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Generational Dynamics Web Log for 3-Nov-07
MarketPsych investor fear index forecasts sharply increased market turbulence.

Web Log - November, 2007

MarketPsych investor fear index forecasts sharply increased market turbulence.

With investor anxiety increasing, the index forecasts a return to the "mini-panic" level of August.

Since I wrote about the Marketpsych "Fear Index" in September, I've been following it on a daily basis. Each day I watch CNBC and make my own judgment as to whether investors are anxious or sanguine, and then the next day I check to see if my judgment is matched by a change in this fear index, and it's been pretty accurate so far. It appears to be a very powerful tool for assessing the level of investor anxiety and panic.

Here's the graph of the index as of today, annotated with some of the major events that have triggered ups and downs in the index this year:


MarketPsych Fear Index -- 2-Nov-2006 to 2-Nov-2007 <font face=Arial size=-2>(Source: Marketpsych)</font>
MarketPsych Fear Index -- 2-Nov-2006 to 2-Nov-2007 (Source: Marketpsych)

From the point of view of Generational Dynamics, the ups and downs of the stock market are not as important as the changes in behaviors and attitudes of the masses of investors, as it's the latter that indicates major generational changes that trigger huge historical events.

If you examine this graph, then you'll see the following:

In order to clarify the annotations on the above graph, I've prepared the following list of the events that I consider most likely to have triggered the major ups and downs in the index since mid-January. The actual data values are approximate, since I have no access to the data other than what I can read from the graph itself.

The index value for a particular day is subject to revision for a couple of days thereafter, and so the last couple of index values may change. But it's been pretty clear that something pretty dramatic changed after the Fed announcement on Wednesday, and investors are exhibiting genuine fear.

Let's review the big picture, what's really going on here. If you go back through history, there are of course many small or regional recessions. But 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.

When comparing these international financial crises, the details are always different, but they're all remarkably similar in the following ways, as described in "The bubble that broke the world": A debauched and perverted use of credit, occurring at exactly the time that the survivors of the previous financial crisis have all died or retired; a huge asset bubble; the securitization of credit; and an upsurge in corruption. All of those elements are enormously present today.

From the point of view of Generational Dynamics, we're waiting until a "generational panic" triggers the inevitable collapse. The asset bubble MUST collapse; the credit securities (CDOs) WILL become worthless; the corruption MUST be punished.

The working hypothesis is that the "MarketPsych Fear Index" is a tool that tells us when this panic is likely to come. We've shown above that the index is showing a pattern that's similar to the last two "mini-panics" of 2007, and that the long-term trend of the index is up. We hypothesize that, therefore, there will be a new sharp spike up in investor anxiety and panic. Further, we hypothesize that if the current spike up in anxiety doesn't lead to a full-scale generational panic, then there will be further repeated similar cycles, until one of them DOES trigger a full-scale generational panic and crash.

Fed Chairman Ben Bernanke "cured" the August mini-panic by means of a dramatic and unexpected injection of liquidity into the financial system. It's possible that the Fed has enough firepower left to "cure" the coming mini-panic, possibly by shocking everyone by dropping the Fed Funds rate another 1% to 3½%. However, he may not have the ability to do that, since it would weaken the dollar so substantially on world markets that the same international financial crisis may be triggered anyway, by a different route.

At any rate, this is a time of great danger to investors. If you're one of those giddy investors who believe that a new stock market crash is impossible, you might at least consider pulling out of the market until the next mini-panic is over. (3-Nov-07) Permanent Link
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