Dynamics
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Generational Dynamics |
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Issue: 20 Years after Tokyo's stock market crash, the economy is as bad off as ever.
In fact, a major factor in the election was a jobs report on Friday that showed a big spike in unemployment, an all-time high since World War II.
With charges of corruption, combined with a crashing economy, the parliamentary balance has reversed. Prior to the election, the ruling Liberal Democratic Party (LDP) held 303 seats, while the Democratic Party of Japan (DPJ) held 112 seats. But according to exit polls from Sunday's elections, the DPJ will now hold about 315 seats, and the LDP will hold about 100 seats.
Thus, this wasn't just a political victory. It was a historic political earthquake.
When World War II ended, Japan was a basket case. They'd expended their national budget on a lost war, and much of the country was in rubble, having been bombed with both conventional fire bombs and nuclear weapons.
Japan's reconstruction era was overseen by American army General Douglas MacArthur, who had led the Pacific theatre of World War II, and who had accepted Japan's surrender on September 2, 1945.
Japan's attitude changed overnight. The people of Japan completely repudiated their imperialist past and, in cooperation with America's generosity, administered by General MacArthur, became a pacifist nation closely allied with the U.S. The idea was that they would depend on the U.S. to defend them.
The Reconstruction period ended in 1955, and Liberal Democratic Party (LDP) was created. By 1956, national income had recovered to its 1940 level, and LDP politicians promised rapid economic growth. The LDP held power ever since then, except for ten months in the early 1990s.
Thus, the victory of the Democratic Party of Japan (DPJ) over the LDP is not a simple change of party; it represents a historic political change, a repudiation of the values of the survivors of World War II, and a new uncharted direction. This is similar to the repudiation of values and change of direction indicated by the election of Barack Obama in America's 2008 election.
The conundrum is this: How come Japan's economy hasn't recovered, even though 20 years have passed since its credit bubble collapsed and its stock market crashed?
Quite honestly, I thought that Japan's economy was in good shape. That's why I wrote, almost three years ago, "Japan's real estate crash may finally end after 16 years." At that time, Japan's real estate prices were finally rising, for the first time since 1990.
Japan had had huge real estate, credit, and stock market bubbles, growing throughout the 1980s. By 1989, the nominal value of just Tokyo's real estate was greater than the nominal value of all the real estate in the entire United States.
As I've discussed several times in the past, Japan's experience following its 1990 financial crash and deflationary spiral is very much part of the discussion of today's financial crisis. I've posted several discussions on presentations by Richard C. Koo, Chief Economist at Nomura Research Institute, on the experience of the 1930s Great Depression and the 1990-2005 "lost decade" in Japan. (See, for example "Fiscal stimulus programs in 1930s and today.")
Japan tried bailouts and quantitative easing for years, and seemed to be achieving success by around 2005. The thought has been that America, Europe, and other countries could try bailouts and quantitative easings that were bigger and better and faster, and prevent the current financial crisis from even occurring. Indeed, people like Hank Paulsen, Ben Bernanke and Larry Summers are currently patting themselves on the back for being so clever as to have avoided a complete meltdown.
As we've said many times, the complete meltdown, a generational panic and crash, is coming and can't be prevented. Furthermore, bailouts and quantitative easing this early in the crash will do little good, because there are tens of trillions of dollars of money being destroyed as the credit bubble leaks, and a few hundred billion dollars in quantitative easing will not have much of an effect.
But still, we might expect that all these bailouts and quantitative easings would produce some results in 5 or 10 years.
But the Japanese experience indicates that it won't produce results for a lot longer.
Why didn't the quantitative easing restore Japan's economy after almost 20 years? Why is Japan's economy now collapsing again? What I believe is that the reasons are the same as the ones I gave in the article referenced above as problems with Koo's theory. It's worthwhile reviewing them now in the current context:
I can't prove the above, but I believe that it's the cause of Japan's current severe economic problems.
There's been a debate on for decades on how long it took the U.S. to recover from the stock market crash of 1929-32. Some people claim that it was Roosevelt's spending policies that ended the Depression, but the data doesn't really support that. It took World War II to end the Great Depression. Apparently it will take another world war to end Japan's 20 year old deflationary spiral.
I always say, half-jokingly, that I'm the gloomiest person in the world. As I began developing the Generational Dynamics methodology in 2002 and 2003, I saw that it implied that we were heading for a new 1930s style Great Depression, and a new Clash of Civilizations world war.
As the years have gone by, and as the number of articles on this web site have gone from tens to hundreds to a couple of thousand, I've been able more and more to connect the dots. A worldwide financial crisis leads to world war, because a world war is the only way to end the financial crisis. In the last seven years, the prognosis has only gotten worse.
Most people are oblivious to what's going on, and don't want to hear about it, as for example I wrote last week in "Stock markets reflect increasingly delusional Wall Street," or as I wrote last month in "China's bubble economy becomes increasingly unstable."
Ten days ago, the Obama administration announced that the May estimate of a $7 trillion deficit was being increased to $9 trillion. As I wrote last year in "One, Two, Three ... Infinity," these deficits are only going to grow uncontrollably.
Neither President Obama nor any other politician can do anything to cause or prevent or stop these growing deficits. These things are caused by powerful forces launched decades and centuries ago, and transmitted through generational waves in the way that the power of an undersea earthquake is transmitted through a tsunami.
What's been infuriating me for years is not that all this is coming, but that people like bankers have been taking advantage of the crisis by royally screwing other people. It infuriates me to see so-called "experts" on CNBC use phony "operating earnings" that are totally meaningless, in order to keep defrauding investors and protect their own 7-digit salaries. It infuriates me to see Iceland's former prime minister claim that he knew nothing about what was going on, when everyone else (including me, as reported several times on this web site) did know. It infuriates me that various Nobel-prizing winning economists state purely ideological theories, masquerading them as economics. It infuriates me to see the administration, for the most venal political reasons, eviscerate the CIA by prosecuting CIA agents for having done their job in protecting this country.
An online correspondent recently wrote the following to me:
I am taking all my data from Main Street these days, and let the big boys talk to each other in a rose-colored haze.
And, oh, yes, let's have something that WORKS (anathema to the screaming moralizers on both sides) and MAKES SENSE (a quality the screaming moralizers find irrelevant.)"
I agree with her sense of despair. It used to be that someone could invest in AT&T if they wanted something safe, or in Xerox or IBM if they wanted something a little more risky. But today, all stocks go up and down together, and it makes almost no difference which stock you buy. Everything is being run by institutional investors and computerized trading. As for the small investor, the old saying applies: When the elephants fight, the grass gets stomped. The politicians, the financiers, even ordinary people, are simply out to screw other people for their own gain.
And there's no end to it. It's not a world that existed 20-30 years ago, it's not a world that I recognize, and it's not a world that I can simply survive in. I've made big mistakes in my life, and I've hurt people unintentionally, but I can honestly say that I've never intentionally set out to screw people the way I see others do to each other. How does one deal with this? How does one trust anyone? I remember Greenspan saying how shocked he was when he realized that all the bankers had conspired to commit fraud. This is independent of ideology and politics. People in all organizations, all ideologies, are just out to screw anyone else for money. Bernie Madoff is the rule, not the exception. Ethics is never even mentioned as a consideration by anyone. Obama couldn't care less whether people starve or are homeless if he can turn it into a way to get votes. (I used to write about this phenomenon with feminists -- they would gladly see more women and children battered, beaten, raped and killed if it meant more money for feminist organizations.) It's as if everyone else in the world besides myself is a psychopath. Or it means that everyone else is sane and I'm a psychopath. What's the difference?
Well, this started out as an analysis of the Japan election, and it turned into quite a rant, didn't it. A person as gloomy as I am shouldn't write these things too late at night, because there's no telling what I'm going to say.
People voted for Obama for President last year because they were desperately grasping for a solution to their problems. Now, 8 months into Obama's presidency, they're discovering that these solutions are illusory, and the situation is as desperate as ever.
A similar thing happened on Sunday in Japan. The Japanese people see massive corruption in government, they see their economy crashing, and still have visceral fears of war with China and North Korea, for good reason. They overwhelmingly threw out the party that had governed for 50 years, and brought in a new party that they desperately hope will solve all their problems. What will they think in 8 months?
(Comments: For reader comments, questions and discussion,
see the Japan thread of the Generational Dynamics forum.)
(31-Aug-2009)
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The war has turned into "very low intensity" clashes and banditry, according to General Martin Luther Agwai, the outgoing commander of the combined United Nations / African Union peacekeeping force (UNAMID). He made the following very Zen statement:
U.N. commander claims that the Darfur war is over:
The war has turned into "very low intensity" clashes and banditry,...
(30-Aug-2009)
Darfur war takes a major turn, as Sudan expels aid groups.:
Oxfam, CARE, Save the Children, and numerous other aid groups...
(11-Mar-2009)
Sri Lanka crisis war appears close to a genocidal climax.:
There are two crisis wars in the world today: Darfur and Sri Lanka....
(27-Dec-2008)
Chad and Sudan may be close to a declaration of war:
The peace agreement signed in March seems to be falling apart....
(18-Jun-2008)
Sudan's Darfur war expands as Khartoum comes under attack by rebels:
What were they thinking? everyone's asking. But it DOES make sense....
(14-May-2008)
China walks Olympics / Darfur tightrope after Steven Spielberg resigns:
Steven Spielberg's resignation earlier this week as artistic adviser to the 2008 Olympics...
(23-Feb-08)
The BBC zings America for not sending troops to Darfur:
Which do they want - intervention or non-intervention?...
(23-Feb-08)
Post-election massacre in Kenya raises concerns of tribal war:
Hundreds of people have been killed in ethnic violence since Monday,...
(2-Jan-08)
President Jimmy Carter has near-altercation in Darfur:
Generationally, Darfur is ten years ahead of Burma....
(5-Oct-07)
Still tilting at windmills, the UN will send "peacekeepers" to Darfur:
What "peace" is there to keep in this massive crisis civil war?...
(3-Aug-07)
Ban Ki Moon blames Darfur genocide on global warming:
Damn! He's blaming the Darfur crisis civil war on America!!...
(19-Jun-07)
Senator Joe Biden wants to move troops from Iraq to Darfur civil war:
Saying on Meet the Press that we should remove troops from Iraqi "civil war,"...
(29-Apr-07)
President Bush gives Sudan "one last chance" to end Darfur genocide:
But is Steven Spielberg aiding the genocide?...
(19-Apr-07)
U.N. Court blames Serbian people, but not country of Serbia, for 1995 Srebrenica genocide:
This is the essence of a generational "crisis war."...
(27-Feb-07)
Women's groups protest rape as a weapon of war in Darfur:
As the civil war in Darfur continues to grow more violent,...
(11-Dec-06)
Kofi Annan makes strongest statement yet on Darfur:
The current world's only generational crisis war may be close to an explosive climax....
(12-Sep-06)
UN: Darfur became much worse "while we were watching Lebanon and Israel":
Amnesty International reports that Sudan's new military buildup is precursor to a "catastrophe"...
(29-Aug-06)
Fighting in Darfur has increased since a peace deal was signed in May.:
Palestinians and Israelis will soon go the way of the people of Sudan and Darfur....
(7-Jul-06)
Survivors commemorate the genocidal 1995 Srebrenica massacre:
After Rwanda, Srebrenica and Darfur, United Nations says "Never again" - again....
(12-Jul-05)
UN declares that Darfur war was "not genocide," in the most sickeningly cynical story of the year:
If mass murders and rapes and forced relocation of millions of people isn't genocide, then what is?...
(01-Feb-05)
Explosive conflict seems imminent in Darfur, Sudan:
Large quantities of arms and ammunition have poured into Darfur in the last two weeks...
(17-Dec-04)
The six most dangerous regions in the world today.:
There are six regions that could lead the world into a new world war. NOTE: This article also contains a lengthy summary of the Generational Dynamics theory and Forecasting Methodology.
(20-Nov-2004)
United Nations: Darfur falling into anarchy:
The Sudan government is losing control of areas of Darfur,...
(4-Nov-04)
Five African nations oppose intervention in Darfur:
Many months ago, I said that the United Nations would never stop the Darfur genocide, which is a force of nature....
(19-Oct-04)
Today's slow-motion genocide in Darfur recalls the lightning quick genocide in Rwanda in 1994:
Why do these things always seem to happen in Africa? Understanding Africa's geography explains why.
(22-Aug-2004)
Jesse Jackson calls for sending American troops to Darfur:
You see how it works? Everyone has a war they like....
(27-Jul-04)
Darfur saga like depraved game of musical chairs:
As I've said before, I've gotten good at turning off my own feelings of horror...
(19-Jul-04)
"We want to create a light-skinned baby.":
That's what a raped black woman told Congressman Frank Wolf when he visited Darfur....
(8-Jul-04)
Darfur genocide: The UN is completely irrelevant:
It was just three months ago that Kofi Annan said "never again," referring to the 1994 Rwanda genocide....
(28-Jun-04)
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But if that is not the definition then there is no war as of now in Darfur."
I wonder if Agwai can also describe to us the sound of one hand clapping.
It's interesting to note that UNAMID itself apparently doesn't agree with Agwai's assessment. If you read the farewell UNAMID press release on Agwai's departure, it makes no reference to the end of the war. It contains only two quotes from Agwai: "We have made significant progress on the ground and the end of deployment is at last in sight" and "I believe we have made remarkable progress, but still need to do more."
From the point of view of Generational Dynamics, this cannot be the end of the war, because there's hasn't been a climax. This is a generational crisis war, and crisis wars end with a bang, not a whimper. A non-crisis war can end with a whimper, but not a crisis war. (See "Basics of Generational Dynamics.")
I'v discussed the concept of the "explosive crisis" several times with respect to the recently ended crisis civil war in Sri Lanka. (See, for example, "Tamil Tigers surrender, ending the Sri Lanka crisis civil war.") The explosive crisis is always some sort of massacre or genocide, something so horrible that both the victors and losers vow that nothing like it can ever be permitted to happen again.
That hasn't happened in Darfur. There are three million refugees living in huge tent farms in the middle of the desert, with food, water and other needs supplied by international care agencies. There are still many rapes and murders and small massacres (these are the "very low intensity" clashes and banditry that Agwai referred to), but full-scale war with Janjaweed militias and other pro-government militias is being held off only because of a small cadre of African Union and United Nations forces.
How are these three million refugees going to return to their homes? Many of their villages have been taken over by the pro-government militias, and most of the others have been burnt to the ground. Whatever visceral emotions launched the full-scale genocide in the first place still exist, and will exist until the cathartic explosive climax occurs.
There have been numerous news stories this week on Agwai's statement, and they all say that the Darfur war began in 2003. This is totally absurd.
The war began in the 1970s as a classic war between farmers and camel herders. These conflicts have occurred in every country throughout history. The farmers plant crops. The herds of animals trample the crops. The farmers put up fences. The herders break through the fences. Tempers flare.
In Darfur, the herders and farmers are different ethnic groups, with the herders allied with the government in Khartoum. The conflicts were settled locally in the 1970s, but they escalated throughout the 1980s and 1990s. Finally in 2002 and 2003 there were several "regeneracy events," turning the low-level war into a crisis war. (For a detailed history of the Darfur war, see "Ban Ki Moon blames Darfur genocide on global warming.")
By 2004, the genocidal events were apparent, and the international community began committing resources to stop the fight. But as I wrote in 2004 in "Darfur genocide: The UN is completely irrelevant," crisis wars are not political wars, and cannot be prevented, started or stopped by politicians. Generational crisis wars come from the masses of people, driven by an entire constellation of generations. They start off slowly, and gather momentum until an explosive climax is reached. Then the people on all sides say to one another, "Omigod, what have we done?" and they vow that it will never happen again. It happens again when the survivors of the crisis war retire and die.
Darfur has not yet reached that explosive climax. The climax has been postponed by huge international commitments of resources to separate the two sides, and to support 3 million refugees in camps. One way or another, those refugee camps are going to disappear and the international aid groups will disappear. Then the militias will have the chance they've been waiting for, and the REAL explosive climax will occur.
(Comments: For reader comments, questions and discussion,
see the Darfur / Sudan crisis war thread of the Generational Dynamics forum.)
(30-Aug-2009)
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Beijing "resolutely opposes" the proposed visit of the Dalai Lama to Taiwan "in whatever form and capacity," according to an official statement from the Chinese Communist Party (CCP). It adds:
When people from all sectors on the mainland are lending a hand to help Taiwan reconstruct and overcome the typhoon disaster quickly, some DPP members have taken the chance to plot the Dalai Lama's visit to Taiwan.
Obviously this is not for the sake of disaster relief. It's an attempt to sabotage the hard-earned good situation in cross-Strait relations."
The bitter CCP statement is in response to a planned 5-day visit by the Dalai Lama to Taiwan next week.
The visit was triggered by the unbelievably slow response of Taiwan's current government to the devastating Morakot typhoon (hurricane) that struck Taiwan a couple of weeks ago.
Take a look at the following extremely dramatic video:
You won't see anything like that too often.
But the KMT government of president Ma Ying-jeou responded very slowly and insensitively to the disaster.
Ma's stiff, delayed response is in contrast to the tirelessly comforting actions of China's Premier Wen Jiabao during last year's devastating earthquake in Sichuan province.
Ma's approval rating had been falling precipitously in recent months, but his response to Morakot has been politically disastrous.
In order to understand what's going on, it will be helpful to briefly summarize the history that got us here:
Things to watch for are the following:
It's possible that this visit by the Dalai Lama will end up changing nothing, and it's possible that it will spiral into a major international incident.
(Comments: For reader comments, questions and discussion,
see the China thread of the Generational Dynamics forum.)
(28-Aug-2009)
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The Dow Industrials reached a 2009 high on Friday, but most analysts believe that a major correction is coming.
Speaking Friday on PBS's Marketplace, Reuters financial blogger Felix Salmon said the following:
This quote explains what's going on in the markets today, and what's likely to be coming in the near future. But first, we need to explain the sources of the delusions.
The view that the stock market is due for a correction is actually fairly widespread among analysts. Analysts differ on the amount of the expected correction -- 10%, 20% or 30%, the last one returning us to the March 15 lows.
This is exactly the same thing that Generational Dynamics predicts. The difference is the predicted aftermath. The analysts say that after the 10% or 20% or 30% correction, the markets will return to a longer period of rallies. This is the "capitulation" concept that Salmon refers to in the quote above.
But the Generational Dynamics prediction is quite different. We're in the midst of a "generational market crash." These generational crashes occur every 70-80 years, just as the generation of survivors of the previous one have all disappeared (retired or died), and the younger generations have resumed the same dangerous credit securitization practices that led to the previous generational crash. Since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.
Thus, the Generational Dynamics prediction is that the market will indeed experience a 10% or 20% or 30% correction, but that instead of rallying after that, it will keep falling, and at some point the market correction will be so great and rapid, that it will be looked back upon as a generational panic, like the "Black Monday" stock market crash of October 28, 1929.
The phrase "weird delusional state" is taken from Salmon's quote above.
If you listen to CNBC or Bloomberg TV, you hear absolutely ridiculous statements about "green shoots" and "end of recession." A few weeks ago, the "experts" were certain that the recession would last into 2010, but now they're saying the recession is already over, and that the economy will spurt upward in the next couple of quarters. If you remember that they've been saying the same thing each quarter for a couple of years, it makes you want to vomit.
Let's begin with the following chart from Decision Point:
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The top of this chart shows the S&P 500 index which is at a near historic all-time highs.
The second graph shows corporate (GAAP or "as reported") earnings. Corporate earnings have been falling sharply, and are now at the levels of the mid 1970s.
The third graph shows price/earnings ratios (or "valuations"), based on as-reported corporate earnings. They've gone off the charts.
Current valuations, based on reported earnings, are well over 100, according to the "official" S&P 500 P/E ratios, from the Standard & Poors spreadsheet.
And talk about delusions, I just can't get over the use of "operating earnings" on CNBC and Bloomberg TV. Analytically, "operating earnings" are COMPLETELY MEANINGLESS, but they're quoted constantly by the so-called experts.
(For discussions of valuations and price/earnings ratios, see "Wall Street Journal sharply revises its fantasy price/earnings computations," and "Laszlo Birinyi provides insight on his fantasy price/earnings computations," and "Wall Street Journal and Birinyi Associates are lying about P/E ratios.")
Incidentally, the Wall Street Journal and Birinyi Associates have apparently completely given up using fantasy "operating earnings," as can be seen from the latest WSJ page on P/E ratios:
Dow Industrial 15.34
Dow Transportation 4568.06
Dow Utility 12.04
Nasdaq Composite 42.02 Russell 2000 nil S&P 500 68.26
All are based on trailing 12 months of as-reported earnings. Sources: Birinyi Associates, WSJ Market Data Group
WSJ is now using reported earnings. This may be my own fantasy, but I like to think that it was pressure from this web site that caused WSJ to change its policy. I also don't know where the 68.26 figure for the S&P 500 P/E index comes from, since the "official" S&P source mentioned above gives a figure well above 100. Still, the 68.26 figure is a lot more honest than the "operating earnings" figures that WSJ was using earlier.
Another area where Wall Street is in a "weird delusional state" is in real estate. Every day in the financial news, they report some detail in the real estate picture that's "some good news" or "a sign of hope."
What they don't mention is the larger trends, particularly in the area of commercial real estate.
For example, Bloomberg reports the following:
Aug. 19 -- Commercial real estate values in the U.S. fell 27 percent in the year through June and rents for offices, shops and warehouse space may continue to drop through 2010 as the recession saps jobs and consumer spending.
The Moody's/REAL Commercial Property Price Indices fell 1 percent in June and are down 36 percent from their October 2007 peak, Moody's Investors Service said in a report today. A rebound isn't likely until the second half of next year, the National Association of Realtors forecast in a separate report.
Unemployment of 9.4 percent, falling industrial production and a drop in consumer spending curbed property demand, NAR said. Falling rental income and scarce credit are hurting both landlords and investors in securities backed by commercial property loans. Defaults and late payments on commercial mortgage-backed securities may surpass 7 percent by year-end, according to research firm Reis Inc."
I've put together some graphics from the Calculated Risk blog:
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The graph on top shows the percentage of subprime mortgage loans in delinquency and foreclosure. The rates are now above 40%. Some people are calling this "good news" because it appears that the plunge is at a slightly decelerating negative growth rate.
Even if that were true, it would still mean that the foreclosure rate would not return to levels below 15% for at least a couple of years. But it's also possible that the delinquency rate slowed slightly because of all the stimulus money, and that it's poised to start up again.
The middle graph shows the same for prime loans. These loans historically have a foreclosure rate below 3%, but this year the foreclosure rate has been accelerating upward.
The bottom graph shows that commercial real estate price collapses are now catching up to residential real estate price collapses. This has been predicted for a couple of years, but now it's happening in full force.
Incidentally, in the next few days I'm going to be posting an analysis showing that the real estate bubble actually began in 1995, the same as the dot-com bubble. The significance of this fact is that we can apply the Law of Mean Reversion and conclude that real estate prices will actually be falling for the next decade.
Salmon's quote, above, starts with "The markets haven't capitulated yet." In order to understand what's going on with the market today, you have to understand the capitulation concept.
As I explained last year in "The origins of the hare-brained 'capitulation' fallacy," investors and analysts today are expecting a repeat of the "false panic of 1987." It was a false panic because the market was underpriced at the time, unlike today when the market is still overpriced by a factor of 160%, according to my Dow Jones historical page.
According to the hare-brained capitulation theory, the markets will fall 10% or 20% or 30% very quickly, indicating that investors have "capitulated," and then the market will resume its former bubble growth.
However, it appears more and more that what we're seeing today is a kind of an "upside capitulation" in progress, based on investors who "go short," or sell stocks that they don't own, because they believe that stock prices will fall.
In selling short, you borrow some shares of stock from your stock broker, and you sell them at the current market price. At a later time, say 30 or 60 days later, you're required to purchase your own shares of stock so that you can return them to your stock broker. If you guessed right, that the stock price is going down, then you're buying the stocks at a much lower price than you received when you sold them, so you make a lot of money; if you guess wrong, and the stock price goes up, then you can lose a great deal of money.
Now, the standard capitulation theory is that people who purchase and hold stocks will continue to hold them even when the market is going down, because they think that the market will eventually start going up again. Capitulation occurs when an investor gives up and decides that the market is going to continue going down, so he sells his stocks and takes his losses. While a lot of investors are capitulating, the volume of selling forces the market further down, until all the capitulators are out of the market. At that time, the market can start going up again.
According to Higgenbotham, a member of the Generational Dynamics forum, what we're experiencing now is being driven by short-sellers. It's a kind of "upside capitulation" situation. There have been many investors holding short positions, because they believe that the market is going to go down again, at which point they'll make a lot of money.
But if the market keeps going up, as has been happening almost continuously since March, then the short sellers are forced to provide more and more money to their stock brokers, who want to make sure that they'll be paid for the stock shares that they lent to the short-selling investors. If the market keeps going up, the short-sellers are forced to provide more and more money, and eventually they'll be "squeezed" out of the market. They'll be forced to give up their short positions, and take their losses.
Whenever a short seller leaves the market, he has to purchase stock shares to replace the shares he's borrowed. Short sellers leaving the market thus can force the market up even further. It's widely believed that this is what's going on. For example, this past Thursday, August 20, Art Cashin appeared on CNBC and stated his opinion that much of that week's market rally was caused by "short covering," or short sellers leaving the market.
According to Higgenbotham, when enough of these short-sellers are forced out of the market, then this "upside capitulation" will occur. The market will stop going up, and will start going down again. Higgenbotham believes that this reversal may lead to a larger panic.
So now we're at a fascinating point in time where we have two conflicting views of what's going to happen:
What both of these views have in common is the expectation of a sharp fall in the markets in the next few weeks.
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Matt Stiles of the Futronomics blog supports the view that short-sellers are controlling the market. The Short Interest Ratio is a measure of the number of short sellers in the market. This graph shows that short selling has been generally increasing since the mid-March stock market lows (with a brief respite in mid-May), continuing upward until mid-July, and falling after that.
According to Stiles: "The shorts appear to be getting frustrated as even bad news (retail sales, consumer confidence, bank failures) is happily bought. The bi-weekly short interest report shows short interest falling in the last two weeks of July, even as the market rallied - consistent with the short squeeze thesis. As mentioned earlier this week, the markets tend to take "the path of maximum frustration" at major turns. It will be attempted to ensure that as few as possible are allowed to benefit from another leg down in the stock market. And notice how short interest is much lower than it was at this time last year."
It's worth repeating that, from the point of view of Generational Dynamics, when this widely predicted correction occurs, the market will continue to fall, to well below the Dow 3000 range, since we're in an era of a generational crash.
In the past, I've strongly advised web site readers not to try short selling, unless they were very sophisticated traders. There are two reasons for this: First, a long bear market rally can exhaust all your funds with short covering. (Remember that John Maynard Keynes said that the market can remain irrational for longer than you can remain solvent.) And second, it's not clear that short sellers will be able to collect the money due them when a full-scale generational panic occurs.
However, there ARE some sophisticated traders in the Financial Topics thread of the Generational Dynamics forum.
Higgenbotham and several others have been maintaining their short positions through the current rally, and have been risking more and more of their net worth. Higgenbotham himself has reported that 2% then 4% of his net worth was at risk, increasing as time goes on. It's personally very painful for me to see people that I've gotten to know going through this turmoil.
However, Higgenbotham knows what he's doing. He's done detailed studies of past generational crashes, including the Panic of 1857, the South Sea Bubble, the Tulipomania bubble, even going back to the 1340s collapse of the Florentine banks (Peruzzi, Bardi, etc.).
On Saturday, he posted the following:
No government attempt to extend the bubble
1637 Tulip Mania and 1720 South Sea Bubble
Bubbles burst the equivalent of second half of July 2009
Some government attempt to extend the bubble
1930 Dow rebound high
Bubble burst the equivalent of first half of August 2009
Extreme government attempts to extend the bubble
2009 Dow rebound high
Bubble has not burst as of August 23, 2009 (let's make it Sunday)
The report above is projecting that this bubble will burst in the first half of September between [S&P 500 index] 1028 and 1052. The high Friday was around 1028.
I have no strong notions at this point about how far the Bernanke experiment will extend this bubble. After Friday's action, I plan to sit short and wait. I guess the only thing I would continue to put forth is that nobody will figure it out exactly. Very few will be short at the peak. As of Friday's close, I am the only person I know of who is short (besides 2 people on this forum - freddyv and wvbill). I'm not in awe of this bubble because it's just another bubble (I am disgusted by it because this whole bubble apparatus/bureaucracy is a useless time and money drain on hard working people and prevents productive activity). So I remain short, take my hit, and wait. Friday it extended beyond all previous generational bubbles so far as I can tell. That much I think I know. I got an e-mail from a former S&P floor trader this morning and he said I don't know how you can take this. That's why the phone calls go back and forth as described in the above report. As for me, I don't really care whether it's over now, at 1032, 1040, or 1052 (and it will almost definitely be some other number that nobody has thought of). In the big picture it makes no difference, but if it extends beyond the area that I've mapped out as my limit, I will take my loss there. That would destroy about 10% of my net worth and help to prove the Maximum Ruin theory."
The last line refers to the Principle of Maximum Ruin that I've discussed many times on this web site. (See, for example, "As new stock bubble expands, the Principle of Maximum Ruin looms larger.")
What all of this shows is how deadly dangerous this market is today, in the midst of a generational crash, even for sophisticated traders. For all web site readers, my strong recommendation remains the same: Keep your assets in cash.
It almost seems as if nothing has been going on in the world this summer.
The Sri Lanka civil war is over. The only news about the Darfur war is the so-called peace negotiations. Israel and Gaza are arguing about what happened in their last war. Pakistan refugees are returning to their homes in Swat Valley. There have been major suicide bomber attacks in Iraq and Afghanistan, but no one cares with Obama, rather than Bush, in office.
The big stories of the last couple of weeks have been the hurricane that hit Taiwan, the wildfires in Athens, the Afghan elections, the release of the convicted Lockerbie bomber. Ahmadinejad is putting a couple of women in his cabinet. These are important stories on a regional basis, but they have little geopolitical significance.
The same kind of thing is true in the financial world. Q2 corporate earnings are down 28% from last year. But earlier estimates were that they would be down 35%, so a massive 28% fall in earnings is taken as good news. The use of "operating earnings" has become common and unquestioned, even though they're analytically meaningless. Every tiny bit of good news is emphasized, while the underlying realities are being totally ignored.
In fact, if you look at what happened last summer, it was almost the same story. The stock market was little changed all summer. Nothing happened until after Labor Day, when the Fannie/Freddie and Lehman crises broke at the same time.
That's just how things are in August. Everyone is on vacation or taking the day off. Everyone is on auto-pilot, and even terrorists can't break through the calm.
So it's quite possible that the current situation will continue at least until Labor Day. After that, things should start moving along, for good or ill.
(Comments: For reader comments, questions and discussion,
see the Financial Topics thread of the Generational Dynamics forum. Read
the entire thread for discussions on how to protect your money.)
(24-Aug-2009)
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How in the hell is that possible?
Iceland's former prime minister was caught completely by surprise:
How in the hell is that possible?...
(19-Aug-2009)
Iceland begs for mercy as Europe turns the screws:
This could be telling us the future of China and the U.S....
(15-Aug-2009)
Can a country go into default on its debt? Can the US?:
Investors are increasingly betting that the answer is 'yes'....
(1-Feb-2009)
We're all Icelanders now, as markets rocket 10% around the world:
The world is a much more dangerous place today than yesterday....
(14-Oct-2008)
More convulsions on Wall street, as financial crisis spreads around the world:
The country of Iceland is bankrupt (or almost bankrupt)...
(8-Oct-2008)
Country of Iceland may be close to financial default:
In an emergency move, Iceland's central bank raised interest rates to 15%....
(31-Mar-08)
Sudden collapse of Iceland krona portends bursting of "carry trade" bubble:
I don't normally write about international interest rates because...
(27-Feb-06)
Comments and questions from readers:
Palestinian peace, war in Iceland, are among the topics that readers have asked me about in the last few weeks....
(09-Feb-05)
| ||
As you know, Dear Reader, I get out of bed every morning and ask myself whether I'm crazy or everyone else in the world is crazy. It has to be one or the other, because there's such massive insanity going on in Washington, on Wall Street, and around the world, that I always feel that at least I'm watching a bad movie, and they won't let me out of the movie theatre.
The bad movie took a particularly bizarre twist on Tuesday, when I heard a BBC interview with Geir Haarde, who was Prime Minister of Iceland last October, when Iceland's banks failed. (You can hear the interview here, starting at the 10:00 point.) Here's what the former Prime Minister said:
Geir Haarde: No, we had no idea when the storm hit us that this was going to happen, and the magnitude of the hurricane."
Now as you know, Dear Reader, in February 2006, I wrote about the possible default of Iceland's banks in "Sudden collapse of Iceland krona portends bursting of 'carry trade' bubble." In that article, I described how Fitch Ratings that it was revising the outlook for Iceland's banks from "stable" to "negative," saying that the new ratings "[took] into account Iceland's macro-prudential risks, including rising inflation, rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness."
Then, in March, 2008, I wrote another article: "Country of Iceland may be close to financial default."
In that article, I wrote, "Iceland's central bank raised interest rates by 1.25% this week to a record 15%, in an effort to support the country's crashing currency. The statistics are grim. The króna ("krona" or "crown") currency has fallen in value over 30% since January 1 against the euro, over 3% on Friday alone. And inflation has jumped sharply in March to 8.7% from February's 6.8%. ... Many investors now consider the króna to be as risky as subprime mortgage loans. Money is pouring out of Iceland, and the value of the currency is falling rapidly."
So how is it possible that Haarde was caught by surprise? And, as I wrote a few days ago in "Iceland begs for mercy as Europe turns the screws," how is it possible that Britain, the EU and the IMF were all caught by surprise as well? How the hell is it possible?
It's like a bad movie, where the Butler kills the Heiress in scene one, in front of the entire cast, and then in the last scene they all express surprise that the Butler did it.
Today it's just as obvious that America, Europe and China are all headed for an even worse financial crisis, for reasons that I've explained many times.
And then expect to see the political and financial wizards on TV say, "Wow! I didn't see THAT coming.!"
(Comments: For reader comments, questions and discussion,
see the Financial Topics thread and the Iceland thread of the Generational Dynamics forum.)
(19-Aug-2009)
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This could be telling us the future of China and the U.S.
Thousands of Icelanders protested outside the Parliament on Thursday, objecting to Draconian economic measures by the European Union (EU) and the International Monetary Fund (IMF) requiring Iceland's taxpayers to reimburse depositors in the UK and the Netherlands.
Iceland's former prime minister was caught completely by surprise:
How in the hell is that possible?...
(19-Aug-2009)
Iceland begs for mercy as Europe turns the screws:
This could be telling us the future of China and the U.S....
(15-Aug-2009)
Can a country go into default on its debt? Can the US?:
Investors are increasingly betting that the answer is 'yes'....
(1-Feb-2009)
We're all Icelanders now, as markets rocket 10% around the world:
The world is a much more dangerous place today than yesterday....
(14-Oct-2008)
More convulsions on Wall street, as financial crisis spreads around the world:
The country of Iceland is bankrupt (or almost bankrupt)...
(8-Oct-2008)
Country of Iceland may be close to financial default:
In an emergency move, Iceland's central bank raised interest rates to 15%....
(31-Mar-08)
Sudden collapse of Iceland krona portends bursting of "carry trade" bubble:
I don't normally write about international interest rates because...
(27-Feb-06)
Comments and questions from readers:
Palestinian peace, war in Iceland, are among the topics that readers have asked me about in the last few weeks....
(09-Feb-05)
| ||
The economic measures were imposed in the wake of last October's failure of Iceland's banks, and then of Iceland's national bonds. Many Europeans, especially in Britain and Netherlands, had deposited their savings into Iceland's bank in an "Icesave" program that provided interest rates of well over 10%. When Iceland defaulted, these depositors lost their money, and Iceland was forced to agree to reimburse the depositors.
Because of the crisis, Iceland's Prime Minister Jóhanna Sigurðardóttir wrote the following for Financial Times on Thursday:
Iceland has no such tendency. It is battling the effects of severe banking and currency crises and a recession that is affecting our part of the world as much as any other. ...
Icelanders, who do not feel responsible for the global banking crisis, are willing to make sacrifices to secure normal relations and trade with the world. But they are angry at having to take on the burden of compensation for the Icesave savings accounts of Landsbanki – a failed, privately owned, commercial bank, which attracted hundreds of thousands of UK and Dutch savers with high interest rates. The amount to be shouldered by Iceland is huge – about 50 per cent of our gross domestic product. Assets against this debt will substantially lower the net amount, but there is much uncertainty about the valuations and forecasts underpinning such calculations.
Last October, when Iceland was in deep crisis, UK authorities froze the assets of Landsbanki, and placed the bank (and for a while Iceland’s government) alongside terrorist organisations on the official UK Treasury list of entities subject to asset freezing. Kaupthing Bank, which had just been granted a government loan amounting to 5 per cent of GDP, then collapsed after its subsidiary in London was seized by the Financial Services Authority. Despite a critical report in April by the House of Commons Treasury Select Committee, no satisfactory explanations have been given for the UK’s actions.
Last October, when Iceland was in deep crisis, UK authorities froze the assets of Landsbanki, and placed the bank (and for a while Iceland’s government) alongside terrorist organisations on the official UK Treasury list of entities subject to asset freezing. Kaupthing Bank, which had just been granted a government loan amounting to 5 per cent of GDP, then collapsed after its subsidiary in London was seized by the Financial Services Authority. Despite a critical report in April by the House of Commons Treasury Select Committee, no satisfactory explanations have been given for the UK’s actions.
The EU deposit insurance directive that places this burden upon us is seen by some as aimed at the failure of individual banks rather than a systemic collapse, as was the case in Iceland. A strong argument has been made for Iceland being the coincidental victim of defects in this directive, which have been ignored.
Icelanders are striving to fulfil their obligations but cannot, and should not, ignore the lessons to be learnt from this crisis regarding potential flaws in banking regulation and deposit insurance schemes affecting the EU and European Economic Area.
The FT has reported how the Dutch opposed the IMF lending to Iceland in order to enforce their demands on Icesave, claiming the UK and Germany as allies. The perception is that Treasury officials in the UK and the Netherlands used their bargaining power against a much weaker party when the Icesave deal, now being debated in the Icelandic parliament, was struck."
Sigurðardóttir's statement is both a plea for mercy and a bitter denunciation of EU and IMF policies.
In order to see why Icelanders are so angry, let's make a list of the indignities that Iceland has suffered, according to an analysis by Eva Joly, Norwegian-French magistrate who investigated the Icelandic bank collapse:
Britain and the EU claim that they have no responsibility in Iceland's default, but that claim is laughable. According to the analysis by Joly, the European countries invited Icelandic banks into their countries, and were required to exercise the same level of oversight into Icelandic banks in their own country as for their own banks.
Well then, is it possible that Gordon Brown, the Europeans and the IMF were caught by surprise by the collapse of Iceland's banks? It's hard to see how they could have been surprised.
In February, 2006, there was a major international currency crisis triggered by Iceland's policies. I wrote about this at the time in "Sudden collapse of Iceland krona portends bursting of 'carry trade' bubble." The crisis occurred in conjunction with an announcement by Fitch Ratings that it was revising the outlook for Iceland's banks from "stable" to "negative." According to Fitch, the new ratings "[took] into account Iceland's macro-prudential risks, including rising inflation, rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness."
And so, I knew that Iceland's banks were in trouble. Fitch Ratings knew that Iceland's banks were in trouble. Apparently the only ones who didn't know there was a problem were Gordon Brown, the Europeans and the IMF.
Furthermore, Iceland's abusive fiscal policies didn't stop when the crisis ended, according to Asgeir Jonsson, chief economist of Iceland's top bank, Kaupthing. Iceland was bailed out by banks and hedge funds around the world, but the whole thing collapsed only after the Lehman Brothers collapse in October, 2008.
And so, Gordon Brown, the Europeans and the IMF could have blown the whistle on Iceland at any time. The facts were well known, and widely available. And yet, they were ignored. Why?
Because Gordon Brown, the Europeans and the IMF were participating in the same debauched, depraved abusive financial policies as Iceland. Whether in Reykjavík, London, Frankfurt or Wall Street, banks and financial institutions were all perpetrating fraud on investors, and were not stopped by any politicians, whether in Reykjavík, London, Brussels, or Washington. This continues to the present day, as exemplified by Obama administration adviser Larry Summers, who personally made millions of dollars benefiting from the frauds that created the financial crisis. (See "Stories of massive generational fraud and corruption continue to pour out.")
Whether in Reykjavík, London, Frankfurt, Wall Street, Brussels, or Washington, if the politicians can find a scapegoat, they'll use it. The stench of corruption continues unabated.
Students of Generational Dynamics, as well as long time readers of this web site, are already well aware that the vengeance that the Europeans are inflicting on Iceland as a coverup to their own complicity is the kind of thing that leads to war. That doesn't mean that tiny little Iceland will be going to war against Europe, but it does provide a template for understanding the future relationship between China and the U.S.
As I've written many times, I believe that the 1932 book, "The bubble that broke the world," provides a template for understanding what's going on in the world today. The U.S. led the rest of the world in trying to bail out Germany in 1931, and the bailout failed. Today, as the level of public debt increases exponentially, there will come a time when America will face a currency and financial crisis similar to Iceland's, and the Chinese will be forced to try to bail out the U.S. in order to save themselves.
The Iceland situation provides us with further guidance in predicting how this coming crisis might unfold.
First off, the Chinese are fully complicit in any future financial default by the U.S. I've been writing for six years that America's level of public debt was increasing exponentially, and that a default was inevitable. And we all know that the Chinese have higher IQs than the Americans, so if I could figure that out, then they could figure that out.
Instead, China created its own internal asset bubble, supported mostly by purchasing debt from the U.S., and using it to stimulate China's factories into producing products that could be sold to the United States. And as I wrote recently in "China's bubble economy becomes increasingly unstable," China itself is very close to a major financial crisis, quite apart from (though related to) America's financial crisis.
Will China be as vengeful and vindictive as the British and the Europeans toward Iceland? There's no doubt about it.
We can see a sample of China's vengeance in their policies towards the Australian company Rio Tinto, the second largest mining company in the world. For years, Rio Tinto sold iron ore to China at high commodity bubble prices, where the bubble was caused by China's own abusive credit policies, which were just as debauched and depraved as those in the West.
Earlier this year, China sought to sign a joint venture with Rio Tinto, which would have been China's biggest ever foreign investment. However, Rio Tinto spurned the offer, instead signing up with one of its competitors, BHP Billiton, the world's largest mining company.
The Chinese were furious, and in recent weeks have arrested four employees of Rio Tinto in Shanghai. At first it appeared that the employees would be charged with stealing state secrets, which would have been punishable by death. But after international pressure, led by the Australians, the charges were reduced to corporate espionage and bribery.
This incident provides just a tiny taste of the kind of vengeance we can expect from the Chinese in the case of an inevitable default by the U.S. The Chinese will angrily agree to "bail out" the U.S., by forgiving some of America's debt. But the Chinese will also jail Americans on various charges, and will make onerous fiscal demands on the U.S., as well as demands for greater international control over the dollar currency. This will frighten and infuriate the American people, and the charges and counter-charges will eventually spiral into full-scale war.
From the point of view of Generational Dynamics, a war between America and China is 100% certain. The scenario of the preceding paragraph is NOT certain, but is only one of several possible scenarios, including war over Taiwanese independence, a war that begins between Japan and China, and a war that begins in central Asia. But "all roads lead to Rome," in the sense that all scenarios lead to the same place -- a Clash of Civilizations world war, with China versus the U.S. in the lead.
(Comments: For reader comments, questions and discussion,
see the China thread and the Iceland thread of the Generational Dynamics forum.)
(15-Aug-2009)
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The opposition to the health care plan is being led by "angry old folks," as I heard them described on MSNBC the other day.
In fact the opposition is being led by seniors (i.e., Boomers), and polls show that barely one-third of seniors support President Obama's health care plan.
For years, President Obama expressed his dislike of Boomers, his mouth dripping with contempt. That opinion is shared by other Generation-Xers, many of whom hate Boomers simply because they're Boomers.
(See "Barack Obama to Boomers: Drop dead!" and "The nihilism and self-destructiveness of Generation X.")
Now the Boomers are finally getting revenge against this contempt by Obama and his supporters.
It's really not surprising that Boomers are furious with Obama, given the stream of contemptuous remarks directed at Boomers by Obama's supporters.
For example, Paul Krugman, who won the Nobel Prize in Economics because of his hatred for Boomer President Bush, wrote the following in recent column, entitled "The Town Hall Mob":
Does this sound familiar? It should: it’s a strategy that has played a central role in American politics ever since Richard Nixon realized that he could advance Republican fortunes by appealing to the racial fears of working-class whites.
Many people hoped that last year’s election would mark the end of the “angry white voter” era in America. Indeed, voters who can be swayed by appeals to cultural and racial fear are a declining share of the electorate."
The implication is that the Boomers are being driven by exploitive political operators and by racism. Stuff like this can only infuriate the Boomers further.
It's ironic that Krugman refers to President Richard Nixon, because it's President Obama who's attempting to do exactly the same thing that President Nixon did. President Nixon imposed wage-price controls, with absolutely disastrous effects on the economy. (See "Obama's health plan, a proposal of economic insanity, appears to be losing support.")
This is Economics 1.01. If health care costs have been increasing faster than inflation, it's because the demand for health care services exceeds the supply, driving prices up. There's no other credible possibility. This has led to rationing and attempted price controls, implemented by the insurance industry.
Boomers understand at some level that President Obama's health care plan is an attempt to change the rationing equation so that Boomers receive less health care and Gen-Xers receive more. Since Obama's plan doesn't create any new doctors or hospitals, the supply of health care will not increase, and so Obama's health plan will not reduce price increases. It will simply rearrange the rationing priorities away from Boomers toward Gen-Xers.
If that were the only result, it wouldn't be so bad. But Obama is channeling President Nixon, using the disastrous approach that Nixon used. Nixon's wage-price controls did not merely fail to control wages and prices; it screwed up the economy so badly that the inflation rate snapped back to over 10%. President Obama's health care wage-price controls would drive doctors out of the system, and would screw up the health care system in other ways as well, resulting in a mess much worse than the current system.
But President Obama and his supporters do not understand Economics 1.01. Instead, they're resorting to vicious ideological attacks on their Boomer-led opponents, a strategy that will drive Boomers up the wall. Obama's ideological attack on Boomers cannot be anything but a political disaster.
Krugman is part of the mainstream press that's completely supporting Obama's campaign. (See "Vile 'teabagging' jokes signal the deterioration of CNN and NBC news.")
This is turning into quite a bonanza for Fox News Channel, which is seeing its ratings surge, because it's the only mainstream news channel that presents boths sides of the health care issue, and which shows respect, rather than contempt, for Boomers.
The following chart shows the cable news ratings for Thursday, August 6. It compares the number of viewers for the five cable news networks (HLN is CNN's Headline News). All numbers are in the thousands of viewers:
Network Total day Afternoon (5-6 pm ET) Prime Time (8-9 pm ET)
------- --------- ---------------------- ----------------------
FNC 1395 Glenn Beck 2427 O’Reilly Factor 3716
CNN 529 Situation Room 600 Campbell Brown 879
MSNBC 402 Hardball/Matthews 600 Keith Olbermann 1070
CNBC 193 Fast Money 231 CNBC Reports 111
HLN 307 Prime News 210 Nancy Grace 946
As usual, Fox News' Bill O'Reilly draws more viewers than all four of the other networks combined. His lead over his competitors has been increasing, and now Glenn Beck is accomplishing the same thing for Fox News in a different time slot.
As I say over and over again on this web site, massive shifts in attitudes and behaviors of people are extremely significant. The "Revenge of the Boomers" and the trend toward Fox News appears more and more to be such a massive shift, and may portend even more vicious political battles between the Obama administration and its opponents this fall and next year.
This kind of vicious political battle is exactly what's predicted by generational theory, as the country goes deeper into a generational Crisis era. As I explained in "Basics of Generational Dynamics," this kind of vicious political bickering will end only when a "regeneracy event," such as a major financial crisis or a major terrorist attack on American soil, occurs and regenerates civic unity for the first time since the end of World War II.
(Comments: For reader comments, questions and discussion,
see the President Barack Obama thread of the Generational Dynamics forum and the
Fox News Channel vs CNN and MSNBC thread of the Generational Dynamics
forum.)
(11-Aug-2009)
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Stock prices exploded 1-1.5% upward on Friday, following the jobs report, which said that "only" 243,000 jobs had been lost in July, down from 645,000 a few months ago. The unemployment rate fell to 9.4% from 9.5%.
Economists who were in despair last March, saying that the recession would not end until next year, were wearing broad grins on Friday, saying that the recession was over already. An ebullient President Obama said, "We've pulled the financial system back from the brink. I am convinced that we can see the light at the end of the tunnel."
If you listen to the continuous Polyannish chatter on CNBC or Bloomberg TV, or in the Wall Street Journal, then you occasionally hear someone wonder, "What if this isn't a new bull market after all? What if it's just a new 'mini-bubble'?"
From the point of view of Generational Dynamics, that's exactly what it must be. As I've been saying since 2002, we're entering a new 1930s style Great Depression, and nothing has happened to change that. That forecast was based on a long-term analysis of stock market trends. (See: "How to compute the 'real value' of the stock market.") Those conclusions are just as valid today as they were in 2002.
The current stock market rally is now just slightly longer than the longest rally that occurred during the 1929-32 period, when the stock market fell 90%. Even if this current rally continues through the doldrums of August into the fall, it's still a bubble.
For years we heard people say that there was no real estate bubble, there was no credit bubble, real estate prices would never fall because "everyone has to have a home," there would never be a financial crisis, there would never be bank failures, the stock market would always just go up. Now those same people are saying that the current rally means once again that the market will continue to go up. For these people, history always begins this morning.
At times like this, I always like to repeat this quote from John Kenneth Galbraith's 1954 book The Great Crash - 1929:
This leads to what I call the Principle of Maximum Ruin. Like the generational panic and crash of 1929-32, the current crash will financially ruin the maximum number of people as possible, to the maximum extent possible.
Back in the 2004 time frame, people used to say the following to me: "John, you can never be proved wrong, because if there's no crisis, you'll always say that it just hasn't happened yet. When will you admit you're wrong?"
My response was that U.S. debt was growing exponentially, and if it ever started to fall in a credible manner, then I would be proven wrong. I've posted graphs of U.S. debt several times in the past, most recently in March. Here's a new graph from Comstock Funds:
 |
Needless to say, no reduction has occurred. U.S. debt has continued to grow exponentially, and nobody watching what's going on in Washington these days can possibly believe that that's going to change until some financial catastrophe forces a change. (Paragraphs corrected - 26-Aug)
Stein's Law: If something cannot go on forever, then it won't.
People who wonder why we have to have a "generational panic and crash" should think about the exponential growth of debt.
The above graph shows that debt has been increasing exponentially since the 1950s, inexorably through Republican and Democratic administrations. Now the Obama administration is following a bizarre pseudo-Keynesian formula that says that the way to reduce public debt is to go astronomically deeper into debt.
There is no way to break this spiral except through a discontinuity - a massive financial crisis.
For readers of this web site, I'm warning you again as I've warned you so many times before: I wish you the best of luck, whatever you decide to do, but if you invest in this stock market, then you're going to lose a very great deal of money.
(Comments: For reader comments, questions and discussion,
see the Financial Topics thread of the Generational Dynamics forum. Read
the entire thread for discussions on how to protect your money.)
(8-Aug-2009)
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This has significant national and global implications.
 |
According to a new analysis by the AP, individual tax revenues are down 22% from a year ago, and corporate income tax revenues are down 57%. Social security tax revenues are down slightly, where they had been expected to grow.
From the point of view of Generational Dynamics, this is only the beginning. Corporate earnings have been in a bubble since 1995, and by the Law of Mean Reversion, they'll be falling lower and remain so for many years to come. Thus, tax revenues are going to continue to fall, despite the giddy dreams of the people in Washington.
Last year, I wrote the article, "One, Two, Three ... Infinity," in which I compared the ever-increasing government spending plans to a book by George Gamow that I read in school in the 1950s. After a couple of years of bailouts and stimulus plans, it was clear even last year that the deficits were going to keep growing to infinity until they crashed of their own weight.
That certainly has turned out to be true. What was a disaster during the Bush administration is turning into a major catastrophe in the Obama administration. The President is on television every day, flacking some bailout or a cure for global warming or a gargantuan health plan.
I lost track of it all some time ago. At first I could keep track of the various bailouts and stimulus plans, but after a while there were so many of them that it became hopeless. According to the AP analysis, the federal deficit now balloons to a record $1.8 trillion, when the national debt already exceeds $11 trillion. And from the point of view of Generational Dynamics, these figures are only going to increase, until some crisis creates a default.
Stein's Law: If something cannot go on forever, then it won't.
Here's a chart that I posted a couple of years ago. It comes comes from the Calculated Risk blog from 2005:
 |
This graph shows that the huge deficit of the Bush administration, which was supposedly caused by the Iraq war, actually began in 2000, the last year of the Clinton administration, with the crash of the dot-com bubble. The outlays caused by the Iraq war were not particularly large by the standards of the preceding three decades. What mattered was the collapse of tax revenues.
As I've described many times, these financial crises are not caused by politicians, nor could they be prevented by politicians. These crises are generational. These crises would never have occurred if the generations of survivors of the Great Depression and World War II were still alive. Instead, the people alive today are the lethal combination of greedy, nihilistic Gen-Xers, combined with greedy, stupid Boomers, all lacking in ethical values and common sense.
I've been complaining for years about the sheer idiocy of what I hear on CNBC and Bloomberg TV, and read in the Wall Street Journal and the financial press.
But the current stock market rally has raised the level of stupidity to previously unheard of levels.
Let's take, as an example, what I heard on CNBC on Monday morning in an interview of James Paulsen, chief investment strategist at Wells Capital Management. He was grinning like an idiot, and bubbled over with the following stuff:
 |
When I look at it I see an average valuation on an absolute basis. We're around the 15 multiple area, which is kinda average, going all the way back to 1870."
Now let's just take a moment and go through the list of what's wrong with all of this.
First, there hasn't been "very good continuous information." Almost all the information, without exception, has continued to be very bad. The unemployment rate is continuing to surge. The number of lost jobs is still plunging precipitously, just slightly more slowly than in the past -- but it's still plunging. Earnings are still in the tank, just slightly less worse than they were -- but they're still getting worse. Almost everything is still way down.
Second, even if there WERE good news during the last three months, that wouldn't overcome the almost two years of dreadfully bad news that preceded it.
Third, of course there's plenty of doubt. As I've said repeatedly, this is a generational thing. The Boomers and Gen-Xers who were defrauded by structured investments from banks are not going to allow that to happen again in their lifetimes.
And fourth, what he says about valuations (price/earnings ratios) is a complete crock of sh-t. Current valuations, based on reported earnings, are not at 15; they're well over 100, according to the "official" S&P 500 P/E ratios, from the Standard & Poors spreadsheet.
(For discussions of valuations and price/earnings ratios, see "Wall Street Journal sharply revises its fantasy price/earnings computations," and "Laszlo Birinyi provides insight on his fantasy price/earnings computations," and "Wall Street Journal and Birinyi Associates are lying about P/E ratios.")
What Paulsen is talking about is not valuations based on reported earnings; it's valuations based on "operating earnings," which only became popular in the last ten years or so because people like Paulsen, who make money by collecting fees and commissions from stock sales, want to hide the stock market bubble. Operating earnings are specifically designed to excluded huge classes of losses, so that earnings will be bloated as high as possible, and P/E ratios will be as low as possible.
So the average for operating earnings valuations don't go back to 1870, so Paulsen has no idea what the average would be since 1870, since they didn't really exist until about a decade ago.
As usual, when I talk about this subject, I have to point out that Paulsen is a sophisticated investment strategist, probably earning a six or seven digit salary, who surely must already know what I've just written about operating earnings.
So the question is, as usual: Did Paulsen blow out that pile of crap because he's an out-and-out liar, using phony figures to defraud his client/investors, or is he so incompetent that he has no idea what he's talking about? I report, you decide.
And let's not forget that financial firms have provably been massively defrauding investors the last few years, and that the same people who perpetrated that fraud are still in charge.
I've been writing about this stuff for years, and as I've said many times, it makes me so sick to my stomach that I almost want to vomit. Of course now I know that I have nothing to worry about, since the new Washington health care package means that if I'm sick to my stomach, the government will take good care of me.
At any rate, the plunge in tax revenues is an extremely serious development that will alter the direction of the Obama administration. Not only is there no money to fund the extravagant campaign promises, but the economy continues its trend on a path off a cliff.
If you look at a page from Obama's 2008 campaign web site, you see the following: "Did you know that Barack Obama will deliver tax cuts for 95% of American households? Unless you make over $250,000 a year, you will not see a dime of increased taxes. You can calculate your tax cut at http://taxcut.barackobama.com."
This was ridiculous at the time that it was promised, and today it can only bring on peals of hysterical laughter. (Incidentally, if you want to calculate your fantasy tax cut, you're too late: taxcut.barackobama.com is gone.)
Even more important are the global implications. The Chinese and other countries are already concerned about a financial default of the US government, and the plunge in tax revenues brings that closer.
In fact, I still believe that the best way to understand what's going on in the world right now is to look at "The bubble that broke the world," with China today playing the role of the US then. If you haven't read this, or you haven't read it lately, it's well worth looking at.
As the deficits grow -- One, Two, Three, ..., Infinity -- the day of collapse comes closer and closer. At some point, I expect China and other countries to feel forced to bail out the US in order to save themselves, and just as America's bailout of Germany in 1932 didn't do any good, and led to war, China's bailout of the US will fail, and will lead to war.
(Comments: For reader comments, questions and discussion,
see the Financial Topics thread of the Generational Dynamics forum. Read
the entire thread for discussions on how to protect your money.)
(4-Aug-2009)
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