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

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Generational Dynamics Web Log for 5-Aug-2011
5-Aug-11 News -- Markets plunge 5% on Thursday over bad economic news

Web Log - August, 2011

5-Aug-11 News -- Markets plunge 5% on Thursday over bad economic news

N. Korea demands food, cement in response to S. Korea's flood aid offer

Markets plunge 5% on Thursday over bad economic news

Politicians scrambled to lie and point fingers, as they tried to figure out how to make sure that someone else was blamed for the plunge on world markets on Thursday. It was a truly vomit-inducing spectacle.

Jose Manuel Barroso

Jose Manuel Barroso

On Wall Street, the Dow Jones Industrial Average fell 512 points, with the biggest nine-day drop since March 2009. The "Volatility Index" (VIX), a measure of investor anxiety computed from the volume of certain hedging options, jumped 35% to 31.66, the highest close since July 2010, and the biggest jump since Feb 27, 2007, according to Bloomberg.

"It’s just panic out there," says one analyst. "Everyone is moving into cash. People are selling everything.”

The economic news has been particularly bad recently in America, Europe and China, as we've been reporting, and that may have triggered the mini-panic. However, many analysts said that it was triggered by a statement by European Commission president Jose Manuel Barroso in the form of a letter to the 27 leaders of the European Union:

"Developments in the sovereign bond markets of Italy, Spain and other euro area Member States are a cause of deep concern.
Though these developments are clearly unwarranted on the basis of economic and budgetary fundamentals and the recent efforts of these Member States, they reflect a growing scepticism among investors about the systemic capacity of the euro area to respond to the evolving crisis. Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis.
The 21st of July bold decisions on the Greek package ... are not having their intended effect on the markets.
Markets highlight, among other reasons, the global economic uncertainties due to both economic growth and the protracted decision on budgetary adjustments in the US but, first and foremost, the undisciplined communication and the complexity and incompleteness of the 21st July package.
Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro-area periphery."

It's really hard to know how to respond to this crap. The "July 21st package" was based on phony numbers and hasn't even been implemented yet. (See "24-Jul-11 World View -- Mauldin: Greece's bond 'haircuts' are at 75-80%")

Barroso and other EU officials have lied over and over, even though it's been obvious since early last year that any bailout of Greece would not prevent default.

Italy 10 year bonds - 8/2/2011 - 6.1% yield

Italy 10 year bonds - 8/2/2011 - 6.1% yield

However, Barroso is right about one thing: that the crisis has spread beyond the periphery, and is beginning to affect the euro's core countries -- Spain, Italy, Belgium, and even France. There's been a bond panic going on in Europe, as we've been describing, with people selling off bonds, forcing up yields (interest rates). The 6.1% yield on Italy's 10-year bonds is the particular value that triggered Barroso's statement.

But now the European bond panic has spread to the stock markets, including Wall Street.

What makes me angry about all this -- besides the constant, incessant lying by politicians in Washington and Brussels and by economists and analysts on CNBC and Bloomberg TV -- is that this was entirely predictable. As I've been saying for years, price/earnings ratios (also called "valuations") have been way above average since 1995.

Thus, by the Law of Mean Reversion, the valuations have to fall to values well below average for a roughly equivalent amount of time, meaning that the stock market will fall to Dow 3000 or lower, and stay there for years. There won't be any recovery until the 2020s.

If you look at the bottom of the Home Page of my web site, you'll see the price/earnings ratio chart that gets updated every week. Here's last Friday's version of the chart:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 29-July-2011. (MarketGauge ® by DataView, LLC)

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 29-July-2011. (MarketGauge ® by DataView, LLC)

And here's the version of the same chart from 2003:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 10-Oct-2003. (MarketGauge ® by DataView, LLC)

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 10-Oct-2003. (MarketGauge ® by DataView, LLC)

So for some of you guys who think I make all this stuff up, you can see that the MarketGauge people have reached exactly the same conclusion. And I didn't invent or make up the Law of Mean Reversion, either. I've been writing about this stuff for years, but in recent days the debt crises in Europe and America have finally educated people about how bad off things are.

I don't expect the average "man on the street" to understand the Law of Mean Reversion, but I do expect the high-priced analysts who appear on TV to understand the Law of Mean Reversion, and to tell the truth about what it means. Instead, they lie about valuations, and always say that stocks are cheap. (See "28-Jul-11 News -- Washington follows Brussels in fraud and extortion")

Mainstream economists are consistently wrong. They didn't predict and can't explain the 1990s tech bubble, the real estate and credit bubbles, the financial crisis since 2007, where we are today, and what's coming next year. They macroeconomic models based on 1970s-80s data, when Great Depression survivors were running things, so these models are consistently wrong today.

If you listen to mainstream economists, then you're going to get screwed. If you listen to analysts on CNBC or Bloomberg TV who are telling you that stocks are way cheap because of Thursday's panic, then you're going to get screwed.

From the point of view of Generational Dynamics, there's going to be a major panic and Wall Street crash to the Dow 3000 level and lower. I'm not saying that we're in the middle of this panic right now (though we may be), but I'm saying that it's coming with mathematical certainly. Use the time remaining to prepare yourself, your family, your community, and your nation.

Note: At this writing, on Thursday evening ET (Friday morning in Asia), Asian stock markets have fallen over 4%.

(Comments: For reader comments, questions and discussion, see the 5-Aug-11 News -- Markets plunge 5% on Thursday over bad economic news thread of the Generational Dynamics forum. Comments may be posted anonymously.) (5-Aug-2011) Permanent Link
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Generational Dynamics Web Log for 5-Aug-2011 5-Aug-11 News -- Markets plunge 5% on Thursday over bad economic news

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Generational Dynamics Web Log for 5-Aug-2011
5-Aug-11 News -- Markets plunge 5% on Thursday over bad economic news