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Generational Dynamics Web Log for 9-Oct-2008
Desperate international intervention fails to calm markets.

Web Log - October, 2008

Desperate international intervention fails to calm markets.

The remaining hope: The news is so bad that it must be over.

Interest rate changes, Oct 8, 2008 <font face=Arial size=-2>(Source: AFP)</font>

Interest rate changes, Oct 8, 2008 (Source: AFP)

Six central banks launched a coordinated effort to provide a psychological boost to investors by lowering short-term rates by a half-percentage point in unison.

A year ago this would have been a historic effort, but now it's just another day, and investors weren't particularly impressed.

Market summary, 8-Oct-2008

Market summary, 8-Oct-2008

I had actually expected the markets to rally upward today, just based on the wild oscillations that occurred in 1929. Panic buying is not much different than panic selling.

However, the coordinated announcement must have seemed like such an act of desperation, that an early rally didn't last long. After another rocky day, major indexes fell 1-2%, with the Dow index now at 65% of its peak value, exactly one year ago on October 9, 2007.

Around the world, things were bad. The Nikkei fell 9%, the greatest plunge since 1987. In India, stocks fell sharply, below the key 11000 level. Iceland's currency continues to crash. Stocks fell sharply in Brazil. And worldwide interbank lending rates continue at historic highs.

If we count the "crash" as starting in August, 2007, which is when the credit crunch started, then we're actually following the 1929 crash pretty closely.

With one big exception.

We haven't seen a major generational panic yet, where millions of Boomers and Gen-Xers panic and try to sell everything.

Must such a panic occur? I believe it must. Generational theory says so.

But this time it won't be just a stock market panic. It will stretch much farther, into hedge funds, credit default swaps ($60 trillion) and other credit derivatives ($1 quadrillion).

All the Fed interventions of the last years -- the TAFs and TARPs and other stuff -- have been very successful it targeting specific points of weakness.

If you imagine the global economy as a huge ballooon, then the Fed interventions have targeted specific large holes in the balloon.

But there are thousands, perhaps millions, of tiny pinholes in the balloon that have escaped the Fed's interventions, and so the balloon as a whole has still be deflating. Even worse, as the balloon contracts, the pinholes actually get larger -- the physical analogy breaks down here, but the hedge funds that represent the pinholes become more and more exposed as the market falls.

Pundits that I heard on Wednesday seemed to me to be stunned, stupefied and exhausted. They've been parroting the same super-optimistic words for over a year now, and those words have proven wrong every time.

A lot of what I heard was downright mushy.

On the Calculated Risk blog, we read,

"When I started this blog (Jan 2005), I was concerned about excessive speculation in housing and extremely loose lending practices. It appeared that housing starts and new home sales would fall significantly. I forecast record foreclosures and significant declines in home prices. Many of us wondered who the eventual bagholders would be for all the bad loans. I was also concerned about the extent of equity extraction from homes (the home ATM), and I believed that the coming housing bust would lead the economy into a recession.

This blog was a daily dose of doom and gloom! ...

I'm frequently asked if I'm more concerned today than I was in 2005. There are reasons for concern: the credit markets have seized up, many financial institutions are insolvent, consumer spending and investment in commercial real estate is starting to decline, export growth appears to be slowing, the unemployment rate is rising ... and the economy is clearly in a recession.

There are huge and scary downside risks today, but I'm actually more sanguine now than I was in 2005. ...

It's easy to get caught up in the day to day financial crisis and recession news - and this blog will continue to bring you the doom and gloom of the worsening recession. But it's important to remember that even though the adjustment process is painful, progress is being made. ...

The financial crisis is worse today than in 1990, and there are many problems ahead (like less consumer spending and business investment), but I believe progress is being made."

With the news worse than ever, Calculated Risk apparently believes that the worst is over.

Analyst Kevin Depew, quoted by blogger Michael "Mish" Shedlock, was equally mushy:

"Here is where we stand with the point and figure bullish percent indicators for equities, based on Investors Intelligence data.

NYSE Bullish Percent: Os (Negative) 9% - lowest since 1987

S&P 500 Bullish Percent: Os (Negative) 7.9% - exceeds 2002 and 1998 lows

Nasdaq Composite Bullish Percent: Os (Negative) 13.4% - lowest since 1987

Nasdaq-100 Bullish Percent: Os (Negative) 4% - in 2001, this indicator actually reached 0

Russell 2000 Bullish Percent: Os (Negative) 14.1% - equals January low

NYSE High-Low Index: Os (Negative) 2.5%

Nasdaq High-Low: Os (Negative) 2.8%

It is easy to be bearish given the circumstances, but the fact of the matter is these indicators are so washed out and so low that the probabilities increasingly favor a sustainable rally. Given the macro headwinds combined with approaching earnings season, it is doubtful this is THE bottom, but we are nearing, or at, a low. Keep in mind, these are probabilities. The market may simply continue lower. Yesterday's action was not capitulation in the traditional sense."

The message is the same: The news is sooooooooooo bad, that there's nowhere to go but up.

This is the kind of nonsense I've been complaining about for years. When the bubble was growing, good data meant that the stock market was going up, while bad data meant that the Fed would lower interest rates, so the stock market would go up.

Now Depew can't identify even one tiny piece of good news, and yet he still concludes that the stock market is going up.

What's interesting is that data is irrelevant to these people. If the data is bad then the stock market is going up, and if the data is good then the stock market is going up. Therefore, data is irrelevant.

These people are stunned, stupefied and exhausted, and have no idea what's going on. And they seem incapable of learning. They've been wrong almost every day for a year, and yet they continue to make the same stupid mistake every day.

So, if I can summarize the things I've written about the last few days, it's that investors and pundits are waiting for something to happen. Some of them believe that the downward drift of the stock market will just end, and the market will go up again. Others believe that there's going to be a "crash event," and the market will go up again. Either way, it'll be "capitulation," and the market will go up again.

Generational Dynamics predicts something a little different: Yes, there'll be a "crash event," but it will stun the world, just like the one in 1929 did, and will be remembered throughout future history. The only thing we can't predict is the date, but it can't be too far off now.

(Comments: For reader comments, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (9-Oct-2008) Permanent Link
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Generational Dynamics Web Log for 9-Oct-2008 Desperate international intervention fails to calm markets.

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Generational Dynamics Web Log for 9-Oct-2008
Desperate international intervention fails to calm markets.