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Generational Dynamics Web Log for 21-Jun-2013
21-Jun-13 World View -- Stock share prices fall sharply in global rout

Web Log - June, 2013

21-Jun-13 World View -- Stock share prices fall sharply in global rout

Russia and China angered by U.S. State Dept. child trafficking report

This morning's key headlines from GenerationalDynamics.com

Afghanistan 'peace process' continues in limbo
Russia and China angered by U.S. State Dept. child trafficking report
Stock share prices fall sharply in global rout
Bonds and gold hammered along with stocks

Afghanistan 'peace process' continues in limbo

Taliban Flag - Islamic Emirate of Afghanistan.

Taliban Flag - Islamic Emirate of Afghanistan.

A meeting between U.S. officials and representatives of the Afghan Taliban had been expected on Thursday in Doha, Qatar, but the meeting has been postponed because the Taliban had portrayed themselves as the government of Afghanistan, thus angering Afghan president Hamid Karzai. The Taliban had been offered the office building in Doha by Qatari officials, but the Taliban hoisted a Taliban flag above the building, and attacked a name plate calling it the "Political Office of the Islamic Emirate of Afghanistan." Qatari officials demanded that the Taliban remove the name plate and the flag, but apparently all they did is move the name plate indoors, and move the flag to a shorter flagpole.

If talks ever begin, the first order of business will probably be a prisoner swap -- American prisoner of war Bowe Bergdahl in exchange for a number of Taliban fighters current imprisoned in Guantanamo Bay. Apparently the Taliban are very anxious to start "peace" talks so that they can get their fighters back, presumably to fight another day against U.S. forces. The Taliban are a terrorist group, and the U.S. never negotiates with terrorists, so it will be interesting to see how this works out. Reuters

Russia and China angered by U.S. State Dept. child trafficking report

The US Department of State released its annual report on human trafficking, and Russia and China reacted angrily after being downgraded to Tier 3, which refers to "Countries whose governments do not fully comply with the minimum standards and are not making significant efforts to do so."

Russia's Foreign Ministry said that the report used "unacceptable methodology":

"The very idea of raising this issue causes indignation. ... In fighting organized crime, including countering trafficking, Russian authorities will never follow instructions worked out in another country, let alone fulfill conditions presented nearly in the form of an ultimatum."

China's Foreign Ministry said,

"We believe that the US side should take an objective and impartial view of China's efforts and stop making unilateral or arbitrary judgments of China."

In the case of China, the report said that trafficking was "pronounced" among China's internal migrant population, and that the country's one-child policy had produced more boys than girls, fuelling demand for prostitution and foreign brides. U.S. State Department and BBC

Stock share prices fall sharply in global rout

Wall Street stock prices fell 2.5% on Thursday, the most in 19 months. Stock prices in general around the world lost 3.4% on Thursday.

The trigger was a statement by Federal Reserve chairman Ben Bernanke that the Fed my start reducing bond purchases (i.e., "printing money") later this year. The Fed has been pouring $85 billion per month of quantitative easing into the markets, and many people believe that this money has mostly made its way into the stock markets, pushing up stock prices to bubble levels. For example, last month we described how the investment bank Interactive Brokers allows wealthy people to borrow $1 million at 1.3% to invest in the stock market, ostensibly for yields above 5%. This shows how new debt and leverage has been used to push up stock market prices.

What Ben Bernanke did was to merely say that the $85 billion per month of quantitative easing would gradually be reduced, possibly starting in the fall. Many investors have been counting on this money so that could keep borrowing and add to their debt, and hope to use the borrowed money by investing in the stock market bubble.

So what always happens is that eventually the bubble starts to collapse, and investors suddenly have to start paying back the money they borrowed. This forces them to sell other stocks, pushing stock prices down even further, in a "vicious cycle."

It's impossible to predict when the current bubble will deflate, but it's possible that it's deflating right now. Stocks are enormously overpriced by historical standards. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index on Friday morning was 18.28, which is astronomically high by historical standards. We can't predict when the stock market crash will occur, but we can say with certainty that it's coming, and when it does, the S&P 500 Price/Earnings index will fall from its current 18.28 down at least as far as to 6, which is where it was in 1982. When that happens, the Dow Industrials index will fall to 3500 or lower. If the pattern of the 1929 crash is followed, and that's quite possible, then the Dow Industrials will fall to 1400.

However, I want to repeat and emphasize that it's impossible to predict when this will happen. It's still possible that Fed chairman Ben Bernanke will reverse himself, and promise more and more and more and more quantitative easing into the future, and that could push stocks up to even higher bubble levels, and postpone the inevitable crisis a while longer. Bloomberg

Bonds and gold hammered along with stocks

The common wisdom from mainstream economists is that when stocks go down, then bonds and gold go up, since investors take their money out of stocks and put it into bonds and stocks. However, mainstream economists are getting that one wrong as well. However, bonds around the world fell 1-2%, while price of gold fell 7%, silver fell 7%, and crude oil fell 4%.

All these prices fell for the same reason that stocks fell -- investors had to pay off their debt by selling any assets they had.

At the same time, the value of the dollar rose sharply against other currencies, continuing the deflationary trend that we've been discussing for ten years. USA Today and Washington Post

(Comments: For reader comments, questions and discussion, see the 21-Jun-13 World View -- Stock share prices fall sharply in global rout thread of the Generational Dynamics forum. Comments may be posted anonymously.) (21-Jun-2013) Permanent Link
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Generational Dynamics Web Log for 21-Jun-2013 21-Jun-13 World View -- Stock share prices fall sharply in global rout

Afghanistan 'peace process' continues in limbo

Russia and China angered by U.S. State Dept. child trafficking report

Stock share prices fall sharply in global rout

Bonds and gold hammered along with stocks

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Generational Dynamics Web Log for 21-Jun-2013
21-Jun-13 World View -- Stock share prices fall sharply in global rout