happening is a reversal of the recent change in behavior, so investors become giddy, giggly and bubbly again, as they were until July 19. I consider such a reversal to be almost impossible, and since the stock market is overvalued by a factor of about 250%, so when investors change from risk-seeking to risk-averse, a slide will continue.

We're conducting a little real-time experiment, comparing the 1929 and 2007 markets, following the respective market peaks. Let's bring the comparison up to date.

This data is taken from my Dow Jones historical page. On September 3, 1929, the market peaked at Dow 381.17. By November 15, it had fallen 40% to 228.73. This year (so far), the market peaked on July 19 at 14000.

This comparison 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%              Fri 08-17 ( +1.82%)  93%
    ------------------------              ------------------------
    Mon 10-07 ( +6.32%)  90%              Mon 08-20 ( +0.32%)  93%
    Tue 10-08 ( -0.21%)  90%              Tue 08-21 ( -0.23%)  93%
    Wed 10-09 ( +0.48%)  90%              Wed 08-22 ( +1.11%)  94%
    Thu 10-10 ( +1.79%)  92%              Thu 08-23 ( -0.00%)  94%
    Fri 10-11 ( -0.05%)  92%              Fri 08-24 ( +1.08%)  95%
    ------------------------              ------------------------
    Mon 10-14 ( -0.49%)  92%              Mon 08-27 ( -0.42%)  95%
    Tue 10-15 ( -1.06%)  91%              Tue 08-28 ( -2.10%)  93%
    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      September 10
    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%                   September 21
    ------------------------
    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%
    -----------------

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As you can see, we're sorta-but-not-quite following the 1929 pattern. The fall from the peak isn't as far as it was then in the pattern.

But most important, there haven't been the large downward moves, such as occurred on 10/3/1929, nor has there been the large upward move (+6.32%) that occurred on 10/7. Both of these sharp movements, a downward collapse or an "upward crash," indicate that levels of anxiety and panic are very high. And as we keep saying, the market ups and downs aren't important by themselves; it's the anxiety and panic that are important.

I've estimated that the most likely dates for a panic are in the two weeks, September 10-21. I honestly don't know whether we're still on track for those dates or not. We should have a much better idea by the end of the week.

So here's where we stand: A full-scale panic and crash MUST occur, because the market is overpriced by a factor of 250%, and it might occur next week, next month or next year. Based on the enormous change in attitudes of investors since July 23, it seems very likely to occur in the next few weeks. And based on speculative comparisons with 1929, the date range September 10-21 seems the most likely. (29-Aug-07) Permanent Link
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Generational Dynamics Web Log for 29-Aug-07 Wall St. markets fall over 2% -- just because the Fed publishes some meeting minutes

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Generational Dynamics Web Log for 29-Aug-07
Wall St. markets fall over 2% -- just because the Fed publishes some meeting minutes