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

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Generational Dynamics Web Log for 8-Aug-2009
As new stock bubble expands, the Principle of Maximum Ruin looms larger

Web Log - August, 2009

As new stock bubble expands, the Principle of Maximum Ruin looms larger

Stock prices exploded 1-1.5% upward on Friday, following the jobs report, which said that "only" 243,000 jobs had been lost in July, down from 645,000 a few months ago. The unemployment rate fell to 9.4% from 9.5%.

Economists who were in despair last March, saying that the recession would not end until next year, were wearing broad grins on Friday, saying that the recession was over already. An ebullient President Obama said, "We've pulled the financial system back from the brink. I am convinced that we can see the light at the end of the tunnel."

If you listen to the continuous Polyannish chatter on CNBC or Bloomberg TV, or in the Wall Street Journal, then you occasionally hear someone wonder, "What if this isn't a new bull market after all? What if it's just a new 'mini-bubble'?"

From the point of view of Generational Dynamics, that's exactly what it must be. As I've been saying since 2002, we're entering a new 1930s style Great Depression, and nothing has happened to change that. That forecast was based on a long-term analysis of stock market trends. (See: "How to compute the 'real value' of the stock market.") Those conclusions are just as valid today as they were in 2002.

The current stock market rally is now just slightly longer than the longest rally that occurred during the 1929-32 period, when the stock market fell 90%. Even if this current rally continues through the doldrums of August into the fall, it's still a bubble.

For years we heard people say that there was no real estate bubble, there was no credit bubble, real estate prices would never fall because "everyone has to have a home," there would never be a financial crisis, there would never be bank failures, the stock market would always just go up. Now those same people are saying that the current rally means once again that the market will continue to go up. For these people, history always begins this morning.

At times like this, I always like to repeat this quote from John Kenneth Galbraith's 1954 book The Great Crash - 1929:

"A common feature of all these earlier troubles [previous panics] was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune." (p. 108)

This leads to what I call the Principle of Maximum Ruin. Like the generational panic and crash of 1929-32, the current crash will financially ruin the maximum number of people as possible, to the maximum extent possible.

Back in the 2004 time frame, people used to say the following to me: "John, you can never be proved wrong, because if there's no crisis, you'll always say that it just hasn't happened yet. When will you admit you're wrong?"

My response was that U.S. debt was growing exponentially, and if it ever started to fall in a credible manner, then I would be proven wrong. I've posted graphs of U.S. debt several times in the past, most recently in March. Here's a new graph from Comstock Funds:

U.S. debt as percentage of GDP <font size=-2>(Source: Comstock Funds)</font>

U.S. debt as percentage of GDP (Source: Comstock Funds)

Needless to say, no reduction has occurred. U.S. debt has continued to grow exponentially, and nobody watching what's going on in Washington these days can possibly believe that that's going to change until some financial catastrophe forces a change. (Paragraphs corrected - 26-Aug)

Stein's Law: If something cannot go on forever, then it won't.

People who wonder why we have to have a "generational panic and crash" should think about the exponential growth of debt.

The above graph shows that debt has been increasing exponentially since the 1950s, inexorably through Republican and Democratic administrations. Now the Obama administration is following a bizarre pseudo-Keynesian formula that says that the way to reduce public debt is to go astronomically deeper into debt.

"Insanity in individuals is something rare - but in groups, parties, nations and epochs, it is the rule." -- Friedrich Nietzsche

There is no way to break this spiral except through a discontinuity - a massive financial crisis.

For readers of this web site, I'm warning you again as I've warned you so many times before: I wish you the best of luck, whatever you decide to do, but if you invest in this stock market, then you're going to lose a very great deal of money.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (8-Aug-2009) Permanent Link
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Generational Dynamics Web Log for 8-Aug-2009 As new stock bubble expands, the Principle of Maximum Ruin looms larger

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Generational Dynamics Web Log for 8-Aug-2009
As new stock bubble expands, the Principle of Maximum Ruin looms larger