Detroit auto makers are asked to produce survival plans, with markets in free fall - 21-Nov-2008 - Generational Dynamics

Generational Dynamics Web Log for 21-Nov-2008

Detroit auto makers are asked to produce survival plans, with markets in free fall

Generational theory asks the question: When will we see a panic?

Congressional bickering caused the failure to pass a plan to provide a $25 billion bailout of the three Detroit auto makers, at a time when the stock market is in free fall and jobless claims are jumping unexpectedly to 16-year high.

In order to save the bailout, Democratic congressional leaders have asked the companies to submit viability plans by December 2. The plans are to lay out precisely how the auto companies will change business practices to survive on the $25 billion bailout.

That'll be a pretty good trick, since the auto companies cannot survive on the $25 billion, and haven't even claimed that they can. It'll be very interesting to see what work of fiction they come up with.

Market summary, 20-Nov-2008

Market summary, 20-Nov-2008

The continuing free fall of stock prices on Wall Street and in markets around the world has politicians worried about being blamed for inaction or the wrong action. The most important thing is to make sure that someone else will be blamed.

As I've been saying since 2002, the country is headed for a new 1930s style Great Depression, with a stock market collapse to the Dow 3000-4000 level or lower.

From the point of Generational Dynamics, there are actually two separate but related things growing on here:

The stock market was overpriced by a factor of up to 250%, and price/earnings ratios have been stratospherically high for 13 years, since 1995. By the Law of Mean Reversion, the P/E ratios have to fall to 5 or lower for a similar period of 13 years. (See: "How to compute the 'real value' of the stock market.")

Generational theory predicts that there must be a "generational panic," a day so traumatizing that it will be remembered for decades. The last such day was in October, 1929, and we're overdue for another one.

At it's close on Thursday, the Dow Industrials index was down 47% from its high 11 months ago. This is roughly where the stock market was after its 1929 peak. So the fall in stock prices this year has been roughly the same as in 1929-1930.

The big difference is that we haven't yet had a major generational panic.

Every day I keep asking myself whether this massive panic is in fact a requirement of generational theory. And every day I keep reviewing the reasons in my mind, and reach the conclusion that it must. A massive panic is necessary to launch the next 70-90 year cycle, and if it doesn't occur one day, then it's more likely to occur the next day, until it occurs.

So we're still waiting for the generational panic and crash, and I've described it this way several times in the past:

"A generational crash is an elemental force of nature, like a tsunami.

You'll have millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, not even believing it was possible, and in a state of total mass panic, trying to sell all at once. Computer systems will crash or will be clogged for hours, or perhaps even for a day or two. People who had hoped to get out just as the collapse is occurring will be totally screwed, and will lose everything. Brokers and other institutions will go bankrupt."

This might happen tomorrow, next week, next month or thereafter. We can't predict when it will happen, but it's coming soon with absolute certainty.

(Comments: For reader comments, questions and discussion, 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.) (21-Nov-2008) Permanent Link
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Generational Dynamics Web Log for 21-Nov-2008 Detroit auto makers are asked to produce survival plans, with markets in free fall

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Generational Dynamics Web Log for 21-Nov-2008
Detroit auto makers are asked to produce survival plans, with markets in free fall