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


Generational Dynamics Web Log for 21-Nov-07
Markets fall as investors are increasingly unsettled by bad economic news

Web Log - November, 2007

Markets fall as investors are increasingly unsettled by bad economic news

Hopes for quick return to "normal" bubble growth are fading.

A strong signal that investors and pundits are becoming increasingly pessimistic is what might be called the "time horizon" effect -- when do pundits think that things will return to "normal"? Usually the pundits give a time horizon of a day or, at most, a week.

But listening to the pundits on CNBC on Tuesday and Wednesday gave a very different picture. I heard one and only one pundit say that he expects a "year-end rally." The rest were unanimous: People are not going to be buying stocks for the rest of year -- and that includes large institutional investors, as well as small investors with 401K's -- because they want to wait until things have "settled down" again.

One pundit said that he's hearing that investors won't buy again until the Dow Industrials index is below 12,000 -- 1,000 points below where it is now. He also said that it might happen within the next week.

Asian stocks fell sharply on Tuesday night / Wednesday:

    Australia All Ordinaries     6450.20     - 0.62%
    Bombay Sensex               18602.62     - 3.52%
    Hong Kong Hang Seng         26618.19     - 4.15%
    Japan Nikkei                14837.66     - 2.46%
    Shanghai Composite           5214.22     - 1.50%
    Singapore STI                3347.20     - 2.65%
    South Korea Composite        1806.99     - 3.49%
    Taiwan Weighted              8484.11     - 2.27%

According to the Wall Street Journal, Asian investors were concerned that the U.S. economy, the most important export market for many of the region's companies, would continue to weaken. It said that "the region took its cue from unsettled trading" on Wall Street on Tuesday, when the market closed slightly higher, but only after turbulent 250 point swings. The article quotes a Tokyo trader as asking, "What the heck were the wild ups and downs in New York?" saying that the trading pattern reflected the unsettled prospects for the market.

European stocks on Wednesday similarly fell sharply.

As I've said many times before, from the point of view of Generational Dynamics, what's important is changes in behaviors and attitudes of large masses of investors, entire generations of people. The ups and downs of the markets are not per se of concern, except insofar as the indicate changes in behaviors and attitudes.

What we're seeing now is what I had been expecting to see when I wrote my August 17 article entitled "The nightmare is finally beginning." I indicated that we were now on the road to a stock market crash in the near future. The exact timing couldn't be predicted, but the speculation was that it would happen by the end of September. However, unexpectedly aggressive Fed interest rate cuts caused a period of drunken euphoria among investors, and postponed the inevitable results.

The markets in the last few days have been following the 1929-like pattern that I was expecting in September, before it was redirected by the Fed interest rate cuts. The one major thing that we haven't seen yet is a large "crash upward" such the 6.9% Dow increase that occurred on October 7, 1929, two weeks before the crash. (See Dow Jones historical page.) At any rate, extreme caution is called for.

Something else that's becoming increasingly clear is that faith in the Fed is collapsing. In fact, faith in any "easy solutions" is collapsing. On October 15, the mind-boggling "M-LEC" announcement, which was supposed to calm jitters, only increased them. The October 31 Fed interest rate cut only caused investors to become more sober, instead of returning to drunken euphoria.

On October 24, I quoted a pundit as saying, "Investors believe that everything is going to be OK because the Fed will cut interest rates. Everyone knows that the Fed is on their side."

No one says anything like that any more. The discussion about the Fed on CNBC on Wednesday morning was extremely negative. CNBC anchor Steve Lieseman expressed great concern that the Fed was contradicting itself on inflation, sometimes indicating that there's no problem, other times expressing concern. Another pundit described as "scary" the impression that the Fed was no longer setting policy, but was simply reacting to day by day events.

So, within the last 4-8 weeks, there has been enormous loss of hope in every direction. I can't recall hearing anyone describe any scenario that's going to make things better, except "waiting."

Before going on, I want to take a quick digression about the inflation rate, because I get a lot of questions about this.

There's a lot of obsessive fixation on the inflation rate because it's thought by many to be the key to the future. If the inflation rate is low, then the Fed can lower interest rates and "save the world" again; if the inflation rate is high, then the Fed can't risk lowering interest rates because that would raise inflation even more.

It's important to remember that there are two separate measures of inflation. They usually track each other closely, but they've been diverging in recent years.

The problem that the Fed has these days is because the dollar is internally deflationary, but is externally inflationary. That's why nobody understands the Fed's message on inflation. For those of you who are concerned about the value of the dollar, it's worthwhile keeping these considerations in mind.

That ends the inflation digression.

The 1929 stock market crash was not a one-day event. The stock market kept falling, month after month after month, for three years, until 1932, when it had fallen 90% of its peak value. (Paragraph corrected - 7-Apr-09)

One question that I've wondered about is the "mood" of investors during those years. During the last few years, we've seen the "euphoric" mood of bubblehead investors for whom every bit of bad news was good news, and every bit of good news was cause for chirps of joy.

Well, what was it like during the downturn years?

It may be what we're seeing now -- an increasing expectation of more and more bad news, a lengthening time horizon before the masses of investors expect good news to start again.

This is certainly something that pundits and investors and journalists are completelly oblivious to. The whole concept of investor mood is foreign to them, especially when it's related to generational concepts.

And yet, it's the key to understanding what's going on and what's coming.

In order to advance this a little farther, here's a graph of the Dow Industrials since 1950:

Generational 'moods' overlaying Dow Industrials since 1950
Generational 'moods' overlaying Dow Industrials since 1950

In the above graph, the red line is the Dow Industrials. The blue line is the exponential growth trend, computed since 1896, and represents the "real value" of the stock market. This provides a reference to whether the market is overpriced or underpriced at any given time.

What I would like to do is speculate on how investor "moods" change as generational changes occur.

What I especially want to focus on is the two "inflection points" on the DJIA graph. At each of these two points, the graph turns a sharp corner to the left, forming the letter "V". Mathematically, these are the points in 1995 and 2003 where the second derivative is discontinuous (or infinite, depending on how you look at it).

Things in nature tend to be continuous, unless affected violently by some external force. A rolling ball may slow down or speed up, but the change in speed will be continuous unless the ball hits a rock or a tree.

Similarly, we would expect the DJIA curve to continue in the same direction, perhaps gradually rising or lowering, but a sharp "V" cannot occur unless affected violently by some external force. And the most obvious choice of an external force is a generational change.

Thus, we provide theoretically the following generational investor "moods" from 1950 to the present:

Don't think that I'm saying that Boomers are good and Xers are bad. Both are pathetically bad, but it's their interaction, the way they complement each other, that results in the destruction we're headed for.

The above is a first pass at a generational explanation of what's going on. As time goes on, and as more information and more criminal prosecutions become known, I'll try to expand and refine it.

Finally, a web site reader has sent me, "for my reading pleasure," the address of a web page containing statements of journalists, pundits, financiers and politicians from the years 1927 to 1933.

Here's the list -- and remember that the crash began on October 24, 1929, and continued for three years, until mid-1932:

It was only in mid-1932 that the stock market began to gain again, having fallen 90% from its 1929 peak. (21-Nov-07) Permanent Link
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