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


Generational Dynamics Web Log for 11-Oct-2008
There's never before been a day like this on Wall Street.

Web Log - October, 2008

There's never before been a day like this on Wall Street.

Possible exception: One of the days just before or after the 1929 crash.

Market summary, 10-Oct-2008
Market summary, 10-Oct-2008

The Dow index fell 621 points within moments after the market opened on Friday. In the next few minutes, it rallied by 688 points. Several times, the Dow went up or down over 100 points within a few minutes. In the last hour of trading alone, the Dow changed direction 16 times. During just one commercial break on CNBC around 3:45 pm, the Dow went from +300 to -100. Never before in history has the intraday high been more than 1000 points above the intraday low. The Dow ended down 128 points.

The Dow has fallen 25% in the last three weeks alone. This would cause huge amounts of forced selling anyway, even if we didn't know that many hedge funds are liquidating.

And yet, I was shocked that one person after another called this good news. CNN's Ali Velshi said that it meant that the market would start going up again.

In the Financial Topics thread of the Generational Dynamics forum, one person wrote, "today was the most bullish day we've had so far during the decline." Another wrote, "My best guess is that ... stocks will rally for a few days, or maybe even a few weeks or months. " My best guess is that you are correct this time and stocks will rally for a few days, or maybe even a few weeks or months."

At a time when P/E ratios are at astronomical highs, and corporate earnings keep falling, it's really hard for me to understand how anyone could hold that belief.

And yet, analysts and pundits seem to have no idea what's going on.

International superstar Professor Nouriel Roubini says that Dow 7,000 is likely "sometime next year," though apparently not before then. Actually, he said that on Tuesday, when the Dow was just beginning to fall through 10,000. I wonder what he thinks on Friday, with the Dow near 8,000?

I'm getting increasingly bemused by Roubini. He's become the the Paris Hilton of economics: He always knows exactly how much leg to show in order to keep himself in the headlines.

His 12 steps to financial disaster was actually quite brilliant, but when it comes to saying what's going to happen, he seems to change his mind every day. Will there be a recession, or not? Will it be V shaped or U shaped or L shaped? If you don't like his answer, then wait a minute.

However, whatever Roubini says on any particular day, the formula is always the same: "Unless the Administration does exactly what I say, then the world is going to suffer systemic financial crisis." He's got it both ways. If there's no crisis, then he can slide by; if there is a crisis, he can claim that he predicted it, because they didn't listen to him.

Paul Krugman is another Paris Hilton-like figure. In his latest column, entitled "The Moment of Truth," he says the following:

"They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression."

Whew! I'm shaking from what a hard-hitting statement this is. They'd better DO something or something MAY happen. Wow, you can take that to the bank.

Actually, I heard Krugman being interviewed on Bloomberg tv on Friday, and I really had to laugh when he was asked what's different today from 1929? Here's what he said:

"Two things are different. We know the Great Depression happened, and this actually gives us some urgency in policy. And I think we do understand economics better than we did 75 years ago. I think we know something about what needs to be done."

Boy, you could fool me. These economists have no idea why the dot-com bubble occurred, why the real estate bubble occurred, why the credit bubble occurred, why they all occurred at the time they did, and how we got to where we are today. They have no idea whatsoever. Mainstream economists know little more than they did in 1929.

(For further information on the failure of mainstream economics, see "System Dynamics and the Failure of Macroeconomics Theory.")

I have to mention the latest column by Michael "Mish" Shedlock. He applies Elliott Wave analysis to the current situation, and evidently fails to find any pattern that predicts what's going to happen.

Things like K-cycles and Elliott Wave analysis actually are valid, but researchers always make the same mistake: they try to use them to analyze generational crashes, and they're not valid for that purpose. Generational cycles are completely independent of K-cycles and Elliott wave cycles, and the fact that researchers don't take that into account is why these tools never seem to work.

I mention this today because I want to make this point: That tools and policies that work fine in "ordinary" times do not work at times of generational crisis. In a generational Crisis era, the financial crisis or war crisis is caused by massive generational behaviorial changes that can't be stopped by any policy that would have worked fine just a few years earlier.

This is something that the survivors of the Great Depression and World War II understood, because they learned that lesson in the 1930s. But those people are all gone now, and today's Boomers and Gen-Xers, including people like Roubini, Krugman, and Shedlock, have to learn all over again.

I had to chuckle when I was listening to a radio talk show on Friday with Krugman as a guest. A lady called into the show and asked, "Why do you give all the air time to people who have been wrong over and over again in the past few years? Why don't you find someone whose predictions have been correct?"

Being right or wrong is completely irrelevant in today's society. If people like Roubini, Krugman and Shedlock are wrong time after time, they're still listened to because they're skillful at saying what people want to hear, rather than what's true.

That's certainly not my skill, as I get shunned by the media, even though every major Generational Dynamics prediction has been correct for the past six years. The media are interested only in supporting their own political biases; they're not interested in the truth.

So I will now once again state the truth, as I have so many times before, about what's coming.

The Wall Street stock markets are now down 60% from their peak a year ago. We're following the same cascading pattern as happened in the 1929 crash. But does that mean that the market is going to keep falling, as it did in the 1930s, and reach below Dow 3000? Or will it bottom out where it is now, around Dow 8000?

Certainly the "experts" don't expect it to go much lower, and neither do the pundits that I hear on tv and read in the papers.

As I'm writing this, I just received an e-mail message informing me that John Mauldin's new column is now available. I've criticized Mauldin for being "muddled" in the past, and this column is no exception. Here's what he says:

"This is not the end of the world. There are a lot of very positive things happening in the US and the world. Companies are creating new inventions. Much of the economy, including health care, is moving along fine. I have lived through two serious recessions (1973-74 and 1980-82), and the point is that a free-market economy will find a way to eventually get back to solid growth. Recessions are simply part of the business cycle. Congress cannot repeal the business cycle. This will not be the last recession of my life. I hope to live long enough to go through 4 or 5 more.

Depressions are caused by governments making major policy mistakes. And we have made some in the areas of not regulating mortgage lending, allowing the five large investment banks to increase their leverage to 30 or 40 to one in 2004 (what was the SEC thinking?), and failing to oversee the rating agencies. That is behind us. It will make a normal recession deeper and the recovery longer, as I have been forecasting for some time.

But as I argue below, immediate actions must be taken by the government to avoid a much deeper problem. To not take actions to stem the credit crisis would be that major policy mistake which would compound all the other mistakes. I think everyone knows the seriousness of the problem and will act. Let's pray they do."

I have nothing against John Mauldin, and I wouldn't be picking on him if I hadn't just received this e-mail message. But this is typical of the nonsense that all the pundits and analysts are using. He's lived through the 1973-74 and 1980-82 recessions? That's nice, but what could that possibly have to do with the deflationary spiral that's going on today?

He criticizes government "policy mistakes," allowing investment banks to increase their leverage. Well, did he say anything about that when it was happening? Mauldin is an investment expert who boasts that his clients all have at least $2 million in assets. He claims to be able to be giving these people expert advice on where to invest. Well, did he ever give these people expert advice about avoiding investing in financial firms that have been over-leveraged? I doubt it very much. He had no idea what was coming, just as he has no idea today what's coming. (As I said, I have nothing against Mauldin in particular; he's just like all the others.)

Of all of these experts I've quoted today, only Roubini has at least foreseen some things before they happened, although he was late to the game, and he's still playing his Paris Hilton act.

But in general, these experts and pundits and politicians and journalists and analysts and college professors have no idea what's going on, and when their so-called "predictions" are wrong, as they are time after time after time, they simply blame someone else. "The regulators should have stopped this." "The Administration should have stopped it." "Congress should have stopped it." Pick your favorite target. If you're an "expert" or even worse, a politician, who's been wrong time after time after time, it's never the fault of your own stupidity and short-sightedness. It's the fault of everyone BUT yourself.

I listened to Fox News Channel's Bill O'Reilly on Friday night. Just three days ago, I heard him advise everyone to take a deep breath and not panic, essentially advising his millions of viewers not to sell, because "The bottom will soon be reached." Now he's claiming that he doesn't give investment advice, and that everyone is at fault but him for not seeing this. Well, why didn't he see it? He's always running various exposés of all kinds of political and financial scams. Why didn't he ever run an exposé of this one? Like all the other "experts," he never blames his own stupidity and short-sightedness. It's the fault of everyone BUT himself.

So let's get back to the truth that none of these "experts" ever talks about:

The S&P 500 price/earnings ratio index is in the 20s, and corporate earnings continue to fall, so the market is nowhere near a bottom.

Furthermore, the P/E ratio has been at historically high levels for 13 years -- since 1995 -- and so by the Law of Mean Reversion, the P/E ratio will be at historically low levels for roughly the next 13 years.

That's what I've been saying for six years, and I've been right every time, and it's really all the proof you need.

Now, I don't expect someone like Bill O'Reilly or CNBC anchor Maria Bartiromo to understand something as mathematically deep, sophisticated and complex as the computations for the price/earnings ratio (i.e., you divide the price per share by the earnings per share), since these people would have trouble figuring out how to add two numbers together.

But Nouriel Roubini is a Professor of Economics at New York University. Paul Krugman was a Professor of Economics at Princeton University, the same place where Fed Chairman Ben Bernanke was head of the Economics Department.

Now, do they even teach calculus in the economics departments of these schools? Judging from what I hear from these "experts," I wonder if you have to know any math at all to be a Professor of Economics at Princeton University or New York University. It seems that all you have to really study is sociology, because these "experts" never seem to say much beyond sociological statements.

I've been analyzing this situation since 2002, which is when I first noticed that we had to be headed for a new 1930s style Great Depression. I've been posting all of these analyses on this web site over the years, and I summarized them last year in the article, "How to compute the 'real value' of the stock market."

As I've noted before, the timeline for the past year has been different from 1929, as you can see from my Dow Jones historical page. The timeline in 1929 was as follows:

The timeline so far today is as follows:

Now, first off, it's incredible and baffling to me that any experts could now predict that the trend described in the above list could suddenly be reversed, and the market will start going up. Obviously this is trending toward an accelerating crash, and only an idiot (which apparently includes most "experts") can miss it.

But the question I want to address is this: Have we somehow managed to avoid the generational panic and crash that I keep talking about?

I've described many times what I expect to see happen; here's a summary: An elemental force of nature, where millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly try to sell everything in a mass panic. This will bring down computer systems for hours, perhaps even for a day or two, as people watch tv in glazed horror as their life savings disappear.

That's the kind of generational panic that occurred in 1929, and is remembered as "the crash of 1929," and it was a year after the generational panic that the market was 40% below its peak. But that hasn't happened this time, even though the market has already fallen 40% from its peak value in the last year. So have we managed to avoid it?

Generational theory says "absolutely not." This generational panic MUST occur, if only to teach a lesson to the generations of "experts" who keep saying stupid things. Generational panics are nature's way of educating "experts" to what is really going on.

However, remarkably enough, this is actually a point of commonality between me and mainstream pundits. Most of them are expecting some sort of "panic event," like the panic of 1987, that will cause a "capitulation," and the market will bottom out and start going up again.

So in fact, most pundits and I are in agreement that some kind of major panic is going to be occurring shortly. The pundits that I hear are expecting it very soon, perhaps as early as next week.

However, this is in the "be careful what you wish for" category, because my expectation is that it will proceed far differently than the mainstream "experts" expect. Actually, this shouldn't surprise anyone, since what happened on Friday didn't happen in 1987, and hasn't happened at any time since 1929. My expectation is that the market will continue its downward path, just as happened in 1930-1932.

There's no way to predict with certainty what's going to happen next week, but I feel pretty safe making the following prediction: One way or another, next week is going to be very rocky.

(Comments: For reader comments, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (11-Oct-2008) Permanent Link
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