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


Web Log - October, 2005


Canada announces discovery of bird flu in migratory ducks in Quebec and Manitoba

Officials emphasize that there's no danger yet to human health, in a press release issued on Monday by the Public Health Agency of Canada.

The discovery was made in the course of regular testing of migratory birds. Scientists have determined that the migratory ducks had Avian flu type H5, but further subtyping may require up to a week. In particular, it will take that long to determine whether the subtype is the highly pathenogenic H5N1.

However, H5 Avian flu is extremely rare in Canada, and H5N1 is the only subtype that's been appearing recently in migratory birds. For that reason, a positive finding of H5N1 will not be a surprise.

The press release emphasizes that transmission of the virus to humans is rare, but says that special precautions should be taken: "Persons handling wild birds should follow routine hand washing and safe food preparation practices. These include disinfecting surfaces, being careful to avoid cross contamination with other food products, keeping raw meat away from other food utensils, and thoroughly cooking all wild birds prior to eating. Following these steps is good practice to minimize risks associated with the handling and preparation of wild fowl." (31-Oct-05) Permanent Link
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Coordinated terrorist bomb blasts across New Delhi kill 60+

An Islamist Kashmiri separatist group has claimed credit.

Prime Minister Manmohan Singh called for calm in the wake of a major terrorist attack at 6 pm on Saturday in India's capital, New Delhi. New Delhi now joins New York, London, Madrid, Moscow and Bali as sites of major terrorist attacks.

There were three different but nearly simultaneous blasts at three widely separated marketplaces crowded with shoppers. Over 60 people were killed, but the toll is likely to rise. Many more were wounded.

The markets were mobbed because of shopping for the Festival of Lights, or Diwali, the most popular festival in India. It's celebrated throughout India by Hindus, Jains and Sikhs alike to celebrate life and strengthen relationships. The date varies from year to year, but it always falls on a dark night, when there's a new moon. This year it falls on Tuesday, November 1.

India, Pakistan, Bangladesh and Kashmir. <font size=-2>(Source: Peter N. Stearns)</font>
India, Pakistan, Bangladesh and Kashmir. (Source: Peter N. Stearns)

A group called Islamic Inquilabi Mahaz, or Islamic Revolutionary Group has claimed credit for the bombings. That group is little known, but is believed to be linked with Lashkar-e-Taiba or Lashkar-e-Toiba (LeT), a known Kashmiri separatist group with an agenda to convert all of India to Islam.

If the link to Kashmiri separatists is confirmed, that would link the bombing to the July 7 London suicide bombers whose ancestral home was Kashmir and who were trained in Kashmir.

In a related story, Bangladesh has also stepped up security, especially around the capital, Dhaka, where a regional summit meeting is to be held later this week. It was just two months ago that Islamist terrorist conducted a spectacular Islamist terrorist attack across Bangladesh.

From the point of view of Generational Dynamics, the significance of this terrorist attack is that it's another step in the linking up of Islamist terrorist groups throughout Africa, the Mideast, through Asia and Southeast Asia. As we described a month ago after the terrorist bombing in Bali, Indonesia, the third in three years, Islamist terrorist groups are using similar methods in Indonesia, Thailand, Bangladesh, India, Pakistan, Iraq, Saudi Arabia, and Palestine/Israel. The intent is to trigger a new "clash of civilizations" world war, and Generational Dynamics predicts that such a war will occur, most likely beginning within 2-3 years. (31-Oct-05) Permanent Link
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Storks fall out of the sky in Lebanon

500 million birds are migrating from Asia to Africa this week and next, flying over the Mideast. Farmers have spotted dozens of storks and other birds falling from the sky near Tyre in Lebanon.

Meanwhile, health experts are investigating the mysterious deaths of 'many birds' in Negev, Israel.

These are only two incidents out of many more that may occur as officials in Israel and in other Mideast countries are nervously watching the massive annual winter migration of 500 million birds from Asia to Africa. The hope is to catch early cases of the disease, and avoid the need to cull (kill) very many domestic birds, as this would affect the farming industry.

However, according to one researcher, the Mideast migration presents a special opportunity for the bird flu virus to adapt to human to human transmission.

According to research by Dr. Henry Niman, a non-lethal form of bird flu endemic to Israel could provide the missing genes to the lethal virus to make it human to human transmissible.

There are three types of influenza virus (A, B and C). Influenza type A viruses cause avian flu (bird flu) and also are a major cause of human influenza.

There are 15 avian influenza virus subtypes, but we're interested in only two of them: Subtype H5N1 is the deadly pathenogenic form that's been killing so many birds recently. It mutates frequently, with the result that it's also spread recently to pigs and tigers. It is not yet transmissible from human to human, as far as is known.

Subtype H9N2 is a far less deadly form of avian flu. It's also a non-deadly form of human flu, and it can spread from human to human.

According to Dr. Niman, H9N2 has become endemic in Israel, meaning that it appears commonly in Mideast chickens, turkeys and geese.

With hundreds of millions of birds flying over Israel this week and next, and with many of those birds releasing droppings containing H5N1, there are many opportunities for H5N1 and H9N2 to infect the same birds in the Mideast. Once a bird is infected with both of these subtypes simultaneously, the genes can recombine to create a new virus with the lethality of H5N1 and the human to human transmissibility of H9N2.

It's thus possible (though, of course, by no means certain) that a bird flu pandemic could begin in Israel in the next few days or weeks. If it's avoided now, then it may happen in March, when the same birds fly north again over Israel, following the same route in reverse.

Thus, many researchers are concerned that there is a non-negligible possibility that a bird flu pandemic could begin in the next few days or weeks, rather than next year as most people hope.

Meanwhile, bird flu has been spreading in other regions as well.

Bird flu outbreaks as of 27-Oct-2005<font size=-2>(Source:</font>
Bird flu outbreaks as of 27-Oct-2005(Source:

Bird flu has already touched most countries in Europe, as the adjoining map shows. So far, rapid action by health officials in the different countries of Europe has contained the spread to isolated regions of the continent. Europeans will breathe a big sigh of relief if they can extinguish all H5N1 outbreaks in the next few weeks, since that will probably leave them safe for the winter.

However, the greatest danger will only be postponed to the spring, when hundreds of millions of migrating wild birds returning from the Black Sea and eastern Mediterranean will be harder to contain.

Europe, Asia and the Mideast are not the only regions in danger, of course: Africa is next.

Open air market in Kenya has chickens for sale. <font size=-2>(Source: Reuters)</font>
Open air market in Kenya has chickens for sale. (Source: Reuters)

The wild birds migrating over the Mideast this week are heading into east Africa, where it will have a devastating effect. Open air bird markets are common in the crowded cities of Africa, especially near the bodies of water that migrating birds will be headed for.

While European and Mideast countries have the veterinary infrastructure necessary to respond quickly to H5N1 outbreaks, most African countries do not.

Even worse, disease is common in the backyard chicken farms that are common throughout Africa, and bird mortality is already fairly high. Even if 80% of a backyard flock is killed by bird flu, the outbreak may not be reported. As a result, H5N1 may spread rapidly throughout Africa this winter. This will present further opportunities for recombinations of H5N1 with H9N2 and other human-transmissible type A viruses, making a human-transible H5N1 even more likely.

The development of a human-transmissible form of deadly H5N1 is basically a numbers game, a roll of the dice. If you roll a pair of dice just once, the probability of getting "snake-eyes" (1-1) is just 1 chance out of 36; but if you roll the pair of dice 100 times, then the chances of getting snake-eyes at least once are almost certain.

Similarly, if you put a duck infected with H5N1 in contact with a duck infected with H9N2, then that one pair of ducks has a small probability of being the "mixing host" for the creation of a human-transmissible virus; but if you have hundreds of millions of migrating ducks available, then the chances of a "mixing host" are far from negligible. (28-Oct-05) Permanent Link
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Donald Rumsfeld visits China and cordially raises concerns

Laying the groundwork for a November visit to China by President Bush, Secretary of Defense Donald Rumsfeld was cordial to Chinese officials in Beijing, but he questioned the purpose of China's rapid military expansion.

In essence, Rumsfeld conveyed the same message to Chinese leaders that he did in a speech in June in Singapore.

His message to Chinese leaders on Wednesday was that the country's rapid and mostly secret military advances are raising concerns around the world.

The "rapid and, from our perspective at least, non-transparent nature" of the country's military expansion, plus its efforts to exclude the United States from regional institutions and activities" are leading nations around the world to wonder about China's intentions, the secretary said.

More importantly, Rumsfeld said, "it raises questions about whether China will make the right choices -- choices that will serve the world's real interests in regional peace and stability."

As I wrote yesterday (Sunday) in an analysis of the sharply deteriorating relations between China and Japan, these concerns are running deep in the region and around the world. A conflict over gas and oil rights in the East China between Japan and China could escalate out of control at any time.

Although Rumsfeld said that China is sending out "mixed signals" about its intentions, on this web site I've made no secret of what I see happening in China: China is rapidly militarizing in preparation for war with America. A war with America over re-unification of Taiwan with China is 100% certain, but it won't stop there. China will attack Japan to get revenge for Japan's atrocities in World War II, and China will go to war to gain hegemony over the entire North and South Pacific region, extending through the Indian Ocean to Africa. This comes at a time when China itself is becoming increasingly unstable, and is approaching civil war, which only makes China even more dangerous to the rest of the world. You don't have to be a Generational Dynamics scholar to see that coming.

Donald Rumsfeld sees this clearly as well. Rumsfeld is a member of the "Silent Generation" that grew up during the Great Depression and World War II, and knows well what can happen. Born in 1932, Rumsfeld was old enough to understand that the militarization of Hitler's Germany in the mid 1930s led to the most violent war the world has known, and Rumsfeld can see the same thing happening in China's aggressive militarization today.

Regular readers of this web site know that I don't get political, and that I have little use for the political prevarications of politicians of any party.

But I'll say this without hesitation: There is only one person in Washington, Democrat or Republican, who knows what's going on in the world and is actually doing something about it, and that's Donald Rumsfeld. Since he took office, he's been modernizing our military and re-focusing it on the Pacific, in preparation for a preemptive war by the Chinese. I dread the day that Rumsfeld leaves office and is replaced by a Gen-Xer (of either party), because anyone that young won't have a clue what's going on.

If America survives the next world war in decent shape then, in my opinion, the person we'll owe the most to is Donald Rumsfeld. (24-Oct-05) Permanent Link
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Will there be a stock market crash before the end of October?

The "Principle of Maximum Ruin" says that it won't happen.

There's an enormous amount of anxiety out there, because a lot of people realize that we could be on the verge of a panic and because several previous huge panics have all occurred in October -- the 1929 crash, the 1987 panic, and the Asian market crash in 1997.

So a crash is on a lot of people's mind, and if you talk to people and read some of the blogs, you realize that a lot of people are very concerned.

The Refco scandal, meltdown and bankruptcy that I've been writing about, might have caused a crash, but the regulators moved very fast to prevent further market damage and to maintain investor confidence. Right now, it looks like a market collapse has been prevented.

Almost everyone will be breathing a sigh of relief when October ends, because panics haven't occurred during the holiday season or in the springtime.

However, one web site reader recently sent me an e-mail message saying that a crash might, in fact, come later after all:

"As far as time frames, I've recently made an observation that may have merit or it may not. It appears that long term stock cycles may be starting to invert, meaning that highs are appearing where lows would be expected. This fits in with what I have been thinking for some time and have expressed indirectly to you ... and that is that since this is the third in a series of 75 year or so complete generational cycles (and the pattern is now well known) that the pattern will change due to our (or the regulators') recognition of it. This might mean that once the September/October "danger period" has passed that the crash could start. There are fundamental reasons to think that is possible such as the runup in home heating fuel prices and recent sudden drop in consumer and CFO (Duke University survey pre-Katrina) confidence. Just a thought."

The writer was referring to the previous two generational crashes -- the crash of 1929 and the Panic of 1857, both of which led to major international financial crises that lasted many ears.

His thought ties in with an essay I've been working on for this web site that's been taking way, way longer than I had expected. It's called "The Principle of Maximum Ruin": If you want to figure out what the market will do during a generational crash, then assume it will take the path that will ruin the most people, and that's the path it will follow.

The purpose of this long-delayed essay is to show why the upcoming crsis will much more devastating than you or anyone expect. I got the idea for it from the following paragraph from John Kenneth Galbraith's 1955 book, "The Great Crash - 1929":

"A common feature of all these earlier troubles [previous panics] was that having happened they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune." (p. 108)

Galbraith's point was that there were previous market panics, such as those occurring in 1903, 1907 and 1921, but that the market had recovered from them in a year or two. But that didn't happened after the 1929 panic.

Instead, the market kept falling.

Not only that, the market's up and downs following the 1929 crash occurred in such a way that more and more people were drawn in by false hopes to invest all their savings in the market. It was almost as if Adam Smith's "invisible hand" had turned into a perverse hand of doom.

The same thing is happening today, so far. The market recovered quickly from the panics of 1987 and 1997. The Nasdaq crash in 2000 was bad, and was made worse by 9/11, but now the market has recovered enough so that almost every investor today is back in the market, expecting it to go up.

If I buy a share of stock for $100, and I sell it to you for $200, and you sell it back to me for $300, then we've both made $100, even though the underlying stock certificate is still worth only $100.

A very simple computation, made by me and by other analysts, shows that the fundamental value of the stock market today is around Dow 4500, and yet stock prices are at Dow 12600, making the market far overpriced. This is also shown by current price/earnings ratios, as I've described many times. And yet investors today are in the same state of giddy denial as they were in 1929.

As I've been saying since 2002, Generational Dynamics tells us that we're entering a new 1930s style Great Depression, and that stock prices will fall to Dow 3000-4000 with certainty. As I've said many times, Generational Dynamics tells us where we're going, but not how we'll get there.

So how will we get there? Well, it's impossible to predict for sure, but we can look for guidance from the Principle of Maximum Ruin.

So what's the most likely thing for the market to do to ruin the greatest number of people? Obviously a crash in October would not be it, since everyone is prepared for it and expecting it.

The thing that would ruin the most people is for the market to do OK in October and into November, and then crash. Or maybe even get through the holiday season and then crash in January. Nothing like this has ever happened before, so almost everyone will be fooled. So if you believe the Principle of Maximum Ruin, then expect a panic and crash sometime after October.

This isn't exactly a farfetched concept. One thing that most analysts agree on these days is that there's going to be a recession early next year, thanks to high oil prices and the effects of the hurricane damage. Such a recession would certainly spread to China, and a recession in China could trigger a market meltdown there, which would cause a market meltdown here.

Incredibly, China just announced another quarter of 9.4% growth. China has been growing at 9-10% for twenty years. Each year since 2002, China has been trying to maneuver the economy into a "soft landing," reducing the growth rate to around 7%, but they've failed every year and every quarter, and every quarter they promise to do better next quarter. Obviously, they've failed again. They're in a huge market bubble themselves, and it's very close to bursting, which would cause the same market meltdown here, even if we don't have a recession first.

And, of course, there's always bird flu, which will be devastating to the global economy. In fact, the BBC recently predicted that a bird flu pandemic would cause a new Great Depression.

So keep the Principle of Maximum Ruin in mind as you make your investment plans in the next few months. (23-Oct-05) Permanent Link
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Refco declares bankruptcy as regulators work to contain more widespread damage

Fast intervention by regulators has prevented a panic or a chain reaction, but the danger is far from over.

Last week, it took only four days for Refco to go from the world's largest commodities and futures dealer to complete meltdown, with the CEO charged with securities fraud.

The SEC shut down trading operations on Friday evening, and on Tuesday, Refco filed the fourth largest bankruptcy in U.S. history. The collapse occurred just ten weeks after Refco went public with a spectacular IPO.

Refco consists of several different companies, and some are in more trouble than others. As is the case in any bankruptcy situation, various investors are looking to purchase different pieces of Refco at the cheapest possible prices. The leading bids are from little known hedge fund firm J. C. Flowers (which evidently has no web site), from the government of Dubai, and from over two dozen additional bidders. The complex negotiations over who will get which pieces will be overseen by the bankruptcy court, but Refco would like to sell its assets as quickly as possible, according to its lawyers in court on Wednesday.

The situation is greatly complicated by the danger to the rest of the rest of the market. Very quick work by regulators last week appears to have controlled the damage, but there are still many unknowns.

As happens in all bankruptcies, creditors often lose a great deal of money. Refco's biggest creditor is Austrian bank Bawag International Finance, which is owed $451.2 million by Refco. Wells Fargo Corporate Trust Services is owed $390 million, and VR Global Partners LP has $380.1 million in claims.

Those are the three largest creditors, but Refco had 200,000 clients, and possible losses may be far more widespread. Since many of Refco's trading operations have been frozen by the SEC, the full impact may not appear until the freeze is lifted.

There are two major dangers that concern regulators as they try to steer the Refco settlement into safe waters:

There's actually a third danger: A chain reaction of discoveries of securities fraud and embezzlement in other firms. How would that work? It would happen as follows:

This is not a far-fetched concept, because this is exactly what happened after the 1929 crash. All sorts of financial irregularities and crimes that had slid by unnoticed before the crash suddenly came to light after the crash.

John Kenneth Galbraith described this phenomenon in his 1954 book, The Great Crash - 1929, as follows:

"[Before the crash], to the normal needs for money, for home, family and dissipation, was added, during the boom, the new and overwhelming requirement for funds to play the market or to meet margin calls. Money was exceptionally plentiful. People were also exceptionally trusting. A bank president [was] unlikely to suspect his lifelong friend the cashier. In the late twenties the bezzle grew apace.

Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed. Most important, the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market. He now confessed. ...

Each week during the autumn more such unfortunates were reveled in their misery. Most of them were small men who had taken a flier in the market and then become more deeply involved. Later they had more impressive companions. It was the crash, and the subsequent ruthless contraction of values which, in the end, exposed the speculation by [financial firms] with the money of other people. Should the American economy ever achieve permanent full employment and prosperity, firms should look well to their auditors. One of the uses of depression is the exposure of what auditors fail to find. Bagehot once observed: "Every great crisis reveals the excessive speculations of many houses which no one before suspected."" [pp. 133-35]

In 1929, these crimes were rampant before the crash, but were not discovered until after the crash, as Galbraith describes. What I'm suggesting is that these crimes are just as rampant today, but instead of waiting for a crash to be uncovered, Grant Thorton's problem may cause some of them to be exposed soon, and it's those very discoveries that might trigger the crash.

In fact, the Panic of 1857, which was the major generational crash that preceded the crash of 1929, was triggered by the embezzlement of a cashier at a bank in New York.

From the point of view of Generational Dynamics, we're entering a new 1930s style Great Depression, as I've been predicting since 2002. At that time, I indicated that Generational Dynamics predicts a stock market crash to the Dow 3000-4000 range, most likely by the 2006-2007 time frame.

The current troubles at Refco may or may not be the trigger that leads to this financial crisis, but one way or another, a financial crisis of this type is going to occur, with absolute certainty. (20-Oct-05) Permanent Link
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Shamil Basayev gains in stature and power as pan-Caucasus terror leader

He claims credit for leading Nalchik attack, but blames a traitor for leaking advance information.

Chechen warlord Shamil Basayev's web site ( presents a stark view of the terrorist leader's intentions in provoking a wider war between Muslims in Chechnya and other North Caucausus provinces and Russia itself (mostly Orthodox Christians).

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In one article, quoting Basayev himself, he took credit for last week's massive assault on Nalchik, saying that "Nalchik was attacked by 217 Mujahideen."

He described it as follows: "217 Mujahideen participated in the assault operation, who at 9:14 a.m. simultaneously stormed 15 military objects of all power structures of KB [Kabardino-Balkarian province] in territory of city."

By objective standards, the attack has to be considered a failure. Dozens of Basayev's militants were killed or captured, while there were only a few Russian FSB (former KGB) casualties. Furthermore, several of the assault targets were defended with no losses whatsoever.

According to Basayev, any failure can be attributed to an information leak:

"Our casualties 41 Shaheeds [martyrs], insha Allah [if Allah wills].

These all are our wounded Mujahideen [Muslim fighters] who could not move and consequently conducted combat up to the end, by remaining in city.

For us it is greater casualties. These casualties were caused because five days before the operation there was a serious information leakage and kafirs [infidels] have dispatched additionally 1000 Special Forces units to Nalchik by planes, trains and motor vehicles."

Basayev adds, "Despite of greater losses, this is a big success for us, as our dead ones in Paradise, insha Allah and their dead ones in the Hell!"

The Caucasus Mountains run from the Black Sea to the Caspian Sea
The Caucasus Mountains run from the Black Sea to the Caspian Sea

Anyway, Basayev's attack is widely considered to be significant because it signals a substantial increase in his power and influence.

A problem for Putin

According to an analysis in the Financial Times: "On the surface, the attack in Nalchik, in which authorities said 92 Islamist militants and 24 police and civilians died, was reminiscent of an incursion last year by rebels from Chechnya into the neighbouring Caucasus republic of Ingushetia. But there was an important evolution: the attack in Nalchik appeared to reflect a recent change of leadership and tactics among Chechen rebels, and their ability to rely upon local discontent in the republics of the north Caucasus."

Much of the world press have framed the Nalchik attack as a policy failure by Russian President Vladimir Putin. One Washington Post commentary entitled " Putin's Spreading War", by Masha Lipman, blames the war on "the irresponsibility and inefficiency of Putin's bureaucracy."

Whatever the reason, few people doubt that the problems in Russia's Caucasus provinces are getting worse. The "nightmare scenario," where all Russia's Muslim provinces in the Caucasus join together with Chechnya in a secessionist cause appears increasingly likely, especially since unemployment in the region exceeds 50%, and government corruption is high.

Keeping corpses

A new Kremlin policy that's infuriating the Nalchik families since the terrorist attacks has the FSB refusing to return the dead bodies of innocent bystanders to their families for burial.

The policy is based on a law passed in 2002, following a terrorist attack in Moscow. The purpose of the policy is to prevent the return of the bodies of terrorists to their leaders, who can then honor them as fallen martyrs.

The result is that innocent bystanders cannot be buried according to Muslim law, causing a great deal of anger and distress.

The problem for the authorities is that there's no way to distinguish innocent bystanders from the terrorists themselves, who were local citizens. An article on Basayev's web site accuses the "FSB scumbags" of planting weapons on innocent bystanders in order to accuse them of being militants.

An analyst critical of Putin, speaking to the BBC, accused the authorities of returning to the days of genocidal dictator Josef Stalin:

"The situation is becoming increasingly unpredictable and unstable. For anyone with intelligence, the situation is understandable. Things have gotten much worse in the last five years. The Mujahideens are not real Mujahideens -- they're just young people who wish to protest, but they can't express their point of view because opposition newspapers have been destroyed in the last five years. These 'Stalin methods' will not work at the present time. It's very wrong not to return the corpses of the people killed to their relatives The relatives are protesting. This is a very small republic and the people know each other. These actions make the authorities very unpopular.

They can't just arrest 100 or 200 young people, say that they're militants, and expect to get a solution to the problem. There's only one solution - an open society."

In fact, Putin is likely to adopt even more confrontational policies, since all of this puts increasing pressure on Russian president Vladimir Putin to "solve" the problem.

According to another article on Basayev's web site, Moscow is getting ready for a "great war" in the Caucasus.

"The Kremlin is getting ready for it," it says. "By the beginning of 2005 Moscow has concentrated 300 000 soldiers in Caucasus . Part of them, more than 100 000 (according to some data up to 200 000), are directly in the Chechen Republic. ... The militarization of all Northern Caucasus goes at full speed."

Conflict risk level for next 6-12 months as of: 30-May-2005
W. Europe 1 Arab Israeli 2
Russia Caucasus 2 Kashmir 1
China 2 North Korea 3
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

Whether this is true or not, there's no doubt that a confrontation between Russia and its Caucasus provinces is gathering steam.

From the point of view of Generational Dynamics, such a confrontation, leading to a major regional civil war, is certain. The Bolshevik Revolution, ending in 1928 with the civil war between Trotsky and Stalin, killed millions of Russians, and that war is going to be refought.

Furthermore, the Caucasus is one of the three regions that have historically have hosted massive crisis wars between the Orthodox and Muslim civilizations. (The others are the Crimea and the Balkans.) (19-Oct-05) Permanent Link
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Condoleezza Rice says goodbye after visiting Moscow

Condoleezza Rice says goodbye after visiting Moscow <font size=-2>(Source: Reuters)</font>
Condoleezza Rice says goodbye after visiting Moscow (Source: Reuters)

Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State Condoleezza Rice say goodbye after their meeting in Moscow October 15, 2005. (Source: Reuters, by way of Kommersant.) (18-Oct-05) Permanent Link
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Friday evening collapse of brokerage firm Refco sends regulators scrambling to prevent market meltdown

It took only four days for the world's largest commodities and futures dealer to go from a high-flying success to almost certain bankruptcy, with the potential of creating a chain reaction with widespread effects.

Ebullient Refco execs at Stock Exchange a month after the August IPO <font size=-2>(Source: Bloomberg)</font>
Ebullient Refco execs at Stock Exchange a month after the August IPO (Source: Bloomberg)

Regulators, well aware of these potential dangers, have moved rapidly to contain the damage. On Thursday, regulators at the Chicago Mercantile Exchange and Commodity Futures Trading Commission asked several financial firms, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. to buy or assume financial responsibility for Refco's trading operations, to stabilize the situation. However, Goldman, at least, has decided against being part of a potential bailout.

On Friday evening, the Securities and Exchange Commission (SEC) stepped in and shut down most trading operations.

Just Monday, Refco was thought to be in great financial shape. But then it was revealed that CEO Phillip Bennett had been hiding $430 million in bad debts, and that the company's financial statements since 2002 could not be relied upon. Bennett was arrested on Tuesday for securities fraud, and he's now free on bail, but is no longer Refco's CEO.

Refco's lightning fast collapse has caught investors and financial institutions by surprise. Some investors say that the collapse should have little impact on the rest of the market, pointing out that, unlike Enron, Refco was merely a broker, not a principal in its major transactions.

Other analysts, however, point out that the collapse has already weakened some commodities futures prices, and that some weaker hedge funds may be battered. Any chain reaction from the Refco collapse would probably occur as the result of concerned and panicking investors pulling their money out of hedge funds, causing further collapses in the highly interlocked hedge fund industry.

Refco has more than 200,000 customers, including corporations, government agencies, hedge funds, pension funds, financial institutions and retail and professional traders. All of these customers are mulling over their strategies over the weekend, and we'll see the results when business opens on Monday. (15-Oct-05) Permanent Link
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Chechnya terrorists attack Russian town (Nalchik) massively

Coordinated attack by 300 Chechen gunmen raises Caucusus violence to new level.

When I first heard a story about "a gunfight in the Caucasus" teased on the news yesterday morning, I wondered, "Why is this even a news story? There are gunfights in the Caucasus every day."

The Caucasus Mountains run from the Black Sea to the Caspian Sea
The Caucasus Mountains run from the Black Sea to the Caspian Sea

As I wrote last July, when a passenger train was bombed in Dagestan, violence in Dagestan occurs almost daily because of 60% unemployment, poverty, and rampant government corruption.

Related Articles

Shamil Basayev
Shamil Basayev is dead: The Chechen terrorist responsible for the Beslan school massacre... (11-Jul-06)
Shamil Basayev gains in stature and power as pan-Caucasus terror leader: He claims credit for leading Nalchik attack, but blames a traitor for leaking advance information.... (19-Oct-05)
Chechnya terrorists attack Russian town (Nalchik) massively: Coordinated attack by 300 Chechen gunmen raises Caucusus violence to new level.... (14-Oct-05)
Russia is barring ABC News reporters from working in Russia: Still infuriated over ABC Nightline's airing of interview with Chechen terrorist warlord Shamil Basayev,... (2-Aug-05)
Russia infuriated over ABC "Nightline" interview of Shamil Basayev: "How many more bombs must hit New York before the American media learns... (29-Jul-05)
Passenger train bombed in Dagestan, following Putin's visit: This is the 70'th terrorist attach this year in Dagestan,... (25-Jul-05)
Massive bomb blasts in Egypt vacation resort: This follows new blasts in London and Chechnya.... (23-Jul-05)
Chechnya: Russian killing of rebel leader returns world's focus back to Caucasus: Terrorist Shamil Basayev may gain, as rebels select an obscure Islamic cleric... (11-Mar-05)
Russia ejects international patrols from Russia-Georgia border: As an act of defiance, Russia has vetoed continuation of an international peacekeeping force... (12-Jan-05)
Chechen terrorist Shamil Basayev now has the same stature as Osama bin Laden: Putin's ploy of blaming "international terrorists" for the Beslan terrorism was demolished... (19-Sep-04)
Russian President Vladimir Putin appears to be calling for revenge: Putin said that Russian "weakness in the face of danger" has caused Russia to be "beaten up" in the face of "a total and full-blown war."... (4-Sept-04)

Dagestan has not disappointed this week. On Tuesday, police in Dagestan defused a powerful bomb, and on Wednesday, gunmen shot and killed two policemen. This kind of stuff happens all the time.

So what's so special about yesterday's gunfight?

First, its size and execution. There were 150-300 gunmen simultaneously attacking three police stations, the airport, and other government buildings. The assault took place in Nalchik, capital of Kabardino-Balkaria, a province near Chechnya, and adjacent to South Ossetia, the site of the Beslan school massacre that killed hundreds of school children a year ago.

Yesterday's assault left the streets of Nalchik littered with some 60 corpses, most of them part of the terrorist group that launched the attack.

Second, and most important, the fact that the attack was sufficiently complex to have required coordination between different Muslim terrorist groups, including one local to Nalchik. In this case, it means that a local Muslim terrorist group coordinated the attack with a Chechen terrorist group.

This theme of coordination and organization is similar to the one we discussed recently as regards the violent beating of Chinese democracy activist Lu Banglie. As long as demonstrations and rebellions are local, the government can handle them. But when local groups start to link together into larger, better organized terrorist armies, then the government can lose control. That is, in fact, what's happening.

Credit for yesterday's attack was claimed by Chechen warlord Shamil Basayev. Basayev is responsible all the terrorist attacks described in the preceding paragraphs, including the Beslan massacre and the downing of two passenger planes while in flight. Basayev's group linked up with Yarmuk, a militant Islamic group based in Kabardino-Balkaria.

This major new terrorist attack is a major setback for Russian President Vladimir Putin's hardline policy in trying to control terrorism in the Caucasus.

President Putin has ordered a complete blockade of Nalchik to keep the remaining terrorists from escaping.

In fact, there's no possibility that any policy by Putin will end the terrorism in Caucasus.

From the point of Generational Dynamics, the Caucasus region is well into a "generational crisis" period, following the Russian civil war of the 1920s, Stalin's genocide of Ukrainians in the 1930s, and exiled Chechens to other regions in the mid 1940s. The Caucasus region is a major front line in the centuries old war between Orthodox Christians and Muslims, and Generational Dynamics predicts that the war between those two civilizations will be fought again, resulting a war that consumes Russia and the entire Caucasus region. (14-Oct-05) Permanent Link
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Violent beating of democratic activist in China illustrates country's increasing instablity

Government authorities are thought to be responsible for the attack on Lu Banglie, who was kidnapped on Saturday evening as he was traveling with a UK Guardian reporter to Taishi. He disappeared until Monday, when authorities drove him to the hospital to be treated for the savage beating he had received. "Five to six of them pulled my hair and punched me in the head," said Lu. "They kicked my legs and body for a couple of minutes. Then I passed out. Some people splashed water on me which brought me round, then I passed out again." The local Chinese Communist Party (CCP) propaganda office said there had been "no violence" and that Mr Lu had "pretended to be dead."

This kind of incident epitomizes the increasing instability of China, as it transitions from a "generational unraveling" period to a "generational crisis" period. As described at length before, Generational Dynamics predicts that China is approaching a massive civil war as its bubble economy unravels, along with the rigid social structure originally set up by Mao Zedong in the 1950s and 60s. Today, there are close to 150 million migrant workers (20% of the workforce), mostly peasants who have lost their farms to corrupt land deals by CCP officials, who take any jobs they can find in the cities and send money back to their families in vast poverty-stricken rural areas. Any recession or economic setback to China would provoke nationwide fury.

China has a long history massive slaughter during periods of rebellions and civil war, most recently the Taiping Rebellion (1852-64) and the civil war between Mao and Chiang Kai-shek (1934-49). The last civil war led to a split in China, with Mao's forces taking control of the mainland as Chiang's forces fled to Taiwan. Generational Dynamics predicts that a new civil war will soon force the violent reunification of Taiwan with China, pulling America and the world into a new world war.

Today, we see instability increasing even without a recession. It's hard to understand this in America, but regional riots occur on an almost daily basis, throughout China. According to CCP figures, 3.6 million people took part in 74,000 "mass incidents" last year, an increase of more than 20% on 2003. Ten years ago, there were only a few hundred such mass riots in the country, but the number has been increasing exponentially as the country's society and economy continue to unravel.

In many ways, Lu Banglie is a perfect example of the generational archetype to lead this kind of rebellion. Born in 1971, he's an example of the "Nomad archetype" in China, known as Generation X in America. From the point of view of Generational Dynamics, Nomads are born and raised during generational awakening eras, periods of enormous political turmoil (like the 60s in America, and they typically grow up to be the angry and disaffected, but the generation that gets things done. Most of the world's greatest war leaders, like FDR, are from the Nomad generation, but so are many of the world's most evil dictators, including Hitler and Mao himself.

Lu, described as a pioneer who studied Gandhi, began in 2001, at age 30, to initiate a class struggle against the CCP by petitioning the Beijing government to relieve taxes on poor farmers. In 2004, he achieved personal success by getting his local village chief ousted, and getting himself elected, campaigning against land seizures, corruption and rising healthcare costs.

That much was tolerated by the CCP, but Lu really started getting into trouble this year when the villagers of Taishi, far from Lu's home, asked him to help them get rid of their own village chief. He willingly got involved, much as Mao himself might have, 70-80 years earlier.

This was intolerable to the CCP because of something that it fears more than anything else: organized dissent. It's one thing when a group of villagers protest or rebel against their local village chief, but when organizers from different regions begin cooperating with one another, then the threat to the CCP becomes overwhelming.

Organized threats to the CCP have always been dealt with very harshly. The seminal event was the 1989 Tiananmen Square massacre. This was the explosive climax to China's generational awakening era, as several million college students from all over the country crowded into Tiananmen Square in Beijing to protest CCP policies. The CCP responded by jailing and slaughtering thousands of students.

But that event also triggered two movements that will eventually be the CCP's undoing. The 1989 massacre launched the Falun Gong movement in 1992, led by Li Hongzhi. Li was born in 1951 or 1952, and is a member of China's "generational prophet generation" (like America's baby boomer generation. From the point of view of Generational Dynamics, the prophet generation typically provides spiritual guidance, while Lu Banglie's nomad generation does the actual implementation work.)

Falun Gong (or Falun Dafa) is a spiritual movement, containing concepts from Buddhism and Taoism. The CCP was shocked to learn that by 1999 the movement had some 100 million practitioners across China. Older people would get together to meditate and do exercises. Once again, Beijing became alarmed at the possibility of organized resistance, and declared in 1999 that practicing the Falun Gong was illegal. Rumors have it that millions of Chinese have been jailed simply for doing the equivalent of Richard Simmons exercises.

Nonetheless, the Falun Gong movement continues to grow and gain practitioners. Their leaders believe it to be the modern version of the God-Worshipper's Society, a spiritual movement which launched the Taiping Rebellion in 1852, and was a form of Christianity combined with Buddhism. China has the most sophisticated technology in the world for controlling internet content, and has the most advanced techniques in the world for crushing regional rebellions. Nonetheless, the Lu Banglie incident is an example of how ordinary Chinese peasants are forming inter-regional organized resistance movements, using whatever slang or obscure language they need to get their ideas across the country through the internet.

The other movement launched by the 1989 Tiananmen Square massacre was the Wild Lily movement in 1990 among Taiwanese college students, who watched the CCP's Tiananmen Square actions in horror, and vowed to remain independent of China. Today, the president of Taiwan is Chen Shui-bian, one of the early supporters of the Wild Lily rebellion, and an advocate of Taiwanese independence.

From the point of view of Generational Dynamics, new religions and ideologies are usually created by the Prophet generation during an awakening era, and are implemented by the Nomad generation during a crisis era. This is a pattern that has been occurred repeatedly throughout history, and we see it happening now, right before our eyes, in China. (11-Oct-05) Permanent Link
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Bird flu spreads to Europe: Romania and Turkey

Suddenly bird flu is a very hot media topic, as President Bush raises the possibility of using the military to contain a flu outbreak.

The sudden confirmation of bird flu in Europe has been expected for several months, ever since the virus was found in birds in the Qinghai Lake region of China. Qinghai Lake is a major central point for waterfowl migrations, and there was rarely any doubt that migrating birds would spread the virus further, once the winter migration began in September.

In Turkey, nearly 2,000 turkeys died last week of the flu at a farm near the Aegean Sea. There is enormous fear that the flu will spread not only to other birds, but also to humans, as it already has in Asia. "I cried when I witnessed the death of my turkeys," says one farmer. "I cannot forget those moments ... But now I think of myself and what will happen to my health. I cannot go near my wife and children."

Authorities are taking precautions to contain the virus, including setting up quarantines around affected areas, and culling (killing) thousands of birds who might be susceptible.

Since many other European countries are on the migration paths, it's likely that other countries will be affected. Already, there are rumors of infections in Iran, Germany, and Hungary, but they haven't been confirmed.

In fact, the Romanian outbreak occurred in the Danube delta, which contains Europe's largest wetlands and is a major migratory area for wild birds coming from Russia, Scandinavia, Poland and Germany. This indicates that the virus will continue to spread worldwide.

In Jakarta, Indonesia, a 4-year-old boy has been diagnosed with bird flu, which would be sixth confirmed human case in the country.

On the other hand, six of fifteen patients being treated for bird flu have been found to have other illnesses instead (ordinary flu or typhoid), and they are being discharged.

Media attention to bird flu has increased, thanks to last week's announcement of the reconstruction of the lethal Spanish Flu virus, that spread around the world in 1918-19. World War I had just ended, killing many more people than any previous war in history, but the Spanish Flu killed more people than the war.

In fact, of American soldiers who died in Europe, half of them fell to the virus and not to the enemy.

The reconstruction was done by obtaining samples from two different sources. One source was small samples of lung tissue that had been saved by the Army in 1918 in the hope that some future generation could learn something from them. The other source was the frozen body of woman who had died from the flu in Alaska in 1918.

The reconstruction was led by Jeffery K. Taubenberger of the Armed Forces Institute of Pathology, said in an interview,

"Our concern is that the H5 type [such as the new avian flu strains] might be going down a similar path [of adapting to humans] as the 1918 virus did. What we've found is kind of eerie. Practically any of the bird viruses that we can find with some of these changes tend to be the highly pathogenic avian viruses, like those in Asia.

This suggests to us that these viruses are acquiring mutations that make them more human-adapted. So far it's a lucky thing. These viruses can get into a person, and they can kill. But they can't yet spread from person to person. The race is on now to figure out what changes are crucial to allowing the virus to be transmissible from one person to another."

Bird flu was first discovered in 1997, and was localized to chickens in Hong Kong, and later Vietnam. Despite repeated attempts by the U.N. World Health Organization to stamp it out, it has continued to survive, and adapt to additional species. Originally it infected only chickens, but since then it's adapted to infect ducks, geese, and other birds, and has gone on to kill pigs, tigers and other cats.

Conflict risk level for next 6-12 months as of: 30-May-2005
W. Europe 1 Arab Israeli 2
Russia Caucasus 2 Kashmir 1
China 2 North Korea 3
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

Most epidemiologists today believe that a worldwide bird flu pandemic is inevitable. Once begun, it will kill tens of millions of people worldwide, and perhaps hundreds of millions. A bird flu pandemic would cause a worldwide financial crisis, and would spark riots among people seeking food or scarce vaccine. Within a year or two, all of the regions in my little "Conflict risk" graphic would be at full scale war, since they're all in "generational crisis" periods.

Right now, the best that officials can hope for is that the pandemic won't start this year. If it doesn't occur till next year, then the time might be used to develop additional vaccines, or find other solutions. However, we're overdue for a stock market panic as well as a bird flu pandemic, and so the world may be a very different place a year from now. (09-Oct-05) Permanent Link
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After 3 days of sharp losses on the stock market, the "Octoberphobia" mood is increasingly gloomy.

Is this a panic? Just what IS a panic, anyway?

The market took a steep fall on Wednesday, for the third day in a row, falling 2.4% in three days. As I'm writing this, the noontime reading of Japan's Nikkei index shows it's fallen almost 3% today alone.

The economic bad news just doesn't seem to stop.

Consumer spending in August had its sharpest decline in four years <font size=-2>(Source: WSJ)</font>
Consumer spending in August had its sharpest decline in four years (Source: WSJ)

Consumer confidence fell sharply in September, to nearly a two-year low <font size=-2>(Source: WSJ)</font>
Consumer confidence fell sharply in September, to nearly a two-year low (Source: WSJ)

Investors have gotten more cautious in the last month.  After keeping the P/E ratio at 20 for a year, last month they pushed it down to the 18-19 range.  <font size=-2>(Source: MarketGauge ® by DataView, LLC)</font>
Investors have gotten more cautious in the last month. After keeping the P/E ratio at 20 for a year, last month they pushed it down to the 18-19 range. (Source: MarketGauge ® by DataView, LLC)

On Wednesday, the Institute of Supply Management released its non-manufacturing business activity index, showing that it fell sharply because commodities prices, led by oil and gas, have spiked up.

Earlier this week, on Monday, the ISM released its manufacturing index, which showed unexpected strength. That should have made investors happy, right? Just the opposite. The "prices paid" component was up sharply, once again led by oil and gas prices, and the market immediately took a dive.

The logic is this: When businesses pay more for commodities, it means that they'll have to increase prices, leading to inflation, which means that Alan Greenspan's Fed will continue to raise interest rates, which means that credit will be tighter, which means that business will be bad.

This is all on top of exponentially increasing public and private debt, with little fiscal control following the destruction wrought by hurricanes Katrina and Rita. And sky-high oil and gas prices are keeping consumers out of shopping centers and eating into discretionary income.

In fact, Alan Greenspan warned that the market may be in danger, a speech he gave on September 27.

This would be really hilarious if it weren't so serious. Greenspan said that the market was in danger because his clever rate-setting policy has stabilized the economy, which has reduced "risk premiums", which has made investors less willing to invest. It reminds me of the statement last year by Greenspan's colleague, Fed Governor Ben Bernanke, blaming America's astronomic credit imbalance on other countries for spending so little that they've created a "global savings glut." These guys just can't stop patting themselves on the back.

There's a great deal of anxiety in the marketplace now, because of "Octoberphobia," the fear of a stock market panic, such as those that occurred in 1987 and 1929.

Are we in a panic situation already? No we aren't. Not even close. A 2% or 3% loss could easily be made up in a single day. (Though as I'm writing this I'm watching the Nikkei index continue to fall, more and more.)

In 1987, the stock market fell 22% in ONE DAY (Oct. 19), and in 1929 the stock market fell 24% in two days.

When a real panic comes, you'll know it when you see it. A "panic" means what it says -- an unreasoned frenzy to sell faster than anyone else does.

Today, the mood is right for a panic. Investors are highly anxious today, and race to the bottom could easily result in a lose of 20% or more in one or two days. That would bring the DJIA down to around 8200, which is where it was in July, 2002, anyway.

But what would happen after that? Would the market keep on falling, as it did in 1929, or would it begin to recover, as it did in 1987?

Most journalists, pundits and high-priced analysts are saying the same thing: There won't be a panic, but if there is, the market will recover soon, as it did after the 1987 panic by 1989.

But those analysts would be wrong, and here's why: As we've said many times, both I and other analysts have computed, the "true value" or book value of the market today is around Dow 4500, which means that the market is overvalued by more than 100%. In fact, the market today is priced at 216% of book value.

In 1929, the market was at 173% of book value when the panic occurred, following the 1920s bubble. The market continued to fall for three more years, ending up at 24% of book value by July, 1932. This shows how a bubble can cause an "anti-bubble", caused by strong risk-averseness among investors; instead of stopping at 100% of book value, the market fall overshot the book value, and fell substantially further.

By contrast, in 1987 the market was just at 105% of book value when the panic occurred. The panic caused a 22% fall, which brought the market price well below book value, so that an early recovery was to be expected at that time. [22-Jan-2006 correction: in 1987, the market was at 127% of book value, still within the normal variation.]

That's why we're entering a new 1930s style Great Depression, as I predicted in 2002, and that the market will fall to the Dow 3000 level, or lower. (If the market again falls to 25% of book value, then it will fall to the Dow 1000-1500 range.) There's no way to predict when a panic will occur, and if it doesn't occur before Thanksgiving, then it probably won't occur until we're well past the Christmas/holiday shopping season.

But October is the cruelest month, and it's a good idea to be prepared for the worst. If you do it right, then you'll be OK whether the worst occurs or not. (06-Oct-05) Permanent Link
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Terror grips Southeast Asia from Thailand to Australia

Weekend Bali bombing targeted Australians, who are warned of further attacks.

"The timing didn't surprise me because, if I'm not mistaken, this is the start of the Australian holiday season, just as it was three years ago," an American DoD consultant told an Australian newspaper. "It's a calculated time when foreigners, particularly Australians, are in Bali."

Azahari Husin - Asia's most-wanted man
Azahari Husin - Asia's most-wanted man

Last Saturday's near-simultaneous blasts struck two seafood cafes in the tourist center in Bali, Indonesia, killing 22 people and injuring more than 100 others.

Last weekend's bombing attack was actually the fourth in as many years. Last year, a bomb blast targeted the Australian embassy in Jakarta, killing 8 people, injuring 168 others. In 2003, A car bomb in front of the JW Marriott Hotel in Jakarta killed 12 people.

The most deadly blast occurred on October 12, 2002, when the bombing of a Bali nightclub killed 202 people, including 88 Australians.

All four attacks are thought to be the work of Islamist terror group Jemaah Islamiyah, led by Malaysians Azahari Husin and Noordin Mohamed Top, the two most wanted men in Asia.

Southeast Asia
Southeast Asia

The two men were trained in bombmaking in the Philippines in 1999, and advanced training in Afghanistan in 2000.

The group's avowed intention is to establish an Islamic state from Indonesia to southern Thailand.

Thailand's Prime Minister Thaksin Shinawatra has warned that the Bali violence could spread to Thailand.

"Geographically it may seem that the locations are far apart, but Indonesia, Malaysia and Thailand are actually connected along sea routes," said Thaksin. "These people (the terrorists) have been traveling between and circulating around the region via the sea for generations."

In fact, Thailand has already has had its own problem with Islamic terrorists in its southern provinces. Prime Minister Thaksin's government was granted sweeping new powers to detain suspects and censor newspapers. The powers were granted following an increasingly serious series of attacks.

Thailand is primarily Buddhist, but there is a predominantly Muslim area in the south, on the border with Malaysia. An Islamist insurgency began there in January 2004, and since then more than 1,000 people have been killed in repeated terrorist attacks. Some 34,000 Buddhists have been forced to flee the region, the most violent arena for Muslim violence outside of Iraq and Southern Russia (Caucasus).

There is a danger that the Thai Muslim terrorists will link up with the Pan-Malaysian Islamic Party (PAS), an Islamist radical party that has control over the northern province of Kelantan bordering Thailand. The PAS in turn may be linking up with Jemaah Islamiyah, the group responsible for the Bali bombings, and with al-Qaeda itself.

From the point of view of Generational Dynamics, this kind of linking up is expected, as we approach a "clash of civilizations" world war. However, some readers of this web site have misunderstood this to mean that the war will be with Islamist terrorist groups. (The politicians in Washington seem to believe the same thing.)

The expected reality is quite different. The war will be between countries: Muslim countries like Pakistan and Malaysia will be at war with non-Muslim countries like India, Thailand and America. Generally speaking, the intentions of terrorist groups are not so much to win a war themselves, but to trigger a major war which, they believe, their "side" will win. Osama bin Laden has, in fact, stated this as his intention, since he believes that a major world war would be won by the more than one billion Muslims in the world.

This linking up of identity groups, to form ever larger identity groups, leading to entire countries being forced to choose sides, is a major feature of crisis wars throughout history. (05-Oct-05) Permanent Link
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