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Generational Dynamics |
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Many others are experiencing a "sense of foreboding," according to Gillian Tett of the Financial Times. In a recent article, Tett quotes a banker correspondent:
Any sense of control is being chucked out of the window. After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months. ... Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?"
Tett concludes by saying, "It is crystal clear that the longer that money remains ultra cheap, the more traders will have an incentive to gamble (particularly if they privately suspect that today's boom will be short-lived and want to score big over the next year). Somehow all this feels horribly familiar; I just hope that my sense of foreboding turns out to be wrong."
The title of Tett's article is "Rally fuelled by cheap money brings a sense of foreboding." She refers to the same facts that I referenced a couple of weeks ago in the article "The current stock market bubble correlates with bailouts and stimulus," Since that time, it's been more and more widely recognized that the current stock market rally is being fueled by governments around the world pouring out free or low-cost money, via central banks and fiscal policy.
On CNBC on Monday morning, NYU professor Nouriel Roubini discussed explicitly how central banker policy was creating a "wall of liquidity" that was feeding a new worldwide asset bubble, growing larger than the last one. Along the way, he appears to be predicting a global market clash with near certainty.
The following is my transcription. The lines in brackets [] are paraphrases of interviewer questions.
Yes, in the short run what's happening is that there's a wall of liquidity, not just in the United States but around the world, that's chasing assets -- it's equities, it's commodities, it's gold, it's emerging market asset classes.
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And now we have even the mother of all carry trades. Everyone is borrowing short, shorting the dollar, borrowing and investing in assets all over the world. Global equities, comodities, credit, emerging market asset classes.
The risk is however, right now people are borrowing at zero percent interest rates in the United States. Effectively the rate of borrowing is negative, because with the dollar falling -- ?? in the capital gain, -- you're buying any asset around the world. All these assets are perfectly correlated.
Eventually, the dollar cannot keep on falling. Once the dollar stops falling, it reverses. You have a sudden reversal of the dollar, you have to close your shorts, you have to dump assets, and you could have a market crash all over the world. That's a risk.
[Is that anywhere near happening?]
No, it's not near happening because for the time being the Fed is keeping short rates at zero, expected to remain zero, and the Fed is becoming the biggest seller of volatility because it's buying $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility on the long end is low, and on the short end is zero, so this game is played until ????.
[Question about central banks]
There's a gap between what you have to do for the real economy, and what you have to do for financial stability. The real economy is still weak. There's deflation actually in the economy. Look at the cycle 2001-2006. They kept the fund rates all the way down to 1% through 2004, three years after the recession was over. Then they did step by step [raises of] 25 basis points every six weeks.
This time it's the same, only worse. Output has fallen 4%, not 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We have actual deflation rather than risk of deflation.
So if the Fed wants to target the real economy and avoid deflation, it has to keep the Fed funds rate at 0 for longer. But if it does that, then you create another huge asset bubble.
With the carry trade, that asset bubble is now becoming global, and everyone has to follow U.S. monetary policy by intervening in a non-sterilized way. That eases money at reduced rates, and therefore we're exporting our monetary policy to the rest of the world.
And that's leading to a global asset bubble. And once there's the unraveling of that carry trade that eventually is going to occur, because the dollar cannot keep on falling, then you can have a market crash on a global basis.
[q: Is this current asset bubble worse than the one that preceded the fall of Lehman?]
It could become worse because if the Fed keeps the rates at zero, and if the Fed keeps controlling and reducing volatility on the long end, then everybody is playing the same game. Everybody is buying dollars and going long in risky assets all over the world.
[Have we put out one fire, only to create another one?]
I think we have two objectives here -- stabilize the real economy, and avoid financial instability. But we're using one target, the Fed funds rate, to target the real economy, but we're creating a new asset bubble, bigger than the previous one, and that's a mistake we're doing right now."
Roubini's reasoning can be summarized as follows:
I've read through this transcript several times, and I don't see that he's left much doubt that this is going to happen. The only point of ambiguity in what he's saying is the timing. He says that it won't happen soon because the Fed will keep interest rates low for a while, but surely he realizes that isn't the issue. The trigger will not be the Fed funds rate, which is set by policy; the trigger will be the ending of the fall of the dollar, and that's set by the market. And with deflation already occurring, the dollar could stop falling at any time, irrespective of the Fed funds rate.
As usual, you have to ask the question, "What would Nouriel Roubini say if he believed that a global market crash was imminent?"
And the answer is that he'd be saying what he said in the above transcript.
He wouldn't be talking about a global market crash at all if he thought it was a distant possibility; the fact that he seems to predict it indicates that he believes that it could happen in the near future.
I've always been puzzled by what people like Nouriel Roubini and Ben Bernanke really believe. As I've been saying for seven years, a market crash MUST occur with 100% probability by applying the Law of Mean Reversion. I don't expect the man on the street to understand the Law of Mean Reversion, but I DO expect professors of economics at NYU and Princeton to understand the Law of Mean Reversion.
This is the first time that I've heard Roubini, or indeed any major financial official in Washington or around the world, predict a market crash. This is a big change in opinion by Roubini, or at least a big change in what he's saying.
From the point of view of Generational Dynamics, the increasingly reckless behavior of financial institutions explains why there MUST be a major stock market crash, and that the worst, by far, is yet to come.
Citibank is an archetypal example of what's going on. The financial engineers and managers at Citibank were prime perpetrators in defrauding investors and the public in creating structured securities that are now called "toxic assets," and they did so in such a way that they could pay themselves billions of dollars irrespective of how many other people lost everything.
And now those same people at Citibank are charging millions of their own customers 30% interest, and using the money to pay themselves hundreds of millions of dollars in additional bonuses. This appears to me (as a non-lawyer) to be criminal extortion. Citibank appears to be turning into a criminal organization.
I've been talking for several years about the debauched and depraved abuse of credit that we've seen in financial institutions, and I've been increasingly sickened and disgusted as I've seen it get worse and worse, as long-time readers of this web site are well aware. But I just can't find the words to describe what I'm seeing today in Citibank and elsewhere. I've lived a long life in America, and I've seen individual examples of criminal behavior, including such people as Bernie Madoff. But I've never seen any behavior so nauseating and loathsome as I'm seeing in Citibank and other places. I truly believe that many of these people are going to go to jail, as their counterparts did in the 1930s, and no one will be happier to see that than I will.
But getting back to the generational point, you can see why there MUST be a major stock market crash. The portion of the crisis that's occurred so far has done nothing to curb the behavior of financial engineers and managers at Citibank in using fraud and extortion to pay themselves million dollar bonuses. The only thing that will stop them, and other bankers like them, is a financial crisis that will destroy Citibank itself. (This is why I often talk about the "The nihilism and self-destructiveness of Generation X.") Citibank gouging and screwing their own customers with 30% interest rates is so self-destructive that it almost appears to be a last act of desperation.
(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.)
(27-Oct-2009)
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Will she or won't she?
Whenever politicians say something, I like to apply a simple test: What would the politicians be saying if the thing they're denying is true? Usually, they'd be saying exactly the same thing. This doesn't prove that what they're denying is true, but it does prove that you can't believe anything that the politicians say.
Applying this test to the hardline Iranian politicians, we ask ourselves, what would the politicians say under these assumptions:
Under those assumptions, the Iranians would say that they have no desire for nuclear weapons, and that they want to fully cooperate with the international community. And they would would stall and raise a lot of extraneous issues.
And of course, that's exactly what they've been doing. That doesn't prove that they're developing nuclear weapons, but it does prove that you can't believe anything they say.
The current drama began in mid-September when President Obama and the leaders of France and Britain disclosed that Iran had been constructing a secret nuclear processing plant in Fordo, a village about 115 miles south of Tehran. The disclosure was extremely embarrassing to Iran, and appeared to have infuriated two of Iran's main supporters, Russia and China, who felt betrayed by Iran's lying.
This was followed a few days later by a test-firing of new missiles capable of striking Israel.
Taken together, the two incidents raised many international alarm bells. American and Europe began considering new sanctions, and Russia and China indicated that they might not veto the sanctions in the U.N. Security Council. Some people feared that an air strike by Israel could be coming soon.
So Iran's politicians moved quickly into obfuscation mode.
On October 4, an ebullient Mohamed ElBaradei, head of the U.N.'s International Atomic Energy Agency (IAEA) announced that Iran was moving away from confrontation with the West, and was agreeing to allow inspections of the Fordo plant by October 25 -- allowing itself plenty of time to remove anything incrminating.
ElBaradei also announced that Iran would return to the negotiating table with the West. Strangely enough, Iran said nothing about these announcements. Nonetheless, ElBaradei's announcements were enough to defuse talk of sanctions, at least for a while.
The negotiations have yielded a complex plan: Iran would ship most of its existing low-grade enriched uranium to Russia and France, where it would be processed into fuel rods with enriched uranium of a purity of 20 percent. This plan would guarantee that Iran would not develop uranium-processing facilities that could also provide weapons-grade material, but would still provide them with the enriched uranium for energy and medical needs.
Once again, it was ElBaradei who announced this plan on Monday, with Iran saying nothing. Iran was asked to approve the plan by Friday, but they keep asking for more time. If the assumptions that I listed above are correct, then they will find a way not to approve this plan.
While this discussion is going on, IAEA inspectors are now arriving at the Fordu nuclear plant to begin their inspection.
Iran's politicians are well aware that it was Saddam Hussein's refusal to allow IAEA inspections that caused the Clinton administration to bomb Iraq almost on a daily basis, starting in 1998, and the Bush administration to launch the 2003 ground offensive. They believe that by allowing inspections, they'll defuse the West's desire to bomb Iran's nuclear installations or impose sanctions.
However, if we're to judge what Iran's Persian-language newspapers are saying, they have no intention whatsoever of agreeing to ElBaradei's enriched uranium plan. While ElBaradei and western media have been have been bubbling with enthusiasm over the supposed success of this plan, sometimes calling it a victory for President Obama's accommodating, non-confrontational approach to Iran, analysis by MEMRI of Iranian media produces these statements:
From the point of view of Generational Dynamics, one cannot simply stop here and conclude that Iran will reject the plan with 100% certainty. Iran is in a generational Awakening era, a time of enormous political turmoil, as could be seen with this summer's student street protests, which are still continuing.
There are conflicting pressures in Iran, as follows:
The political turmoil gives rise to the possibility that Iran may agree to ElBaradei's plan. But on balance, I estimate the chances to be vanishingly small. We can thus expect Iran to continue playing its grand game, and continue to tie the Western community into political knots.
(Comments: For reader comments, questions and discussion,
see the Iran thread of the Generational Dynamics forum.)
(26-Oct-2009)
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Following two suicide bombings at Islamabad's International Islamic University, Interior Minister Rehman Malik said that Pakistan is currently in a state of war.
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Pakistan went on nationwide heightened alert Wednesday, and shut down all schools and colleges nationwide.
These events occurred in the context of a growing military operation in South Waziristan, the southernmost region of the Federally Administered Tribal Areas (FATA).
Schools in most of country are expected to reopen by Monday, but schools in Punjab province may remain closed indefinitely. This reflects the increasing role of Punjabi militants in Taliban terrorist attacks.
Whereas the Taliban was originally formed from ethnic Pashtuns in Afghanistan and northwest Pakistan, recent intelligence shows that Punjabi militants are increasingly in control of the Taliban.
It was the Punjabi terrorist group Lashkar-e-Taiba (LeT) that perpetrated the attack on the Sri Lanka cricket team in Lahore in March of this year, and the the horrendous '26/11' terrorist attack on Mumbai in November of last year.
The same Punjabi group is believed to have perpetrated Tuesday's university attack, and it's feared that attacks on additional universities are planned in the Punjab province.
(Comments: For reader comments, questions and discussion,
see the Afghanistan, Pakistan and India thread of the Generational
Dynamics forum.)
(23-Oct-2009)
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Iran's Revolutionary Guards vow revenge.
Mohammad Ali Jafari, the Revolutionary Guards' commander-in-chief, said that Jundollah, the terrorist group claiming credit for Sunday's terrorist attack in southeastern Iran, has ties to American, British and Pakistani intelligence organizations.
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I briefly mentioned Sunday's attack a couple of days ago, in my article on the growing war between the Pakistani army and the Taliban. Jundullah, the Sunni Islamist terrorist group with links to al-Qaeda and the Taliban, killed 42 people in a bomb attack, including 20 or so top commanders in the Revolutionary Guards.
What's becoming increasingly clear is that this terrorist attack is a major humiliation to the Revolutionary Guards. It's the biggest attack on the Revolutionary Guards since the Iran/Iraq war of the 1980s, and apparently the leadership will demand revenge for the attacks.
To put this into a generational context, think back to the beginning of American President John F. Kennedy's administration in 1961. WW II had just ended 16 years earlier, and JFK was a young president who had to prove to Americans that he could stand up to the Russians. So he triggered the Bay of Pigs disaster and risked thermonuclear war with the Cuban Missile Crisis.
Today, the Iran/Iraq war ended just 21 years ago, and Mahmoud Ahmadinejad is a young president who has to prove to Iranians that he can stand up the West. Sooner or later, he may be forced to trigger some major international confrontation, to prove that he's "tough enough."
Blaming the US and Britain is a knee-jerk reaction for the Iranian hardliners. In the Iranian hostage crisis of 1979, employees of the American embassy in Tehran were kept as hostages for over a year. Iran's ayatollahs were able to unify the Iranian people behind the Islamic Revolution by blaming "the Great Satan" for all their troubles. Iranian hardliners today are looking for ways to repeat that formula. They've certainly tried it in opposing the student street protests of this summer -- and incidentally, these street protests are still continuing on an almost weekly basis on college campuses.
But what's really fascinating about this situation is the increasing tension between Iran and Pakistan.
Iran's Intelligence Minister Heidar Moslehi is quoted as saying, "We have good evidence and documents ... which show that Abdulmalek Rigi (Jundullah leader) and all his terrorist agents are in contact with Pakistani intelligence system. ... An Iranian delegation is due to visit Pakistan to present them with the documents."
Thus, one possible scenario in the next few weeks and months is that Iranian forces could cross the border back into Pakistan to attack Jundullah on Pakistani soil. This could spiral into a full-fledged diplomatic crisis.
From the point of view of Generational Dynamics, what's interesting about this situation is that we see the two sides forming in the coming battle between Sunni and Shia Muslims.
Mahmoud Ahmadinejad and other Iran hardliners have been pursuing an incredible fantasy that Iran can create an Islamic empire encompassing the entire Mideast, and that even Sunni groups would be willing to be governed by Tehran.
What we've been seeing recently is that al-Qaeda is playing the part of the "glue" that's been unifying Sunni militants from the entire region, including Somalia, Yemen, Afghanistan, Pakistan and Uzbekistan, against the West, Shia Muslims and Hindus. This new confrontation between Iran and Pakistan makes it clear that Shia Iran is clearly on the side of the West in that confrontation.
As I've been pointing out for years, the Iranian people (as opposed to their leaders) are generally pro-American and pro-West, and it's still my expectation that Iran will be an ally of America, Britain, Israel and the West in the coming Clash of Civilizations World War.
(Comments: For reader comments, questions and discussion,
see the Iran thread of the Generational Dynamics forum.)
(22-Oct-2009)
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Al-Qaeda, the Taliban, and Punjabi terrorists appear to be linking up.
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For two weeks there have been almost daily suicide bombing attacks in cities across Pakistan, including Peshawar in the northwest, Rawalpindi, which is adjacent to Islamabad, the nation's capital, and Lahore, in the east. The widespread attacks appear to be coordinated, and appear to be targeting Pakistan's security forces. Over 150 people have been killed.
According to Taliban leaders, these have been revenge attacks for last spring's army operations in Swat valley, which the army claims were successful in driving in the Taliban from the region, and for the planned new army operations now beginning in South Waziristan in the FATA.
The widespread nature of the recent terrorist attacks, and the fact that they appear to be coordinated, indicate that terrorist Islamists from different ethnic groups, all Sunni Muslim, are coordinating their activities:
This suspicion became apparent on Sunday when Jundullah conducted an al-Qaeda-like suicide bombing in southeastern Iran, in the Sistan-Baluchistan province. This was an extremely significant attack in Iran, because it targeted Iran's hallowed Revolutionary Guard, killing 11, in addition to more than 20 civilians. The Revolution
All of these groups have a great deal in common. They're all Sunni Muslim extremists. They're all funded by the drug trade in Afghanistan. They're all anti-American, anti-Western, and anti-Shia.
And with al-Qaeda in the ideological lead, their primary objective is to take control of some country. They're ideal model is the 1979 Islamic Revolution in Iran which, ironically, is a Shia state. They tried to create a similar revolution in Iraq, and failed, and now they're trying in Somalia and Pakistan, with potential future targets in Saudi Arabia and Palestine.
On the other side are Shia groups -- the Persians in Iran, the Sindhis in Pakistan -- and their historic allies, the Hindus in India.
More and more, we can see the growing trend leading towards the major war between Sunni and Shia Muslims that will encompass the entire region. From the point of view of Generational Dynamics, this war is coming with absolute certainty.
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On Saturday, Pakistan launched a massive air and ground attack on Taliban strongholds in South Waziristan, hoping to score a victory within a few weeks.
Communication with South Waziristan is difficult in the best of times, but now there's none at all. However, hundreds of thousands of refugees are pouring out of the region to escape the fighting, and the fighting is believed to be particularly bloody, often at the level of hand to hand street fighting.
Here's an al-Jazeera video on the fighting:
From the point of view of Generational Dynamics, this war is the next step in the path to a totally genocidal crisis war. As I explained several months ago in "Sri Lanka, Pakistan and Gaza are all following the same path," these wars, occurring in a generational Crisis era, become increasingly bloody as time goes on. Thus, previous army battles in the FATA region ended in stalemate, while last spring's army battle in the Swat Valley was more violent, and the current war will be move violent still.
(Comments: For reader comments, questions and discussion,
as well as more frequent updates on this subject, see the Afghanistan, Pakistan and India thread of the Generational
Dynamics forum.)
(20-Oct-2009)
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This is another refutation of Richard Koo's stimulus theories.
An analysis posted on the "Jesse's Café Américain" blog provides an explanation for the current stock market bubble that's been soaring since March. The analysis shows that stimulus, bailout and quantitative easing money from the government is highly correlated to the current stock market bubble, implying that this government money is pouring into stocks and boosting this new bubble.
The following graph of the adjusted monetary base provides an indication of the amount of money that's been injected into the economy by means of bailouts, stimulus and quantitative easing:
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The above graph shows that the monetary base has expanded from $900 billion in late 2008 to $1.9 trillion today, a $1 trillion increase in the last year.
But where has that $1 trillion gone?
In the past, 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.")
The theory presented by Koo is the entire basis in mainstream macroeconomic theory justifying the large stimulus programs being implemented by the Obama administration, as well as by countries around the world. As explained in the Koo presentations, this theory is based on the following assumption: That the stimulus money will first create jobs, and then will return to the Treasury in the form of bond purchases, because there's nowhere else for the money to go.
So where has all the money gone?
It certainly hasn't gone into bank lending, as the following graph shows:
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The above graph shows that bank lending has plummeted, even as $1 trillion in bailouts, stimulus and quantitative easing has poured into the economy.
This is what's expected from Koo's concept of "balance sheet recession," his name for a deflationary spiral. During such a period, assets are destroyed, but debts remain, so everyone is in debt. People and businesses refuse to go even deeper into debt, and instead of spending any money they have, they either save it or use it to pay down debt. Either way, it goes into a bank, which (according to Koo) uses the money to purchase government bonds, thus returning the money to the Treasury. But the bank does not risk lending the money out, which is consistent with the above graph.
But what if the money was somehow being used to buy stocks? There's certainly a correlation, as shown by the following graphs of the S&P 500 price/earnings ratio (also called "valuations"):
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Notice that the as-reported P/E ratios began skyrocketing at exactly the same time that the stimulus money started pouring out. Also notice that the operating earnings P/E ratio has also been soaring.
(For a discussion of "operating" versus "as reported" earnings, see "Wall Street Journal sharply revises its fantasy price/earnings computations.")
The following graph overlays the monetary base with the reported earnings P/E ratio:
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These graphs show that the bailouts, stimulus and quantitative easing are highly correlated with this years stock market bubble. Correlation doesn't imply causation, of course, but the size and duration of this year's stock market bubble has been extremely puzzling, and this correlation provides a highly credible explanation.
This is an extremely significant conclusion because it strikes at the heart at the macroeconomic justification for the massive stimulus programs. For stimulus to work, it's absolutely essential that the stimulus money create jobs and then come back into the Treasury through saving and debt reduction.
If the money is being channeled into the stock market, then much of it will "leak" out of the country into investments in other countries, thus defeating the purpose of the stimulus.
How much longer can this go on? How long can the Fed and the Treasury pour out hundreds of billions of dollars to expand the stock market bubble? That can't be predicted, of course, but every bubble has to burst some time, and all it would take is some surprise event to trigger a panic.
The "Jesse's Café Américain" article contains another interesting chart:
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The current stock market bubble correlates with bailouts and stimulus:
This is another refutation of Richard Koo's stimulus theories....
(14-Oct-2009)
The effects of massive fiscal stimulus - Part II:
President-elect Barack Obama is turning apocalyptic in his speeches....
(12-Jan-2009)
The economic outlook for 2009 :
How we got to where we are today, who's to blame, and where we're going in 2009.
(5-Jan-2009)
The effects of massive fiscal stimulus.:
A study comparing Japan's deflationary spiral with ours shows the way....
(24-Dec-2008)
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I've often wondered about the wealth disparity and income inequality statistics. I've been reading for years that income inequality has been increasing, and I felt intuitively that this had to be related to the generational financial cycle.
This graph supports the conclusion that income inequality is a generational trend. It seems that income inequality increases substantially during the generational stock market, real estate and credit bubbles, and then presumably crashes along with the stock market.
In fact, we can think of wealth disparity as just one more bubble that's still growing today, and will crash along with the other bubbles.
I was shocked earlier this year when Citibank, Bank of America and other banks announced that they would continue paying million dollar bonuses. These and other banks had caused the financial crisis by creating worthless structured securities and fraudulently selling them to investors. Paying big bonuses to people who defrauded the public for years is, at the very least, a public relations disaster.
What's become apparent in the last few months is that this disaster goes far beyond simple public relations. Citibank, Bank of America and other banks have been screwing and gouging their own customers in order to provide the cash flow to justify the million dollar bonuses. Stories abound about banks arbitrarily raising interest rates to 30%, doubling or tripling minimum payments, or engineering phony fees of hundreds or thousands of dollars per customer.
In one sense, this should be no surprise at all. The same people who made billions of dollars selling worthless structured securities to investors are now making billions of dollars by gouging their own customers. They've changed only their methods, not their patterns of behavior.
As I've mentioned several times on this web site, when I was growing up in the 1950s, my parents and my teachers really hated bankers, but I never understood why. I sure understand why today. Bankers did exactly the same kinds of things in the 1930s that they're doing today. Many bankers went to jail by the end of the 1930s, and the rest of them were hated for decades.
If you look at the narrative that I've presented in this article, you can see some ironies. These banks have received hundreds of billions of dollars in bailout money, and are benefiting from the stimulus and quantitative easing programs. They aren't lending any of this money to consumers, since credit card defaults might reach as high as 10-15%, and they're evidently not investing the cash in safe Treasuries. Instead, a lot of the money is being channeled into stock market bubble, and when that bubble bursts, they're going to lose much more money than they would have from credit card defaults.
That's not all. If you look at the last graph above, the wealth disparity graph, and you see what happened in the 1930s, then you can predict what's going to happen before long now. That wealth disparity is going to disappear, as the Principle of Maximum Ruin catches up with the bankers who have been perpetrating all these misdeeds, defrauding investors and gouging customers. It's a modern morality play.
From the point of view of Generational Dynamics, you can see how the circle is closing. I know that long-time readers of this web site are sick and tired of hearing me endlessly talk about the "The nihilism and self-destructiveness of Generation X," and how the lethal combination of greedy, nihilistic Gen-Xers, along with greedy, incompetent Boomers, has brought about the current financial disaster.
Now we're beginning to see how the people in this lethal combination used destruction and nihilism to lay the seeds for their own self-destruction. Not only will most of them lose all their ill-gotten wealth, but many of them will go to jail. The rest will be hated for decades.
To that end, a significant criminal trial began on Tuesday. Two former Bear Stearns executives, Ralph Cioffi and Matthew Tannin are charged with securities fraud and face 20 years in prison if convicted.
It's no surprise that Bear Stearns executives defrauded investors. (See, for example, "Bear Stearns bails out defaulting hedge funds, preventing broad market meltdown.") But there's increasing momentum in public opinion building that people who perpetrated this fraud should be punished, just like the 1930s.
As I've said many times, there's no doubt whatsoever that fraud was rampant. It was absolutely clear by 2006 that the real estate bubble was bursting, and that the computerized risk models that had been used to justify the creation of mortgage-backed structured securities were based on incorrect assumptions. If investment bankers had been honest, then they would have warned their investors that something was wrong. Instead, they redoubled their efforts to sell these securities (now called "toxic assets"), paying themselves huge commissions for each sale. Thus, there's absolutely no doubt at all that massive fraud was going on. However, this is all circumstantial evidence, not enough to convict anyone in court.
And political figures are just as guilty as investment bankers. This has nothing to do with any political party. You have Robert Rubin from the Clinton administration, Henry Paulson from the Bush administration, and Larry Summers from the Obama administration -- all of them made many millions of dollars participating in this fraud, and they're still running things. Journalists are to blame as well. They've lied about this fraud because they didn't want to lose advertisers.
In the Ralph Cioffi / Matthew Tannin case that begins today, prosecutors have obtained the e-mail messages they exchanged in March 2007. These messages indicate that they were telling each other that the funds were likely to crash, while they were telling investors that they were solid. If prosecutors obtain a conviction against Cioffi and Tannin, then they will have opened the door to obtaining convictions against other investment bankers.
This brings us back to the original subject of this article. Cioffi and Tannin are typical of an entire generation of investment bankers, real estate execs, politicians, journalists, and others who believe that rules don't apply to them, and they're allowed to screw anyone they want to make as much money as they want. The bailout, stimulus and quantitative easing money is supposed to be used for consumer loans and job creation. Instead, it's being channeled into the stock market bubble, undoubtedly by people who are paying themselves fat commissions for brokering stock purchases. This causes even more damage to the economy in general, and encourages ordinary investors to invest in the bubble, and risk losing everything.
In other words, the same people who created the financial crisis for their own gain are now prolonging and worsening the financial crisis, for their own gain.
(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.)
(14-Oct-2009)
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This completely explodes the myth that Alan Greenspan caused the housing bubble.
A few weeks ago, I posted the article "The housing bubble began in 1995." That article was based on an analysis that showed that the American housing bubble began in 1995.
From the point of view of Generational Dynamics, that conclusion makes perfect sense. The dot-com stock market bubble also began in 1995. Both bubbles occurred just as the generations of survivors of the 1930s Great Depression were all disappearing (retiring or dying), all at once. Those people had pursued risk-averse investment policies for decades, but by the mid-1990s, they were replaced in senior management positions by Boomers who had no regard for old fogey risk aversion.
Now, a new report by McKinsey Global Institute completes the picture.
Consider this graph from the report:
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This graph shows that, just as in the United States, housing prices in many countries around the world soared, starting in the mid-1990s.
It is thus completely impossible for Alan Greenspan's Fed to have caused the housing bubble by lowering interest rates in the 2002-2005 time frame.
What this DOES show is that the same generational changes that occurred in America also occurred in countries around the world. This is not surprising, since the 1930s Great Depression was a worldwide event, not restricted to the United States.
An interesting exception is Japan, whose real estate bubble began in the mid-1980s -- also at the same time as the beginning of their own stock market bubble! (See "Japan's real estate crash may finally end after 16 years" for a complete analysis.) And that is also precisely the time that the survivors of Japan's previous generational stock market crash (1919) all retired and died.
I'm always hearing from people who say that "you haven't proven any of the claims you make about Generational Dynamics, and the things you've gotten right are just lucky guesses." Well, I don't know how much more proof you need, and Generational Dynamics seems to produce one "lucky guess" prediction after another. (See "Generational Dynamics forecasting methodology" and "List of major Generational Dynamics predictions.")
The analysis that the global housing bubble began in the 1990s in multiple countries around the world really completes the picture, and provides almost irrefutable evidence of the validity of the Generational Dynamics analysis of the financial crisis.
There's plenty of criticism these days of mainstream macroeconomics, which has totally failed to predict the financial crisis, and mis-predicted many things. (I was reminded this weekend that Ben Bernanke said early in 2008 that the "subprime mortgage crisis was completely contained," and would not affect the broader economy.) And yet, mainstream economists seem to have some kind of neuron dislocations in their brains, that make it impossible for them to understand generational explanations of macroeconomic trends, no matter how obvious the generational explanation is. If economists began incorporating generational theory into their macroeconomic models, then they'd finally start producing more accurate results, though they may not like what they get.
(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.)
(12-Oct-2009)
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October 23 will be a crucial day for Latvia and for Europe.
Like many countries (including the United States), Latvia went on a multi-year spending spree, borrowing money, and taking advantage of a huge real estate bubble. Now the credit crisis is hitting hard, and Latvia has to pay the price.
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In the halcyon days of the credit and real estate bubbles, Latvia followed an especially pernicious form of credit abuse. Latvia has its own currency, the lat, and Latvia is in the European Union. Therefore, everyone assumed that Latvia would would soon adopt the euro currency (in fact, this is still the plan for 2013), and therefore everyone assumed that the lat was as good as the euro.
Thus, many European banks, especially those in Switzerland and Sweden, loaned enormous amounts of money at low interest rates (we call these "subprime loans" in America) to Latvian consumers and businesses, causing the credit and real estate bubbles to be especially large in Latvia. When the bubbles started popping, Latvia was hit very hard.
Latvia's gross domestic product (GDP) is down almost 20% from last year. Retail sales are down over 30%. Latvia’s government debt will rise to 61 percent of GDP by the end of 2011, compared with 20 percent at the end of last year. Real estate values have fallen 50%.
Latvia is no longer able to finance its debts by issuing bonds, which only creates more debt. They could devalue their currency, but that would violate the EU rules for joining the euro currency in 2013.
Instead, they've had to beg for help. No one would care very much about the Latvians, except for the fear that a Latvian default or currency devaluation would cause a chain reaction of defaults and devaluations throughout Eastern Europe, especially in Lithuania, Estonia, Poland, Hungary, Bulgaria and Romania.
So last spring, Sweden, the EU and the IMF agreed to bail out Latvia. They offered to provide a $12 billion loan to help Latvia get through the crisis. There were conditions, though. In order to get the loan Latvia would have to cut public spending by 500 million lats ($1 billion) per year.
Several months ago, the Latvian government agreed to cut 225 million lats from the budget and impose 100 million lats in tax increases, in partial compliance with these demands. Even with this partial compliance, salaries for public workers were cut by 40%, and many hospitals and schools were closed.
As I wrote two months ago in "Iceland begs for mercy as Europe turns the screws," the EU and the IMF are in no mood to be lenient to countries that get into trouble. So it's not surprising that they're demanding the full 500 million lats in budget cuts before any aid can be provided.
The Swedes are being particularly vociferous in demanding full Latvian compliance because Swedish banks are especially at risk. Riksbank, Sweden's central bank, and a chorus of top Swedish officials are warning Latvia that they can't simply ignore their previous agreements. "It is as though we are living in a completely different world," said Riksbank Governor Stefan Ingves.
There have been some recent developments that have raised concerns that a major crisis is brewing:
Insofar as this reflects a kind of "mini-rebellion" among the Latvian people to refuse to make any more cuts, it puts the entire bailout into doubt, and may mean that a currency devaluation and chain reaction effect is all but certain.
But its significance goes well beyond that. The unemployment rate among youth is already 31%, and concentrated among ethnic Russians. This is sure to revive old feelings from World War II, when Latvia was a battleground between the Nazis and the Russians, and after WW II, when Latvia was forced to become a Soviet state. Thus, social unrest becomes a big danger.
The result of all this is that a compromise of some kind will be almost impossible to effect. With the lenders committed to one position, and the Latvian Parliament having overwhelmingly voted down further budget cuts, a crisis situation will be difficult to avoid.
The Swedes are furious at this proposal, since it would mean that the assets carried on the books of Swedish banks would take a major tumble immediately.
There is a feeling in the financial community that the entire worldwide financial crisis is over, and that therefore there's no real need to bail out Latvia.
This illustrates the problem with the airheaded optimism that pervades today. It causes people to make wrong, sometimes disastrous decisions. When these decisions backfire, everyone is shocked, and the consequences can be enormous. That's why we say that the "Principle of Maximum Ruin" applies to today's financial marketplace.
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To see how complacent the financial community has become, take a look at the adjoining graph. Long-time readers of this web site may recall that in 2007 I occasionally discussed the "Marketpsych Fear Index." This index measures the anxiety of investors by examining media stories. They have a computerized methodology that counts words in financial stories to determine how anxious investors are.
As you can see, the anxiety level of investors has plummeted to the lowest level in over a year, and actually to the lowest level since early 2007, the start of the financial meltdown. The overconfidence is astonishing, as is the new stock market bubble we're seeing.
Most of these overconfident people in the investment and financial community probably couldn't even spell "Latvia," let alone find it on a map. If they could, they wouldn't be so complacent.
On October 23, the Latvian government must submit its budget proposal for 2010. The choices are appalling:
All of these decisions have to be made by October 23. At that point we'll see if the Latvian situation fizzles, or if it triggers a major new financial crisis.
(Comments: For reader comments, questions and discussion,
see the Latvia thread of the Generational Dynamics forum.)
(11-Oct-2009)
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One of the major causes is falling tax revenues.
A year ago, I wrote the article, "One, Two, Three ... Infinity," in which I compared to the ever-increasing government spending plans to a book by George Gamow that I read in school in the 1950s. (Paragraph corrected - 1-Jan-10)
My use of that particular phrase was to convey the idea that American debt was on an exponential growth path that would not be stopped except by a major financial collapse and crisis.
As if to prove the point, the Congressional Business Office has announced that for the fiscal year ending on September 30, 2009, the budget deficit was $1.4 trillion, more than tripling the record 2008 deficit of $459 billion. There is absolutely no reason to believe that any steps will be taken to prevent the deficit from doubling or tripling again next year.
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One major reason is the collapse in tax revenues. As I wrote two months ago in "US tax revenues fall sharply, the most since 1932," tax revenues for fiscal 2009 have fallen by almost 50% from last year.
Other reasons include the bailouts and stimulus packages.
Stein's Law: If something cannot go on forever, then it won't.
It is mathematically impossible for this rapid exponential growth to continue indefinitely. It is politically impossible to end this rapid exponential growth without a major financial crisis. Therefore, it will be stopped only by a major financial crisis that includes a major stock market crash.
(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-Oct-2009)
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Twin messages from the government: Enemies are both inside and outside China.
A comparable event would be the July 4, 1976, celebrations of the 200th anniversary of America's birth. There were parades, concerts, fireworks, and spectacular visits by tall ships from around the world. It was a nationwide celebration, with families and ordinary people attending events across the country.
But that isn't what happened in China last week, as the country celebrated the 60th anniversary of the Mao Zedong's victory in the Communist Revolution, and the birth of the People's Republic of China.
There was indeed a parade in Beijing, but there were no "ordinary people" to be seen. They were all told to stay at home and watch it on TV. They weren't allowed anywhere near the parade. Tens of thousands of heavily armed police were stationed around Beijing to keep people away from the parade. Hotels were closed, and residents from nearby neighborhoods were evacuated.
Here's a video of China's 60th National Day parade:
The parade was rehearsed to perfection by almost 200,000 people taking part. They were selected based on the Chinese Communist Party (CCP) affiliation, and those appearing in groups were chosen to have the same height.
The heart of the parade were the military. There were thousands of troops from the People's Liberation Army (PLA), showcasing tanks and trucks carrying nuclear missiles, while fighter planes flew overhead. On display were 52 new weapons systems, all developed from Chinese technology (as opposed to the past, when weapons systems were all purchased from Russia).
The celebration concluded on Thursday evening, with applause, cheers and fireworks, after a chorus by about 60,000 people, including President Hu Jintao, danced and sang the classic "Ode To The Motherland."
The 60th anniversary celebrations sent to the world two major messages, both of which I've written about many times.
The first message is that the Chinese government is scared to death of its own people, to the extent that this is probably the most paranoid government on earth. This paranoia began with the Tiananmen Square massacre in 1989, followed in 1991 by the collapse of Russia's Communist government and the dissolution of the Soviet Union. Since then, the CCP has lived with increasing fear and anxiety that the same thing would happen to them.
There's good reason for them to have this fear. The number of "mass incidents" is now exceeding 100,000 per year. Each mass incident can involve just a few dozen people, but some of them involve tens of thousands of people. If even one of these mass incidents occurred in the U.S., it would be international news, but there are tens of thousands of them each year in China. These mass incidents are mostly directed against the wealthy élite of the CCP. The Chinese security forces are very experienced at keeping these mass incidents under control, but China has a history of these things growing out of control, leading to a major rebellion.
These fears have grown in the last two years, thanks to the widespread violence in Tibet in 2008, and the widespread violence among the Uighurs in Xinjiang province earlier this year.
According to one study:
Many problems in modern China begin with the increased role of the Chinese Communist Party in Chinese economy and society. Tellingly, the number of officials before and after the Tiananmen protests has more than doubled, from 20 million to 45 million. Since the early 1990s, the CCP has retaken control of the economy. State-controlled enterprises receive more than three-quarters of the country's entire capital each year, reversing the situation prior to 1989.
The private sector, on the other hand, is denied both formal capital (bank loans) and access to the most lucrative markets, which are reserved for the state-controlled sector. Only about 50 of the 1,400 listed companies on the Shanghai and Shenzhen stock exchanges are genuinely private. Fewer than 50 of the 1,000 richest people in China are not linked to the Party. This state-corporatist model favors a relatively small number of well-placed insiders.
Rise in Corruption
Meanwhile, a billion people remain "outsiders" in the corporate-state system and are largely missing out on the fruits of gross domestic product growth. In fact, 400 million people have seen their net incomes decline during the past decade. Absolute poverty has doubled since 2000.
This extensive role of the CCP has coincided with a rise in systemic corruption. Courts at all levels are still explicitly under the control of Party organs. According to studies by the Chinese Academy of Social Sciences, stealing from the public purse by officials amounts to about 2 percent of GDP each year, and it is rising. According to a 2005 CASS report, more than 40 million households have had their lands illegally seized by corrupt and unaccountable officials since the early 1990s."
This is exactly the kind of environment that gave rise to massive rebellions in the past. Previous major popular rebellions have included the White Lotus Rebellion (1796-1805), the Taiping Rebellion (1851-64), and the Communist Revolution (1934-49). The time is right for a new one, and the CCP is well aware of the danger. (See my 2005 article, "China approaches Civil War.")
By closing the 60th anniversary parades and celebrations to ordinary Chinese citizens, the CCP's paranoia has taken a giant step forward.
The massive military display is another warning to the world that China is preparing for war, especially with the United States.
One thing that I've noticed over the years is that the Chinese don't really deny this. Officially, they talk about "harmonious relations" with other countries, but that's always in the context of assuming that other countries will do as China wants. But if you look at what China is DOING, rather than what they're SAYING, it's clear that they expect a war. (See, for example, my 2006 article, "China's plans for war with America.")
The massive military display last week is yet another warning to the U.S. and the world. The Chinese military must feel increasingly confident to have put up that kind of display.
These two messages -- an internal rebellion and an external war -- are not contradictory. In fact, that's what happened last time, when they fought the Japanese in WW II right in the middle of their Communist Revolution.
(Comments: For reader comments, questions and discussion,
see the China thread of the Generational Dynamics forum.)
(8-Oct-2009)
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Is the bear market rally finally over?
I've just moved to a new apartment in Cambridge, Mass. For the last few weeks I've been distracted by packing and moving boxes and furniture. Now I'm distracted by unpacking boxes and searching for missing things.
Even with all that going on, I still couldn't miss the gathering disaster in the stock markets and financial markets in general.
Right now, there's a great deal of confusion. The mainstream analysts have no idea what's going on. There are some non-mainstream analysts who realize how great the danger is, but anyone who talks about it is quickly marginalized.
On Wednesday, I saw CNBC anchor Joe Kernen gloating about how dumb the "bears" have been. He was mocking all the people who said the market would go down, and laughed at them in view of the "best" quarter for the S&P in many years. If anything is a sign of danger, this kind of gloating surely must be.
On Friday, the September jobs report came out, and it was an utter disaster:
Oct. 2 (Bloomberg) -- U.S. job losses accelerated last month and the unemployment rate climbed to the highest level since 1983, stark reminders of how the worst financial crisis in more than seven decades may undermine consumer spending and economic growth in the months ahead.
Hours after today’s Labor Department report, President Barack Obama said he’s working to “explore any and all additional measures” to spur growth. ...
Payrolls dropped by 263,000 in September, exceeding the median forecast in Bloomberg’s survey, with losses extending from cash-strapped state and local governments to retailers to builders, today’s report showed. The jobless rate rose to 9.8 percent from 9.7 percent in August, while working hours matched a record low. ...
A Commerce Department report today showed that orders placed with factories fell unexpectedly in August, restrained by long-lasting items such as commercial aircraft and construction machinery. Bookings fell 0.8 percent after a revised 1.4 percent increase in July that was larger than previously estimated. Excluding transportation equipment, orders rose 0.4 percent.
Obama called today’s report a “sobering reminder that progress comes in fits and starts” in remarks at the White House after returning from Copenhagen, where he made an unsuccessful bid for Chicago to host the 2016 Olympic Games. ...
September’s losses bring total jobs lost since the recession began in December 2007 to 7.2 million, the biggest decline since the Great Depression.
Payrolls were expected to drop 175,000, the median of 84 estimates in a Bloomberg News survey of economists. Forecasts ranged from decreases of 260,000 to 100,000. Job losses peaked at 741,000 in January, the most since 1949. The September unemployment rate matched the median projection. ...
The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.
The projected decrease was three times larger than the historical average, the Labor Department said. Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings, the government said."
The last couple of paragraphs are interesting, because they expose a flaw in the "birth/death model" that the Labor Department uses to estimate the unemployment rate. Mike "Mish" Shedlock has been commenting on this flaw for months, and says that the current estimates are still "wildly optimistic."
Commenting on the jobs report, Ken Langone, former CEO of Home Depot, appeared on Bloomberg tv to say that there was a huge disconnect between the economy and the stock market, and that the U.S. is in "horrible economic storm." He agrees that the unemployment picture is much worse than government figures indicate (some of this is paraphrasing):
What is the mindset of a person who's afraid of losing his job? "Honey, if you can't eat it, don't buy it. We're not going to go on a vacation. We're not going to put a new roof on the house - we're going to repair the old roof. We're not going to put a bathroom or a kitchen in." ...
[With regard to the stock market] All of the people that I respect, as investors and as people, are all scratching their heads saying, "We don't get it."
This stock market rise over the last 7 months -- and you look at the economy -- and I spend a lot of my time now reaching out to companies running businesses -- and I'm getting the same thing from everybody -- it's terrible, it's getting worse, September was worse than August. ...
And by the way, this stimulus package, I'm sorry it's an enormous waste. ... It's not creating jobs.
This "cash for clunkers" we know now, it was doing nothing but pulling orders forward. No net change in aggregate daemand over a period of months or years. ...
I know of one agency in Washington, I can't say who because I don't want to get people in trouble. Last year they were given $3 million for their operation. And this is an activity that doesn't create jobs. This year, they were given $6 billion, and they were told, go spend it. Go get rid of the money." Not, "Come back and tell us how many jobs yuo've created." This stimulus package, in my opinion, is going to backfire. ...
If we in business ever did what all these so-called sagacious economists from the government are telling us -- "it's getting better" and "things are looking up" -- we would be investigated by the SEC for consumer fraud."
Christina Romer, chairman of the White House’s Council of Economic Advisers, and the worst bubblehead in Washington except for Paul Krugman, came on to respond to Langone. She said, "You're right that the jobs number is disappointing. We like the market had been expecting less job loss, so that's unfortunate. On the other hand, this is how real recoveries happen. They come in fits and starts, and and I think what this is is a fit."
Well, I'm glad she cleared that up.
People like Romer and Krugman are complete idiots and don't have the vaguest idea what's coming, even though they claim to be economists.
But what about Ben Bernanke? I've harshly criticized his policies, but I've also said that "I have a lot of respect for him," and I certainly don't think he's an idiot like Romer and Krugman.
So what about Bernanke? I've had to think about him a lot in the past few days, after a co-worked said to me, "Look, how can you claim to know what's going on, and claim that Ben Bernanke doesn't. Are you really saying that you're the only person who's intelligent, and everyone else is stupid?"
It's a good question. It's true that most journalists and politicians really are incredibly stupid and ignorant. In the case of the Iraq war, this was shown by articles in the Congressional Quarterly, where the editor asked Washington journalists, analysts and politicians simple basic questions about what was going on in Iraq. These were people who represented themselves as experts on Iraq, but they didn't know the differences between Sunni and Shi'ite, and they didn't know that al-Qaeda is operating in Iraq, or that al-Qaeda is a Sunni organization.
There's been no similar Congressional Quarterly study on so-called Washington experts and economists on the financial crisis, but I doubt all but 0.001% of these experts could explain, for example, what a "collateralized debt obligation (CDO)" is, and how it was used to create the financial crisis.
I actually went to a great deal of trouble to learn how they worked (see "A primer on financial engineering and structured finance") so that I could write about them on this web site, and I'm not even being paid, but I doubt that almost any of those so-called Washington experts who ARE being paid to be journalists or analysts bothered to figure out what was going on.
So back to Ben Bernanke. I believe that there's a good chance that he knows exactly what a CDO is, and how it was used to create the financial crisis. As head of the Princeton University Economics Department, I have no doubt that he knows a very great deal about what's going on, unlike the standard Washington idiot.
So why do I know what's coming, and he doesn't? I think the answer comes from the following key question:
When you ask the question that way, then the answer is completely obvious: He'd be saying and doing exactly what he IS saying and doing, and HAS BEEN saying and doing since the crisis began in August 2007.
He certainly couldn't announce to the world, "My analysis is that there will be a major stock market crash, with 99% probability." If he said anything like that, he would infuriate everyone on both the left and right, he'd be fired as Fed chairman, he'd cause a national and worldwide panic, and he'd be personally blamed for CAUSING the stock market crash, whenever it occurred.
That's simply not an option. The only option available to him is to do what he's doing -- talk about "green shoots," and become the grandfather of many stimulus, quantitative easing and bailout plans, all the time hoping, hoping, hoping for a miracle, the other 1%, and no stock market crash.
So that provides the answer to my co-worker's question. If you apply pure logic, then you can't conclude anything from what Bernanke says or does, because he'd say and do the same thing whether he believes that a stock market crash is coming or not.
From the point of view of Generational Dynamics, there isn't even a 1% chance of avoiding a stock market crash, but that's beside the point. For Bernanke, there's a tiny of sliver of hope for him to grasp, and he'll do so, even though his economic models tell him that there's really no hope at all.
When people are anxious and scared, they'll do what Bernanke is doing -- grasp at any sliver of hope available to them, and lie to themselves and others about it. The stock market rally has turned into an extremely dangerous bubble that has hurt a lot of people, and will hurt a lot more when the bubble deflates.
The "mainstream" journalists and analysts have it all figured out. There are mainstream bulls and bears. The bulls think the stock market will keep going up forever. The bears think that it will pull back slightly, then will keep going up forever.
The "mainstream" is guided by the following beliefs:
It's worth mentioning one major expected green shoot that hasn't happened. Corporate earnings have been falling rapidly since fourth quarter 2007. Each quarter since then, the journalists and analysts have solemnly declared that earnings growth would exceed 50% within a quarter or two. This is a never-ending prediction that's been wrong every quarter. In January of this year, analysts were predicting explosive earnings growth by the third quarter. Well now, third quarter 2009 earnings are coming out, and once again, the growth is negative, according to CNBC earnings central. Earnings appear to have fallen 25% from third quarter of last year -- and remember that in third quarter of last year, they were down 20% from the previous year. That means that corporate earnings have fallen 40% in two years, and are still falling.
The main thing holding the mainstream journalists and analysts together is that they can't believe this crisis isn't over. No crisis in their lifetime has lasted this long, so it's IMPOSSIBLE that this crisis will continue. It HAS to be over, irrespective of any actual facts.
It's once again time to post this quote from John Kenneth Galbraith's 1954 book The Great Crash - 1929. It describes how the "Principle of Maximum Ruin" played out in 1929:
The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. ... The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or fourth of the purchase price in the next twenty-four months. ... The ruthlessness of [the stock market was] remarkable." (p. 108)
This is the text from which I derived the Principle of Maximum Ruin so many years ago -- that the current stock market will ruin the maximum number of people to the maximum extent possible. The rally that started last March, and is ending just now (or may not even be ending) has sucked huge amounts of money from short sellers, and will suck more huge amounts of money from those holding stock.
Web site readers used to ask me, several years ago, exactly how the Principle of Maximum Ruin would work, and I said that I honestly didn't know how it would work, only that it would work.
But now we really see well it works. A lot of people were comparing this rally to the 1930 rally, and when this one lasted longer, they said, "See? This isn't like the Great Depression. This rally is lasting much longer, so it's OK to assume that the market will keep going up and up." Thus you get people like Joe Kernen gloating.
As Galbraith said, "Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune."
As for me, I'm going to go back to unpacking boxes now. I'm still pretty wiped out from moving, and my writing for this web site has suffered as a result. Hopefully, things will be back on track in a few more days.
(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.)
(5-Oct-2009)
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