Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 8-Jun-07
Morgan Stanley in Europe signals a "Full House" sell signal on stocks.

Web Log - June, 2007

Morgan Stanley in Europe signals a "Full House" sell signal on stocks.

Saying that stocks could fall by 14% in the next few months, a Morgan Stanley European strategy report says that all three of its major leading indicators -- bond yields, manufacturing forecasts and P/E ratios -- were signalling a market about to lose value.

"Such a full house sell signal across these three indicators is rare, and has occurred only five times since 1980," said analyst Teun Draaisma in a European strategy research report. "Equities have always been down in the next 6 months, on average by 15%."

This forecast actually is consistent with other forecasts that the market is "overdue for a correction," meaning that even the usually exuberant analysts realize that every once in a while a continually rising market has to fall, at least a little.

What none of these forecasts are taking into account is the possibility of a full scale generational stock market panic.

From the point of view of Generational Dynamics, a generational stock market crash is overdue. 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. We're now overdue for the next one. It could happen next week, next month or next year.

From the point of view of Generational Dynamics, it's easy to prove that a new financial crisis is coming, just by showing that various trend variables -- international account balances, public debt, market capitalization -- are all increasing uncontrollably, with no real attempt being made to stop them. And lately we've seen that the Chinese economy continues to explode out of control, even though Chinese officials have to tried to bring down the huge imbalances for five years and have failed completely. This past week's fall in the Shanghai stock market has alarmed Chinese officials greatly, as they wait to see what's going to happen next.

Wall Street's stock market indices in Thursday all fell 1.5% to 1.8%, and as I write this on Thursday evening (approaching noon Friday in Tokyo), the Tokyo and Hong Kong indices are down 1.6%.

One possible scenario is this: the markets will fall a little further, then level off and start to rise again. I've personally been surprised by how frequently that's happened.

But there's another scenario, and this one must occur at some point in the not to distant future: The markets will fall perhaps 1% or 2% a day for a few days, and then full-scale generational panic will set in, and the markets will fall 20% over a period of just a few days.

No one is expecting this because there hasn't been anything like in our lifetimes -- since 1929. (As I've indicated a number of times, the so-called panic of 1987 was a "false panic," since the market was underpriced at that time. Today, the market is overpriced by a factor of more than 250%, just like 1929.)

I've posted warnings two or three times in the past that such a panic may be close at hand, and the market has recovered each time. However, on each such occasion, the negative signals were stronger than the last time.

In this case, we have the Morgan Stanley "full house" signal, which indicates that many parts of the economy are increasingly in trouble.

But more important, we have increased awareness of the weakness of the Chinese economy, including the March statement by Chinese premier Wen Jiabao said that China is "unsteady, unbalanced, uncoordinated and unsustainable." As I wrote in January, 2005, China is becoming increasingly unstable and approaching a civil war, and the increasing financial instability of China means that this day may be approaching quickly.

Once again I urge all my readers to get out of the stock market, and I'd like to add a little more information in response to a couple of reader questions that I've gotten in the last couple of days.

Let me summarize a few points:

Another web site reader sent me the following reminiscence (slightly modified to disguise the identity):

"Some days I wish this nonsense would end, yet I feel a real fear about what is coming. At times it is very intense and at other times it dissipates almost to nothing. It goes back and forth, round and round. It's almost like being tortured.

See, I can still remember looking into my Grandfather's face when he was old. I'll never forget the real and intense fear I saw in his face as long as I live. My Dad's father, who was 87 (born in 1902) was was getting forgetful and one morning a look of intense fear came over his face and he announced, "I have no money!" He was reliving the Depression. My Dad, a Silent born in 1933, very patiently took all of his bank statements out of the drawer and proceeded to show him how much money he had. A look of relief came over my Grandfather's face and he slumped down into the chair and said "Oh." I should also say that my Dad never talked about that incident. I knew it was too painful for him to talk about. ...

This is a risky time to be living no matter what you do. Those who survive this will be extremely shrewd AND extremely lucky. Nothing is safe, I'm afraid. The best investment will be one that nobody gave a thought to, like pepper during WWII or something like that. I think you and I think too much alike. That article you wrote about religion is the only thing I've ever seen on the subject that articulates most of my philosophy. Unfortunately, it will probably turn a lot of people off. And that "Full House" signal that Morgan Stanley announced ... will only be the beginning. It may be this month. If it is, there will probably be a brief relief period before it gets worse. That would be the best case for everyone, but I'm not so sure it can work that way. The Fed has been withdrawing liquidity for a year but private liquidity is still raging out of control."

This is relevant to our lives today because there are actually a lot of people, especially young people, looking forward to a major financial or war crisis, because they're simply looking for a change, any kind of change. I've had to tell more than one person to be careful what you wish for. The day that the stock market crashes will be the worst day of your life. (8-Jun-07) Permanent Link
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