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

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 7-May-2010
7-May-10 News -- Euro and stocks get hammered as ECB rejects 'nuclear option'

Web Log - May, 2010

7-May-10 News -- Euro and stocks get hammered as ECB rejects 'nuclear option'

Greece approves austerity package, amid somber protests

What was the cause of the Dow's 1000 point drop?

Dow Industrials, 6-May-2010. High = 10879, low=9869. <font size=-2>(Source: NY Times)</font>

Dow Industrials, 6-May-2010. High = 10879, low=9869. (Source: NY Times)

The Dow Jones Industrial Average plunged hundreds of points for a while on Thursday afternoon, attaining an almost 1000 point drop at one point. At that point, bargain hunters came into the market, convinced that stops were "incredibly cheap" (as one financial pundit I heard said). At the end of the day, the Dow Industrials were down "only" 348 points.

Some pundits are claiming that the plunge was caused by some kind of computer glitch. Bloomberg quotes a New York Stock Exchange spokesman as blaming the guys over at the Nasdaq exchange.

"There were a number of erroneous trades Our guys just told me Nasdaq is investigating the erroneous trades. What happened today in P&G for instance, the bad print was on Nasdaq, not here." The reference to P&G was a 37% plunge in Proctor & Gamble stock prices.

These claims seem almost comical. There was clearly a panic going on.

At the height of the panic, around 2:45 pm ET on Thursday, I heard the following from the Bloomberg TV financial news reporter Adam (I didn't get his last name):

"I just tried calling several trading desks. They would not pick up the phone. They said, 'I can't talk, I'm flooded with orders.' And that's what you're seeing. Guys are selling indiscriminately. If you have money in the market, and you've made money, then you have to sell right now, it doesn't matter. You don't care what the bid is, you just want out, you've got to protect what you've got.

Look, it was only 14 months ago that this thing was at the low, and you have to protect what you have. That's what it boils down to. ...

The mindset is 'Get me out!' As one trader said -- I spoke to him, one of the few who would pick up for me -- he said, I'm selling stock for a guy right now. I called and I said, 'I do have a bid.' And the guy said 'Sold!' And I said, 'But you don't know what I'm buying.' He said, 'I don't care. There's a bid. That's all I want. I'll sell anything. Just show me a bid.' That's what it boils down to."

In fact, the plunge was not a surprise to some traders. Higgenbotham, in the Generational Dynamics forum, says: "The market had been showing weakness since last evening. I e-mailed my broker before the crash, warning him the S&P could drop 30 points in a short period of time if 1150 gave way." As it turned out, the panic began shortly after the S&P index fell below 1150.

The fact that the plunged wasn't CAUSED by a computer glitch doesn't mean that computers didn't play an important role, in what some analysts are calling a "computer rout," according to Bloomberg.

It's worth remembering that in the 1929 crash, when everything was being done manually, the stock exchange was backed up for hours, before all the trades could be settled. Today, computers settle the trades quickly, but computers also generate orders much more quickly as well, so that a panic can take place at the speed of light, rather than just at the speed of a human.

I'm always reminded of a saying that I first started hearing in the 1970s: "To err is human, but to really f--k things up takes a computer."

As regular readers of this web site are well aware, Generational Dynamics predicts that a major stock market crash is mathematically certain.

The reason is that the stock market has been overpriced by a factor of 150%-200% since 1995. By the Law of Mean Reversion, they must fall to Dow 3000 or lower for a roughly equivalent length of time. See "How to compute the 'real value' of the stock market." This is an absolute certainty, if not now, then at some time in the near future.

The European Central Bank rejects the 'nuclear option'

A lot of people are blaming the panic on Jean-Claude Trichet, president of the European Central Bank (ECB).

Thus, Bloomberg quotes one analyst as saying, "The ECB can fix this instantly by doing what the Fed has done -- instantly providing liquidity by buying bad fixed-income instruments and paying cash in U.S. dollars. The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk assets."

This is what the Europeans are calling the "nuclear option" -- purchasing vast amounts of toxic assets from Greece, Portugal, Spain and other eurozone countries, similar to the Fed's TARP (troubled asset recovery program). Trichet had been expected to announce such a program at his press conference on Thursday afternoon, but instead he retained very conservative ECB policies.

This option would have required the ECB to "print money" -- issue almost $1 trillion of its own debt -- and use that money to purchase the assets.

An analysis by the NY Times indicates that this kind of explosive move would be almost politically impossible in Europe, because of national rivalries, especially opposition by the Germans.

According to the article,

"It is not really about money," said Timothy Congdon, an economist and professed euro skeptic who foresees an exodus of savings from banks on Europe’s periphery to Germany as doubts build about these countries' staying power in the Eurozone. "It is about how much pain the people in periphery can stand in order to keep this thing going. Once the confidence is gone, and Greeks and Spaniards move their deposits to Frankfurt, it becomes a self-fulfilling prophecy, and the whole thing implodes."

Congdon concludes that the ECB is under the influece of Germany, which firmly opposes this type of expansive policy, which would only weaken the euro currency.

Euro collapses vs the dollar, since Monday of this week <font face=Arial size=-2>(Source: ftalphaville.ft.com)</font>

Euro collapses vs the dollar, since Monday of this week (Source: ftalphaville.ft.com)

Unfortunately, Trichet's strategy isn't working, as the adjoining graph shows. The value of the euro against the dollar has been falling since last year, and has been falling rapidly this week, once it became obvious to investors that the latest EU non-bailout bailout of Greece wasn't going to help.

Greece is at the 'edge of an abyss'

The bodies of three people, one of whom was a pregnant woman, were pulled from the charred remains of the bank that had been firebombed by leftist protestors on Wednesday. The deaths shocked the nation.

Kathimerini quotes Greece's president Karolos Papoulias as summing up the situation as follows: "Our country has reached the edge of the abyss. It is everybody’s responsibility that we do not take the step toward the drop. Responsibility is proved in action, not in words. History will judge us all."

Much of the financial world was riveted on televised scenes from the streets of Athens on Wednesday, and many blame Thursday's Wall Street plunge on continuing violence in Athens by those protesting the austerity requirements of the bailout. However, Athens was much more somber on Thursday than on Wednesday, and the crowds were much smaller, according to the Times Online.

The debate in the Greek parliament was over whether they should agree to the austerity demans of the EU -- cutting spending, and raising taxes. The socialist government of Prime Minister George Panandreou criticized the protestors, saying, "neither rocks nor violence will get Greece out of the guardianship" of the EU.

Conservative opposition leader Antonis Samaras said, "The dose of the medicine you are administering is in danger of killing the patient. You know that these measures have sparked a social explosion. The citizens of this country have to believe there is a way out. Because whoever cuts pensions of €700 cannot convince anyone."

All this happened while protestors were outside, demanding that the austerity bill be rejected.

However, prime minister Papandreou carried the day by saying that there was no alternative. "Today things are simple. Either we vote and implement the deal, or we condemn Greece to bankruptcy." The parliament passed the austerity bill.

It's remarkable that these events, which would normally be avoided by anyone outside of Greece, had suddenly become the focus of worldwide attention. As always, Generational Dynamics focuses on the behaviors and attitudes of large masses of people, and large masses of people around the world followed the situation in Athens very closely. This shows how much the world has become anxious about the situation in Greece, and how they feel that it will affect their own personal lives.

And indeed, the Greek "contagion" is having an effect far beyond Greece's borders. As we pointed out a couple of weeks ago, Europe is in the midst of a full-scale panic. Nothing that's happened since then has had any effect, other than to accelerate the panic and resulting deterioration.

An analysis by Reuters points out that a wider euro debt crisis is almost certainly coming soon. The article points out that bond prices in Spain and Portugal have been collapsing, although they haven't yet reached Greece's low point. European banks already refuse to lend money to Greek banks, and the big danger right now, according to the article, is that the same fate will happen to banks in Portugal, Ireland and Spain.

The contagion is spreading to Asia as well. As I'm writing this on Thursday evening (Friday morning in Asia), stock prices have fallen sharply.

It's altogether possible that the panic that we saw on Wall Street on Thrusday is just part of the "contagion" that began in Greece. If so, then we can expect a lot more carnage in the days to come.

Additional links

A big nationwide real estate developer in China is offering a 15% discount on property across the country. I heard China expert Jim Chanos on CNBC say that was a very big story. It could be a sign that China's real estate bubble is finally crashing. The Shanghai stock market has fallen sharply as a result. China Daily

More than 2,000 babies have been born to women who lost their children in China's 2008 Sichuan earthquake. China had relaxed the "one child" rule for these women. Radio Australia News

Taiwan's president Ma Ying-jeou had to back off of a recent statement saying, "we will never ask the Americans to fight for Taiwan." China Post

The CIA has received secret permission to use unmanned drones to attack a wider range of targets in Pakistan's border region. This is a significant expansion. LA Times

(Comments: For reader comments, questions and discussion, see the 7-May-10 News -- Euro and stocks gets hammered as ECB rejects 'nuclear option' thread of the Generational Dynamics forum. Comments may be posted anonymously.) (7-May-2010) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages