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Generational Dynamics Web Log for 25-Aug-2015
25-Aug-15 World View -- What to expect after Monday's global stock selloff

Web Log - August, 2015

25-Aug-15 World View -- What to expect after Monday's global stock selloff

North Korea 'expresses regret', defusing war threat with South Korea

This morning's key headlines from GenerationalDynamics.com

What to expect after Monday's global stock selloff
African currencies crashing, along with commodities and China
North Korea 'expresses regret', defusing war threat with South Korea

What to expect after Monday's global stock selloff

S&P 500 Price/Earnings ratio at astronomically high 21.63 on August 21 (WSJ)

S&P 500 Price/Earnings ratio at astronomically high 21.63 on August 21 (WSJ)

Monday was one of the most volatile days in Wall Street history, with high-volume wild swings. The DJIA fell almost 1100 points within minutes after the opening, and then recovered most of the loss, finally ending down 588 points, or almost 4%.

The selloff was global. In Europe, stock exchanges in Britain, Germany and France fell around 5%, and in Asia, stock markets in Japan, Hong Kong and Australia fell 4-5%.

So let's start with where we are.

Generational Dynamics predicts that we're headed for a global financial panic and crisis. According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations index) on Friday morning (August 21) was at an astronomically high 21.63. This is far above the historical average of 14, indicating that the stock market is in a huge bubble that could burst at any time. Generational Dynamics predicts that the P/E ratio will fall to the 5-6 range or lower, which is where it was as recently as 1982, resulting in a Dow Jones Industrial Average of 3000 or lower.

I've been pointing out for years that the Wall St bubble had to burst at some point, with 100% certainty. It's impossible to predict the exact time. It's worth noting that we still don't know to this day why the stock market crashed on that particular day, Black Monday, October 28, 1929, instead of a few weeks earlier or later.

So it's quite possible that when the crash comes, we'll never know why it occurred on precisely that day.

Most of the commentators and analysts on Monday were their usual glib selves, saying things like, "This is a healthy correction," and "This is a buying opportunity, and "China has too small economy to affect the rest of the world."

I listened to a number of analysts on CNBC and Bloomberg TV on Monday, and I did notice a change. Normally, mentioning the price/earnings ratio (stock valuations) is always strictly forbidden, or if it's mentioned, then the analysts simply lie, saying "it's low," which is ridiculous. But on Monday, I actually heard two or three analysts mention, however briefly, that stock valuations were unsustainably high. This is quite remarkable, as if some secret code were being violated.

There's was one particular exchange that was especially interesting. Mohamed El-Arian is quite possibly the most glib analyst on TV, always taking a professorial tone, and answering every question by intoning something like, "There are three reasons: one ... two ... three...." On Monday, he was specifically asked if stock valuations were high. He said, almost under his breath, that they were, and then quickly changed the subject to something completely different. Apparently he is not ready yet to break the secret code by saying clearly that valuations are unsustainably high, though he evidently is aware of it. It was one of the many weird things on a weird day.

Some analysts are calling this Monday the new "Black Monday," but it's not.

From the point of view of generational theory, October 28, 1929, is a very special day because it was a day of total panic, and it traumatized the nation, and it's remembered to this day. But this day was nothing like that, not a day of total panic. It was a bad day, but it will be soon forgotten. This was no new "Black Monday."

What this Monday seemed like was a prelude to the real day of panic. And with stock markets plunging globally, the panic may not begin on Wall Street at all -- it may begin elsewhere and spread to Wall Street. As I wrote yesterday ( "24-Aug-15 World View -- Asian stock markets in freefall, with China in full-scale panic"), it may be that China already appears to be in full-scale panic, though it's hard for me to judge for sure from this distance.

If I were to guess what's going to happen in the next few days it would be this: I would expect Wall Street stocks to bounce back up on Tuesday. Expect to see a lot more volatility, with stocks rebounding one day, and plunging the next. Then, one day, a real panic will occur, and that will be the day that will be remembered for years. That day has to come, with 100% certainty. We just don't know exactly when. AP and ZeroHedge

African currencies crashing, along with commodities and China

Stock markets usually get most of the attention, but in fact the global selloff is applying to currencies and commodities as well.

As we wrote last week ( "21-Aug-15 World View -- Kazakhstan joins the 'currency wars' as global stocks plummet"), a number of currencies are falling against the dollar, following in the lead of China's surprise devaluation of its yuan currency.

African economies, and African currencies, are being hit hard China's devaluation and economic slowdown. More than one-quarter of Africa's exports go to China, and countries like South Africa, Kenya and Zambia are being hit hard. Zambia derives almost 70% of its export earnings from copper, and with copper prices falling, Zambia's currency fell 4.6%. The price of oil keeps falling, and oil-exporting countries Nigeria and Angola are losing substantial portions of their income.

The price of oil is falling dramatically, reaching as low as $38 per barrel on Monday. Countries outside Africa, such as Venezuela, Russia and Saudi Arabia, are suffering because their income depends on oil being closer to $100 per barrel.

What makes the global financial situation so precarious is that there doesn't seem to be any good news anywhere. Economic growth is tepid in the the U.S. and slowing, while there's no growth to speak of in China, Europe, or any of the developing countries with the possible exception of India.

Another bizarre twist in today's world is that investors are very concerned when the US Federal Reserve is going to raise interest rates, with the base Fed Funds Rate currently almost zero (0.13%). With all of these currencies weakening and devaluing against the dollar, the dollar is getting stronger, which will make America less competitive in the world, and affect the US economy.

However, there's another angle to this. With near-zero interest rates in the U.S., it's been possible for countries and businesses around the world to borrow a lot of money, and go deeply into debt. If the Fed Funds Rate goes up, then the interest rates on those debts will also grow, causing further problems for these borrowers. Bloomberg and BBC and Zero Hedge

North Korea 'expresses regret', defusing war threat with South Korea

As we reported yesterday, North and South Korea were both mobilizing for war, but were negotiating for peace at the same time. South Korea was demanding that the North apologize for planting landmines in the demilitarized zone (DMZ), causing two South Korean soldiers to be wounded. North Korea was refusing to apologize, or to admit laying the land mines. South Korea was using loudspeakers to broadcast anti-North propaganda across the DMZ, and the North was demanding that the loudspeakers be turned off.

Some analyzed were predicting that the North and South would reach an agreement, whereby the North would "express regret," without actually apologizing, and that the South would accept that as an apology.

And that's exactly what's happened. North Korea said that it "regrets" that South Korean soldiers were injured by landmines and lifted its "semi-state of war."

Even though this was neither an admission nor an apology, it was good enough for the South to claim that the North had apologized. The South shut down the loudspeakers, and the national security chief, Kim Kwan-jin, said:

"I wish that we can build the new South and North Korea relationship that our people (wish for) by sincerely carrying out the agreed issues and building trust through dialogue and cooperation. During the meeting, it is very meaningful in the aspect that the North apologized over the landmine incident and that they agreed on making efforts to prevent such incidents from reoccurring and easing tension."

Nobody believes that this new agreement will bring about any fundamental changes. It won't be long before the North once again does a military provocation, or threatens the South with war. Korea Herald and CNN

(Comments: For reader comments, questions and discussion, see the 25-Aug-15 World View -- What to expect after Monday's global stock selloff thread of the Generational Dynamics forum. Comments may be posted anonymously.) (25-Aug-2015) Permanent Link
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Generational Dynamics Web Log for 25-Aug-2015 25-Aug-15 World View -- What to expect after Monday's global stock selloff

What to expect after Monday's global stock selloff

African currencies crashing, along with commodities and China

North Korea 'expresses regret', defusing war threat with South Korea

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25-Aug-15 World View -- What to expect after Monday's global stock selloff