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


Generational Dynamics Web Log for 5-Jun-2009
Some reader questions on the bear market rally.

Web Log - June, 2009

Some reader questions on the bear market rally.

People want to know whether the market has finally bottomed.

Here's a question from a web site reader:

"The Baltic Dry Index, a historically excellent way of evaluating international trade and thus world economic activity and direction, has just begun to spike upward. do you think that this is an accurate indicator of the bottom of our economic woes?"

I last wrote about the Baltic Dry Index (BDI) six months ago, in December, in "World wide transportation and trade sink farther into deep freeze."

The Baltic Dry Index is a measure of shipping costs for cargoes in "capesize" vessels -- vessels that are too large to fit through the Suez or Panama canals, and so must go around the Cape of Good Hope or Cape Horn. These vessels transport the huge cargoes of copper, iron ore and other commodities.

Baltic Dry Index and price of copper for 2004 to 4-Jun-2009 <font size=-2>(Source:</font>
Baltic Dry Index and price of copper for 2004 to 4-Jun-2009 (Source:

What happened last fall was that worldwide trade and transportation came to an almost complete halt. It was as if the earth had become frozen in place. The BDI fell an astounding 95% from its peak, and many commodity prices saw similar collapses.

Since January, the BDI has recovered to the point where it is currently 65% below its peak, and commodity prices have also increased.

These increases are apparently caused by China's huge bailout and fiscal stimulus programs, giving factories money to buy copper, iron ore, and other commodities (including gold). This has pushed up the BDI and commodity prices.

However, attempting to reflate its economic bubble cannot work, for China or for the US. If China's factories turn out new products for which there are no buyers, then the products will simply pile up in warehouses. That can't continue long.

When will the market reach a bottom? It's impossible to predict. The best we can do is make a comparison with the 1930s.

The optimistic scenario is that we'll follow the path from 1929-32. The market will fall to around Dow 1500 (around S&P 150) in 2011-12, and then will start rising again.

The pessimistic scenario is that, since the 2000s bubble was orders of magnitude larger than the 1920s bubble, that the market crash will continue past 2012, and go even lower.

There are now huge bailout and fiscal stimulus programs of one kind or another in countries around the world. These programs are creating huge additional distortions in the world financial system, beyond what was done already by the credit bubble and crash so far. Politicians, analysts, journalists and pundits are almost universally proclaiming that the worst is over, and that the world economies will start growing again by the end of the year -- in other words, that the enormous credit bubble will be reflated again.

That is simply impossible. There is no possibility whatsoever that this can work for long. I've been writing about this for seven years, and nothing has changed. The stock market is still overpriced by a factor of over 150% (See "How to compute the 'real value' of the stock market" and the Dow Jones historical page.)

The Law of Mean Reversion has not been repealed. From the point of view of Generational Dynamics, we're current in the midst of a generational stock market crash, the first since 1929-32. The stock market still has far to fall.

"What happened? Why are you not posting your negative thinking about the stock market anymore? Are you too scared to look foolish now? Damn it, why did I believe in your stupid thoughts. I missed this big rally because of you. Stop writing bullshit if you can't understand what's happening out there.

I don't write about this every day because I don't have anything new to say. Nothing has changed.

Here are three recent articles that I wrote on what's going on today:

"Stock market rally raises cautious, anxious hope among investors," and "Wall Street Journal and Birinyi Associates are lying about P/E ratios," and "Laszlo Birinyi provides insight on his fantasy price/earnings computation.s"

None of this has changed. We're still in a bear market rally, and it's not unusual or surprising. During 1929-32, the market fell 90%, and that included several rallies, one of which was longer and larger than the one we're in now.

Take a look at the last of the three articles above, and read the section about the "Principle of Maximum Ruin," and the quote from Galbraith's book.

You're in a highly emotional mood, and that's exactly the right mood for people who are going to be victims of "Maximum Ruin."

If you want other people's opinions, feel free to join the Generational Dynamics forum, and express your concerns there. This kind of discussion -- pros and cons -- appears regularly, especially in the Financial Topics thread.

There are people in that thread who have been investing and making money (especially Gordo, freddyv and Higgenbotham), but they have very complex short/long strategies that I wouldn't recommend to anyone but an expert. To anyone else, I strongly recommend preserving your cash and staying out of the market.

I wish you the best of luck whatever you decide to do, but if you buy long into this market, you're going to lose a lot of money.

For today's musical entertainment video, I've selected a great production number, "June is bustin' out all over" from the Rodgers and Hammerstein musical Carousel.

I selected this video because June IS busting out all over on CNBC, Bloomberg, WSJ, and other financial media, where the politicians, the journalists, the analysts and the investors are all bustin' out with sap.

For those of you who are bustin' out with song over the current stock market bear market rally, please remember that the festivities in the play Carousel didn't end very well either.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (5-Jun-2009) Permanent Link
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