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


Generational Dynamics Web Log for 14-Feb-2011
14-Feb-11 News -- Bangladesh stock market continues free fall, while Cairo's remains closed

Web Log - February, 2011

14-Feb-11 News -- Bangladesh stock market continues free fall, while Cairo's remains closed

Reader question about the Egypt and the Muslim Brotherhood

IBM Watson supercomputer will be on Jeopardy! on M-W, Feb 14-16

Be sure to watch Jeopardy! on television this week. On Monday-Wednesday, February 14-16, when one of the contestants will be the IBM Watson supercomputer. It should be a lot of fun. See "27-Dec-10 News -- IBM vs Jeopardy! brings robotic warfare and the Singularity closer" for more information.

Bangladesh stock market continues free fall, while Cairo's remains closed

For the third time, Egyptian officials have postponed the reopening of the Cairo stock exchange. It was closed on January 27 after having fallen 20% in a few days. It's now scheduled to reopen on Wednesday.

Cairo / Dhaka stock markets
Cairo / Dhaka stock markets

The Dhaka stock exchange was in a huge bubble last year, but now is in a full scale stock market crash. It has fallen over 30% in the last few weeks, including an additional 7.27% dive on Sunday, Feb 13.

I'd like to quote some excerpts from the Reuters article describing Sunday's dive:

"DHAKA (Reuters) - Hundreds of Bangladeshi small investors, angry at a new plunge in share prices, set fire to tires and pelted police with bricks on Sunday outside the stock exchange and demanded the resignation of the finance minister.

Police with batons dispersed the protesters in pitched battles that snarled traffic for hours.

The country's main Dhaka Stock Exchange General Index dived by more than 474.77 points or 7.27 percent to 6052.41 on Sunday, the steepest one-day fall since January 20.

"Who is to blame for the continuing fall of share prices? Why haven't they been found and punished?" shouted Shafiqur Rahman, a small investor.

Demonstrators called for the resignation of Finance Minister Abul Maal Abdul Muhith.

"He assured us that the market will see an uptrend this week," said investor Rakibul Haq. "It makes me so frustrated and angry that this has not happened."

Prime Minister Sheikh Hasina last week asked the relevant authorities to take immediate steps to stabilize markets, with about 3.3 million people, mostly small-time investors new to stock trading, relying on it to supplement meager incomes.

Share prices nearly doubled in 2010, encouraging new investors into the market. ...

Hasina and her rival Begum Khaleda Zia, a former prime minister and contender in parliamentary elections due by the end of 2013, accuse each other of prompting the price declines.

"They (Khaleda and her allies) are fuelling the unrest in the stock market, trying to cause greater anarchy and make gains out of it," Hasina told parliament last week.

Khaleda said at the weekend that the slide in the bourses was further proof that the government was incapable of managing anything."

What I think is absolutely incredible about this story is that nobody seems to have the vaguest idea what's going on, even though it's completely obvious. Stock prices doubled last year, so of course it was a bubble, and of course it's in a full-fledged crash, and yet none of these people, including the supposed experts at Reuters, seem to grasp that simple concept. They keep talking ridiculous nonsense about politicians doing this or that, as if politicians could ever prevent a stock market crash.

The same insane mood is prevalent on Wall Street today. Those who follow my Dow Jones historical page are aware that the DJIA is just shy of 200% of the long-term trend value, meaning that, for the first time since 2008, stocks are overpriced by a factor of 2. Furthermore, stocks have been overpriced since 1995, so by the Law of Mean Reversion, stock prices are going to fall to Dow 3000 or below, and stay there for many years. People on Wall Street are as oblivious to all this, just like officials in Dhaka.

Here's a graph of the S&P 500 price/earnings index from 1871 to 2010:

S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010
S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010

Anyone who can't see a stock market bubble since 1995 is blind. By the Law of Mean Reversion, P/E ratios (also called "valuations") will fall to lower than the 5-6 range to which they've fallen three times in the last century, most recently in 1982.

Perhaps the thing that shocks and infuriates me the most is to see managers from investment firms go on to CNBC or Bloomberg TV and simply lie about valuations. I won't name names here, but I have in the past, ( here and here). And I'm 99% certain that these people, or their PR departments, have seen these reports, but I've never heard from anyone to explain why I'm wrong, and ask me to post a correction. They undoubtedly earn 7-digit salaries. Are they crooks or just incompetent? I report, you decide.

During the 2005 to early 2007 period, I was writing about a credit bubble, a real estate bubble, and a stock market bubble, and about lying and fraud that was going on. I was called a psychopath, but today the credit and real estate bubbles are finally acknowledged, as is the massive generational fraud. The stock market also took a dive, but now it's going way up into bubble territory again, and the people on Wall Street are the same kinds of dim-witted crooks that are selling stocks to gullible investors in Dhaka.

When I was growing up in the 1950s, my parents and teachers would tell me how "experts" in the 1930s kept predicting that the stock market would go up again. I didn't understand then, but I certainly understand now. The criminal activity going on in Washington and on Wall Street was the same in the 1930s decade as it has been in the 2000s decade, and the results will be just as devastating, if not more so.

Reader questions about the Egypt and the Muslim Brotherhood

I've received a number of questions about Egypt and the Muslim Brotherhood.

Muslim Brotherhood logo
Muslim Brotherhood logo

Here's one that arrived today:

"I subscribe to your RSS feed and happen to find your analysis interesting. However, I am curious how you can so confidently apply your methodology to vastly different cultures and peoples?

I live in Israel, and I happen to find your analysis of Egypt comforting, but my understanding of Arab and Muslim culture leads me to different conclusions. ...

Anyway, we'll see. Egypt is a good case. If you're right, you will prove MANY people wrong who think that the Arab idea of democracy is to vote one time for an Islamic state. So far, that has been the case every time a predominantly Muslim state has had a free election."

That's an interesting way of looking at it, although perhaps Iraq can be considered an exception these days. Also, non-Arab Muslim states such as Turkey, Pakistan, Bangladesh and Indonesia appear to be exceptions, at least so far.

However, it's not entirely clear that Egypt is headed for a democracy. The army has just dissolved the parliament, suspended the constitution, and promised elections in six months, though there's no way to predict whether the elections will happen. And a massacre scenario is still a possibility.

What I've said is that there are very significant generational reasons why there won't be an Islamic state like Iran, and that it's very unlikely that Egypt will abrogate its peace treaty with Israel. News events in the last few days have supported those predictions so far.

I need to write something that's going to generate hate mail, but it's a point I need to make, so I ask those of you who insist on writing to me to at least limit yourselves to just 1-2 epithets per person. Sunday is the 66th anniversary of the Allied bombing of Dresden, according to the AFP, and some people consider that to be an act of genocide. Also, a web site reader has called my attention to the 1946 Zionist bombing of the King David Hotel, which some people claim is an act of terrorism.

So the point I need to make is that, while I have absolutely no love for the Muslim Brotherhood, they have renounced their past violence like others have. However, that's not enough. What's most important is the generational point: With the vast majority of the population of Egypt under age 30, most Egyptians, including Egyptians that support the Brotherhood, have never known a violent Brotherhood.

It's a basic principle of Generational Dynamics that even in a dictatorship, major policies are determined by masses of people, entire generations of people, and not by politicians. The generational trends in Egypt are clearly away from an Islamic state. Even if the Brotherhood gained power, and some of the old geezers in the top level of the Brotherhood wanted to relive their glory days of fighting the Jews, the vast majority of Brotherhood supporters would oppose terrorism or abrogating the treaty.

Finally, the other reasons I've mentioned before are that there's no jihadist constituency in Egypt, there's no ethnic division that would affect the government, there's no fault line between the monarchy and the clergy, as there is in Iran and Saudi Arabia, and there's no popular charismatic leader like Iran's Ayatollah Ruhollah Khomeini.

These are very powerful generational reasons for the conclusions I've reached, as I've been describing in this series of reports.

Quite honestly, my expectation increasingly is that questions like parliamentary elections in Egypt will be determined by events outside of Egypt, because of the increasing instability of the entire region, exacerbated by surging global food prices.

I've written in the last couple of days about the instability of Saudi Arabia and about Egyptian police clashes with Bedouins in northern Sinai. In addition, the news today is that there are Sunni-Shia clashes in Bahrain, and that the entire Palestinian cabinet plans to resign on Monday.

As I've written many times, the Mideast is headed for a new war, refighting the 1948 war between Arabs and Jews. This will be one component of the "Clash of Civilizations" world war, pitting the "axis" of China, Pakistan and the Sunni nations against the "allies" of US, India, Russia and Iran, Israel, among others. The current instability in the Mideast is very worrisome in view of that prediction.

The REALLY INTERESTING question, which I haven't yet attempted to address, is the following: When forced to choose one side or the other, will the Egyptians side with the "axis" or the "allies"?

On the one hand, Egypt fought against the Israelis in three wars, making it more likely that they will again.

On the other hand, the generational reasons described above make it more likely that Egypt will side with Israel. In fact, I've seen little mutual xenophobia between Israelis and Egyptians, while I've seen lots of mutual xenophobia between Israelis and Palestinians. That gives a clue as to how things will line up.

On balance, I'm somewhat surprised to find myself leaning towards the second scenario. The generational trends are just too powerful. We'll see.

Additional links

Opposition leaders in Iran have called for nationwide marches against the government on Monday, in solidarity with the protests in Egypt and Tunisia. Iran's government has promised brutal crackdowns on demonstrators. Al-Jazeera

Cairo's cats choke on teargas during demonstrations. Time

In the wake of the Egypt demonstrations, governments of Syria, Sudan, and other Mideast countries have ramped up their own use of social media sites like Facebook. Fierce Government IT

The cyberweapon that could take down the internet. New Scientist

For Valentine's Day: Geekiest marriage proposals of all time. Network World

10 Thrifty Ways To Deliver Big On Valentine's Day. Consumerist

(Comments: For reader comments, questions and discussion, see the 14-Feb-11 News -- Bangladesh stock market continues free fall, while Cairo's remains closed thread of the Generational Dynamics forum. Comments may be posted anonymously.) (14-Feb-2011) Permanent Link
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