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Generational Dynamics Web Log for 9-Aug-2011
9-Aug-11 News -- World stock markets continue their dramatic slide

Web Log - August, 2011

9-Aug-11 News -- World stock markets continue their dramatic slide

Repeating October 21, 1929

World stock markets continue their dramatic slide

July 21 was the day on which Wall Street stocks reached their most recent high, the highest since May 10.

A trader at the NYSE (AFP)

A trader at the NYSE (AFP)

July 21 was also the day when the Europeans announced a new bailout plan allowing Greece to default. This was the third bailout of Greece in 18 months, and it was clear to most people at the time that this bailout had simply "kicked the can down the road," that it was a fraud and would fail like the others.

Since July 21, Wall Street stocks have been falling pretty steadily.

Last week, Congress and the President announced a debt ceiling agreement that was also clearly a fraud. Only the most crooked CNBC/Bloomberg TV analysts could claim that it would be successful.

Since then, the fall in stock prices has been accelerating. On Thursday of last week, markets plunge 5% over bad economic news.

Over the weekend, the European Central Bank announced it would effectively start to bail out Spain and Italy -- a move of clear desperation. On Monday, Wall Street stocks fell about 6%, and stocks fell 2-6% on other stock markets around the world, according to UPI.

In other words, since July 21, it's become abundantly clear to the public that politicians in Washington and Brussels, and economists around the world really don't have the vaguest idea what they're talking about. This is something that students of Generational Dynamics have known for years, but in the past three weeks, the general public has become aware of it.

Along these lines, it's not surprising that the Dow Industrials fell an additional 200 points as President Obama began to speak on Monday afternoon, and continued to blame the problems on the S&P downgrade and that lack of tax increases. Obama is no different from any other politician these days, in that people no longer want to hear crap from politicians.

In the spirit of vitriol, Democrats are saying that the problem is a "Tea Party downgrade." Next thing you know, we'll hear Chris Matthews and Bill Maher say that the people at S&P are "racist terrorists."

S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010

S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010

I'm posting this chart again because it's highly relevant to what happened on Monday. Even if you don't understand the Law of Mean Reversion at all, you can still understand this chart. This shows that P/E ratios (also called "valuations") have been high, sometimes astronomically high, continuously since 1995.

You don't have to be a rocket scientist to see that they're falling to their 1982 levels. And if you do the math, that means that stock prices are to fall to roughly 1/3 of their current prices. This is mathematically certain, and can't be prevented.

By the way, the S&P downgrade of U.S. debt announced on Friday does not seem to have any relation to the fall in stock prices, since prices of U.S. Treasuries rose sharply on Monday, indicating that investors do not fear that U.S. debt is going to default. What's happening is that investors are pulling money out of stock markets, and putting them into US Treasuries, which they consider to be the safest place to put your money these days.

Repeating October 21, 1929

The following is taken from my Dow Jones historical page:

"The market had fallen 16% since it reached its peak on September 3,
but no one was concerned.  In fact, pundits said that it was time to
buy.  Everone believed that the economy and the market were
"fundamentally sound" (that phrase is a sure sign of trouble), and so
few suspected that anything was wrong."

Date              DJIA (Change)   (% of trend)      (% of 1929 high)
----------------- --------------  ---------------- ----------------
Mon 1929-10-21    320.91( -3.71%) (213% of 150.23) ( 84% of 1929-09-03)
Tue 1929-10-22    326.51( +1.75%) (217% of 150.25) ( 85% of 1929-09-03)
Wed 1929-10-23    305.85( -6.33%) (203% of 150.26) ( 80% of 1929-09-03)
Thu 1929-10-24    299.47( -2.09%) (199% of 150.28) ( 78% of 1929-09-03) Black Thursday
Fri 1929-10-25    301.22( +0.58%) (200% of 150.30) ( 79% of 1929-09-03)
---------------------------------------------------------------------
Mon 1929-10-28    260.64(-13.47%) (173% of 150.36) ( 68% of 1929-09-03) Black Monday
Tue 1929-10-29    230.07(-11.73%) (152% of 150.38) ( 60% of 1929-09-03)
Wed 1929-10-30    258.47(+12.34%) (171% of 150.40) ( 67% of 1929-09-03)
Thu 1929-10-31    273.51( +5.82%) (181% of 150.41) ( 71% of 1929-09-03) (half-day)
---------------------------------------------------------------------
Mon 1929-11-04    257.68( -5.79%) (171% of 150.49) ( 67% of 1929-09-03)
Wed 1929-11-06    232.13( -9.92%) (154% of 150.53) ( 60% of 1929-09-03)
Thu 1929-11-07    238.19( +2.61%) (158% of 150.55) ( 62% of 1929-09-03)
Fri 1929-11-08    236.53( -0.70%) (157% of 150.57) ( 62% of 1929-09-03)
---------------------------------------------------------------------
Mon 1929-11-11    220.39( -6.82%) (146% of 150.62) ( 57% of 1929-09-03)
Tue 1929-11-12    209.74( -4.83%) (139% of 150.64) ( 55% of 1929-09-03)
Wed 1929-11-13    198.69( -5.27%) (131% of 150.66) ( 52% of 1929-09-03)
Thu 1929-11-14    217.28( +9.36%) (144% of 150.68) ( 57% of 1929-09-03)
Fri 1929-11-15    228.73( +5.27%) (151% of 150.70) ( 60% of 1929-09-03)
---------------------------------------------------------------------

My reason for posting this data is because what we're seeing these days appears to be very similar to what happened prior to the 1929 crash, especially the wild volatility, and the calm assurance of some analysts that the worst is over.

Does that mean that we're days away from a crash? It's impossible to tell, of course, and Higgenbotham in the Generational Dynamics forum expects the market to remain fairly steady for at least a few more weeks.

What can be said with certainty is that the stock market is very dangerous right now. Take care.

Note: At this writing, late Monday evening ET, Wall Street stock index futures are down another 2.5%, and Asian stocks on Tuesday morning are nosediving, according to CNBC.

(Comments: For reader comments, questions and discussion, see the 9-Aug-11 News -- World stock markets continue their dramatic slide thread of the Generational Dynamics forum. Comments may be posted anonymously.) (9-Aug-2011) Permanent Link
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Generational Dynamics Web Log for 9-Aug-2011 9-Aug-11 News -- World stock markets continue their dramatic slide

World stock markets continue their dramatic slide

Repeating October 21, 1929

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Generational Dynamics Web Log for 9-Aug-2011
9-Aug-11 News -- World stock markets continue their dramatic slide