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

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Generational Dynamics Web Log for 18-Jun-2008
Royal Bank of Scotland issues global stock crash alert

Web Log - June, 2008

Royal Bank of Scotland issues global stock crash alert

"A very nasty period is soon to be upon us - be prepared," says the RBS research report to investors, according to an article in Wednesday's Telegraph.

The report advises clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyzes the major central banks. It warns that the S&P 500 index is likely to fall more than 300 points to around 1050 by September, as "all the chickens come home to roost."

This would correspond roughly to a fall of 3000 points in the Dow Jones Industrial Average, to around 9000.

The RBS report also warns that the contagion will spread across Europe and emerging markets.

The report was written by Bob Janjuah, the bank's credit strategist.

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names. Cash is the key safe haven. This is about not losing your money, and not losing your job," according to Janjuah, whose grim warnings last year about the credit crisis proved all too accurate.

Janjuah's conclusions are based on highly technical considerations, but an article by James Montier of Société Générale, appearing in John Mauldin's newsletter, does a comparison of today's financial marketplace to that of 1929.

This article also draws lessons from the huge Japanese real estate bubble of the 1980s, and the subsequent real estate and stock market crash of the 1990s.

You may recall that real estate prices were in a huge bubble in Japan in the 1980s. The bubble was so huge that the total nominal value of real estate in Tokyo alone, at the height of the bubble, was greater than the value of all real estate in the U.S. at the time.

The following graph from Mauldin's report shows the path of Japanese real estate prices following the crash:

Changes in Japan's land prices (% growth or decline) following 1990 crash (red line) <font size=-2>(Source: Mauldin)</font>

Changes in Japan's land prices (% growth or decline) following 1990 crash (red line) (Source: Mauldin)

As you can see, following the 1990 stock market crash, Japanese real estate prices kept falling sharply for 16 years, only starting to increase again in 2006. I noted this in an article last year: "Japan's real estate crash may finally end after 16 years."

Interestingly, the RBS research was pretty much ignored on the BBC and other mainstream media, except for the Telegraph.

However, an analysis by Financial Times finds broad agreement with the findings, though not with the timing:

"Mr Janjuah’s peers at other European banks agreed it was inevitable that credit markets would deteriorate later in the year, potentially quite dramatically, when large companies started to default on their debt. However, most said that RBS was a touch aggressive in forecasting that turmoil would strike as soon as August.

“[The predictions] are pretty much in line with what we’d expect,” said one strategist, “though we’re not so sure about the timeframe.” He said many struggling companies would be able to limp along into 2009 before falling apart."

From the point of view of Generational Dynamics, if you go back through history, there are many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.

These are called "generational crashes" because they occur every 70-80 years, just as the generation of people who lived through the last one have all disappeared, and the younger generations have resumed the same dangerous credit securitization practices that led to the previous generational crash. After each of these generational crashes, the survivors impose new rules or laws to make sure that it never happens again. As soon as those survivors are dead, the new generations ignore the rules, thinking that they're just for "old people," and a new generational crash occurs.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (18-Jun-2008) Permanent Link
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Generational Dynamics Web Log for 18-Jun-2008 Royal Bank of Scotland issues global stock crash alert

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Generational Dynamics Web Log for 18-Jun-2008
Royal Bank of Scotland issues global stock crash alert