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

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Generational Dynamics Web Log for 1-Jul-2010
1-Jul-10 News -- World economy increasingly in deflationary spiral

Web Log - July, 2010

1-Jul-10 News -- World economy increasingly in deflationary spiral

European banks and bond markets are back in crisis mode

Wall St. stocks fall 10% in second quarter

It really is amazing to watch the financial experts on TV on days like Wednesday, when Wall Street stocks fall sharply. They look at each other in confusion. They ask the same question over and over, and get the same collection of answers. "The market has a little farther to fall." Or, "This is a buying opportunity." Or, "I'm still expecting the market to be way up by the end of the year."

On days when the market is up sharply, they're just as confused. They look at each other with broad grins, and say "You'd better get into the market quick so you can make as much money as possible."

As we've been saying for years, the market has been substantially overpriced continuously since 1995. (See "How to compute the 'real value' of the stock market.") By the Law of Mean Reversion, the stock market has to fall to at least the Dow 3000 level. This is a mathematical certainty.

Late in 2008, worldwide trade and transportation crashed, and fell sharply almost every day until mid-March of 2009. At that time, a remarkable thing happened -- a series of very aggressive stimulus and bailout programs in the US, Europe, China, and other countries pushed stocks and profits up again in an artificial, non-sustainable way. Now those stimulus and bailout programs are all expiring, and the trend values that they propped up are all falling again.

Now as I understand it, Wednesday's stock market fall was a particularly important one because it broke through a "support level." The S&P 500 index has been bobbing up and down for a few weeks, coming down as low as 1040 several times, but never closing below it. As soon as the index fell to 1040, investors went on a buying spree and pushed it up again.

Wednesday, for the first time, the S&P 500 index closed at 1030, well below the 1040 support level. According to the financial pundits that I heard, this means that it could continue falling, probably below 1000.

Increasing signs of a deflationary spiral

The deflationary spiral was slowed by the massive stimulus and bailout programs. Now that they've pretty much ended, the deflationary spiral is accelerating.

This has been increasingly apparent for several weeks now. Early in June I wrote "7-Jun-10 News -- Globally, May was a month of ominous events.") In that article, I listed a few early signs: Sharp falls in new home sales, jobs report much worse than analysts expected, crisis levels in the European bond markets.

Top: Baltic Dry Index, 3-year; Bottom: Shanghai Composite Index, 3-year. <font size=-2>(Source: StockCharts.com)</font>

Top: Baltic Dry Index, 3-year; Bottom: Shanghai Composite Index, 3-year. (Source: StockCharts.com)

Each day it appears more and more that we're returning to conditions that occurred in the last quarter of 2008, which I compared to the old science fiction movie "The Day the Earth Stood Still" -- except that this time it wasn't science fiction. Worldwide trade and transportation crashed, along with commodity prices, because China stopped importing commodities.

Now, all the signs are pointing to the same thing. Commodities prices are falling to their lowest levels since the 2008 crash, according to Bloomberg, led by declines in industrial metals, gasoline and crude oil. According to the article, a survey of economists indicates that the US and Chinese economies will slow in the next two quarters, leading to the decline in commodities.

The graphs on the right shows two important indicators. On top, is the Baltic Dry Index, an indicator of world wide shipping. On the bottom is the Shanghai Composite Index, an indicator of China's economy. As you can see, both values achieved bubble levels in late 2007. Then, both of the crashed, by about 95% and 70%, respectively.

Throughout 2009, once the stimulus and bailout packages reached full force, the two values recovered some of their losses.

But since the end of April and the beginning of May, they've both been falling sharply again, and may be headed back to their lows of late 2008.

At the same time, Wall Street stocks may continue falling, possibly reaching and surpassing the March, 2009, lows.

There is one major Generational Dynamics prediction that we haven't yet seen: a generational stock market crash and financial panic. I used to write about this all the time, but didn't mention it during last year's rally.

But now all the signs are pointing downward, and the possibility is in play again. It needn't start on Wall Street, though it might; instead it might start in Europe or in China or in Japan. But it is coming with absolute certainty. And when it does, it will be a day that will be remembered for decades, just like October 24, 1929.

Additional links

After a brief lull, during which the crisis seemed almost forgotten, European banks and bond markets are back in crisis mode. Euro Intelligence

Spain grinds to halt on third day of strike by transportation workers. Telegraph

Moody's Investors Service said it is reviewing Spain's ratings and may lower them by as much as two levels. Spain suffers the highest level of unemployment in the euro zone at over 20%, while more than 40% of those under age 25 available for work are unemployed. Reuters

In a humorous twist, Standard & Poor's ratings agency said that it may cut the ratings of its rival, Moody's Investors Service. Associated Press

Younger generations commonly view the Holocaust with indifference, and World War II as irrelevant to their lives. Thus, an educators' conference is debating whether teaching young people about the Holocaust will prevent genocide in the future. From the point of view of Generational Dynamics, it will not. NY Times

President Obama assured the visiting king of Saudi Arabia on Tuesday that he remains committed to closing the U.S. military prison at Guantanamo Bay. Washington Post

General David Petraeus warned Congress that it could be years before Afghan troops can manage their own security. Guardian

Russian President Dmitry Medvedev warned that Kyrgyzstan's path to a parliamentary democracy is fraught with peril and could lead to a government collapse with extremists taking power. Moscow Times

As ethnic Uzbeks return to their villages in Kyrgyzstan, where their former ethnic Kyrgyz friends and neighbors killed and tortured Uzbeks, destroying their homes, they are obtaining guns in large quantities and planning revenge. The Kyrgyzstan crisis is far from over. EurasiaNet

(Comments: For reader comments, questions and discussion, see the 1-Jul-10 News -- World economy increasingly in deflationary spiral thread of the Generational Dynamics forum. Comments may be posted anonymously.) (1-Jul-2010) Permanent Link
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Generational Dynamics Web Log for 1-Jul-2010 1-Jul-10 News -- World economy increasingly in deflationary spiral

Wall St. stocks fall 10% in second quarter

Increasing signs of a deflationary spiral

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Generational Dynamics Web Log for 1-Jul-2010
1-Jul-10 News -- World economy increasingly in deflationary spiral