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Generational Dynamics Web Log for 17-Aug-07
The nightmare is finally beginning.

Web Log - August, 2007

The nightmare is finally beginning.

After Thursday's events, there can be little doubt: A generational panic and stock market crash has begun.

When I say "Thursday's events," I don't mean the fact that the Dow went from 0 to -350 to -150 to -200 and then, in the last few minutes of the session, became positive before settling at slightly negative. That plays into it, but it's not the main factor.

I'm talking about dramatic and overwhelming changes in attitudes that have occurred in just the last two weeks.

Remember the rules about Generational Dynamics: It's not the events that matter; it's not the attitudes and behaviors of a few politicians that matter. What matters is the attitudes and behaviors of large masses of people, entire generations of people.

There was a big stock market nosedive for a while on Thursday, but a stock market nosedive happens all the time. As with everything else in generational theory, it's not the "spark" that matters, but people's reactions to the spark.

There have been HUGE changes in attitudes and behaviors in just the last couple of weeks, and that's why I'm saying that the nightmare has begun. A month ago, investors ignored bad news and continued as before. Today, investors are panicking, and each new piece of bad news causes them to panic even more. This is a change that's occurring VERY RAPIDLY, and it cannot be stopped.

I want to emphasize as strongly as I can that the supposed experts have NO IDEA what's going on. You cannot understand what's going on unless you understand generational theory, and everyone I try to explain it to simply rejects it. They'd rather stick with the "experts," who have gotten EVERYTHING wrong since the 1995 bubble started, and they won't even consider generational theory and this web site, which has gotten every prediction right for the past five years.

A couple of days ago, I listed some of the really stupid things that "experts" were saying on CNBC, like "You just have to ride it out," "There's still plenty of money sitting on the sidelines waiting to come back in to the market," and "Fundamentals will soon come back in to line."

Here are some additional things I've been hearing:

These are statements that were made by "experts." Keep in mind that they have no idea what they're talking about.


S&P 500 Price/Earnings Ratio (P/E1) 1871-2007
S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

Over the years, I've given many reasons why a stock market crash MUST occur, using such things as exponential growth forecasting methods and mean reversion techniques with price/earnings ratios.

The above graph shows the P/E ratio index since 1871 (stock prices divided by trailing one-year earnings). If you look at it, you see that the ratio has been above average (the blue line) since 1995, and has been as low as 5 several times in the last century, most recently in 1982. If you look at the right hand side, you can see that it appears about to fall that low again. In fact it MUST do so, by the law of mean reversion. When the P/E ratio falls to 5, stock share prices will fall to 1/3rd their current value.

If you still don't believe me, then show this graph to an expert with analytical experience. Don't show it to a stock broker or other salesman -- those guys flunked 4th grade math, but they can sell ice cubes to Eskimos. Show it to the nerd in the back room. Ask him to tell you what it means for stock prices.

A few days ago I posted a chart comparing 1929 and 2007 after the stock market reached the respective peaks. This is purely speculative, but here's an update of that table:

    1929   % of peak (381.17)
    -------------------------
    Tue 09-03 ( +0.22%) 100%              2007   % of peak (14000)
    Wed 09-04 ( -0.41%)  99%              ------------------------
    Thu 09-05 ( -2.59%)  97%              Thu 07-19 ( +0.59%) 100%
    Fri 09-06 ( +1.76%)  98%              Fri 07-20 ( -1.07%)  98%
    ------------------------              ------------------------
    Mon 09-09 ( -0.36%)  98%              Mon 07-23 ( +0.67%)  99%
    Tue 09-10 ( -2.04%)  96%              Tue 07-24 ( -1.62%)  97%
    Wed 09-11 ( +0.99%)  97%              Wed 07-25 ( +0.50%)  98%
    Thu 09-12 ( -1.23%)  96%              Thu 07-26 ( -2.26%)  96%
    Fri 09-13 ( +0.14%)  96%              Fri 07-27 ( -1.54%)  94%
    ------------------------              ------------------------
    Mon 09-16 ( +1.51%)  97%              Mon 07-30 ( +0.70%)  95%
    Tue 09-17 ( -1.04%)  96%              Tue 07-31 ( -1.10%)  94%
    Wed 09-18 ( +0.65%)  97%              Wed 08-01 ( +1.14%)  95%
    Thu 09-19 ( -0.25%)  97%              Thu 08-02 ( +0.76%)  96%
    Fri 09-20 ( -2.14%)  94%              Fri 08-03 ( -2.09%)  94%
    ------------------------              ------------------------
    Mon 09-23 ( -0.84%)  94%              Mon 08-06 ( +2.18%)  96%
    Tue 09-24 ( -1.78%)  92%              Tue 08-07 ( +0.26%)  96%
    Wed 09-25 ( -0.01%)  92%              Wed 08-08 ( +1.14%)  97%
    Thu 09-26 ( +0.96%)  93%              Thu 08-09 ( -2.83%)  94%
    Fri 09-27 ( -3.11%)  90%              Fri 08-10 ( -0.23%)  94%
    ------------------------              ------------------------
    Mon 09-30 ( -0.41%)  90%              Mon 08-13 ( -0.02%)  94%
    Tue 10-01 ( -0.26%)  89%              Tue 08-14 ( -1.57%)  93%
    Wed 10-02 ( +0.56%)  90%              Wed 08-15 ( -1.29%)  91%
    Thu 10-03 ( -4.22%)  86%              Thu 08-16 ( -0.12%)  91%
    Fri 10-04 ( -1.45%)  85%
    ------------------------
    Mon 10-07 ( +6.32%)  90%
    Tue 10-08 ( -0.21%)  90%
    Wed 10-09 ( +0.48%)  90%
    Thu 10-10 ( +1.79%)  92%
    Fri 10-11 ( -0.05%)  92%
    ------------------------
    Mon 10-14 ( -0.49%)  92%
    Tue 10-15 ( -1.06%)  91%
    Wed 10-16 ( -3.20%)  88%
    Thu 10-17 ( +1.70%)  89%
    Fri 10-18 ( -2.51%)  87%
    ------------------ -----
    Mon 10-21 ( -3.71%)  84%
    Tue 10-22 ( +1.75%)  85%
    Wed 10-23 ( -6.33%)  80%
    Thu 10-24 ( -2.09%)  78% Black Thursday
    Fri 10-25 ( +0.58%)  79%
    ------------------------
    Mon 10-28 (-13.47%)  68% Black Monday
    Tue 10-29 (-11.73%)  60%
    Wed 10-30 (+12.34%)  67%
    Thu 10-31 ( +5.82%)  71%
    Fri 11-01  (Closed)
    -----------------------
    Mon 11-04 ( -5.79%)  67%
    Tue 11-05  (Closed)
    Wed 11-06 ( -9.92%)  60%
    Thu 11-07 ( +2.61%)  62%
    Fri 11-08 ( -0.70%)  62%
    ------------------------
    Mon 11-11 ( -6.82%)  57%
    Tue 11-12 ( -4.83%)  55%
    Wed 11-13 ( -5.27%)  52%
    Thu 11-14 ( +9.36%)  57%
    Fri 11-15 ( +5.27%)  60%
    -----------------

This is purely speculative, but if we continue to follow the 1929 pattern, then we should expect to see enormous swings, such as the huge swings that occurred on 10/3 and 10/7/1929, and we should expect to see a real generational panic and crash in about six weeks.

This is one of the saddest and most dreaded days of my life. This is the day that I reached the conclusion that the nightmare has now begun. We're now in the beginning stages of a classic generational panic and stock market crash. I don't think I'm going to sleep much tonight. (17-Aug-07) Permanent Link
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