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


Generational Dynamics Web Log for 11-Aug-2008
As commodities plummet worldwide, the meaning is unclear.

Web Log - August, 2008

As commodities plummet worldwide, the meaning is unclear.

We speculate on some possibilities.

Price of oil plummets
Price of oil plummets

Commodities -- oil, soybeans, gold, corn, etc. -- are suddenly falling sharply in price. The dollar is significantly strengthened in one day. And stocks surge on Wall Street.

The conventional view is that commodities were in a speculator-induced bubble, and that now the bubble is ending. Prices will return to "normal" in an orderly fashion, and many of the problems caused by the commodities bubble will sort themselves out fairly quickly.

That may well be what's happening, but let's speculate on something far different.

From the point of view of Generational Dynamics, what I watch for are major shifts in public opinion, since these usually indicate an important new generational viewpoint.

That's exactly what's going on, according to The Telegraph's Ambrose Evans-Pritchard:

"US dollar rallies as extent of worldwide recession becomes clearer

The psychology of global markets has shifted hugely over recent days as it becomes clear that Europe, Australasia and parts of Asia are sliding into recession.

The US dollar has launched its best rally in half a decade, reflecting a recognition that half the world is in even worse shape than the US. In fact, America is the only G7 country to eke out modest growth this summer.

The US dollar index - currencies watched closely by traders - smashed through resistance yesterday in the biggest one-day move since the long dollar slide began seven years ago.

"This was highly significant. Perceptions have changed," said Ian Stannard, currency strategist at BNP Paribas. ...

Commodities tumbled as hedge funds and financial investors struggled to untangle themselves from crowded positions on the futures markets. Brent crude fell $4 to under $114 a barrel, down over 20pc since peaking in early July. The Baltic Dry Index has now fallen every day for over three weeks, dropping 30pc on fears that ship demand is fizzling out.

Copper fell to a six-month low on reports of rising inventories in China and Europe. Lead, nickel and tin all dived in frantic trading on the London Metal Exchange.

"We see a deep global recession," said Albert Edwards, chief strategist at Société Générale.

"Growth prospects in the Eurozone, Japan and the UK have deteriorated. Most now accept that recession has already begun in all three," he said. Mr Edwards predicted a "collapse" in emerging markets next. "You ain't seen nothing yet," he said."

This article goes to the heart of the global financial system today.

I've written many times on the subject of deflation -- how the country is in a deflationary spiral, and there's no danger whatsoever of "hyperinflation," as many people fear.

Those who have worried about hyperinflation in the US often overlook the important fact that, as bad off as the American economy is, it's actually much better off than many foreign economies.

The huge international credit bubble has been almost entirely an American dollar bubble. That's because the $750 trillion in credit derivatives that have been created in the past few years have all been denominated in dollars. As the bubble leaks, it reduces the amount of money (in dollars) in the world, which actually makes the dollar more valuable. Thus, the American dollar is in a deflationary spiral around the world.

But that's not true, for example, of the euro. The volume of credit derivatives denominated in euros is tiny compared to those in dollars. Any inflationary tendency in US dollars is overwhelmed by the deflationary spiral in US dollars, but an inflationary tendency in euros would not be similarly deflated.

The sudden spike in the international value of the dollar currency is, according to the article quoted above, not something based on the American economy, but on something based on the other economies -- that they're deteriorating quickly, more quickly than the American economy.

Thus, investors are pulling money out of non-dollar-denominated assets. Thus, we've seen substantial plunges in stock market indexes, particularly in Asia. Even China's Shanghai Stock Market, which had finally seemed stable in the last month after falling 50%, has now resumed its plunge in the last week.

Commodities prices are also denominated in dollars, and so the rapid strengthening of the dollar last week means that commodity prices are going to fall in price relative to the strengthened dollar.

This would seem to be good news -- and it is for any business that purchases copper or oil as raw material. It's also good news if it means that food prices will moderate. It also seems to be good news for Wall Street -- money invested in foreign markets is now being redirected into American stocks.

But it may be very bad news for numerous Asian economies. With stock markets crashing, the fall in commodities prices may be caused by financial crises in these countries -- not just recessions, as Evans-Pritchard suggests, but full-fledged stock market crashes.

The speculation, then, is that the sudden strengthening of the dollar, combined with a fall in commodities prices, is the sign of an imminent global financial crisis. Presumably, we'll know within a week or two which of the two views (mainstream or speculative) is in play.

Corporate earnings

As regular readers know, I post the table of S&P 500 average corporate earnings estimates, based on figures from CNBC Earnings Central supplied by Thomson Reuters.

Here's the latest table for second quarter earnings:

  Date    2Q Earnings growth estimate as of that date
  ------- -------------------------------------------
  Jan  1:              +4.7%
  Feb  6:              +3.5%
  Apr  1:              -2.0%   Start of quarter
  Jun  6:              -7.3%
  Jun 13:              -8.1%
  Jun 20:              -9.0%
  Jun 27:             -11.3%   End of quarter
  Jul  3:             -12.4%
  Jul  8:             -13.0%
  Jul 11:             -14.7%
  Jul 18:             -17.1%
  Jul 25:             -17.9%
  Aug  1:             -20.4%
  Aug  8:             -22.1%

As you can see, second quarter earnings estimates have fallen by another 8%, which means that price/earnings ratios will rise by 8%.

I don't know where the P/E ratio index will end up this week, but stock prices surging and earnings plunging, it should be quite dramatic.

Banks cave re auction rate securities

I wrote on August 3 that New York's attorney general Andrew Cuomo was bringing fraud charges against several banks over auction rate securities.

(For a discussion of the hare-brained auction rate securities scheme, see "Investment bank UBS is now 'writing down' clients' auction rate securities.")

It didn't take long to get a response. Swiss bank UBS AG, Citigroup and Merrill Lynch have all agreed to repurchase the near-worthless auction rate securities from retail customers, charities and small and mid-size businesses, and to pay substantial fines.

What's interesting about this is how quickly these financial institutions caved in to the accusations, agreeing to settle very quickly. Why were they willing to settle very quickly?

Obviously it's because they knew they would be found guilty, but there's more to it, according to some pundit conversations I heard on CNBC last week. It seems that the brokers in each of these financial institutions were pressuring their bosses to settle, because the brokers themselves were afraid of being individual prosecuted, for having lied to their customers.

Two months ago we had "'Operation Malicious Mortgage' indicts 406 people including Bear Stearns execs." Now we have more a few more banks.

Last year in September, I made a list of people who are currently being blamed, or soon will be blamed, and who will be the subject of investigations, civil lawsuits and possible prosecution. Let's take another look at that list, and update it a little:

We can now see that the deception and fraud were ubiquitous, occurred in every financial, real estate and government organization, from top-level management to bottom-level salesmen. Furthermore, it occurred throughout the world.

What I really think is hilarious is that everyone I hear on tv is now blaming the current situation on Alan Greenspan, because the Fed lowered interest rates to near-zero in 2002-2003.

This is totally absurd. For one thing, it doesn't explain the dot-com bubble and crash that occurred earlier. More important, to say that brokers, salespeople, home buyers, etc., at every level, in countries ALL AROUND THE WORLD, all committed fraud because of something that Greenspan did is so ridiculous that it could never possibly be believed by anyone except the macroeconomics and finance experts we see on tv, and who, almost without exception, have their heads up their asses.

The only explanation of this mess that makes any sense is generational. The survivors of the 1930s Great Depression would never have tolerated any of this fraud, but they're dead and gone now. In their place are entire generations of Boomers and Gen-Xers who willingly pursued fraudulent policies that screwed everyone else for their own gain.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (11-Aug-2008) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages

Current Web Log

Web Log Summary - 2016
Web Log Summary - 2015
Web Log Summary - 2014
Web Log Summary - 2013
Web Log Summary - 2012
Web Log Summary - 2011
Web Log Summary - 2010
Web Log Summary - 2009
Web Log Summary - 2008
Web Log Summary - 2007
Web Log Summary - 2006
Web Log Summary - 2005
Web Log Summary - 2004

Web Log - December, 2016
Web Log - November, 2016
Web Log - October, 2016
Web Log - September, 2016
Web Log - August, 2016
Web Log - July, 2016
Web Log - June, 2016
Web Log - May, 2016
Web Log - April, 2016
Web Log - March, 2016
Web Log - February, 2016
Web Log - January, 2016
Web Log - December, 2015
Web Log - November, 2015
Web Log - October, 2015
Web Log - September, 2015
Web Log - August, 2015
Web Log - July, 2015
Web Log - June, 2015
Web Log - May, 2015
Web Log - April, 2015
Web Log - March, 2015
Web Log - February, 2015
Web Log - January, 2015
Web Log - December, 2014
Web Log - November, 2014
Web Log - October, 2014
Web Log - September, 2014
Web Log - August, 2014
Web Log - July, 2014
Web Log - June, 2014
Web Log - May, 2014
Web Log - April, 2014
Web Log - March, 2014
Web Log - February, 2014
Web Log - January, 2014
Web Log - December, 2013
Web Log - November, 2013
Web Log - October, 2013
Web Log - September, 2013
Web Log - August, 2013
Web Log - July, 2013
Web Log - June, 2013
Web Log - May, 2013
Web Log - April, 2013
Web Log - March, 2013
Web Log - February, 2013
Web Log - January, 2013
Web Log - December, 2012
Web Log - November, 2012
Web Log - October, 2012
Web Log - September, 2012
Web Log - August, 2012
Web Log - July, 2012
Web Log - June, 2012
Web Log - May, 2012
Web Log - April, 2012
Web Log - March, 2012
Web Log - February, 2012
Web Log - January, 2012
Web Log - December, 2011
Web Log - November, 2011
Web Log - October, 2011
Web Log - September, 2011
Web Log - August, 2011
Web Log - July, 2011
Web Log - June, 2011
Web Log - May, 2011
Web Log - April, 2011
Web Log - March, 2011
Web Log - February, 2011
Web Log - January, 2011
Web Log - December, 2010
Web Log - November, 2010
Web Log - October, 2010
Web Log - September, 2010
Web Log - August, 2010
Web Log - July, 2010
Web Log - June, 2010
Web Log - May, 2010
Web Log - April, 2010
Web Log - March, 2010
Web Log - February, 2010
Web Log - January, 2010
Web Log - December, 2009
Web Log - November, 2009
Web Log - October, 2009
Web Log - September, 2009
Web Log - August, 2009
Web Log - July, 2009
Web Log - June, 2009
Web Log - May, 2009
Web Log - April, 2009
Web Log - March, 2009
Web Log - February, 2009
Web Log - January, 2009
Web Log - December, 2008
Web Log - November, 2008
Web Log - October, 2008
Web Log - September, 2008
Web Log - August, 2008
Web Log - July, 2008
Web Log - June, 2008
Web Log - May, 2008
Web Log - April, 2008
Web Log - March, 2008
Web Log - February, 2008
Web Log - January, 2008
Web Log - December, 2007
Web Log - November, 2007
Web Log - October, 2007
Web Log - September, 2007
Web Log - August, 2007
Web Log - July, 2007
Web Log - June, 2007
Web Log - May, 2007
Web Log - April, 2007
Web Log - March, 2007
Web Log - February, 2007
Web Log - January, 2007
Web Log - December, 2006
Web Log - November, 2006
Web Log - October, 2006
Web Log - September, 2006
Web Log - August, 2006
Web Log - July, 2006
Web Log - June, 2006
Web Log - May, 2006
Web Log - April, 2006
Web Log - March, 2006
Web Log - February, 2006
Web Log - January, 2006
Web Log - December, 2005
Web Log - November, 2005
Web Log - October, 2005
Web Log - September, 2005
Web Log - August, 2005
Web Log - July, 2005
Web Log - June, 2005
Web Log - May, 2005
Web Log - April, 2005
Web Log - March, 2005
Web Log - February, 2005
Web Log - January, 2005
Web Log - December, 2004
Web Log - November, 2004
Web Log - October, 2004
Web Log - September, 2004
Web Log - August, 2004
Web Log - July, 2004
Web Log - June, 2004

Copyright © 2002-2016 by John J. Xenakis.