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


Web Log - November, 2007


Tony Blair compares the Mideast peace process to the Northern Ireland peace process

Generational Dynamics illuminates when such historical comparisons are valid and when they are not.

People are always quoting the famous phrase by George Santayana, "Those who cannot remember the past are condemned to repeat it." Politicians and historians are always trying to discover ways to apply the lessons of the past to the present.

Unfortunately what is true in one place or time may or may not be true in another place or time. For example, there was an international oil embargo against South Africa in the late 1980s because of Apartheid, and it was one of the factors that successfully ended Apartheid.

On the other hand, there was an oil embargo against Japan in 1941, and it led to Pearl Harbor and international war.

So, what do we learn from history? Do we learn that oil embargoes work, or do we learn that oil embargoes don't work?

Generational Dynamics gives us at least a partial answer. The oil embargo against South Africa worked because it occurred at the time of the climax of an Awakening era. Politics and morality play a big role in societies in late Awakening and Unraveling eras, and so a political act, like an embargo, can have a big effect.

The oil embargo failed against Japan because Japan was in a generational Crisis era. During a Crisis era, morality issues are far less potent, and something like an embargo can easily be considered to be an act of war.

Thus, when you're trying to learn lessons from history, you have to make sure that the generational eras correspond.

Another example is the civil war in Darfur versus the so-called "civil war" in Iraq.

I've said for years that a civil war in Iraq is impossible, because Iraq is in a generational Awakening era, and any incipient civil war fizzles quickly. That's exactly what happened in Iraq.

Contrast that to the real civil war in Darfur. Politicians around the world have been whining because no one has "stopped" the Darfur civil war. I wrote from the beginning that the Darfur is in a generational crisis era, and a crisis civil war CANNOT be stopped, just as a tsunami cannot be stopped. And indeed, the UN and the international community have failed completely and repeatedly to stop it.

That's the difference between a generational Awakening era, as in Iraq, and a generational Crisis era, as in Darfur.

If people in the State Department or the United Nations understood generational theory, they wouldn't make so many mistakes. Generational theory, properly applied, could give any country a substantial advantage in international relations. Unfortunately, no one even wants to consider it.

This finally brings us to the main topic today, Tony Blair's comparison of the Mideast "peace process," going on today, versus the Northern Ireland peace process.

The "Troubles" of Northern Ireland peaked in 1972 with "Bloody Sunday," in which the British army fired on a large mass of civil rights protestors, killing 26. (A roughly similar event occurred in the US in 1971, when the Ohio National Guard fired on Kent State students, killing four.)

These are Awakening era events -- violent to be sure, but still Awakening era events. Violent Awakening Era events are never crisis civil wars, but the issues surrounding them either grow and fester, leading to civil war in the next Crisis era, or else they die out, usually in the next Unraveling era. The latter is what happened in the Troubles of Northern Ireland. Bloody Sunday ostensibly pitted the Protestants against the Catholics, but there has been no recent history of a major war fault line between Protestants and Catholics. The amount of violence has substantially disappeared since 1972.

But no such reasoning applies to the Mideast. There IS a major fault like between Arabs and Jews in the Mideast, and they fought an extremely bloody and genocidal war in the late 1940s when Palestine was partitioned and the state of Israel was created. Israel was created on May 15, 1948, and the Palestinians today still commemorate May 15 every year as "Al Naqba - Catastrophe Day."

Mideast envoy Tony Blair, former British Prime Minister. <font face=Arial size=-2>(Source: CNN)</font>
Mideast envoy Tony Blair, former British Prime Minister. (Source: CNN)

And so, from the point of view of Generational Dynamics, the Northern Ireland Troubles would have led to peace with or without the help of politicians, while the Mideast troubles must lead to war with or without the help of politicians. Politicians make ABSOLUTELY no difference to either situation.

That doesn't stop them from taking the credit, though. (As the old joke goes, it's like the rooster taking credit for the sunrise.)

And that's exactly what Tony Blair did on Thursday, when interviewed by reporter Hala Gorani on CNN International.

The context of the interview was the Mideast summit in Annapolis that ended on the same day. The "accomplishment" was that everyone agreed to talk some more. It's really kind of pathetic, but it's what politicians do.

Here's how Blair began:

"The really important thing about the conference at Annapolis is that it has launched a process with a time table, namely 2008. And not to talk about SOME of the issues, but to resolve ALL of the core issues between Israel and Palestine. And that is a, you know, it's a huge undertaking. It's a very big challenge. And, of course, there will be lots of people be skeptical because of all the failures in the past. But actually this is a very strong statement and commitment by both the Israelis and the Palestinians and the president of the United States has put the weight of the U.S. behind it. So, you know, there's a lot that's got to happen now that it's a very strong and important beginning."

Coquettish Hala Gorani interviews Tony Blair on CNN International <font face=Arial size=-2>(Source: CNN)</font>
Coquettish Hala Gorani interviews Tony Blair on CNN International (Source: CNN)

You know I like Tony Blair, because he always has a friendly, positive demeanor, even when he's blowing hot air.

The "peace process" has repeatedly failed to accomplish anything for decades, and Blair is saying that EVERYTHING will now be accomplished within a year. Why? Because of a "very strong statement and commitment" by both sides. What was that commitment? To talk more.

Gorani asked Blair about the Jerusalem issue, which she indicated was one of many issues on which neither side is willing to compromise. here's Blair's response:

"You know, one of the things I learned when I did the northern Ireland peace process is that things that seem absolutely irresolvable, you know, things that -- where the parties just, you think, that can't be done, actually can be done if the will is there and some hope and credibility comes back in the process. So -- and it's not for me to negotiate the issue of Jerusalem here, but I don't believe if you get everything else working, it will be impossible to find a way through."

Now this is simply wrong. Here's where Blair is comparing an Awakening era political dispute to a Crisis era fault line dispute. The first is resolvable, and the second is not. Having "some hope and credibility" has nothing to do with it. There is simply no comparison.

Gorani picks up on the comparison by comparing the northern Ireland terrorist group, the Irish Republican Army (IRA), with the Palestinian terrorist organization, Hamas:

Gorani: "Now you mentioned northern Ireland and this was a great success achieving peace in that part of the world after so many decades of bad blood between two communities. But the IRA, which was considered a terrorist group that nobody could ever talk to, was then embraced in the end. Why not do the same with Hamas? What is the difference?"

Blair: "The difference is very simple. When we actually got the Sinn Féin political party associated with the IRA into the peace process, we did so on the basis that certain principles were accepted. And let me make it very clear, it's not that people are saying, we will never contemplate dealing with Hamas. Hamas can be dealt with provided that they except the two principles of the gateway into the process. Number one, there should be two states, so Israel's got a right to exist."

Comparing the IRA to Hamas really illuminates the lash of generational theory, and why it means that the two situations are completely different.

Fault lines and generation gaps
Fault lines and generation gaps

Here's a diagram that I worked up several years ago to illustrate what goes on, and how generation gap lines are distinguished from fault lines. When I have some time, perhaps I'll turn it into an animated GIF where the horizontal generation gap line moves up and down automatically.

But here's the idea: In the years immediately following a crisis war, the horizontal generation gap line is near the bottom of the diagram, and there's a large older generation of war survivors who have vowed to spend their lives preventing any such war from ever occurring again. That's why the portion of the vertical fault line that's above the horizontal line is shown as a dotted line; violence across the fault line is muted because neither side wants another war.

As time goes on, the horizontal line moves up; the older generation disappears, and the younger generation grows larger. The portion of the vertical fault line that's BELOW the horizontal line is shown as a solid line, because it's a real fault line, and the level of violence and hostility grows.

It's a shame that people in our State Dept. or the United Nations don't have a clue about any of this stuff. At the very least, it would allow them to concentrate their resources where they might actually do some good. (30-Nov-07) Permanent Link
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Investors in drunken orgy push the Dow up 311 points.

It was the biggest two-day Dow Industrials increase in five years, and everyone wore a smile a mile wide on CNBC on Wednesday.

On Tuesday, investors had gotten all excited when the nice oil sheiks in Abu Dhabi agreed to bail out Citibank.

On Wednesday, a Fed Governor gave a speech and supposedly hinted that the Fed would cut interest rates again, when the FOMC (Federal Open Market Committee) meets next on December 11.

That's all it took to push the Dow Industrials up 311 points on Tuesday.

Here's how a Financial Times article explained what happened:

"Stocks surged on Wednesday after Federal Reserve vice-chairman Don Kohn dropped what investors saw as a clear hint that the US central bank was ready to cut interest rates again next month unless market conditions improve.

Mr Kohn, the number-two official at the central bank, said the Fed would be "flexible and pragmatic" in responding to new risks to growth arising from the relapse in financial markets."

Now, I read through Kohn's complete speech, and you can do the same, but I don't see any "clear hint" at all. The 2000 word speech discusses the Fed balancing act -- promoting financial stability while avoiding moral hazard -- and concludes with the following:

"In response to developments in financial markets, the Federal Reserve has adjusted the stance of monetary policy and the parameters of how we supply liquidity to banks and the financial markets. These adjustments have been designed to foster price stability and maximum sustainable growth and to restore better functioning of financial markets in support of these economic objectives. My discussion today was intended to highlight some of the issues we will be looking at in financial markets as we weigh the necessity of future actions. We will need to assess the implications of these developments, along with the vast array of incoming information on economic activity and prices, for the future path of the U.S. economy. As the Federal Open Market Committee noted at its last meeting, uncertainties about the economic outlook are unusually high right now. In my view, these uncertainties require flexible and pragmatic policymaking--nimble is the adjective I used a few weeks ago. In the conduct of monetary policy, as Chairman Bernanke has emphasized, we will act as needed to foster both price stability and full employment."

So yes, the phrase "flexible and pragmatic policymaking" does appear in the next-to-last sentence of the speech, but it refers to the balancing act of financial stability versus moral hazard. It's a thin reed on which to base a stock-buying orgy. Nonetheless, investors have succumbed to full-scale bipolar disease for several weeks now, and after a long depressive period, it was probably time for a manic episode.

Phil Roth, Miller Tabak <font face=Arial size=-2>(Source: CNBC)</font>
Phil Roth, Miller Tabak (Source: CNBC)

I did make note of some particularly amusing statements made on CNBC on Wednesday, so that I could share them with you, Dear Reader.

Here's one from Phil Roth, chief technical market analyst at trading firm Miller Tabak:

"Short term the problem will be the Fed meeting, because people are now buying stock in anticipation of some good news from the Fed. You probably need bad economic news to get good news from the Fed. So you probably have to hope for a bad employment report, and then action from the Fed."

This is exactly the kind of "bad news is good news" statement that I keep talking about. So if you've recently become unemployed, and you can't find another job, you should be aware that it's good news, and that a you're very lucky person. Even more important, you're helping the wealthy Wall Street investors make more money, and that's what counts in life.

Julie Van Cleave, DWS Capital Growth Fund <font face=Arial size=-2>(Source: CNBC)</font>
Julie Van Cleave, DWS Capital Growth Fund (Source: CNBC)

And now, here's the funniest statement of all on CNBC on Wednesday:

"The market was very oversold, and currently we've got a 14 multiple on the market which is very low in any of the last 10 years as far as what would be a normal point here. So I think the market was very oversold. We've taken a lot of bad news and we're ready for a short term rally."

This brief statement is so wrong on so many levels that it's hard to know where to begin. It's typical of what we hear on CNBC, and I wish the quote had come from a male, so that I can't be accused of picking on a girl, especially a blonde. But male or female, blonde, brunette or redhead, this kind of blithering stupidity is the norm.

She says that "we've got a 14 multiple on the market." What does that mean? It means that the price/earnings ratio index is 14. But readers may have noted that there's a price/earnings ratio chart at the bottom of this web site's home page, and it gets updated automatically every Friday. Here's the November 23 version of the chart:

S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 23-Nov-2007. <font face=Arial size=-2>(Source: MarketGauge ® by DataView, LLC)</font>
S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 23-Nov-2007. (Source: MarketGauge ® by DataView, LLC)

As you can see from the above graph, the P/E ratio is not 14. It's actually around 17-18. The question is: Where did Van Cleave get the figure 14 from?

The answer is that she's using the wrong value for earnings. The P/E ratio should be computed by dividing the stock price by the company's earnings per share for the last year. But Van Cleave isn't doing that, because that would give an embarrassing result.

Van Cleave is using so-called "forward earnings," the bloated estimates for earnings in 2008. By using a bloated value for earnings, the P/E ratio becomes smaller. What Van Cleave computed is total gibberish.

And this is a woman who probably makes over a million dollars per year investing other people's money in the stock market.

What you should understand, Dear Reader, is that YOUR pension fund, your 401k, your stock market or hedge fund broker -- the people managing YOUR hard-earned money are, like Van Cleave, too stupid to know how to compute a price/earnings ratio.

Computing the price/earnings ratio isn't exactly rocket science. Someone would have to be unbelievably stupid to be unable to learn it. And yet, Van Cleave and other people who manage YOUR money are just that stupid.

It doesn't stop there.

She says, "which is very low in any of the last 10 years." But look at this graph of P/E ratios for the last century that I've posted several times:

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007
S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

Now as you can see, the P/E ratio index was ENORMOUSLY above average for the last ten years, by historical standards, and so to compare today's value to the last 10 years is moronic.

I don't expect the "man on the street" to necessarily understand these things. But I DO expect someone who earns millions of dollars managing other people's money to understand them.

And yet, Van Cleave is not only TOO STUPID to even know how to compute a price/earnings ratio, she's also TOO STUPID to know what the historical average is. And remember, this idiot or someone like her is managing your pension fund.

Let's go on to the third common error, though not one used by Van Cleave on this day.

Very often you hear some so-called expert on CNBC use the phrase "reversion to the mean," or "is reverting to the mean," to indicate that some long-term index is getting closer to its long-time historic average or mean value.

For example, some so-called genius might say, "the P/E ratio is getting close to 14, so it's reverting to the mean, so stocks are cheap again."

This is total nonsense. The Principle of Mean Reversion is not "reversion TO the mean"; it's "reversion OF the mean."

It's not the current P/E ratio that has to revert to 14; it's the mean or average that has to revert to 14. And the only way that can happen is for the current P/E ratio to go much lower -- around 5 or 6, as has happened several times in the last century, most recently in 1982 -- and stay very low for many years, so that the AVERAGE will get back down to 14.

I realize that to understand this concept requires several advanced degrees in higher mathematics, and so we can't expect Van Cleave and other financial experts to understand it when they're too stupid even to know how to compute the P/E ratio in the first place.

I just can't get over the sheer day by day stupidity of these people. It never ceases to astound me and infuriate me.

The only thing I can't figure out is whether they're being incredibly stupid or incredibly dishonest. It's quite possible that Van Cleave and others like her are very well aware that they're lying, and therefore they're committing fraud on their clients. If you're a client of one of these people, I definitely think you should start preparing your lawsuit for fraud and make these people pay dearly for their dishonesty and lack of ethics. They deserve the worst punishment they can get.

Now still you may be thinking, "Gee, who cares? The markets went up 2˝% to 3% on Wednesday, so everything is going great!!"

Well just take a look at my Dow Jones historical page, and check out what happened on Monday, October 7, 1929 (1929-10-07) -- notice that the market went up 6.32% on that one day alone. You can just imagine the smiles and laughter of investors on that day. And look at how much the stock market continued to gain throughout the entire week. Then, check out what happened just two weeks later.

That doesn't mean that we're going to have a stock market crash in two weeks, though we might. What it means is that Wednesday's 3% gain is not a sign of market strength; it's a sign of a drunken orgy at a time of great investor desperation.

From the point of view of Generational Dynamics, we're overdue for a stock market panic and crash. It might come next week, next month or next year, but it's coming with absolute certainty, and probably sooner rather than later. (29-Nov-07) Permanent Link
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Will the United Arab Emirates save the world?

Markets soar after Abu Dhabi oil sheiks give Citibank $7.6 billion, in return for a stake in the company.

I've been wondering the last few days whether the Fed or the Dept. of Treasury would come up with some spectacular move to attempt to resolve the revived credit crunch crisis, and return the investment community back to a state of euphoria.

Well, it was neither the Fed, nor the Treasury Dept.

It was the Abu Dhabi Investment Authority (AIDA), the secretive association that invests the enormous oil profits of Abu Dhabi in the United Arab Emirates (UAE).

Actually, I should have thought of something like that. When I wrote the article, "The bubble that broke the world," I suggested that China might try to save the American economy, for its own well-being, in the same way that the US tried to save the German economy in 1931. Then and now it should have occurred to me that the Gulf oil sheiks might try to do exactly the same thing.

AIDA will invest $7.5 billion in Citibank (actually, Citigroup) in return for a stake in the company.

Rumors have been spreading for several days that Citibank was planning thousands of layoffs, and some people were speculating that Citibank would become insolvent. The rumors spread because Citibank has had to take $16.9 billion in writedowns in recent weeks. These writedowns have become common among many financial institutions recently. They come about because financial institutions create credit derivatives and CDOs, backed by subprime mortgage loans, priced according to computerized models that compute notional values far above what anyone would really be willing to pay for them. One firm after another has been forced to go through the "mark to market" process recently, revealing the true market value of these securities. Quite a few, nominally worth billions of dollars, have turned out to be almost worthless.

Citibank has been hit so hard by these writedowns that the future existence of the institution was in doubt. The injection of funds from Abu Dhabi gives new life to Citibank, at a time when it was most desperate to receive it.

However, Citibank, which has 320,000 employees globally, is still expected to lay off tens of thousands of employees.

It'll be interesting to see what kind of political backlash, if any, this provokes. In the past, Washington has gotten all bent out of shape after Arabs or Chinese or Japanese have made large investments in the U.S. This time, however, the Citibank situation is so desperate that it's not likely that we'll hear more than a few peeps.

Investors were thrilled, and quickly became drunk with euphoria. The Dow Industrials quickly rose over 100 points on Tuesday morning, and closed 215 points up.

The "bad news is good news" mentality returned to investors throughout the day. The reasoning was as follows: The market has fallen 10% from its high -- an amount that would qualify as a market "correction." Since the market has now had its "correction," according to this reasoning, it's time for the market to go up again.

Here's how CNBC anchor Joe Kernen put it on Tuesday morning:

"We're down 10%. This is a script that I'm writing. If I produce a movie.

Market hits a 10% correction. All these things that have gone too far -- where we may have quasi- or pseudo-bubbles -- they start to reverse. The markets finish - got the 10% out of the way -- oil starts reversing. The dollar starts reversing. Interest rates stop dropping. All these things start happening, and we all live happily ever after."

It's a nice fairy tale, and maybe some day it'll make a great movie.

But unfortunately the latest news doesn't justify this kind of euphoria. Housing prices have fallen 1.7% in the last three months alone -- the largest tumble in the 21 year history of the Home Price Index. And the US Consumer Confidence Survey index fell much more sharply than expected, indicating that consumer spending will be reduced.

Several paragraphs ago I mentioned the article, "The bubble that broke the world." If you haven't read that, then now would be a good time to do so. It uses a book written in 1931 to inform us of what's happening today -- how one desperate measure after another is being used to avoid the inevitable result.

From the point of view of Generational Dynamics, the stock market is overpriced by a large factor, currently almost 250%, same as in 1929. A full-scale generational panic and crash must come before too much longer. (28-Nov-07) Permanent Link
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Mideast summit in Annapolis has feel of act of desperation

No one appears to have any expectations whatsoever -- talking just to talk.

The last major Mideast peace initiative of the Bush administration begins on Tuesday in Annapolis, as leaders of Israel, the Palestinian Authority, Saudi Arabia and even Syria sit down to talk.

If there's anybody anywhere who believes that this summit meeting will actually accomplish anything, I haven't seen it or read about it.

Instead, those who favor the initiative are saying it's the beginning of a process, consisting of additional meetings in the future, to eventually come to a Mideast peace solution -- two states, one Israeli and one Palestinian, living side by side in joy and peace and harmony.

However, this "process" has begun a number of times in the past. Major examples include the Oslo accordings in 1994, President Clinton's 14-day Camp David summit get-together in 2000, and the Mideast Roadmap to Peace in 2003.

These and other initiatives have all failed completely -- even when an agreement was reached, things only got worse afterwards.

In fact, on May 1, 2003, when the Mideast Roadmap to Peace was announced, I predicted that the Roadmap would fail, the Mideast would becoming increasingly chaotic, leading to a major genocidal war between Arabs and Jews that would re-fight the genocidal war of 1948-49, following the partitioning of Palestine and the creation of the state of Israel.

Since 2003, and especially since the death of Yasser Arafat, it's hard to find a single day when the situation was not measurably worse than it was the previous day.

In fact, things have been getting worse and worse pretty steadily since the first Intifada in the late 1980s. President Clinton held several summit meetings with Mideast leaders during his Presidency, and things only got worse, especially after the disastrous Camp David meeting in 2000. President Bush has held no summit meetings until now, and things have only gotten worse. It doesn't take a rocket scientist to see that it doesn't make any difference whether you hold summit meetings or not -- things will get worse either way.

Indeed, each day that passes makes any kind of agreement less likely. Why? Because the people who most want an agreement are the generations that survived the 1949 war, and who see an agreement as the best way to prevent any such disaster from occurring again, and every day, more and more of those survivors die. Left behind are younger generations, most of whom are convinced that the only way to resolve the issue is to have victory over the other side.

Here are some of the current roadblocks to a peace agreement:

It's worth pointing out that the trends on all of the above issues is that they've gotten worse and more intractable; there is no indication of an improvement in any area that I'm aware of.

In fact, as I've pointed out many times, the governments of countries that fought in World War II as a crisis war are all becoming increasingly paralyzed. This is true of the United States, France, Japan, and other countries. The reason is that the the post-war generations, like America's Boomer generation, don't have any skills for leading and governing. This also applies to the Israelis and Palestinians. So even an agreement like the Oslo accords could not be repeated now.

From the point of view of Generational Dynamics, the Mideast is going in one and only one direction: Toward a major new war between Arabs and Jews, refighting the genocidal war of the late 1940s. And the new war will pull in the United States and numerous other countries that will be forced to choose sides between the two warring enemies. (27-Nov-07) Permanent Link
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International credit markets are nearing "virtual panic mode"

Markets in Europe, America and Asia have fallen sharply on Monday and Tuesday, as the evidence builds that a major new international "credit crunch" crisis is about to begin.

Banks are hoarding cash, refusing to lend money to other banks. The interest rates tell the story:

This is exactly what happened in July and August, when the "credit crunch" almost shut down the entire banking system.

This time, however, the Fed and other central banks are trying to stay ahead of it. The Fed is pumping $8 billion into the economy, to head of a new credit crunch. The European Central Bank (ECB) announced a similar policy last week.

However, it's not clear that the central banks can do much more than they have, and what they've done isn't very much.

According to a JPMorgan economist, the markets went into "virtual panic mode" last week. "Pressure is building for central banks to become a lot more active and vocal [this] week if they want to avert a collapse in credit markets."

Whether the central banks and the Treasury Dept. can pull of some spectacular policy change to postpone the inevitable remains to be seen.

From the point of view of Generational Dynamics, there's no question about what's going to happen. As I've been saying since 2002, the stock market is overpriced by a large factor, currently almost 250%, same as in 1929. A full-scale generational panic and crash must come before too much longer. (27-Nov-07) Permanent Link
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Political chaos increases in Lebanon as Constitution fails to provide a new President

Hizbollah is threatening to cripple Lebanon's government indefinitely, now that Émile Lahoud's term as President ended on Friday, and the Parliament has been unable to select a successor.

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Lebanon is politically split between pro-Syrian and anti-Syrian politicians. Lahoud was a pro-Syrian politician. That's why Hizbollah was supporting him, and don't want him replaced with an anti-Syrian person.

The Lebanese Parliament is supposed to select a new President, but it currently has anti-Syrian majority.

Terrorists, most likely hired and funded by Syria, have been killing one anti-Syrian politician after another, beginning in 2005 with the massive Beirut explosion that killed Rafiq Hariri. There have been more of these killings, and the seventh killing occurred with a Beirut bomb blast in June. This has whittled the anti-Syrian majority in the Parliament down to just one or two votes.

That's presumably the reason why Hizbollah is threatening to prevent a vote indefinitely. They can do this by having their members boycott Parliament meetings, so there won't be a necessary quorum. Presumably that kind of stalling will give Syria the time necessary to kill off one or two more anti-Syrian members.

There has been renewed fear of civil war in Lebanon, like the horrible civil war that occurred in the 1980s.

Ever since last summer's Israeli war with Hizbollah in Lebanon, pundits have been almost unanimous in predicting a new civil war in Lebanon, especially since Hizbollah (supported by Iran and Syria) has been trying to trigger one. Apparently the pundits' reasoning is that if they had a horrible civil war 20 years ago, then they're ready, willing and able to have another.

I've said repeatedly that a civil war in Lebanon is absolutely impossible, since only one generation has passed since the genocidal Lebanese civil war of the 1980s. Lebanon is in a generational Awakening era, and so a civil war is impossible.

The Lebanese are terrified of another civil war. This is true of every country in a generational Awakening era. In this case, the survivors who lived through the 1980s are still, to this day, completely traumatized and horrified because of the barbarity of what ordinary Lebanese people did to each other. This was especially true in the explosive climax in 1982 when Christian Arab forces massacred and butchered hundreds or perhaps thousands of Palestinian refugees in camps in Sabra and Shatila.

It's this horror and fear of repeating the atrocities of the last crisis war that prevent the survivors from ever taking part in a new crisis war. That's the essence of a generational Awakening era.

So, as bad as the political turmoil becomes in Lebanon, there won't be another civil war, no matter how much the pundits talk about it.

To get a feel for how the current situation is affecting the Lebanese, think of the American election in the year 2000, when there wasn't a clear winner chosen on election night.

It's extremely dangerous for a country to be without a leader, since decisions can't be properly made. It was certainly one of the principal motivations of the US Supreme Court at that time to make sure that the indecisive state didn't continue for long. And there are many bitter feelings still continuing to this day over the way it turned out.

That's the situation in Lebanon right now. The country will continue on with only a partial government until some compromise can be found to select a new President. But there won't be a civil war.

(26-Nov-07) Permanent Link
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Pakistan is suspended from the British Commonwealth of Nations

Once upon a time, long, long ago, there was a British Empire.

Today, there's no longer a British Empire. In its place is the British Commonwealth of Nations, a group whose members are 53 nations consisting mostly of former British colonies.

Reference list of members: Antigua and Barbuda, Australia, Bangladesh, Barbados, Belize, Botswana, Brunei Darussalam, Cameroon, Canada, Cyprus, Dominica, Fiji Islands [suspended], Ghana, Grenada, Guyana, India, Jamaica, Kenya, Kiribati, Lesotho, Malawi, Malaysia, Maldives, Malta, Mauritius, Mozambique, Namibia, Nauru [special member], New Zealand, Nigeria, Pakistan [now suspended], Papua New Guinea, Samoa, Seychelles, Sierra Leone, Singapore, Solomon Islands, South Africa, Sri Lanka, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines, Swaziland, The Bahamas, The Gambia, Tonga, Trinidad and Tobago, Tuvalu, Uganda, United Kingdom, United Republic of Tanzania, Vanuatu, Zambia.

Although the Commonwealth has officially existed since the mid 1800s, it became particularly important with the breakup of the British Empire after World War II. Still with the Queen as its head, the nations of the Commonwealth provide technical and administrative assistance to one another.

Interestingly, there is a competing organization: Organisation internationale de la Francophonie, the alliance of French-speaking nations. Coincidentally, la Francophonie also has 53 member nations. Just as Britain and France are in competition over everything else, there's also a competition between the Commonwealth and la Francophonie.

In fact, there's currently a kerfuffle over the bid by Francophone nation Rwanda to join the Commonwealth. Rwanda's aspiration to join the Commonwealth is not intended to shut out Francophone practices and the French language, according to the Rwandan government. "We are not going to the Commonwealth to speak better English, but to get economical, social and community benefits."

And so, although the Commonwealth and la Francophonie organizations are almost totally unknown in the United States, membership in these organizations is a very big deal among many nations internationally.

Which is why Thursday's suspension of Pakistan from the Commonwealth is also a very big deal.

Every two years, there's a Commonwealth Heads of Government Meeting (CHOGM), a get-together of the leaders of all the member nations. By coincidence, the CHOGM 2007 meeting is being held this very weekend in Kampala, Uganda.

On the eve of the meeting, on Thursday evening, the Commonwealth Ministers Action Group (CMAG) reached the decision to suspend Pakistan from the Commonwealth, because "it failed to fulfil. its obligations in accordance with Commonwealth principles." CMAG particularly objected to the fact that President Musharraf is both a civilian and military leader, both Head of State and Chief of Army Staff.

Saying that the decision was taken "taken in sorrow not in anger," CMAG demanded implementation of the following measures before Pakistan could be restored to full membership in the Commonwealth:

This is actually the second time that the Commonwealth has suspended Pakistan's membership. Pakistan was suspended in 1999, when General Pervez Musharraf seized power through a coup. The suspension was lifted in 2004.

An angry Pakistan government spokesman rejected CMAG’s decision and said it was "based on lack of realism and absence of understanding" of the situation in the country, and that they would not tolerate outside interference in Pakistan's affairs.

Pakistan's Ministry of Foreign Affairs issued the following statement on Friday:

"The Government of Pakistan deeply regrets the decision of the Commonwealth Ministerial Action Group (CMAG) to suspend Pakistan from the Councils of the Commonwealth. The decision does not take into account the objective conditions prevailing in Pakistan .

The Government of Pakistan is committed to restore full democracy in the country. Emergency was a necessary measure to avert a serious internal crisis which is being addressed and the situation is now returning towards normalcy.

A neutral caretaker government is in place to hold free, fair and impartial elections. The Election Commission of Pakistan has already announced that elections to the National and Provincial Assemblies would be held on 8 th January, 2008 . Foreign election observers are welcome. Except for a few, all detainees held as a measure of precaution have been released. The print media was never under any restriction, while the large majority of television channels have resumed their transmission. Following the judgment of the Supreme Court on the validity of Presidential election, President Musharraf is expected to take the oath of the office as a civilian President.

The pace of progress towards normalcy will be determined by ground realities and legal requirements in Pakistan rather then unrealistic demands from outside.

In order to prevent any precipitate decision by CMAG, both the Prime Minister and the Foreign Minister had contacted the leaders of CMAG on telephone and through letters communicating the ground realities in Pakistan and underlining the significant political progress made since the imposition of Emergency. The CMAG countries were asked to take this progress into account in their deliberations and to postpone any consideration of suspension until a CMAG delegation could visit Pakistan to see for itself the existing circumstances and the steps taken by the Government to place Pakistan firmly on the path of democracy.

Therefore, the CMAG decision is unreasonable and unjustified. Pakistan will review its association and further cooperation with the organization."

As indicated by this statement, Musharraf appears to be moving in the direction of complying with Commonwealth demands. However, he has not yet named a date for removing the state of emergency.

On Friday, Pakistan's election commission confirmed that Musharraf won the October 6 presidential election, giving him another five years in office as Head of State.

This frees Musharraf, according to previous promises he's made. to resign as head of the military, and he's renewed his promise to do this within a week. Parliamentary elections are scheduled for January 8.

Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas),  highlighting Swat Valley <font face=Arial size=-2>(Source:</font>
Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas), highlighting Swat Valley (Source:

From the point of view of Generational Dynamics, Pakistan and India are headed for a new crisis war, re-fighting the genocide that followed the 1947 Partition of the subcontinent into (Muslim) Pakistan and (Hindu and Sikh) India.

Thus, there are many things happening that will complicate the path to the January 8 elections and the removal of the state of emergency:

Reading through the above list, it's clear how rapidly Pakistan's domestic situation is changing.

Thus, although the Commonwealth's suspension of Pakistan is humiliating, it's far down the list of major factors that will influence Musharraf's actions.

And there's little doubt that there will be further rapid and unexpected changes in the weeks to come. (24-Nov-07) Permanent Link
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żPor qué no te callas?

The King of Spain's memorable putdown of Venezuelan President Hugo Chávez has become the most popular ringtone in Spanish history.

"Parody sweeps Bájatela" is the claim by the Bájatela mobile phone company in a ringtone ad. <font face=Arial size=-2>(Source: CNN)</font>
"Parody sweeps Bájatela" is the claim by the Bájatela mobile phone company in a ringtone ad. (Source: CNN)

Venezuelan President Hugo Chávez has increasingly become the biggest and most obnoxious loudmouth among international leaders, often even eclipsing his pal, Iranian President Mahmoud Ahmadinejad. (His other pal, Cuba's Fidel Castro, has been too sick to matter for a while now.)

So at a meeting in Chile two weeks ago, when Chávez kept interrupting Spanish Prime Minister José Luis Rodriguez Zapatero in order to call Spain's former Prime Minister José María Aznar a fascist,

Spain's King Juan Carlos spoke up and said to Chávez "żPor qué no te callas?" which means, "Why don't you shut up?"

The King's remark has been made available as a mobile phone ringtone by several by several phone companies, and about half a million people have downloaded it to their mobile phones. In addition, the phrase has appeared on T-shirts and mugs.

Here's an English-language translation of the exchange that occurred in Chile on November 11:

"Zapatero: We are in a committee of democratic governments which represent their citizens in an Ibero American community which has respect as main principle. You can be diametrically opposed to a political idea, I don’t share former president Aznar’s ideas, but former president Aznar was chosen by Spanish people and I demand, I demand…

Chávez: Tell him to respect.

Zapatero: I demand you......., one moment….

Chávez: Tell him the same.

Zapatero: I demand that respect for one reason, moreover…..

Chávez: Tell him the same, president.

Zapatero: Of course.

Chávez: Tell him the same....

Spain’s King: Why don’t you shut up?

Bachelet: Please, don’t make a conversation, you have already had time to express your points of view, president, you have to finish,

Chávez: President Aznar may be Spanish but he is a fascist and a……

Zapatero: President Hugo Chávez, I think an essence exists, and it is that in order to respect and to be respected, we must try not to discredit. You can have different ideas, condemn conducts, but without discrediting. What I want to express is that a good way to work is to understand each other in favour of our countries, we must respect each other, and I ask – president Bachelet- that must be a rule of conduct in a summit which represents citizens, we must respect our leaders, every presidents and former presidents of all the countries that form this community.

I think it is a good principle and I strongly wish that should be a rule of conduct, because conduct gives essence to things, and you can disagree with everything respecting the rules, that is the principle in order to be respected.

I’m sure that all this committee and all Latin Americans want every democratic leaders (…) to be respected, today and tomorrow, although we have different beliefs.


Chávez: Venezuela’s Government reserves the right to answer any attack anywhere, and in any tone.

Chávez is not used to having anyone talk back to him. He's demanded that the King Carlos apologize to him, and has made implied threats to nationalize Spanish investments in Venezuela if no apology is forthcoming.

So this amusing little spat is probably not yet over. (23-Nov-07) Permanent Link
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CNBC's Steve Lieseman talks about Armageddon

In a discussion on Friday morning on CNBC, CNBC's chief macroeconomics commentator compared what's happening now to the worldwide credit crisis that occurred in August. That crisis, you'll recall, was resolved by unexpectedly large interest rate cuts by the Fed. Lieseman described what he's been hearing people say lately:

"I want to give you the flavor of what I'm hearing from people in the credit markets. And the story I'm hearing is that it's worse now than it was back in August. I'm hearing worse comments, like Armageddon out there in some of these credit markets.

ABX and Swap Spread screens referenced by Lieseman <font face=Arial size=-2>(Source: CNBC)</font>
ABX and Swap Spread screens referenced by Lieseman (Source: CNBC)

It's an easier story to tell than it was back in August, because you're seeing it reflected in equity markets.

I want to run through a couple of screens here.

Take a look at the ABX. This is a market for insuring mortgage bonds or mortgage derivatives, and that's down - this is the close of business on Wednesday. That's not good -- it's below the August level by quite a bit.

Then take a look at a wider market, which is the swaps market, and this is a swaps to treasury spread -- and you can see that it's actually higher now than it was back in August. And what you see there -- this is just a measure of risk aversion. The higher that number is, basically, the more risk averse people are. ...

Bottom line is that relative to August -- and equities have caught on to this it seems -- credit markets are doing worse.

We're awaiting a fix. There is increasing talk about a government fix here -- not letting the market sort this out on its own."

Jack Bouroudijian of Brewer Investment Group gushes over stock market (29-Dec-06) <font face=Arial size=-2>(Source: CNBC)</font>
Jack Bouroudijian of Brewer Investment Group gushes over stock market (29-Dec-06) (Source: CNBC)

Before continuing with this, I'd like to remind the reader of an article that I wrote in December of last year, entitled "Financial analysts gush at stock market's meteoric rise." In that article, I quoted what Jack Bouroudijian of the Brewer Investment Group said on on CNBC:

"This has been a wonderful six months for the market. And the worst thing about it is that we underperformed the rest of the world. So it's really of question of whether we're at the beginning of a multi-year run in equities. I guess that's the big debate. When you've got these superstar fund managers like the Bill Millers of the world, that are underperforming that are still unbelievers out there, that makes me even more bullish than I am. And we see all this data coming out and this is absolutely everything that you want."

Bouroudijian's extremely gushy remarks were contrasted to the more sober remarks of others.

Randall Dodd, director of the Financial Policy Forum  (29-Dec-06) <font face=Arial size=-2>(Source: CNBC)</font>
Randall Dodd, director of the Financial Policy Forum (29-Dec-06) (Source: CNBC)

In particular, in that same article, I also quoted Randall Dodd, director of The Financial Policy Forum, who gave a warning about the coming crisis in credit derivatives:

"I don't want to be alarming, I'm just trying to raise people awareness about these issues. I would look at the credit derivatives market. We've had some problems in clearing and settlement of those contracts. We've had problems with people trading more credit derivatives than there is underlying debt. And right now there's one big issue we have to look at -- it's that a lot of our major banks and broker dealers are moving their credit risk off their books and into hedge funds. So you have financial institutions with capital requirements reducing the amount of capital they use by moving that credit risk into hedge funds which have no capital requirements and often use very high leverage to manage their credit risk of selling credit protection through this credit derivatives market."

Now that these warnings about credit derivatives are coming true, it's interesting to look at how attitudes have changed in the past year.

Randall Dodd's warning is no long considered "alarming"; it's part of the general discourse today, and now for the first time there's even talk of "Armageddon."

Bouroudijian appears on the CNBC panels pretty often, and he's consistently gushy. To him, the market can go in only one direction -- up, then up some more. He uses words like "unbelievers out there" to indicate that it's all a matter of faith.

Well, now the question is this: Has Bouroudijian changed at all recently, now that the market has been falling fairly steadily since the October 9 high?

Here's how he responded on Friday morning to a question about what would be necessary for a year-end rally to occur:

"I think one of the things we're going to have to see is the dollar stabilizing a little bit. You and I know that one of the problems out there is the speed at which the dollar is deteriorating. It's OK for the dollar to go down in a controlled manner, but what's been happening lately has been scaring a lot of portfolio managers.

One of the things that I like is that there is so much negative press out there. If you read the NY Times today, then there's an article about the Japanese basically calling it quits in America. Remember that this is the same group that bought the top.

Lieseman and Bouroudijian argue about government intervention. <font face=Arial size=-2>(Source: CNBC)</font>
Lieseman and Bouroudijian argue about government intervention. (Source: CNBC)

And as far as Steve is concerned, Steve, you're talking to people who were looking at NO PROBLEM WHATSOEVER early in the summer. And now they're looking at Armageddon, now that all the news is out. Well that tells me that we're very close to a bottom. I love that kind of press."

Well, Bouroudijian is always good for a chuckle. But there are some very interesting things about what he said:

Lieseman responded to Bouroudijian as follows:

"I'm going to take you on a little bit on that. I think this is one of those things where "negative" is not a marginal consideration -- it's a real consideration. And I think in order to turn the market around you need two things -- visibility on one, the problem, and two, the solution. And I don't think we're close to that.

You need a sense that you're not going to come in in the morning and get whacked from the side that you've never heard of before, which keeps happening. Almost every day we hear a new thing coming out. That's one.

And two, you need a sense that either the government or the markets or some combination of the markets and the government have their hands around how to put a fix into the system. I don't think we're anywhere near the bottom on either one of those two stories yet."

There was some further arguing between the two over whether it's appropriate for the government to intervene in the market system, with Bouroudijian firmly opposed to any such intervention.

What's interesting about that discussion is the unstated assumption that there IS a government fix that would work. Is there really a government fix for everything? What if there ISN'T any government fix? No one considered that possibility. After all, the government has been so successful at fixing everything else, so naturally they have a fix for the credit crunch crisis as well, don't they.

Let's take a look at one more indicator:

MarketPsych Fear Index -- 23-Nov-2006 to 23-Nov-2007 <font face=Arial size=-2>(Source: Marketpsych)</font>
MarketPsych Fear Index -- 23-Nov-2006 to 23-Nov-2007 (Source: Marketpsych)

I've referenced the MarketPsych investor fear index several times in the past, most recently on November 3, when I wrote that it was forecasting sharply increased market turbulence. The graphic above presents the index as of Friday morning.

Notice that there's a sharp upward spike on the right-hand side. That spike may or may not hold. In watching this index, I've noticed that spikes often disappear within a day or two, as more data comes in. So that spike may or may not disappear.

What IS significant, however, is the permanently elevated level of the index for over a full month. This is at the same level as the one-day spike in February over the Shanghai stock market panic, and it's almost as high as the August level. This index was at a low on January 19, and has been trending upward ever since, indicating an increasing level of investor anxiety throughout the year.

And this is the main point that I want to emphasize today.

When I wrote my August 17 article entitled "The nightmare is finally beginning," I wasn't referring to what was happening to the stock market indexes; I was referring to what I perceived as a sharply increased level of investor anxiety.

Because really, nothing special has happened to the stock market indexes in the last few months, or even this year. You could take this year's stock market performance and drop it into almost any year in the past six decades, and it wouldn't be considered particularly exceptional or noteworthy.

From the point of view of Generational Dynamics, what's important are the changes in attitudes and behaviors of masses of investors, entire generations of investors. The ups and downs of the stock market are irrelevant, except insofar as they reflect the changes in attitudes and behaviors of the masses of investors.

What's different now is that something big has changed since July 19, when the market reached the historic high of Dow 14000.

The triggering event appears to have been the July 18 Bear Stearns announcement that its hedge funds were almost worthless, thanks to writedowns of CDOs. By August 17, when I wrote the "nightmare" article, it was very clear that things had changed dramatically.

What we're seeing now is a huge change since July 19. Attitudes and behaviors have changed enormously. And the market itself is reflecting these changes, through its steady downward drift since it reached its new history high of Dow 14164 on October 9.

As I've been saying since 2002, Generational Dynamics predicts that we're overdue for a generational stock market panic and crash, as happened in 1929. This is based on the simple fact that price/earnings ratios have been astronomically high by historic standards, and that the stock market is overpriced today by a factor of about 250%, same as in 1929. (23-Nov-07) Permanent Link
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On Thanksgiving, thank you to my readers.

The number of regular readers to this web site has been growing steadily over the past year, and I thank all of you who keep coming back.

I particularly want to thank the four people who donated a total of $441. This was extremely generous and unexpected.

I often receive e-mail messages from people who call me insane or psychopathic. I chuckle at these, and I note that as the world situation deteriorates I'm getting far fewer of them.

More important, I also get e-mail messages from people who thank me profusely for "saving" them and their families, by allowing them to prepare for what's coming. I'm very thankful for these messages. These messages are very special to me, and they make all the work that I put into this web site worthwhile.

I'm very proud of the work that I've done in the development of Generational Dynamics, because I've accomplished so much, as I've shown on this web site. The amount of resistance to accepting anything this new, especially from Boomer academics, is enormous, and quite honestly I don't expect to survive long enough to see generational theory as an established academic pursuit. Nonetheless, with more and more people reading this web site, I hope that I've created a nucleus of interest that will grow as this extremely important analytical and forecasting methodology becomes better recognized.

I want to thank Bill Strauss and Neil Howe, the founding fathers of generational theory, as described in their 1995 book, The Fourth Turning. Generational Dynamics builds on top of their theory, and without their work it would not have happened. I've just learned recently that Bill is seriously ill with cancer. I wish him well.

I'm still managing to keep up with all e-mail questions sent to me, though it sometimes takes a few days (or longer) for me to get back with a response, depending on volume of e-mail. So if you have a question, by all means send me an e-mail message, or use the "Comment" link at the top of this page.

If you want to have a more open debate, you can do so in the "Objections to Generational Dynamics" thread of the Fourth Turning forum.

A web site reader recently wrote to me to wonder if there was any "redemption" for people like me. I wrote back to her that if there is any redemption, it comes about from people who read this web site and who take action in their own lives.

As I've said many times: No one can stop what's coming, any more than anyone can stop a tsunami. You can't stop what's coming, but you can prepare for it. Treasure the time you have left, and use the time to prepare yourself, your family, your community and your nation.

If you haven't heeded that advice yet, then now is the time to do it. (22-Nov-07) Permanent Link
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Markets fall as investors are increasingly unsettled by bad economic news

Hopes for quick return to "normal" bubble growth are fading.

A strong signal that investors and pundits are becoming increasingly pessimistic is what might be called the "time horizon" effect -- when do pundits think that things will return to "normal"? Usually the pundits give a time horizon of a day or, at most, a week.

But listening to the pundits on CNBC on Tuesday and Wednesday gave a very different picture. I heard one and only one pundit say that he expects a "year-end rally." The rest were unanimous: People are not going to be buying stocks for the rest of year -- and that includes large institutional investors, as well as small investors with 401K's -- because they want to wait until things have "settled down" again.

One pundit said that he's hearing that investors won't buy again until the Dow Industrials index is below 12,000 -- 1,000 points below where it is now. He also said that it might happen within the next week.

Asian stocks fell sharply on Tuesday night / Wednesday:

    Australia All Ordinaries     6450.20     - 0.62%
    Bombay Sensex               18602.62     - 3.52%
    Hong Kong Hang Seng         26618.19     - 4.15%
    Japan Nikkei                14837.66     - 2.46%
    Shanghai Composite           5214.22     - 1.50%
    Singapore STI                3347.20     - 2.65%
    South Korea Composite        1806.99     - 3.49%
    Taiwan Weighted              8484.11     - 2.27%

According to the Wall Street Journal, Asian investors were concerned that the U.S. economy, the most important export market for many of the region's companies, would continue to weaken. It said that "the region took its cue from unsettled trading" on Wall Street on Tuesday, when the market closed slightly higher, but only after turbulent 250 point swings. The article quotes a Tokyo trader as asking, "What the heck were the wild ups and downs in New York?" saying that the trading pattern reflected the unsettled prospects for the market.

European stocks on Wednesday similarly fell sharply.

As I've said many times before, from the point of view of Generational Dynamics, what's important is changes in behaviors and attitudes of large masses of investors, entire generations of people. The ups and downs of the markets are not per se of concern, except insofar as the indicate changes in behaviors and attitudes.

What we're seeing now is what I had been expecting to see when I wrote my August 17 article entitled "The nightmare is finally beginning." I indicated that we were now on the road to a stock market crash in the near future. The exact timing couldn't be predicted, but the speculation was that it would happen by the end of September. However, unexpectedly aggressive Fed interest rate cuts caused a period of drunken euphoria among investors, and postponed the inevitable results.

The markets in the last few days have been following the 1929-like pattern that I was expecting in September, before it was redirected by the Fed interest rate cuts. The one major thing that we haven't seen yet is a large "crash upward" such the 6.9% Dow increase that occurred on October 7, 1929, two weeks before the crash. (See Dow Jones historical page.) At any rate, extreme caution is called for.

Something else that's becoming increasingly clear is that faith in the Fed is collapsing. In fact, faith in any "easy solutions" is collapsing. On October 15, the mind-boggling "M-LEC" announcement, which was supposed to calm jitters, only increased them. The October 31 Fed interest rate cut only caused investors to become more sober, instead of returning to drunken euphoria.

On October 24, I quoted a pundit as saying, "Investors believe that everything is going to be OK because the Fed will cut interest rates. Everyone knows that the Fed is on their side."

No one says anything like that any more. The discussion about the Fed on CNBC on Wednesday morning was extremely negative. CNBC anchor Steve Lieseman expressed great concern that the Fed was contradicting itself on inflation, sometimes indicating that there's no problem, other times expressing concern. Another pundit described as "scary" the impression that the Fed was no longer setting policy, but was simply reacting to day by day events.

So, within the last 4-8 weeks, there has been enormous loss of hope in every direction. I can't recall hearing anyone describe any scenario that's going to make things better, except "waiting."

Before going on, I want to take a quick digression about the inflation rate, because I get a lot of questions about this.

There's a lot of obsessive fixation on the inflation rate because it's thought by many to be the key to the future. If the inflation rate is low, then the Fed can lower interest rates and "save the world" again; if the inflation rate is high, then the Fed can't risk lowering interest rates because that would raise inflation even more.

It's important to remember that there are two separate measures of inflation. They usually track each other closely, but they've been diverging in recent years.

The problem that the Fed has these days is because the dollar is internally deflationary, but is externally inflationary. That's why nobody understands the Fed's message on inflation. For those of you who are concerned about the value of the dollar, it's worthwhile keeping these considerations in mind.

That ends the inflation digression.

The 1929 stock market crash was not a one-day event. The stock market kept falling, month after month after month, for three years, until 1932, when it had fallen 90% of its peak value. (Paragraph corrected - 7-Apr-09)

One question that I've wondered about is the "mood" of investors during those years. During the last few years, we've seen the "euphoric" mood of bubblehead investors for whom every bit of bad news was good news, and every bit of good news was cause for chirps of joy.

Well, what was it like during the downturn years?

It may be what we're seeing now -- an increasing expectation of more and more bad news, a lengthening time horizon before the masses of investors expect good news to start again.

This is certainly something that pundits and investors and journalists are completelly oblivious to. The whole concept of investor mood is foreign to them, especially when it's related to generational concepts.

And yet, it's the key to understanding what's going on and what's coming.

In order to advance this a little farther, here's a graph of the Dow Industrials since 1950:

Generational 'moods' overlaying Dow Industrials since 1950
Generational 'moods' overlaying Dow Industrials since 1950

In the above graph, the red line is the Dow Industrials. The blue line is the exponential growth trend, computed since 1896, and represents the "real value" of the stock market. This provides a reference to whether the market is overpriced or underpriced at any given time.

What I would like to do is speculate on how investor "moods" change as generational changes occur.

What I especially want to focus on is the two "inflection points" on the DJIA graph. At each of these two points, the graph turns a sharp corner to the left, forming the letter "V". Mathematically, these are the points in 1995 and 2003 where the second derivative is discontinuous (or infinite, depending on how you look at it).

Things in nature tend to be continuous, unless affected violently by some external force. A rolling ball may slow down or speed up, but the change in speed will be continuous unless the ball hits a rock or a tree.

Similarly, we would expect the DJIA curve to continue in the same direction, perhaps gradually rising or lowering, but a sharp "V" cannot occur unless affected violently by some external force. And the most obvious choice of an external force is a generational change.

Thus, we provide theoretically the following generational investor "moods" from 1950 to the present:

Don't think that I'm saying that Boomers are good and Xers are bad. Both are pathetically bad, but it's their interaction, the way they complement each other, that results in the destruction we're headed for.

The above is a first pass at a generational explanation of what's going on. As time goes on, and as more information and more criminal prosecutions become known, I'll try to expand and refine it.

Finally, a web site reader has sent me, "for my reading pleasure," the address of a web page containing statements of journalists, pundits, financiers and politicians from the years 1927 to 1933.

Here's the list -- and remember that the crash began on October 24, 1929, and continued for three years, until mid-1932:

It was only in mid-1932 that the stock market began to gain again, having fallen 90% from its 1929 peak. (21-Nov-07) Permanent Link
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Sunni/Shia violence increasing in Pakistan tribal areas as Taliban gains strength

The Pakistan army is massing for an assault against Taliban in Northwest Frontier Province (NWFP), as Taliban militants have taken control of the Swat valley.

Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas),  highlighting Swat Valley <font face=Arial size=-2>(Source:</font>
Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas), highlighting Swat Valley (Source:

Pakistan army helicopters and artillery are pounding militant positions in the Swat Valley, in anticipation for a ground assault in the next few days.

According to a rare media briefing by the army, a senior commander said the army had assembled about 15,000 troops in the Swat Valley's main town, and would launch its main offensive within days because militants from Afghanistan as well as the lawless Pakistani border regions of Waziristan and Bajaur had reinforced the followers of rebel cleric Maulana Fazlullah in Swat.

The plan was to push the militants back into the rugged Piochar side valley where they had established bases. "We will bottle up as many of them as possible and then eliminate them," said General Ahmed Shuja Pasha. "This is our killing ground," he added.

For some time, al-Qaeda and Taliban militants, including Osama bin Laden himself, have had control of the lawless FATA (Federally Administered Tribal Areas) -- not officially part of Pakistan, but administed by the Pakistan government.

In recent days, Taliban cleric Maulana Fazlullah has led his army of Taliban militants from the tribal areas into the settled areas of Pakistan's Northwest Frontier Province (NWFP), and have gained control of the Swat Valley.

This was one of the reasons given by President Pervez Musharraf to explain the imposed state of emergency.

In a related matter, dozens are dead in a clash between Sunnis and Shia in the tribal areas near Balochistan.

In an interview broadcast on CNN on Sunday, opposition leader Benazir Bhutto blamed the increasing violence on Musharraf. The following is my transcription of her remarks:

"I want to say that what General Musharraf has done is simply not enough, because al-Qaeda and Taliban have regrouped, and pro-Taliban elements now control the tribal areas of Pakistan. They have entered into the settled areas of the Frontier Province of Pakistan, and there is a fierce battle taking place between the military and the militants. Now the military is engaged in blanket bombing at times, and instead of targeting just the terrorists, it actually ends up targeting the local population too. We'd like to see the local population co-opted. We'd like to see the military go in instead, for combat against the militants like the Americans did in Pujera(?) [[probably Bakubah]] - what was that place in Baghdad - near Baghdad, a holdout of the militants. That's the kind of support we need from our military.

And we need to support our military by also co-opting the local population. I know the local population would have defended their town if we had given them the arms and the guns. They turned to me and asked me to get them some help, and I spoke about this at a diplomatic reception to caution the government that the militants were coming.

But unfortunately, the people aren't given the support they need to fight and face the militants themselves, and in the meantime, the militants spread. So I think that what General Musharraf has done may have been a little bit, but it hasn't stopped the spread of militancy and extremism in Pakistan.

... The issue for me is to have fair elections, and to have the people of Pakistan to express their view. I believe that the attempts to block my leadership and to block democracy are actually paving the way for the extremists to spread their influence, and I feel that the focus ought to be really on the extremists, not diverting the attention away from the real battle in Pakistan.

In my view it's the threat by the extremists that threatens today to disintegrate Pakistan. They're already into the Valley of Swat, and soon they'll be spreading outwards, toward our capital city of Islamabad. I may have my critics, but I leave the decision of Pakistan's destiny to the people of Pakistan. And the people of Pakistan have stood by me. Three million of them turned up at Karachi airport to receive me. 18,000 were imprisoned in the witchhunt launched to stop our "long march" to apply pressure for the restoration of democracy. The people want a democracy. They're marching with their feet so that their voices can be heard, so that their march can be heard.

And I would make a plea for fair elections. My concern is that if the elections are rigged, and I think they're heading towards rigged elections, well General Musharraf's team might end up giving more control to the religious parties under whose influence these extremists have spread, and then we would really be in the soup."

One thing that I'm understanding more and more about Benazir Bhutto is that she's an extremely careful politician who weighs every word she says for its political import. Many of remarks about democracy and popularity should be viewed through that filter.

There is one particular portion of her comments that I'd like to focus on:

"We'd like to see the military go in instead, for combat against the militants like the Americans did in Pujera(?) - what was that place in Baghdad - near Baghdad, a holdout of the militants. That's the kind of support we need from our military."

Bhutto is suggesting that Musharraf execute a military strategy similar to the "surge" strategy devised by General Petraeus in Iraq. The end result of that strategy is that the Sunni insurgents turned against al-Qaeda in Iraq, and ended up fighting on the side of the Americans.

It's important to understand that this strategy cannot possibly work in Pakistan.

From the point of view of Generational Dynamics, Iraq is in a generational Awakening era, just one generation past the end of the last crisis war, the genocidal Iran/Iraq war of the 1980s. That means that the Iraqi people are "attracted away" from war, and will do everything possible to keep another genocidal war from occurring. That's why the Iraqi war was never a crisis civil war, and could never have been a crisis civil war. Any attempt to ignite a civil war, which is what al-Qaeda in Iraq tried, was doomed to failure, and any such war would fizzle out quickly. That's exactly what happened.

But Pakistan is in a generational Crisis era, three generations past the end of the last crisis war, the genocidal war that followed Partition in 1947. That means that the Pakistani people are "attracted towards" war.

Thus, Bhutto's suggestion to provide arms and weapons to the people of Swat Valley and expect them to eject the Taliban militia is far more likely to spiral out of control into full-scale warfare.

Iraq today and Pakistan today are in totally different generational eras. There is NO COMPARISON between the two. Anyone who tries to apply lessons learned in one country to the other country is on a fool's errand. If there is any "rule" to be learned, it's that Pakistan will most likely do exactly the opposite of what Iraq does in a like situation.

Possibly the thing that struck me the most when I did my in-depth analysis of Pakistan last week is that Musharraf and Bhutto are themselves split along the major internal Pakistan fault line -- Urdu-speaking Mohajirs (migrants from India) versus Sindhi-speaking Sindhis. This means that there never was a snowflake's chance in hell that Musharraf and Bhutto could have governed together in some power-sharing agreement, even though encouraging such an arrangement was (and perhaps still is) official US and British policy.

A web site reader has pointed out a related fact that's perhaps even more crucial.

I've said many times that I have great admiration for both Pakistan's President Pervez Musharraf and his Indian counterpart, India's Prime Minister Manmohan Singh, because these two leaders have engineered a remarkable détente that has prevented a conflict, indeed a nuclear conflict, between the nations, and they've pulled back from the continuing seething dispute over Kashmir and Jammu.

What my web site reader has pointed out is that both Musharraf and Singh share the same ethnic group -- Punjabi -- though of course they have different religions (Muslim and Sikh, respectively). Singh was born in 1932 in what is now Pakistan's Punjab province, and Musharraf was born in 1943 in Delhi, adjacent to what is now India's Punjab province.

That means that once Partition took place in 1947, Singh's family was in the forced relocation of western Hindus and Sikhs to India, while Musharraf's family was in the relocation of eastern Muslims to Pakistan.

That's very significant, and explains a great deal about why Musharraf and Singh have developed such a close relationship, and why they've been able to forge the remarkable détente that I've discussed.

It also means that any similar arrangement between Bhutto and Singh would be very unlikely.

From the point of view of Generational Dynamics, the genocidal bloodbath war that followed Partition in 1947 will be re-fought with 100% certainty. There are two major scenarios. The first scenario is a regional war in Kashmir spreading throughout the region; and the second scenario is an ethnic or sectarian war starting somewhere and spreading through the region. Either way, a major nuclear between Pakistan and India cannot be avoided. (19-Nov-07) Permanent Link
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CBS's Bob Schieffer comments on the "Do Nothing" Congress

This was the only mildly amusing thing on the Sunday news talk shows.

CBS's Bob Schieffer on Face the Nation. <font face=Arial size=-2>(Source: CBS)</font>
CBS's Bob Schieffer on Face the Nation. (Source: CBS)

In his weekly commentary on "Face the Nation" on Sunday, CBS news man Bob Schieffer said that Congress could only accomplish one thing, namely, doing nothing:

"Senate Republican Leader Mitch McConnell made a speech the other day in which he bragged that even though Republicans are the minority, they had kept many bad things from happening.

Well, that's just the half of it.

With the help of the Democratic majority, they have managed to keep much of anything from happening, good or bad.

Who says there's nothing that two sides can't accomplish together? Of course there is - doing nothing.

Congress ran to the airport Friday for yet another break - they're taking two weeks this year for Thanksgiving. I wouldn't ask how many days you're taking because that would be a digression.

But my question is this: What do the following have in common?

Legislation to provide health insurance for children, education legislation, energy legislation, the farm bill, funding the Iraq war, and legislation funding all federal agencies except the Pentagon next year.

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The answer is: All of them are stalled in Congress, awaiting final action, tangled in the gridlock that the Republicans blame on the Democrats and the Democrats blame on the Republicans.

Breaking the gridlock won't be easy. After all, once Congress gets back from the Thanksgiving break, Christmas vacation will be just weeks away.

I've heard all the excuses so many times, I've stopped listening. All I know is Congress continues to bring new meaning to that old phrase: Nothing Doing."

This is all exactly as predicted by Generational Dynamics.

I've written about this many times, in articles in the adjacent "Related Articles" bar. America is now being led by Boomers, people who were born after World War II. These people grew up during the 1960s "generation gap," where all they did was argue with and humiliate their parents. They never learned how to do anything but argue -- certainly not how to lead and govern.

That's why Congress can't accomplish anything.

In the 1980s, Congress accomplished a lot, because people from the GI Generation and the Silent Generation (people born during the Great Depression and WW II) were in charge.

In the 1980s, the Republicans and the Democrats cooperated with each other to change the Social Security system to make it a sounder system. After that, they cooperated again to specify new rules to control the budget deficit. Compromise was still possible in 1996, when Democratic President Bill Clinton, saying that "the era of big government is over," cooperated with the Republican congress to eliminate the welfare entitlement.

But there isn't a single such issue on which compromise is possible today.

The Democrats are especially paralyzed, because they're hog-tied by the nihilistic folks over at, who take so-called anti-war positions that are willfully self-destructive and destructive of the country, the party, and the individual Democrats who are forced to do's bidding.

However, America is not unique in this predicament. Every country that fought WW II as a crisis war is in the same predicament, being led by people in the post-war generations that can't do anything but whine and complain.

From the point of view of Generational Dynamics, everyone is sitting around waiting for "something" to happen. There's no way to predict what that "something" will be -- it might be a major terrorist attack on American soil or a major military defeat elsewhere in the world, for example -- but it will be something that ends the political bickering and unifies the country. In generational theory it's called the "regeneracy," because it "regenerates" national and societal unity.

Until then, expect the Congress to continue with "Nothing Doing." (18-Nov-07) Permanent Link
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Warning signs for imminent financial crisis are growing rapidly

European interest rates soared on Friday, raising fears of a new credit crunch.

The interest rate of concern is the LIBOR (London Interbank Offered Rate), which is the rate at which European banks lend money to one another. It jumped to nearly 6.34% on Friday (sterling, 3-month contract), from 6.29% on Thursday. It's at its highest point since September, when the worldwide credit crunch finally began to ease.

What this means is that banks are holding on to their cash, for fear of not being able to borrow money when they need it. That's exactly what happened when the global financial crisis occurred in August.

That's only one piece of a slew of extremely gloomy financial news that's been released in the last couple of days.

Goldman Sachs report

The biggest news on Friday morning was a report by Goldman Sachs on the spreading subprime crisis.

You'll recall that this has to do with CDOs and other credit derivatives with notional values that are far higher than the market would pay for them. There are hundreds of trillions of dollars (notional) worth of these in financial portfolios around the world.

The Goldman report, written by Jan Hatzius, the company's chief economist, says that "the likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized. It is easy to see how such a shock could produce a substantial recession."

The issue is this: Large financial firms have been "writing down" the values of their securities backed by mortgages. There have been some $64 billion in writedowns from a number of large financial institutions, including Citigroup, Merrill Lynch, Morgan Stanley, Goldman Sachs, JPMorgan Chase and Bear Stearns.

Analysts are predicting that large financial institutions will lose as much as $400 billion in writedowns, but that's the not the end of the problem:

"But unlike stock market losses, which are typically absorbed by "long-only" investors, this mortgage-related hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises.

And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling -- A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses.

"The macroeconomic consequences could be quite dramatic," Hatzius said in the note to clients. "If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion."

"This is a large shock," he said, adding the number equates to 7 percent of total debt owed by U.S. non-financial sectors."

The scaling back of lending by $2 trillion will take an enormous amount of money out of the economy.

What the Goldman report is talking about is the reverse of the credit bubble. Financiers were using 10 to 1 leveraging to build up the credit bubble quickly, and now leveraging is going to collapse the credit bubble quickly. Because of leveraging, $200-400 billion credit loss is leveraged into $2 trillion in scaled back lending.

I want to comment on the first paragraph above. If you're a "long-only" investor, then you buy and sell stock shares, sometimes making money, sometimes losing money. If you lose money, then someone else makes money, and the total amount of money in the financial system remains the same.

But reducing lending by $2 trillion means that there's actually $2 trillion less money in the economy. (For more information, see my September 9 article, "Understanding deflation: Why there's less money in the world today than a month ago.")

But CNBC commentator Rick Santelli said that the situation is much worse than that. The following is a transcription of his remarks:

"Many of the issues that we've been talking about for how long are finally beginning to be talked about in public. I think the biggest comments today are really what Goldman is saying. And what they're saying is that unlike equities, a dollar lost is a dollar lost.

When you look at the capital markets and you consider $200-400 billion, which is probably on the light side - real losses -- in some of these investment banks, the part of the picture that nobody's talking about, that they very well understand is that trillions, hundreds of trillions, of notional value derivatives have been marketed by that core group. But yet only the core group has moved up to the confessional.

Do you think at this poker table they're only dealing derivatives among themselves? How much have you heard from all the people on the other side of the trades?

The issue here is that Goldman says the "back of the envelope" on this $400 billion could turn out to be trillions. Well of course it can.

You know, this credit was created off balance sheet for a reason. It's credit creation out of the realm of regulators. Unregulated means unregulated. And the notion we've had all along -- delights many on our channel -- is that the Fed's easing is going to make a difference.

Well, it probably makes a difference on the back side when the economy looks at this leverage and realizes it can get nastier.

But the reality is that it's not going to help the epicenter of this, or as it spreads out into things like hedge funds ...

You know, maybe Goldman's on the right side of this trade, but the real question is - the leverage on those receivables they think they have might be at the risk of the counterparty who owes them the money who at some point might not be willing or able to pony it up."

Santelli is referring to a figure that I've mentioned a few times -- the $750 trillion of credit derivatives that are in financial portfolios around the world.

Many of these are Credit Default Swaps (CDSs) that investors take out as "insurance" against mortgage defaults and foreclosures. The counterparties are the institutions that will have to pay off that insurance if the defaults occur. The problem is that these counterparties will "not be willing or able" to make the insurance payouts, as the number of mortgage foreclosures surges.

As Santelli points out, this is something that almost no one is talking about, except on web sites like this one. But now the Goldman report is beginning to make these concerns public. This would make the macroeconomic losses much higher than the $2 trillion, which is already astronomically high.

Fourth quarter earnings

As I wrote a couple of days ago, third quarter corporate earnings are far below expectations. As of July 1, analysts were predicting that third quarter corporate earnings would grow 6.2%; now it turns out that they didn't grow at all, but fell by 2.4%. This is a huge turnaround.

Now let's turn to fourth quarter earnings.

Another anomaly is that, up until two or three weeks ago, analysts were predicting that 4th quarter earnings growth would be double-digits -- 11.5%. Now the analysts have adjusted these predictions to a growth of only 3%.

Quarterly S&P 500 earnings growth, 2000-present, with estimates for Q4 and for 2008 (graphic from 23-Oct).
Quarterly S&P 500 earnings growth, 2000-present, with estimates for Q4 and for 2008 (graphic from 23-Oct).

In an article a month ago, I posted the adjoining WSJ graphic which shows -0.1% earnings growth in Q3 2007 (that's the figure that's now been reduced to -2.4%), but also showed over 10% earnings growth estimates in Q4 and Q1. I and several CNBC pundits pointed out that those Q4 and Q1 estimates are completely unrealistic.

Well, now is the time that those unrealistic estimates are finally coming down. Fourth quarter estimates of earnings growth are now only 3%.

CNBC anchor Bob Pisani's fourth quarter earnings growth summary. <font face=Arial size=-2>(Source: CNBC)</font>
CNBC anchor Bob Pisani's fourth quarter earnings growth summary. (Source: CNBC)

CNBC's Bob Pisani discussed these changes, highlighting the major ones with the adjoining graphic. Stocks for financial institutions had been expected to grow by 0.7%; instead, growth is negative, down 20%. Stocks for retailers for consumer discretionary spending had been expected to grow by 22%; now the estimate is only 15%.

Chances of a recession

For at least a couple of years, pundits have debated whether a recession was coming, especially in view of escalating energy prices, and the bursting of the housing bubble. The analytical view was that consumers would have less to spend because of increasing energy prices, and falling real estate prices would make it impossible for consumers to borrow money by refinancing their homes.

What's happened for several quarters now is that consumers have continued to borrow, but on their credit cards, with the result that retail spending has continued to grow.

But now the "chickens are coming home to roost," as the saying goes, and consumers finally appear to be spending less.

The stock market bubble in the last few years was based on this willingness of Americans to buy more and more on credit, using money provided through the astronomical credit bubble. But as these bubbles burst, consumers and businesses alike are becoming more risk-averse.

On CNBC on Friday afternoon, David Rosenberg, chief North American economist at Merrill Lynch, made the case why a recession is coming.

What's interesting about this interview was the behavior of the interviewer, well-known CNBC anchor Maria Bartiromo. This chick is an enormous cheerleader for the bubbleheads. I mentioned a couple of months ago one day when the market went up that Bartiromo "was so giddy that she jumped up and down like a schoolgirl."

In this interview, she was openly hostile to Rosenberg's discussion of the factors leading to a recession. Here's Rosenberg's first response to why a recession is coming:

"We had a number today [indicating] that the recession may already be starting. The industrial production number. The production of consumer goods was down .3% - it's now down 3 months in a row.

Another sign: We have the worst credit crunch since 1991; we have the worst energy price information since 1991; we have a situation where employment growth has been cut in half; and you can see already in the consumer confidence numbers we're going into the most important season of the year for retailers, and consumer confidence is actually weaker today than it was in the onset of the past two recessions.

David Rosenberg, Merrill Lynch, on CNBC.  On the bottom, Maria Bartiromo glares at Rosenberg to convey disbelief. <font face=Arial size=-2>(Source: CNBC)</font>
David Rosenberg, Merrill Lynch, on CNBC. On the bottom, Maria Bartiromo glares at Rosenberg to convey disbelief. (Source: CNBC)

And what people are telling you in these surveys is that people are pulling back in their selling intentions, and it's primarily what we've seen in the housing market, the credit crunch, reduced employment prospects, and of course these punishingly high gasoline prices now as well."

Bartiromo asked where there were weaknesses in the economy besides housing.

"Out of the retail numbers, you're seeing a slowdown in practically every consumer discretionary, consumer cyclical outside of restaurants. Restaurants and travel and tourism -- because of the weak dollar I would say that part is absolutely booming - but you're seeing it across apparel, you're seeing it in department stores, you're seeing it in furniture, applicances, electronics. You're even starting to see it now out of the data in "etailing" [[electronic retailing]] - so online shopping's also slowing down. So it's actually -- even outside housing it's becoming very broadly based. This is no longer a "contained" story, just the latest in the housing market.

Bartiromo: But what about the other side, that the global story remains intact, we're seeing economies around the world doing very well, American businesses are benefiting from that.

Rosenberg: That's an overbought story, and frankly I don't even think it's true any more."

Now, here's where Bartiromo became super-indignant. "How is it not true any more? You've got India growing 9%, China growing 12%, and Europe up 3%. What do you MEAN it's not true any more?"

As she said that, she raised her eyebrows, opened her mouth, and effected a glare that a woman might use to convey doubt that the lipstick on her boyfriend's collar had an innocent explanation.

Rosenberg stuttered a little under this hostile glare, but pushed on:

"OK, well look, the UK - is it speeding up or slowing down? It's slowing down. Is continental Europe speeding up or slowing down? It's slowing down. Japan's probably going to be negative this quarter. When you take a look at the part of the global economy that's actually slowing down right now, it's 60% of our exports. So yeah, it's nice to talk about India, Russia and China -- but when you take a look at these bricks, the emerging markets, they represent 10% of our exports. 60% of our export pie in terms of where it goes globally, is actually slowing down right now, so the export story -- I'm not going to stay it's not a positive story. It's been completely overblown."

It doesn't appear that Bartiromo understood the point Rosenberg was making, as she asked, "How much can China slow down so it's going to be a problem? It's growing 12%, so it slows down to 10% -- I'm supposed to be worried at that?"

Rosenberg concluded,

"No, but if China slows down, how does that affect the United States? Maybe if China slows down, it's gonna affect emerging markets. China's the one that exports to the US. We don't really export to China. That's my major point, Maria. Who are our primary export destinations? It's not China. It's Canada, it's Mexico, it's the UK, it's Euroland, it's Japan. They're all slowing down. I would say take the last 12 months, and transcend it on the next 12 months is a very dangerous game right now. The global economy is slowing. It doesn't mean that there's not pockets of strength. Unfortunately the pockets of strength are not where the US exports to."

When Rosenberg referred to "pockets of strength," Bartiromo could be heard to exclaim, "Aha!"

Bartiromo thanked Rosenberg for coming on the show. Later in the hour, when the Dow Industrials index increased, Bartiromo once again squealed with delight like a schoolgirl.

Mervyn King predicts severe fall

Mervyn King, Governor of the Bank of England. <font face=Arial size=-2>(Source: Bloomberg)</font>
Mervyn King, Governor of the Bank of England. (Source: Bloomberg)

Mervyn King is the Governor of the Bank of England, and plays the same central banker role for Britain that Ben Bernanke does for the US as Chairman of the Federal Reserve Bank.

It was just three weeks ago that the Bank of England issued a report saying that the global financial system is at risk of further instability because of "ongoing uncertainties" about credit-market losses, and that both the stock market and commercial real estate values are particularly vulnerable to "further shocks, either in credit markets or from new sources."

Now Mervyn King is adding an "extremely unusual warning" about the world stock markets. His point was that the August credit crunch was so severe that it should have driven stock prices down.

(I just love this. King is totally confused because investors drove the stock market up, even though the financial news was very bad. Poor Mervyn King just doesn't understand the bubblehead investor logic that "bad news is good news" that's prevailed for several years: If the news is bad, then the Fed will lower interest rates, and so the news is really good.)

"It is very striking that despite the developments we've seen in the last three months , despite the stresses and strains in the banking sector , equity prices are higher now than they were in August. ... This is true around the world, and in emerging markets they're 20% higher. There must be some downside risks there. ... That's the bigger risk to the global economy than the narrower one focused on the banking sector. ...

The repricing of risk hasn't really fed through to equity markets, and if there were to be an adjustment of risk premia in equity markets with a fall in asset prices then that could have a bigger impact on the world economy. ...

The difficulty in the world economic system at present is that a number of major economies have flexible exchange rates... Others, like China, have linked theirs to the dollar and that is causing great currency tensions.

I came away from the [International Monetary Fund] meeting more concerned about the implications of these tensions, because the unwinding of [global economic] imbalances is not just a hypothetical prospect, but is happening now. And I think this is a major concern."

The last paragraph is important, because it describes the current situation in a way that few people seem capable of understanding: The financial crisis has already begun.

I'll repeat an analogy that I've used before. Think of the world economy as a huge, enormous bloated mansion made of wood, with all kinds of additions tacked on all over the place. Think of the CDOs as millions of termites that are eating away at the insides, so that another piece of the mansion falls off into the ravine almost every day.

The Fed and other central banks have been running around the mansion with hammers and glue and nails, patching things up as fast as they can, trying to keep ahead of termites. They've been pretty successful with their hammers and glue and nails in postponing the inevitable, even bloating the mansion up a little more, but they can't keep up with the termites.

What Mervyn King is saying is that the hammers and glue and nails aren't working, and that it won't be long now before the entire mansion collapses into the ravine.

Nouriel Roubini: Systemic Financial Meltdown

I've mocked Nouriel Roubini before, and recently criticized him further, because he repeatedly presents a great deal of data in his blog showing that the economy is headed for a major crisis, but he remains completely unwilling to draw that as a conclusion. Instead, he equivocates over whether the economy will have a "soft landing" or "hard landing."

On Friday, Roubini turned around. The data is too great for even him to ignore. In his Friday blog entry he wrote the following:

"Those of us who warned for the last 12 months about a combination of a worsening housing recession, a severe credit crunch and financial meltdown, high oil prices and a saving-less and debt-burdened consumers being on the ropes causing an economy-wide recession were repeatedly rebuffed the consensus view about a soft landing given the presumed resilience of the US consumer.

But the evidence is now building that an ugly recession is inevitable. Thus, the repeated statements by Fed officials that they may be done with cutting the Fed Funds rate are both hollow and utterly disingenuous. The Fed Funds rate will be down to 4% by January and below 3% by the end of 2008.

More revealing of the change in mood the financial press and some of the most prominent market analysts are coming to the realization that a recession is highly likely. The Economist has a cover story and long piece arguing that a US recession highly likely (and citing this author's work with Menegatti and our views on the inevitability of such a recession)."

Roubini gives several more examples to show that the mood has changed in the financial press.

As I've said many times, the important things from the point of view of Generational Dynamics are the attitudes and behaviors of the large masses of people, entire generations of people. Although Roubini (probably) knows nothing about generational theory, his remarks are exactly to the point that the mood is changing, and that this widespread change in mood is significant.

What is most breathtaking about Roubini's Friday essay is his conclusion:

"I now see the risk of a severe and worsening liquidity and credit crunch leading to a generalized meltdown of the financial system of a severity and magnitude like we have never observed before. In this extreme scenario whose likelihood is increasing we could see a generalized run on some banks; and runs on a couple of weaker (non-bank) broker dealers that may go bankrupt with severe and systemic ripple effects on a mass of highly leveraged derivative instruments that will lead to a seizure of the derivatives markets (think of LTCM to the power of three); a collapse of the ABCP market and a disorderly collapse of the SIVs and conduits; massive losses on money market funds with a run on both those sponsored by banks and those not sponsored by banks (with the latter at even more severe risk as the recent effective bailout of the formers’ losses by theirs sponsoring banks is not available to those not being backed by banks); ever growing defaults and losses ($500 billion plus) in subprime, near prime and prime mortgages with severe known-on effect on the RMBS and CDOs market; massive losses in consumer credit (auto loans, credit cards); severe problems and losses in commercial real estate and related CMBS; the drying up of liquidity and credit in a variety of asset backed securities putting the entire model of securitization at risk; runs on hedge funds and other financial institutions that do not have access to the Fed’s lender of last resort support; a sharp increase in corporate defaults and credit spreads; and a massive process of re-intermediation into the banking system of activities that were until now altogether securitized.

When a year ago this author warned of the risk of a systemic banking and financial crisis – a combination of global liquidity and solvency/credit problems - like we had not seen in decades, these views were considered as far fetched. They are not that extreme any more today as Goldman Sachs is writing today on the risk of a contraction of credit of the staggering order of $2 trillion dollars in the next few years causing a severe credit crunch and a serious recession. As I will flesh out in a forthcoming note the risks of such a generalized systemic financial meltdown are now rising. Hopefully by now some folks at the New York Fed and at the Fed Board are starting to think about this most dangerous systemic financial crisis that could emerge in the next year and what to do to prepare for it."

Roubini is very late to the game in saying these things, but that fact alone gives his remarks greater significance. What's interesting is that he provides a step by step scenario about how he expects the system to break down.

Even now, he's hedging. His final sentence says that the crisis "could emerge in the next year." He's still covering his ass, apparently for fear that God, in a massive deus ex machina intervention in human affairs, will smite the financial engineers and restore the global economy to normalcy. I don't think that's in the cards.

Some Observations

On August 17, I posted an article entitled "The nightmare is finally beginning." I indicated that we were now on the road to a stock market crash in the near future. The exact timing couldn't be predicted, but the speculation was that it would happen by the end of September.

It didn't happen at that time, but the trends have only been getting worse. Today the trend lines are MUCH WORSE than they were on August 17.

Perhaps most significant of all is that the mood of gloom and doom is saturating the investment community, including investors and pundits, except for Maria Bartiromo.

From the point of view of Generational Dynamics, there have been a series of generational financial panics and crashes, of international significance, every 70-80 years or so. Since the 1600s, these have been: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash. Each new bubble begins precisely when the people in the generations that survived the preceding crash all disappear (retire or die), all at once, leaving behind younger generations with no wisdom and no fear of the horrors of a generational panic.

We're now overdue for the next generational panic. It might happen next week, next month or next year, but it MUST happen soon because the stock market is overpriced by a factor of 250%, same as in 1929. The worsening trend lines indicate that it's getting close. (17-Nov-07) Permanent Link
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Third quarter corporate earnings are substantially below expectations

Stocks have been falling pretty steadily since the October 9 high at Dow 14164. Here's the most recent data from my Dow Jones historical page:

Date              DJIA (Change)   (% of trend)      (% of 2007 high)
----------------- --------------  ---------------- ----------------
Tue 2007-10-09  14164.53( +0.86%) (267% of 5302.8) (100% of 07-10-09) [October 9, 2007]
Wed 2007-10-10  14078.69( -0.61%) (265% of 5303.5) ( 99% of 07-10-09)
Thu 2007-10-11  14015.12( -0.45%) (264% of 5304.2) ( 98% of 07-10-09)
Fri 2007-10-12  14093.08( +0.56%) (265% of 5304.8) ( 99% of 07-10-09)
Mon 2007-10-15  13984.80( -0.77%) (263% of 5306.8) ( 98% of 07-10-09)
Tue 2007-10-16  13912.94( -0.51%) (262% of 5307.5) ( 98% of 07-10-09)
Wed 2007-10-17  13892.54( -0.15%) (261% of 5308.1) ( 98% of 07-10-09)
Thu 2007-10-18  13888.96( -0.03%) (261% of 5308.8) ( 98% of 07-10-09)
Fri 2007-10-19  13522.02( -2.64%) (254% of 5309.5) ( 95% of 07-10-09)
Mon 2007-10-22  13566.97( +0.33%) (255% of 5311.5) ( 95% of 07-10-09)
Tue 2007-10-23  13676.23( +0.81%) (257% of 5312.1) ( 96% of 07-10-09)
Wed 2007-10-24  13675.25( -0.01%) (257% of 5312.8) ( 96% of 07-10-09)
Thu 2007-10-25  13671.92( -0.02%) (257% of 5313.5) ( 96% of 07-10-09)
Fri 2007-10-26  13806.70( +0.99%) (259% of 5314.1) ( 97% of 07-10-09)
Mon 2007-10-29  13870.26( +0.46%) (260% of 5316.1) ( 97% of 07-10-09)
Tue 2007-10-30  13792.47( -0.56%) (259% of 5316.8) ( 97% of 07-10-09)
Wed 2007-10-31  13930.01( +1.00%) (261% of 5317.5) ( 98% of 07-10-09)
Thu 2007-11-01  13567.87( -2.60%) (255% of 5318.1) ( 95% of 07-10-09)
Fri 2007-11-02  13595.10( +0.20%) (255% of 5318.8) ( 95% of 07-10-09)
Mon 2007-11-05  13543.40( -0.38%) (254% of 5320.8) ( 95% of 07-10-09) [October 9, 2007]
Tue 2007-11-06  13660.94( +0.87%) (256% of 5321.5) ( 96% of 07-10-09)
Wed 2007-11-07  13300.02( -2.64%) (249% of 5322.1) ( 93% of 07-10-09)
Thu 2007-11-08  13266.29( -0.25%) (249% of 5322.8) ( 93% of 07-10-09)
Fri 2007-11-09  13042.74( -1.69%) (245% of 5323.5) ( 92% of 07-10-09)
Mon 2007-11-12  12987.55( -0.42%) (243% of 5325.5) ( 91% of 07-10-09)
Tue 2007-11-13  13307.09( +2.46%) (249% of 5326.1) ( 93% of 07-10-09)
Wed 2007-11-14  13223.93( -0.62%) (248% of 5326.8) ( 93% of 07-10-09)
Thu 2007-11-15  13110.05( -0.86%) (246% of 5327.5) ( 92% of 07-10-09)

The last line of this shows the following:

Why has the market been falling? Is it because our bubblehead investment community has finally developed a little sense? I guess it's possible, but in view of the moronic display we've been seeing in the past, that doesn't seem likely.

My guess is that they're getting scared. In fact, that's what Generational Dynamics predicts, as I've said many times. The Boomers only know how to argue; they have no idea what's going on, since their parents' generation always took care of everything for them. The Generation-Xers are even worse; they don't have idea what's going on either, but they're driven by a nihilistic view of the world that causes them to be destructive and self-destructive. How else can you explain the existence of $750 trillion of CDOs and other credit derivatives, much of which may turn out to be worthless?

But not having any idea what's going on means that you don't know what to do when all your assumptions are wrong.

For years, one assumption has been that earnings per share would continue to grow at double-digit rates, something that hasn't happened for long historically.

Well, now the long-awaited fall in corporate earnings seems to be happening, as of the third quarter. Here's the summary from CNBC's earnings central:

"As of Friday, November 9th: 451 companies in the S&P 500 have reported earnings for third-quarter, 64.30% have beaten estimates, 11.31% were in-line, and 24.39% have missed. (Data provided by Reuters Estimates)

The blended earnings growth rate for the S&P 500 in third-quarter 2007, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -2.4% from -1.6% last week, and below the 3.6% estimate from October 1st. On July 1st, the estimated growth rate was 6.2%. (Data provided by Thomson Financial)

In other words, as of July 1, our financial gurus expected third quarter earnings to grow by 6.2%; instead, earnings have FALLEN by 2.4%. And that's even worse than expected just last week.

This pulls the rug out from under the standard bubblehead investment strategy that we keep seeing. Now things are changing.

Formerly, the subprime mortgage bubble fed into a huge credit bubble (by means of CDOs and other credit derivatives backed by faulty mortgage contracts), which provided cash to corporations to generate bubble earnings, which caused historically high earnings growth, which investors used to justify high price/earnings ratios on stocks.

Now with the bubble credit bubble deflating, there's less money around, and it's harder to generate bubble earnings, which means that stock prices have to fall to maintain the same price/earnings ratios.

But there's more, and this is an interesting angle pointed out by Kevin Depew in the Minyanville blog. He quotes Karen Hoguet, CFO of Macy's.

Macy's had been planning to buy back $1 billion of its own stock before the end of the year. But now with the credit bubble collapsing, these plans are in doubt, according to Hoguet:

"Given the current condition in the credit markets, we are carefully evaluating our options with respect to the timing of completing our remaining $1 billion authorization. As a result, some or most of that $1 billion could end up being deferred into next year. While we are optimistic about our prospects, and we believe the stock today represents a great value, we do need to balance this with the benefits of preserving access to all financial markets during these volatile times in the credit market."

Now here's the gimmick: Macy's and many other companies had been using money from the credit bubble to buy back their own stock for years. Why? It reduces the number of outstanding shares of stock for the company. By reducing the number of shares, the "earnings per share" computation increases (because you're dividing by a smaller number of shares outstanding), and that's the same as the price/earnings ratio. So companies have been reducing the price/earnings ratio of their own stock by using credit bubble money to buy back shares of their own stock.

Now that window is being closed down, and Macy's and other companies are forced to defer their stock buyback plans. Here's some more from Hoguet:

"The truth is that's why we give a range of estimates. If we don't buy back the billion dollars, obviously the operations are going to have to do better to get to the same earnings [per share]. But that is part of the reason we give a range. You know, it's not as precise as you all think to estimate earnings going forward. So we do the best that we can as we provide guidance."

So CFO Hoguet is saying that Macy's will have to WORK for those earnings per share, rather than get them automatically through stock buybacks.

What we're seeing is a stock market collapse proceeding step by step. We haven't seen a total panic yet, but it's coming. It would be a truly wondrous thing to behold if the consequences weren't so disastrous.

From the point of view of Generational Dynamics, we're overdue for a stock market panic and crash. It might come next week, next month or next year, but it's coming with absolute certainty. (16-Nov-07) Permanent Link
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Hamas fires on civilian Palestinian crowd commemorating Yasser Arafat

Eight people were killed when Hamas gunmen fired into the crowd.

Hundreds of thousands of Palestinians carrying yellow Fatah flags pay tribute to Yasser Arafat.  Later, at bottom, Fatah supporter is dragged and beaten by Hamas. <font face=Arial size=-2>(Source: BBC)</font>
Hundreds of thousands of Palestinians carrying yellow Fatah flags pay tribute to Yasser Arafat. Later, at bottom, Fatah supporter is dragged and beaten by Hamas. (Source: BBC)

Hundreds of thousands of Palestinians crowded into Gaza city on Monday to pay tribute to Yasser Arafat. This was the first major demonstration by Fatah in Gaza since the entire Mideast was shocked by Hamas' stunning victory of Fatah in Gaza.

Each side is blaming the other for starting the violence, though the battle was unequal, with the Fatah supporters throwing stones and the Hamas forces firing guns and throwing stun grenades. By the end, eight Palestinians were killed, and over 130 were wounded.

According to some witnesses, the trouble started when some in the crowd through stones at the Hamas forces, shouting "Shiite, Shiite," accusing them of being a proxy for Iran and its ally Syria.

From the point of view of Generational Dynamics, there are several significant things about this development.

First, something I've mentioned before -- the Palestinians don't seem to have anything like the pure venomous hatred of Israelis that they have for each other.

This is something that I look for in evaluating events today. Mainstream news media tend to completely confuse political fighting with genocidal violence, and lump them all together. So, for example, in Pakistan these last few days, I've seen lots of political conflict, including lawyers in penguin suits running around and demonstrating like college students, but almost no real violence.

As I've said before, if the Palestinians were ready to take on Israel, they'd pour through that security wall separating Israel from the Palestinian territories and start slitting some throats. But I've seen nothing like that.

However, what happened on Monday between Fatah supporters and Hamas. To call a Palestinian a "Shiite" is a venomous epithet, especially if it represents a widespread attitude, and Hamas forces exhibited extremely violent behavior toward Fatah supporters, as you can see from the third picture above.

Second, the "Shiite" epithet is also a direct insult to Iranian president Mahmoud Ahmadinejad.

As I wrote in my July analysis of Iran and Ahmadinejad, Iran is a very dangerous wild card in international politics. Ahmadinejad has plans to gain hegemony over the entire Mideast, including the Arabian peninsula. To that end, he's been funding Hizbollah in Lebanon, and terrorist Palestinian groups, including Hamas.

The problem is that the Arabian peninsula is Sunni Muslim, while Iran is Shia Muslim, and there's no way in Allah's heaven that the Arabs are ever going to submit to hegemony by Shiites.

Thus, ironically, this split between Fatah and Hamas Palestinians is more offensive to Iran than it is to Israel.

When the Mideast Roadmap to Peace was announced in May, 2003, calling for side-by-side Palestinian and Israeli states, I predicted that the Roadmap would never succeed, and that the death of Yasser Arafat, when it occurred, would trigger a generational change leading to a new genocidal war between Arabs and Jews. This is based on a Generational Dynamics analysis of the situation following the genocidal war of the late 1940s, when Palestine was partitioned and the state of Israel was created.

I said at the time that the situation would degenerate into war, probably within two years after Arafat's death. Monday's rally was for the third anniversary of Arafat's death, so my timeline was off, as is often the case when I speculate on a timeline, but the end result hasn't changed. Since Arafat's death, life in the Palestinian territories, especially Gaza, has been increasing violent and degenerate, with the vast majority of the citizens unemployed. The vitriolic hatreds between Hamas and Fatah continue to deepen, a violent civil war, followed by a war between Arabs and Jews, cannot be too far off. (13-Nov-07) Permanent Link
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British Prime Minister Gordon Brown loves America too.

We now have two European leaders competing for our affections.

Last week, French President Nicolas Sarkozy spent an hour telling how much he loved America and America's idealism to a joint session of Congress.

As I wrote last week, Sarkozy is playing a complex political game to gain a French advantage over Britain in the European Union, by trying to show that France can be a better friend to America than Britain can.

Well, not so fast. On Monday, British Prime Minister Gordon Brown gave his first major foreign policy speech and, not to be outdone by the French, he expressed his admiration for America too:

"It is no secret that I am a life long admirer of America. I have no truck with anti-Americanism in Britain or elsewhere in Europe and I believe that our ties with America - founded on values we share - constitute our most important bilateral relationship. And it is good for Britain, for Europe and for the wider world that today France and Germany and the European Union are building stronger relationships with America.

The 20th century showed that when Europe and America are distant from one another, instability is greater; when partners for progress the world is stronger."

Brown even complimented "the personal leadership of President Bush."

This is quite a change. For years, former Prime Minister Tony Blair was ridiculed by the press as being "George Bush's poodle," because of his close ties with American policy. What this was supposed to mean, in case you don't get it, is that Blair was somehow hypnotized by Bush, and simply did as Bush commanded, a concept so ludicrous that only someone like a BBC reporter could conceive of it.

Thus, when Blair stepped down and Brown became Prime Minister, he carefully avoided giving the impression that he was going to be Bush's new poodle. He made it clear that he was his own man, and that his policies would be distinctly different from America's.

Well, Nicolas Sarkozy seems to have changed all that. Here's how the BBC put it on Monday:

"Gordon Brown's Guildhall speech shows that Britain's foreign policy remains somewhere in the middle of the Atlantic.

On this occasion, the British prime minister gave a touch on the tiller to take the British ship of state a bit closer to the American shore.

He was worried perhaps that mixed signals he and his ministers have been putting out indicated a cooling off after the heat of the Blair-Bush relationship.

He is also mindful that the French under Nicolas Sarkozy have suddenly rediscovered their taste for America. Britain might be feeling a little left out, but then it has always been the case that the prodigal son gets the warmest welcome."

And so, for a while at least, the English and the French are competing for the love and attention of America.

Let's enjoy it while it lasts, because I doubt that it will last long. (13-Nov-07) Permanent Link
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Tense Pakistani president Musharaff calls for elections by January 9

After the embarassingly small turnout by Benazir Bhutto supporters on Friday, it's hard to see that there's any political leader around who could challenge the current President Pervez Musharraf. If that's true, it means that the country will be led by Musharraf, or will be displaced by a new army coup.

Tense and somber Pakistan President Pervez Musharraf at press conference on Sunday <font face=Arial size=-2>(Source: CNN)</font>
Tense and somber Pakistan President Pervez Musharraf at press conference on Sunday (Source: CNN)

In Sunday's tense press conference, Musharraf announced the following:

Former Prime Minister Benazir Bhutto called for anti-Musharraf protests and demonstrations on Friday. She was prepared to lead these demonstrations, but army forces prevented her from leaving her home in Rawalpindi (near the capital, Islamabad). Only a few hundred supporters showed up to take part in the demonstrations, far fewer than the tens of thousands that she had called for, and far, far fewer than the hundreds of thousands who cheered her return from exile at Karachi airport on October 18. (That was the day she was almost killed by a suicide bomber.)

Bhutto is defiantly calling for more anti-Musharraf protests and demonstrations starting on Monday. She's described those planned demonstrations as a "long march" (reminiscent of Mao Zedong's "long march" in 1934), traveling from Lahore to Islamabad.

There is nothing in all this that gives a picture of stability. It's possible that the upcoming election will lead to a resolution of problems, but things are moving quickly, and there are many factors that can upset the applecart.

In Sunday's tense press conference, Musharraf claimed again that the imposition of martial law was not for his political gain, but for the sake of the country, a claim that I find to be credible, for reasons I gave last week. He described the declaration of the state of emergency as "the most difficult decision I have ever taken in my life," and added the following: "I could have preserved myself, but then it would have damaged the nation. I found myself between a rock and a hard surface. I have no personal ego and ambitions to guard. I have the national interest foremost." He voiced anger over the "aspersions" cast on his commitment to fighting Taliban and al-Qaeda militants, and his commitment to democracy.

However, while many Pakistanis support the decision for martial law, as shown by the lack of support so far for Bhutto, many others are infuriated by it, including many who are sympathetic to the the Taliban and al-Qaeda. So the possibility of more violence, including terrorist attacks and suicide bombings, is real.

The Pakistani Provinces

In an attempt to get at least a basic understanding of what's going on in Pakistan, I've been studying the ethnic and geographic breakdown of the country.

Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas) <font face=Arial size=-2>(Source:</font>
Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas) (Source:

The name "Pakistan" itself is a hybrid. It was formed in the 1930s from the name of the largest region, Balochistan, by removing the "Baloch" part, and replacing it with P for Punjab, A for Afghanistan, and K for Kashmir. A later interpretation of the name says that I is for Indus, S is for Sindh, and T is for Turkestan, leaving only the "AN" as the remains of the original name, Balochistan.

The official "correct" map of Pakistan, obtained from the Pakistan government web site, shows four major provinces. However, the story isn't complete unless you do something like what I did: I added the "FATA" regions in red. These regions, the Federally Administered Tribal Areas, are tribal areas in a strip of land between Pakistan and Afghanistan. They're considered part of Pakistan, sort of, but they're self-governing and not under the control of Pakistan, although Pakistan does provide administrative services.

Now, the FATA regions are quite important, because that's where you'll find, for example, the tribal region of Waziristan, where Osama bin Laden is supposedly hiding out, along with his merry band of throat-slashers. That's also where the training camps for the international terrorist movement are located. The London subway bombers were trained in Waziristan. The FATA regions are heavily populated by Taliban and al-Qaeda supporters, and they've become terrorist havens out of reach of either the coalition forces in Afghanistan or the Pakistan army.

Now let's look at the four major provinces:

Musharraf himself claims to be without political affiliation, although he's worked closely with MQM since his successful 1999 coup.

Some Observations

Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas) <font face=Arial size=-2>(Source:</font>
Official map of Pakistan, with the addition of the FATA (Federally Administered Tribal Areas) (Source:

The Pakistan crisis was touched upon in the Sunday morning television news talk shows, but it's pretty clear that almost none of the journalists and politicians giving opinions have bothered to learn even the minimal amount about Pakistan that I learned in a few days of research and study.

Sunday's Toronto Sun has a story about an 80-year old Pakistani-Canadian who, years ago, was a student fighting for independence of Pakistan:

"Witness to Pakistan's birth sides with Musharraf crackdown, by Don Peat

For one Pakistani-Canadian living in Mississauga the present emergency in his homeland brings back memories of the country's past turmoil-- the mass migrations and mass killings that grimly greeted Pakistani independence in 1947.

Hasan Akhter Beg, 80, describes his life as having seen the history of Pakistan unfold in front of his eyes.

The Mississauga resident was a university student in his late teens and living in eastern Punjab when he watched the British Raj dissolve into India and Pakistan and erupt into religious violence between Hindus and Muslims.

"We lost so many lives trying to make (Pakistan) a place we would want to live," Beg said.

He travelled from the east on foot to western Punjab, what would become Pakistan, and witnessed the fighting first-hand.

"I saw so many kidnappings and killings," Beg said. "Oh my God, you can't imagine, what miseries with my own eyes can't imagine."

To cope with all he saw he has written political poems about what he calls "the miseries of partition." Despite the chaos then, as now, life went on.

Beg was as a student worker in the independence movement. His job was to work for the election committee. He spent the next 40 years as a railway track engineer before coming to Canada in 1991.

Watching the current situation in Pakistan, Beg is troubled by the violence and unrest.

But, from the events he's seen, Beg feels that Pakistani President General Pervez Musharraf is on the right track.

His experience during partition fuels that view.

"I always tell my sons that our priority is not democracy," he said. "Our survival, our existence must come first."

Beg says the army is the only way to guarantee that survival.

"People are divided here (in Canada) but the majority are with Musharraf," he said.

The judiciary was interfering too much with the path of the country, Beg believes, and so Musharraf is justified in trying to maintain order.

"There should be fair elections- no doubt," he said. "But we don't want corrupt leaders in our country."

As protests mount and uncertainty continues, Beg hopes the country he helped forge will survive.

"I feel the work they did (during independence) is preserved," Beg said. "I hopes it stays that way."

This is the point of view held by people who survived the Partition and resulting genocide. It's less often the position of someone who was born after Partition.

From the point of view of Generational Dynamics, the result is inevitable. People in old generations die, and their wisdom dies with them. People in new generations are born, and they repeat the same forgotten mistakes that their forefathers made. A new genocidal war between India and Pakistan, between Muslims and Hindus, in the near future is 100% certain.

President Musharraf is under pressure from all sides, internally and externally. In his tense press conference on Sunday, he tried to "thread the needle" through policy decisions in a way that would keep everyone happy, without triggering an explosion.

In many ways, Pervez Musharraf is in the same boat as Ben Bernanke. Both of these men realize that they're on the precipice of disaster -- one in Pakistan, and one in global financial markets -- and both are trying to prevent a disaster. But the best that either of them can hope to do is postpone the disaster. Whether either or both of them will be able to do even that in the next few weeks remains to be seen. (12-Nov-07) Permanent Link
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Markets fall as torrents of CDO exposures bolster fears of new credit crunch

British investors panicked on Friday on a rumor that Barclays Bank (Barclays Plc) would have to write down $10 billion in overpriced securities. Panic selling drove Barclays stock shares down 9% on the London Stock Exchange before trading was suspended. Trading resumed after a company spokesman said, "There is absolutely no substance to these rumours," and the stock closed down 2˝% for the day.

The Barclays rumors spread after Wachovia Bank announced, on Friday morning, $1.7 billion in writedowns.

In fact, there have been some $64 billion in writedowns from a number of large financial institutions, including Citigroup, Merrill Lynch, Morgan Stanley, Goldman Sachs, JPMorgan Chase and Bear Stearns.

A new report from Morgan Stanley predicts that the writedown will total as much as $500 billion.

Do you believe that's all it will be, Dear Reader? At the beginning of the year it was going to be nothing, then it would be a few hundred million, then a few billion, and now $500 billion. Do you see a trend here?

What's being written down is credit derivatives (Credit Default Swaps (CDSs) and Collateralized Debt Obligations (CDOs)) that were devised by brilliant PhD financial engineers who discovered that they could turn high-risk subprime mortgage loans into AAA rated securities.

Now that real estate prices have been falling, and the number of mortgage foreclosures has been surging, it turns out these credit derivatives are worth a lot less -- 50%, 10% -- of what the financial engineers said they'd be worth. Some have turned out to be worthless.

There are some $750 trillion in various credit derivatives in the financial portfolios of institutions around the world, based on figures from the Bank of International Settlements. Even if only 10% of them are written down 50% (an optimistic assumption), that's still $37.5 trillion writedowns, where the global GDP is just $45 trillion. (Corrections made on 13-Nov)

Where are all these $750 trillion in credit derivatives? Nobody wants to admit it, but a good guess is that they're in the portfolios of tens of millions of businesses and individuals that have invested in "high-yielding bonds," so that "their money can work for them by earning more money."

Hiding the truth

That's why all these institutions are desperately trying to avoid having to sell off their assets. There's widespread fear that if there's a major sale of CDOs, then a "market price" will be established, and that will force other institutions to "mark to market" -- write down their assets to the market price, which in many cases is "nearly worthless."

However, events are conspiring to force more and more huge chunks of near worthless CDOs to be written down. In just the last few days:

What's interesting about the above list is how many different things are piling up at once. It seems to me that the domino effect has already begun, albeit slowly, and is speeding up. The days where "all bad news is good news" seem to be over.

How did we get here?

Before going on to further consequences, it's worthwhile to stop, take a breath, and recall how we got here.

This is a generational thing. There is nothing new about this. People who say that this is "new" or "different" are fooling themselves.

If you go back through history, there are many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.

When comparing these international financial crises, the details are always different, but they're all remarkably similar in the following ways, as described in "The bubble that broke the world": A debauched and perverted use of credit, occurring at exactly the time that the survivors of the previous financial crisis have all died or retired; a huge asset bubble; the securitization of credit; and an upsurge in corruption. All of those elements are enormously present today.

Not only that, but in each previous case there was an invented certificate or security that could be bought and sold and which, in the end, turned out to be worthless: tulip futures, shares in South Sea company, "assignats" based on lands confiscated from French clergy, railway shares in 1857, and stock shares in 1929. Today it's CDOs.

In fact, we've been discussing debauched abuse of mortgage credit, but the same can be said for many other forms of credit -- prime mortgages, auto loans, credit cards, consumer loans and commercial real estate loans, for example. Problems with these forms of credit haven't yet made the front pages, but they will before long. It isn't mortgages that are the problem; the problem is with Boomers and Xers.

From the point of view of Generational Dynamics, we're waiting until a "generational panic" triggers the inevitable collapse. The asset bubble MUST collapse; the credit securities (CDOs) WILL become worthless; the corruption MUST be punished.

Almost no one alive today has any personal memories of the Great Depression. People in the Boomer generation are narcissistic and arrogant, and have no idea how to run the world, since their parents took care of everything. The people in Generation-X are worse.

Arrogant Boomers are content to let other people take care of things so they can sit back and criticize, as they criticized their parents during the 1960s, and criticize each other today. The youthful nihilistic Xers show contempt for all caution and have no fear of anything, even their own destruction, and devised the huge credit bubble that close to bursting today.

An anecdote in the comment section of a blog entry in a Financial Times blog from a couple of days ago gives a good example.

This anecdote tells of a conversation with someone from the Fitch ratings agency who was explaining why their high ratings for CDO securities were so good. The ratings are assigned by means of a computer software algorithm that takes into account the creditworthiness of the homeowner (as measured by his FICO score), and assumes that home prices will continue to increase, as they have "for the past 50 years":

"We were on the March 22 call with Fitch regarding the sub-prime securitization market’s difficulties. In their talk, they were highly confident regarding their models and their ratings. My associate asked several questions.

FPA: “What are the key drivers of your rating model?”

Fitch: They responded, FICO scores and home price appreciation (HPA) of low single digit (LSD) or mid single digit (MSD), as HPA has been for the past 50 years.

FPA: “What if HPA was flat for an extended period of time?”

Fitch: They responded that their model would start to break down.

FPA: “What if HPA were to decline 1% to 2% for an extended period of time?”

Fitch: They responded that their models would break down completely.

FPA: “With 2% depreciation, how far up the rating’s scale would it harm?”

Fitch: They responded that it might go as high as the AA or AAA tranches."

This phone conversation took place on March 22. At that time, the Fitch representative was explaining how wonderful their models were, even though they assumed that real estate prices would keep on increasing.

Who the heck are these people? Are they totally nuts? You mean that they didn't know, on March 22 of this year, that the real estate bubble was bursting? How could they not know?

These are supposed to be brilliant, highly skilled financiers. How did I know in 2004 that there was a housing bubble, and I said so. (That was in the article where Fed Chairman Alan Greenspan said that there's no housing bubble, but even if there were, it would be a GOOD thing, because homeowners have been refinancing the mortgages, and that gives the homeowners a lot more money to spend. Ha, ha.)

How did I know, in 2005, that the housing bubble was about to burst, which is the one and only reason why I sold my condo and moved into an apartment?

How did I know these things, if these financial geniuses at Fitch didn't even know on March 22 of this year?

I just can't get over this. I listen to CNBC or I read articles in WSJ by Greg Ip, or I read statements by Ben Bernanke, and I constantly have to ask myself, how is it possible that I can see what's going on and these people can't? Am I hallucinating? Am I insane? Am I nuts? Is it really possible that all these people are so dumb that they can't see what's right in front of their faces, and I'm the only person who isn't? Is that even conceivable?

And then there's my article, "How to compute the 'real value' of the stock market," which shows that the stock market is overpriced by a factor of 250% today, same as in 1929.

One of the graphs from that article is the following, which is an updated version of a graph I've been showing people and posting for years:

S&P 500 Price/Earnings Ratio (P/E1) 1871-2007
S&P 500 Price/Earnings Ratio (P/E1) 1871-2007

Now, no one in his right mind can look at this graph and not see immediately that the stock market is going to crash. The P/E ratio will drop below 10, as it did in 1982, for example, and the stock market will fall to Dow 4000 or lower. This has been perfectly obvious to me since I first constructed a version of this graph in 2002, and started telling people we were headed for a new 1930s style Great Depression.

And there isn't even any doubt. This MUST happen. Why, why, why am I the only person who sees this? Why do I have this "superpower," which has turned into an obsession, and which has brought me nothing but grief, contempt and sadness?

I started studying generational theory shortly after 9/11, when I picked up a copy of The Fourth Turning, by William Strauss and Neil Howe. Out of that came Generational Dynamics and this web site.

The Fourth Turning, written in the early 1990s, predicted that people would become incredibly stupid in this decade (although Strauss and Howe didn't use the word "stupid," that's what it amounts to). But I never could have believed that it would be this bad. How could so many people be so stupid?

I read the various economics blog on the internet.

I read Nouriel Roubini's blog, Michael ("Mish") Shedlock's blog, the Calculated Risk blog (with Tanta), the Sudden Debt blog, the MinyanVille blog, and others.

All of these people post analyses of things going on -- the latest jobs reports, the latest currency exchange rates, real estate foreclosure rates, interest rates, housing inventories, etc. They paint dark pictures of what's going on, but they never say what's coming next. Do they believe that we can get out of this mess? They never say that. Do they believe that there's going to be another 1930s style Great Depression? They NEVER say that.

The most they ever say is that we might have a repeat of the Panic of 1987, which was hardly a blip to the economy. In fact, from the point of view of Generational Dynamics, it's called the false panic of 1987, since the stock market was actually underpriced at that time. One other person said that the worst we were headed for was a repeat of the Panic of 1892. I think he was joking, but I'm not sure. "1929" is the word that may not be uttered.

I was mocking Professor Nouriel Roubini a few weeks ago, for bragging about how clever he was, a year ago, to predict that the housing bubble would cause a "hard landing" in the economy. Well, what the hell, how did I know that in 2005? All of these guys (and Tanta) are supposed to be top-notch experts. They seem to know a lot of details, but they have no idea of what's going on -- the big picture. Why is that?

I don't expect the man on the street to look at the above P/E1 graph and understand it. Lots of people don't have those skills. But hell, we're not talking about the man in the street. We're talking about financial engineers with PhDs in economics and mathematics. We're talking about a Princeton University professor of economics, for heavens sake. Why don't any of them know what's going on or, if they do, why don't they say so?

The fall of Nasdaq and tech stocks

OK, enough ranting about that subject. Let's turn to the stock market this week.

Anxiety was pretty high on CNBC most of this week, as pundits and financiers sought to reassure each other with phrases like, "I think every company is moving as quickly as possible to get their writedowns completed," or "The worst of the credit crunch is over," or "A couple more weeks of bad news, and then we'll get back to business as usual," or "It's just the financials dragging the stock market down; the tech stocks look like real winners."

Oops, well that wasn't true by the end of the week, as the Nasdaq and other tech stocks fell sharply. The tech-heavy Nasdaq index has been spiking up all year, and lately the index has been principally supported by four stocks: Apple, Google, RIMM (Research in Motion), and Amazon. But on Friday, all four fell sharply.

One CNBC pundit (I wish I had made a note of his name) was close to tears over Google, which fell over 4% on Friday. "I just can't understand it. Google has been doing well this year, and the fundamentals haven't changed, so why oh why is it falling now?" Ya think he has some Google shares he's been counting on?

A poster on one online forum gave his reasons "Why Google deserves its share price and more." He explains, "I've been reading articles about how Google is overpriced ever since their IPO, and ... [all] of them are wrong, and I'll explain why." He explains why Google has the best search engine, good PR, great free services, a great business model. Saying that "MSN and Yahoo suck," he concludes, "Google is one of those rare companies that comes along and kicks everyone's ass for a very long time, and I'm not getting off the bus anytime soon."

Now the problem with this argument is that it doesn't provide any reason that Google's share price is worth it. Let's assume that everything he says is correct; then the same argument could be used to justify a share price of $600, $6000 or $6 million. Is Google worth $6 million a share? According to the above "reasoning," it is.

Google has a price/earnings ratio of about 60. There's no way it's worth the $600+ share price, by a long shot. But we've seen this show before, haven't we? There were lots of "googles" in 2000, all of them "rare companies" that were "kicking everyone's ass," and they all fell on their faces in the Nasdaq crash.

Financial pundits have been talking about getting past the "bad news," and getting back to "business as usual." It never seems to dawn on them that bubblehead logic is not "business as usual." We will never return to the mania of just a few months ago.

The mania has been driven by Boomers and Xers. Not having lived through the Great Depression, they have no idea what's going on, or how to handle it. Now they're beginning to panic, because they're over their heads in debt, threatened with bankruptcy and losing their homes. Their stock market investments are based on raw emotion. The events of the last few months have frightened them, and all it will take is one little push to send them over the edge into full-scale panic.

Can Ben Bernanke save the world again?

On August 17, I posted an article entitled "The nightmare is finally beginning." I indicated that we were now on the road to a stock market crash in the near future. The exact timing couldn't be predicted, but the speculation was that it would happen by the end of September.

Well, it didn't happen, and so I got what I deserved for speculating. But hey, I'm a Boomer, and like other Boomers, I never seem to learn my lesson. So I'm going to speculate once again.

Fed Chairman Ben Bernanke "saved the world" last time, by lowering the discount rate on August 17, and then lowering interest rates by an unexpectedly large ˝% on September 18. Investor anxiety dissolved into euphoria, and drunken investors pushed the stock market bubble up to a historic high of Dow 14164 on October 9.

The euphoria died on October 15 with the M-LEC announcement. When the Fed lowered interest rates again on October 31, not only did it not restore the euphoria, it appeared to increase the level of dread.

And so, today, we're back at the point where I originally wrote, "The nightmare is finally beginning."

Can Ben Bernanke "save the world" again?

Bernanke is no fool, as many people seem to believe he is. As I wrote in "Bernanke's historic experiment takes center stage," Bernanke has a specific strategy for handling this situation.

The only problem is the Bernanke's strategy cannot possible work, and the fiasco of the October 31 interest rate reduction is already a significant failure in his strategy.

Does he have any ammunition left? I don't believe he can do much by himself, but he might seek help from two other sources:

The point is that Bernanke can only "save this world" this time with something significant and dramatic.

From the point of view of Generational Dynamics, nothing can work in the long run. Just take another look at the price/earnings (P/E1) graph earlier in this article. All the Fed can do is stall a little longer. (11-Nov-07) Permanent Link
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Nicolas Sarkozy gives stirring speech to joint session of Congress

Years of French/American hostility seemed to melt away on Wednesday, as French President Nicolas Sarkozy expressed his love for America in a speech to a joint session of Congress. There were frequent standing ovations as he cheered American idealism, American morality, and America's courage in saving France during the World Wars.

French President Nicolas Sarkozy speaks to a joint session of Congress. <font face=Arial size=-2>(Source: C-SPAN)</font>
French President Nicolas Sarkozy speaks to a joint session of Congress. (Source: C-SPAN)

I frequently point out that, from the point of view of Generational Dynamics, the actions and behaviors of politicians are really irrelevant to what's going to happen, except insofar as the politicians' views represent those of the masses of people who elected them. So the question is, how deeply do the French agree with these views stated by Sarkozy?

I don't know the answer to that question, except that I've heard several pundits recently talk about how much the French people love America, only differing with Americans over pursuit of the Iraq war. I have to say that this is news to me. During the 1970s I spent a fair amount of time in Europe on business, and it was perfectly clear to me that the Germans liked Americans and the French hated Americans.

Probably more to the point is the attitudes of the French people toward the British or, as Sarkozy's predecessor used to call them, the "Anglo-Saxons." Jacques Chirac's denunciations of Tony Blair and British policy during discussions of the EU constitution were so bitter that I indicated that a future war between France and Britain seemed fairly certain.

People tend to recoil when I suggest this, but it's really not far-fetched at all. There have been numerous bitter crisis wars fought between the English and French in the millennium since 1066, and the only really far-fetched idea is that such a war will never happen again.

Many older French people today still have bitter feelings towards the British because of the Duke of Wellington's victory over Napoleon Bonaparte at Waterloo in 1815. Napoleon had an early vision of a "European Union" led by France, and the visceral feeling is that the British are guilty of blocking France's leadership in the EU today just as they did with Napoleon.

So it's not surprising that Sarkozy spoke at length about France's support for America in the American revolution. He didn't mention the British, but of course web site readers may recall that the American Revolution was fought against the British, with whom France had been at war in many places around the world in the previous century.

An ironic choice by Sarkozy was his emphasis on the great French aristocrat Lafayette, who volunteered to fight alongside the colonists in the Revolutionary War and became a close friend with George Washington. Sarkozy repeatedly referred to this close friendship, but didn't mention that later Lafayette opposed Napoleon.

Thanking America's courage in the World Wars

The most touching of Sarkozy's remarks came when he thanked America for saving France twice during the two world wars. It's interesting that he put a generational spin on it as well. (This is my own transcript of the simultaneous translation; I'll update this page if a better transcript becomes available.)

"Ladies and gentlemen, the men and women of my generation heard their grandparents talk to them about how in 1917, America saved France. At a time when my country had reached the final limits of its strengths, a time when France was exhausted, it had spent its strength in the most absurd and bloodiest of wars, and France was able to count upon the courage of American soldiers. And I have come to say to you on behalf of the French people that never, never will we forget that.

The men and women of my generation heard their parents talk about how America returned in 1944 to free us from the horrifying tyranny that threatened to enslave us. And fathers in my country took their sons to see the vast cemetaries where under thousands of white crosses, so far from home, thousands of American soldiers lay, who had fallen not to defend their own freedom, but to defend the freedom of all others, who died far from their homes

Not to defend their own families and their own homeland, but to defend humanity as a whole. That is why we love America.

And the fathers took their sons to the beaches, the beaches where the young men of America had so heroically landed. and the fathers read to their sons the admirable letters of farewell that those soldiers, those 20 year old soldiers, had written to their families before battle, to say to them, we don't consider ourselves to be heroes, we want this war to be over, but however much dread that we feel, you can count on us.

And before they landed, Eisenhower told them -- and we have not forgotten in Europe these words -- "The eyes of the world are upon you, young men of America, the hopes and prayers of all liberty loving people much with you."

And the children of my generation, as they listen to their fathers, as they watch movies, as they read history books, and the letters of YOUR soldiers who died on our beaches of Normandy and Provence, as they visited the cemetaries where the Star Spangled Banner flies, the children of my generation understood that these young 20 year old Americans were true heroes to whom we owed the fact that we were free people and not slaves. America liberated us, and this is an eternal debt that we owe America.

As president of the French Republic, my duty is to say to the people of America, that you represent in its vast diversity, that France will never forget, the sacrifice of your children, and to say to the families of those who did not return, those who did not come back, to those who cried the loss of their fathers whom they virtually had no time to know. that the gratitude of France is forever.

On behalf of my generation that did not suffer under the war, on behalf of those children who will always remember, and to all the veterans who are present here, and in particular the seven I was honored to decorate last night, one of whom, [Hawaii Senator Daniel K.] Inouye, who belongs to your Congress, I want to express the deep and sincere gratitude of the French people. and I want to tell you something, something important.

Every time, whenever an American soldier falls, somewhere in the world, I think of what the American army did for France, I think of them, and I am sad, as one is saddened to lose a member of one's family.

Sarkozy received several standing ovations during this portion of the speech, and that was true in other portions as well.

Praise for American idealism

"But the US and France are not simply two nations that are true to the memory of what they've accomplished together in the past. The United States and France are two nations that remain true to the one and same ideal, who uphold the same principles, believe in the same values.

Sarkozy enjoys a standing ovation after praising American idealism <font face=Arial size=-2>(Source: C-SPAN)</font>
Sarkozy enjoys a standing ovation after praising American idealism (Source: C-SPAN)

I refer, I speak to you, as I stand before the portraits and of Washington and of Lafayette. Lafayette was the first to speak to both chambers. What could possibly have brought together two people who were so different in terms of age and of origin - Lafayette and Washington?

It is the common values, the shared values. the same love of liberty and of justice. And when Lafayette joined George Washington, he said to him, I have come here to this land of America to learn, and not to teach. He came from the old world, and he came to the new world, and he said, I have come to learn, and not to teach. That is the new spirit and youth of the old world, coming to seek out the wisdom of the new world. to open here in America new era for all of humankind.

The American dream, was from the very beginning, the very outset, a matter of putting into practice what the old world had dreamt of without being able to build it, to acommplish it.

From the beginning, the American dream meant proving to all men and women throughout the world, that freedom, justice, human rights and democracy, were not an utopia, but quite the reverse -- they where the most realistic policy there is, and the most like ly to improve the lot and fate of each and every one. to the millions of men and women who came from every country in the world and with their own hands, their intelligence, and their hearts, built the greatest nation in the world, America did not say, come and everything will be given to you. Rather she said, come, and the only limits to what you will be able to achieve will be the limits of your own courage, your boldness, and your talent.

The America that we love throughout the world embodies this extraordinary ability to grant each and every person a a second chance, another chance, because in America, failure is never the last world, there's always another chance. Here, in your contry, on this soil, the humblest and most illustrious citizens alike, know that nothing is owed to them, and that everything has to be earned. That is what constitutes the moral value of America.

America did not teach men the idea of freedom. She taught them how to practice it. And America fought for this freedom whenever she felt it to be threatened or jeopardized. And it was by watching America grow that men and women understood that freedom and liberty were possible, and it is that that gives you a special responsibility. What made America great is her ability to transform her own dream, the American dream, into a source of hope for all of mankind."

From Elvis to Martin Luther King

"But my generation did not love America only because she defended freedom. We also loved America because for us she embodied what was most audacious about the human enterprise, because America for us embodied the spirit of conquest. We loved America, because for us, America was a new frontier that was continuously being rolled back, a constantly renewed challenge to the inventiveness of the human spirit.

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My generation, without even coming to America, shared all of your dreams. In our imaginations, our imaginations were fueled by Hollywood, by the great conquest of the western territories, by Elvis Presley - you probably haven't head his name quoted here -- but for my generation, he is universal.

Duke Ellington, Hemingway, John Wayne, Charlton Heston, Marilyn Monroe, Rita Hayworth, Bud Armstrong, Aldren, Collins, who fulfilled mankind's oldest dream, on the day when Americans walked on the moon. That day, America was universal, and each one of us wanted to be part of its great adventure.

What was most extraordinary for us was that through your literature, your cinema, your music, it seemed to us that America America always seemed to emerge ever greater, ever stronger from adversity, from the challenges that it faced. And it seemed to us that instead of causing America to engage in self-doubt, these difficulties only strengthened her belief in her values.

What makes America strong is the strength of this ideal that is shared by all Americans, and by all those who love her, because they love freedom.

And let me say as I stand before you in this congress America's strength is not only a material strength, it is first and foremost a moral strength, a spiritual strength, and no one expressed this better than a black pastor, who asked just one thing of America, that she be true to the ideal in whose name he -- he the grandson of a slave -- felt so deeply American. That name was Martin Luther King. He made America a universal role model.

And the world still remembers his words, that not a single young Frenchman of my generation has forgotten either, the words of Martin Luther King words of love, words of dignity, words of justice. And these words, America heard, and as a result America changed. And the men and women who had doubted America, because they no longer recognized her, began to love her once again.

Fundamentally, what are those who love America asking of her, if not to remain forever true to your founding values."

Remembering 9/11

"Ladies and gentlemen, today as in the past, as we stand at the beginning of the 21st century, it is together that we must fight to defend and promote the values and ideals of freedom and democracy that men such as Washington and Lafayette coined and invented together.

Together, united, we must fight against terror.

On September 11, 2001, all of France, horror struck as we were, but rallied to the American people. On the front page headline of one of our major dailies read, we are all American on this 11th of September 2001.

And on that day, when you were mourning so many dead, never had America appeared to me so great, so dignified, so strong. The terrorists had thought they would weaken you, but they made you greater, and the people of the world admired America for its courage. that is the truth.

And from day one, France decided to participate shoulder to shoulder with you in the war. in afghanistan. And let me tell you solemnly today, France will remain engaged in Afghanistan for as long as it takes, because what is at stake in that country is the very future of our values and that of the of the Atlantic alliance.

Solemnly, before you, let me say, failure is not an option. Terrorism will not prevail, for democracies are not entitled to be weak. And because, we, the free world, are not afraid of this new barbarism, and because of that, America can count on France in its battle on terror.

The above is a transition into policy issues. Sarkozy commits France to continued support of the war on terror and the war in Afghanistan. Later, he declares support for America's policy versus Iran. He never mentions Iraq.

Financial capitalism and monetary war

Sarko didn't use the word "subprime," but he made some startling remarks alluding to the current global financial crisis, for which he clearly blames the United States:

"And allow a friend of America to say this to her. This stated responsibility comes with duties, for France and for America, and the first of which is setting an example. Those who love this nation, which, more than any other has demonstrated the virtues of free enterprise, expect America to be the very first to denounce the abuses and the excesses of a financial capitalism that sets too great a store by speculation. They expect her to commit fully to the necessary rules and safeguards. the America that I love is the one that encourages entrepreneurs, not speculators.

Those who admire the nation that has built the world's greatest economy, and has never ceased trying to persuade the world of the advantages of free trade, expect her to be the first to promote fair exchange rates. the yuan is already everybody's problem. The dollar cannot remain solely the problem of others.

If we are not careful, monetary disarray could indeed morph into monetary war, and we would all, all of us, be its victims.

Talking about "monetary war" is a fairly alarming statement for a politician who's in the middle of a speech where he's sucking up to American congressmen. It's the main reminder of the Jacques Chirac's bitter remarks in 2005 about the "Anglo-Saxon" word view, and how it differs from the French world view.

He made some remarks on global warming that didn't go over too well:

"Those of us who love the country of wide open spaces, and open parks, and nature protected nature reserves expect America to stand alongside europe, leading the fight against global warming that threatens the destruction of our planet.

I know that the American people and its citizen states are increasingly aware of the stakes and determined to act.

Allow me to say with all the friendship that I feel for America: That this fight is essential for the future of humanity, and we will not be able to achieve the results that we must achieve without America leading this fight, for the safeguarding of our planet, of the human species. We need America in order to protect our planet and its environment."

Sarkozy received polite applause for these remarks on global warming, but just after the words "destruction of our planet," I could swear that I heard a number of "boos" mixed in with the polite applause.

Some observations

During the past few days, we've had two major speeches by international leaders appealing to America's sense of its own history.

Pakistan President Pervez Musharraf's speech declaring marshal law spoke of how Abraham Lincoln had to violate Constitutional principles at the height of the American Civil War.

Sarkozy shakes hands after his speech ends <font face=Arial size=-2>(Source: C-SPAN)</font>
Sarkozy shakes hands after his speech ends (Source: C-SPAN)

And now we have Sarkozy's speech, where he talks of his own love for America and French-American friendship by referring to America's own Revolutionary War ideals.

People who criticize this web site or Generational Dynamics seem to be unaware of the power of historical images in other people, while accepting in themselves.

Thus, most Americans understand the symbolism intended by Musharraf and Sarkozy in their references to American history, to Lincoln and Washington, respectively.

So it shouldn't be a surprise that people in other nations have strong reactions to references to the 1947 genocidal bloodbath in Pakistan and India, or the fall of the Byzantine Empire in Constantinople to the Muslims in 1453. Events like these are earthquakes that trigger tsunamis that are just reaching us today.

Nicolas Sarkozy's speech to the joint session of Congress on Wednesday is important because of the symbols he chose to mention -- the American Revolutionary War and the victory over the British at Yorktown. But it's also important because of the symbol that he didn't mention -- the British victory over France at Waterloo.

Sarkozy is playing a complex political game to gain a French advantage over Britain in the European Union, by trying to show that France can be a better friend to America than Britain can. Whether it's possible for a few Sarkozy speeches to overcome deep visceral hatreds from a millennium of wars between the French and the Anglo-Saxons remains to be seen, but from the point of view of Generational Dynamics, it's not very likely.

Even so, it's nice to hear such deeply textured words of praise for America and American ideals. Things may become contentious again before long, but we can at least enjoy the moment while it lasts. (8-Nov-07) Permanent Link
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Benazir Bhutto to make a power play against Musharraf on Friday

Bhutto has called for thousands of her supporters to demonstrations and protests on Friday.

If she succeeds in inciting large crowds of Pakistanis to call for an immediate end to President Pervez Musharraf's state of emergency, then she will have achieved a big political victory.

Indeed, Musharraf's actions appear to have been getting harsher, and dozens of Bhutto supporters have now been jailed. Furthermore, officials in Musharraf's administration have indicated that they won't permit the demonstration to occur.

So far, I still don't see any massive Pakistani upheaval against the martial law restrictions so far. There have been lawyers in penguin suits protesting the restrictions on courts; there have been sporadic student demonstrations, not generally supported by the mass of students.

This makes sense to me. Whatever results Musharraf's actions have for the state of democracy in Pakistan, most people are very concerned about the rise in Taliban and al-Qaeda violence throughout the country, and the fact that the Taliban is now in complete control of the northwest provinces in Waziristan, on the border with Afghanistan. Bhutto herself narrowly escaped death last month when her procession was attacked by a suicide bomber.

So the results of Friday's pro-Bhutto demonstrations and protests can have a significant impact, and may go either way: A poor showing may indicate support for Musharraf's proclamation, and a good showing may indicate that Musharraf's in trouble. From the point of view of Generational Dynamics, the turnout will be an indicator of the near-term stability of Pakistan itself. (8-Nov-07) Permanent Link
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Chief of MI5 says that al-Qaeda is recruiting British teenagers

Describing "the most immediate and acute peacetime threat in the 98-year history" of MI5, Director General Jonathan Evans gave a speech on Monday on the UK's threat from al-Qaeda.

MI5 Director Jonathan Evans
MI5 Director Jonathan Evans

A major point was that al-Qaeda is recruiting young teenagers:

"As a country, we are rightly concerned to protect children from exploitation in other areas. We need to do the same in relation to violent extremism. As I speak, terrorists are methodically and intentionally targeting young people and children in this country. They are radicalising, indoctrinating and grooming young, vulnerable people to carry out acts of terrorism. This year, we have seen individuals as young as 15 and 16 implicated in terrorist-related activity."

This is consistent with the speech given last year by Dame Eliza Manningham-Buller, the previous Director-General of MI5:

"And, chillingly, we see the results here. Young teenagers are being groomed to be suicide bombers. We are aware of numerous plots to kill people and to damage our economy. What do I mean by numerous? Five? Ten? No, nearer....... thirty that we know of. These plots often have links back to Al-Qaida in Pakistan and through those links Al-Qaida gives guidance and training to its largely British foot soldiers here on an extensive and growing scale. And it is not just the UK of course. Other countries also face a new terrorist threat: from Spain to France to Canada and Germany."

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This year, Evans made it clear that the problem is spreading, rather than being contained:

"You may recall that in her speech this time last year, my predecessor, Eliza Manningham-Buller, pointed out that this country was facing an increasing threat from Al Qaida-inspired terrorism. When she spoke, MI5 had identified around 1,600 individuals who we believed posed a direct threat to national security and public safety, because of their support for terrorism. That figure today would be at least 2,000. This growth, which has driven the increasingly strong and coordinated government response, is partly because our coverage of the extremist networks is now more thorough. But it is also because there remains a steady flow of new recruits to the extremist cause.

And it is important that we recognise an uncomfortable truth: terrorist attacks we have seen against the UK are not simply random plots by disparate and fragmented groups. The majority of these attacks, successful or otherwise, have taken place because Al Qaida has a clear determination to mount terrorist attacks against the United Kingdom. This remains the case today, and there is no sign of it reducing. So although MI5 and the police are investigating plots, and thwarting them, on a continuing basis, we do not view them in isolation. Al Qaida is conducting a deliberate campaign against us. It is the expression of a hostility towards the UK which existed long before September 11, 2001. It is evident in the wills and letters left behind by actual and would-be bombers. And it regularly forms part of Al Qaida's broadcast messages."

The successful July 7, 2005, London subway bombing has been a powerful tool for the Islamist radicals in recruiting young Muslims in England to form terror cells for further terrorist acts.

As I wrote last year, from the point of view of Generational Dynamics, many of Britain's young Muslims have set up a "Hero/Prophet" relationship with the radical clerics in Pakistan. This kind of relationship is the visceral basis by means of which new genocidal crisis wars begin. There's an emotional connection between the elder Prophet generation (the idealistic generation born after the last crisis war) and the impatient college age Hero generation (the soldiers who will be fighting the new crisis war). It's becoming increasingly clear that the young British Muslims are particularly connected to the resurging al-Qaeda leadership on the Afghan-Pakistan border.

This is exactly the same region in northwest Pakistan that is completely controlled by al-Qaeda and Taliban militants, causing President Pervez Musharraf to declare martial law in the country.

But now, even the Pakistani-based "Prophet" culture is expanding to multiple nations, according to Evans:

"Another development in the last 12 months has been the extent to which the conspiracies here are being driven from an increasing range of overseas countries.

Over the last five years much of the command, control and inspiration for attack planning in the UK has derived from Al Qaida's remaining core leadership in the tribal areas of Pakistan - often using young British citizens to mount the actual attack. But worryingly, we have more recently seen similar processes emerging elsewhere.

For instance, there is no doubt now that Al Qaida in Iraq aspires to promote terrorist attacks outside Iraq. There is no doubt that there is training activity and terrorist planning in East Africa - particularly in Somalia - which is focused on the UK. And there is no doubt that the extension of what one might call the 'Al Qaida franchise' to other groups in other countries - notably in Algeria - has created a significant upsurge in terrorist violence in these countries. It is no coincidence that the first suicide bombing in Algeria followed the creation of the new 'Al Qaida in the Lands of the Islamic Maghreb.'

This sort of extension of the Al Qaida brand to new parts of the Middle East and beyond poses a further threat to us in this country because it provides Al Qaida with access to new centres of support which it can motivate and exploit, including in its campaign against the UK.

Since 9/11, there have been a number of examples of serious Al Qaida-related terrorist activity in Europe. But in the last 12 months we have seen an increase in attack planning across the continent. This summer alone we saw many terrorist arrests, including those in Germany, Denmark and Austria. It is too early to assess with confidence what all this means but certainly, we can see that the threat from Al Qaida related terrorism goes well beyond the UK."

This concept of the al-Qaeda "brand name" is one we've written about several times, as al-Qaeda-sanctioned suicide bombings occur in other countries. The al-Qaeda linked groups in other countries are not under the control of al-Qaeda in Pakistan, but they communicate over the internet, and share technology and planning.

In reporting on the Jonathan Evans' speech, the BBC reporter described the speech while standing in front of a screen with displays of MI5 software to keep track of the thousands of suspects, cells and plots:

BBC reporter in front of a screen displaying MI5 software for tracking suspected terrorists <font face=Arial size=-2>(Source: BBC)</font>
BBC reporter in front of a screen displaying MI5 software for tracking suspected terrorists (Source: BBC)

That such software is needed is indicated by Evans' description of the difficulty in obtaining the proper intelligence:

"It is important to recognise too that intelligence will rarely provide a complete picture. It gives us pieces of a whole, which then require assessment and interpretation. It helps improve our chances of success. And as we have seen in more than 200 terrorist convictions in the UK since 9/11, it does save lives. But it will not in itself provide certainty.

There is, however, a further difficulty in relation to intelligence work against the current threat, and it is one that I think has led to a degree of misunderstanding about MI5's work.

The networks we investigate are not the hard-edged cells typical of some other terrorist groups. Even though it may only be a handful of people who actually carry out a violent attack, it is now rare to see extremist groups acting entirely in isolation.

So the deeper we investigate, the more we know about the networks. And the more we know, the greater the likelihood that, when an attack or attempted attack does occur, my Service will have some information on at least one of the perpetrators. And in a sense this is a benefit. Why? First, because it means we can move more swiftly from intelligence to arrests. It means we can provide an informed assessment for the police, emergency services and Government, of the context of an attack, the likely depth of the conspiracy, and most importantly, the potential leads to follow to ensure that culprits can be arrested. And second, it demonstrates how the counter-terrorist net that the British intelligence community and our liaison partners have strung across the globe is working."

From the point of view of Generational Dynamics, al-Qaeda by itself is not a major source of danger except, of course, to the thousands or tens of thousands of innocent people who are killed by suicide bombings and other terrorist attacks.

The real danger from al-Qaeda is as we're seeing in Pakistan: Frequent terrorist acts polarize the population and generate small conflicts that can easily become large ethnic or religious conflicts. This is the danger in Pakistan today. (7-Nov-07) Permanent Link
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UN expert calls biofuels a "crime against humanity"

Separately, Oxfam says that biofuels won't work, and they "trample" poor people.

He's called by the title, "The UN Special Rapporteur on the right to food." And he's commenting on the meteoric rise in the price of wheat this year, as well as similar increases in other food prices.

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According to Jean Ziegler, the rising prices of food prices are making it impossible for poor countries to import enough food for their people:

"It is a crime against humanity to convert agricultural productive soil into soil which produces food stuff that will be burned into biofuel."

Ziegler argued that biofuels will only lead to further hunger in a world where an estimated 854 million people (1 out of 6) already suffer from the scourge; 100,000 people die from hunger or its immediate consequences every day; and every five seconds, a child dies from hunger.

All of this takes place, he added, in a world that already produces enough food to feed every child, woman and man and could feed 12 billion people, double the current world population, according to the UN Food and Agriculture Organisation (FAO).

"All causes of hunger are man-made, it's a problem of access, not overpopulation or underproduction, and can be changed by human decision," he stated.

A lot of this is just plain silly, and he's contradicting himself. Worldwide, about 2% of the available crop land is used for biofuels today. If there's enough food to feed double the current world population, then what difference would it make to have a small fraction of food production diverted to biofuels? If there's enough food to feed double the current population, then why is anyone starving? If the only problem was access, then why not just fix the access problem, and stop worrying about biofuels?

I'll answer all these questions in the section below on "The Law of Diminishing Returns," but first let's take a look at what's happening:

Price controls and panic buying are only going to make the problem worse on a worldwide basis, as panic buying in one place tends to create greater shortages in other places. As things stand, rising food prices are causing social unrest in poor countries around the world, according to United Nations warnings.

The Law of Diminishing Returns

What I mainly want to focus on in this article is the question that always comes up when the topic of food prices and food scarcity comes up:

"If there's more than enough food in the world to feed twice the world's population, then why are people starving?"

I specifically want to discuss how the Law of Diminishing Returns applies to this question, but first, let's look at some obvious things:

So the issue isn't the amount of FOOD, it's the amount of OTHER RESOURCES that are keeping the world from being fed.

So we have a situation which can be described as follows: You have a process that requires multiple resources to produce an output. You want to add resources in order to produce a greater output, but you can only add certain types of resources.

Here's what the Law of Diminishing Returns says:

In other examples, you have a manufacturing process that uses both machines and manual labor. You can add more people, but each new person results in less return (output) than the previous person you added.

Farming is a perfect application to discuss with respect to the Law of Diminishing Returns, because you're usually talking about a fixed amount of farmland.

If you want to grow more food on the same amount of farmland, you can use more fertilizer, more insecticide and more herbicide. In fact, that's what was done in the "Green Revolution" of the 1960s and beyond. The first time that fertilizers, insecticides and herbicides were used in India and other places, they produced spectacular results in terms of increased output. But then the use of these ingredients was increased on a given acreage of farmland, and each increase produced diminishing benefits and output. After a while, use of additional fertilizers, insecticides and herbicides actually became counterproductive, since runoffs tended to cause pollution.

The "Law of Escalating Prices"

The "Law of Escalating Prices" is not an officially recognized law, but it's my name for another way of looking at the Law of Diminishing Returns.

If you add resources to a process, but only increase the output a little, then the costs per unit of output are going to increase.

For example, in the example of the multiple carpenters working with a single plumber and electrician, all those carpenters have to be paid, even when they're sitting around waiting for the electrician and plumber to catch up, and those costs go into the final cost of the houses being built.

In the case of adding fertilizers, insecticides and herbicides to the farmland, the costs of those items go into the cost of growing the food.

Feeding the world

Now let's tackle the problem we're really interested in: If there's enough food in the world to feed twice the population, then how do we feed the world?

For all practical purposes, the amount of farmland in the world, and hence the amount of food, is fixed. (It's actually growing gradually, but for this discussion that's not important.)

But in order to get the food where it's needed, then you need to spend a number of additional resources as listed previously, including harvesting, preparation, packaging, refrigeration, transportation, local distribution.

By the "Law of Escalating Prices," also known as the Law of Diminishing Returns, these additional resources are going to add to the cost of the food.

And that shouldn't be surprising. As world population increases, it becomes more and more expensive to ship food into densely populated megacities. Just imagine one resource -- refrigerated trucks. Those are very expensive items, and more and more of them are needed in order to distribute food locally within these megacities. Who's going to pay for those trucks? Whoever does is going to add the cost of those trucks into the price of the food.

Shipping food from, say, South America to, say, Africa or southeast Asia, obviously incurs shipping costs, and by the Law of Escalating Prices, those costs increase per unit of food.

Thus, the increases in food prices we've seen since 2000 can be attributed to the Law of Diminishing Returns. And as "returns" have kept diminishing as resources are added, the food prices have been increasing very sharply since 2005, and even more sharply in 2007.

We can show this very dramatically by means of the following graph:

Shipping costs and soybean prices from 2001 to the present
Shipping costs and soybean prices from 2001 to the present

This graph illustrates how the price of shipping and the price of soybeans have increased in tandem.

I wrote about the Baltic Dry Index in 2005, and how it had been increasing at that time because of the demand for imported goods into China.

The graph above does not prove that the increased cost of soybeans is caused by the increased cost of shipping from the Law of Diminishing Returns, but it provides dramatic support.

In fact, it illustrates a larger picture. Because it takes so long to build a new ship, the number of ships has also been fairly constant, just like the amount of food in the world. The increased demand for shipping, especially from China, has pushed up the cost of shipping for ALL goods, not just food.

Generational view of food scarcity and famine

The recent crisis in Pakistan has called attention the problems of the entire Indian subcontinent, especially the genocidal bloodbath that occurred in 1947 with Partition and the independence of India and Pakistan, when Britain relinquished control of the Indian subcontinent.

That wasn't the only memorable disaster that happened to the Indian subcontinent during World War II. The following is a description of the Bengal (eastern India) famine of 1943:

"The world's worst recorded food disaster happened in 1943 in British-ruled India. Known as the Bengal Famine, an estimated four million people died of hunger that year alone in eastern India (that included today's Bangladesh). The initial theory put forward to 'explain' that catastrophe was that there as an acute shortfall in food production in the area. However, Indian economist Amartya Sen (recipient of the Nobel Prize for Economics, 1998) has established that while food shortage was a contributor to the problem, a more potent factor was the result of hysteria related to World War II which made food supply a low priority for the British rulers. The hysteria was further exploited by Indian traders who hoarded food in order to sell at higher prices.

Nevertheless, when the British left India four years later in 1947, India continued to be haunted by memories of the Bengal Famine. It was therefore natural that food security was a paramount item on free India's agenda. This awareness led, on one hand, to the Green Revolution in India and, on the other, legislative measures to ensure that businessmen would never again be able to hoard food for reasons of profit."

This essay, which was written recently, goes on to describe the successes and problems of the Green Revolution.

I want to call your attention particularly to one of the essay's conclusions:

"Nothing like the Bengal Famine can happen in India again. But it is disturbing to note that even today, there are places like Kalahandi (in India's eastern state of Orissa) where famine-like conditions have been existing for many years and where some starvation deaths have also been reported. Of course, this is due to reasons other than availability of food in India, but the very fact that some people are still starving in India (whatever the reason may be), brings into question whether the Green Revolution has failed in its overall social objectives though it has been a resounding success in terms of agricultural production."

This paragraph is so much an emblem of our times:

Social objectives, political objectives. Nothing else matters to these people.

There are many reasons why the price of foods is going up: increased demand, dietary changes in developing nations, use of biofuels, and the Law of Diminishing Returns are major reasons. Failure of "social objectives" is not on the list of reasons, or if it is, it's pretty far down.

Overlaying all this is a generational lack of purpose. Maybe it might be possible to feed everyone today with the food available. But that would require a worldwide determination to do so.

The people who survived WW II spent their lives traumatized by it, and determined that nothing like that should ever happen again, especially to their children. Now those survivors are gone, and their children are the leaders, and they're completely oblivious to what's going on.

If you had to pick one word to characterize today's generations of leaders, a good choice would be "oblivious." They're oblivious about the growing dangers of starvation of huge masses of people in the world. They're oblivious about the dangers of abuse of debt and credit, and about the dangers of the many stock market bubbles today -- they've learned nothing from the dot-com bubble of the late 1990s, or the housing bubble of the last five years. They're oblivious about the danger of world war in the near future, as illustrated by the nonsense we're hearing from politicians and reporters about the current crisis in Pakistan.

Food prices have been increasing faster than inflation since 2000, and have been surging quickly since 2004. This year they've grown faster than ever. The world appears to have crossed some "tipping point," where food prices are simply out of control. Almost everyone is completely oblivious to what's going on, preferring instead to worry about Britney or spew fatuous political nonsense. This won't last forever. (7-Nov-07) Permanent Link
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Risk of Pakistan meltdown increases as Musharaff clamps down

We're raising the "conflict risk index" for Kashmir from 2 (medium risk) to 3 (high risk).

Pakistani President Pervez Musharaff faced massive international and domestic pressure on Monday, and even threats of a coup, in the third day of the country's state of emergency.

Musharaff's order suspends freedoms of speech and assembly, shutsdown broadcasts by independent media, and jailed some 1500 activists and politic opponents, including some in the judiciary. In his televised speech on Saturday, he said that the courts and the media were, in effect, supporting the al-Qaeda terrorists that were becoming increasing violent and powerful within the country. "I personally, with all my conviction, and with all the facts available to me, consider that inaction at this moment is suicide for Pakistan, and I cannot allow this country to commit suicide."

You can be certain that Musharraf is reacting to events that occurred when he was just five years old. In 1947, Britain relinquished control of the Indian subcontinent, which was partitioned into (Hindu) India and (Muslim) Pakistan. The Partition and the independence of India and Pakistan triggered a massive genocidal bloodbath that even a five-year-old could never forget. Today, with rising religious and ethnic violence, he sees the same forces building. Musharraf's motivation is not political. Musharraf is making a desperate and panicky move to prevent a recurrence of the 1947 bloodbath.

Domestic and international politicians and media are oblivious to this. They're condemning Musharraf's declaration, saying that its ONLY purpose was purely political -- to retain political power. The BBC report asked the question that was typical of the media: "Will the White House do anything to punish its ally?" The implication of the report was that President Bush would do nothing -- also for political reasons.

A rare serious analysis of the situation in Pakistan was given by Arnaud de Borchgrave (pronounced AHR no de BOHR grahv) of the Center for Strategic and International Studies, interviewed by Wolf Blitzer on CNN on Sunday. Here are some excerpts:

"Well, what's unfolding is a failing state that is also one of the eight nuclear powers in the world, Wolf. This is the worst nightmare that anybody can think of. Doesn't mean that the nuclear weapons are going to be used by bad guys tomorrow against us among the terrorists, but there is that danger. ...

The arsenal is controlled by the military, and the warheads are separated from the launchers in different parts of the country, which is their security system. But beyond that, I don't know how they're controlled.

What we do know is that two of the four provinces in Pakistan are controlled by people who are pro-Taliban and pro-Al Qaida. The Red Mosque in downtown Islamabad has been retaken by the bad guys, by the pro-Taliban people. We know that Osama bin Laden is -- has got almost a 50 percent approval rating in Pakistan out of 160 million people. And that Musharraf himself is in the single-digit approval. ...

I don't see how [a return to] democracy would prevent a return to sanity in that country. Right now, it is out of control. The military, as you know, have been defeated in the federally administered tribal areas, in the north, especially North Waziristan and South Waziristan. Several hundred soldiers were captured without a fight. I mean, this is a very bad situation. ...

ISI [The Pakistan intelligence service] is still very active all over Afghanistan. And Taliban ... and Al Qaida have virtually won against the Pakistani army on the border, which enables, of course, the ISI to repenetrate Afghanistan and in effect, turn against -- I mean, counteract India's influence, which has grown quite strong, in Afghanistan, in recent times.

[When asked if this is right now the most dangerous situation in the world:]

Without any question. Just think of Pakistan as one of the eight nuclear powers and out of control."

Other reports indicate that Musharraf has become extremely unpopular in both the general public AND in the army, and that the portions of the army are turning against Musharraf.

The Pakistan people were shocked on Friday when paramilitary army forces, fighting Taliban militants in the North West Frontier Province (NWFP), dropped their arms and surrendered, rather than fire on Muslims. The Islamic militants paraded the Pakistani fighters in front of the press before allowing them to leave.

From the point of view of Generational Dynamics, it's important to know how deep the opposition to Musharraf goes among the Pakistani people. With the enormous hostility in the mainstream media to Musharraf, especially for his pro-Bush and pro-American policies, it's hard to for me to make that judgment from here in my apartment in Framingham, Mass. After the Saturday proclamation, the press had been predicting massive street demonstrations and riots across the country on Monday.

There were indeed demonstrations on Monday, but the major participants appear to the group of lawyers who protested against Musharraf in March, following Musharraf's suspension of the country's Chief Justice Iftikhar Muhammad Chaudhry. Chaudhry is currently under house arrest.

Former Prime Minister Benazir Bhutto is playing an ambiguous role. You'll recall that she narrowly escaped death two weeks ago from suicide bombers, during her triumphal return from eight years of exile. At that time, it was thought that she and Musharraf would make some kind of agreement to govern the country jointly.

Bhutto has refused to fully condemn Musharraf, and even holds out the possibility of further negotiations, but she's called for immediate cessation of martial law, and is threatening street demonstrations.

Now here's the point: On Sunday's interview with Arnaud de Borchgrave, excerpted above, they quoted an excerpt from an e-mail message that Bhutto had sent to de Borchgrave the previous day. The excerpt read:

"The fact that militants hold open meetings without fear of retaliation proves that the Musharraf regime is totally inept, unwilling or colluding in their expansion. Our rapprochement talks with Musharraf have foundered in the quicksand of his failing promises."

The issue here is that Bhutto's stance is far more confrontational than Musharraf's is.

Indian subcontinent, showing the disputed regions of Kashmir and Jammu.
Indian subcontinent, showing the disputed regions of Kashmir and Jammu.

This is exactly what generational theory tells us to expect. Musharraf grew up during the bloody Partition genocide and is in the "Artist" generational archetype, so named because they tend to be very sensitive and always willing to compromise. But Bhutto was born after the war ended, and is so is similar to the arrogant, narcissistic people in America's Boomer generation.

Conflict risk level for next 6-12 months as of: 9-Feb-2006
W. Europe 1 Arab Israeli 3
Russia Caucasus 2 Kashmir 2
China 2 North Korea 2
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

This is why I've said so many times that Musharraf himself is almost indispensible to Pakistan. When he's replaced, he'll be replaced by someone younger who will be much more confrontational than he is. Even if he retains power, then he's likely to be weakened enough that he'll be forced to become more confrontational himself.

For these reasons, I now believe that the risk of all out war between Pakistan and India in the next six months has gotten considerably greater. The epicenter of such a war would be the disputed regions of Kashmir and Jammu.

As de Borchgrave says, Pakistan is the most dangerous region in the world today, "without any question."

I am therefore going to raise the "conflict risk level" for Kashmir from 2 (medium risk of war within 6 months) to 3 (high risk of war within six months).

This is the first change in the conflict risk graphic since February, 2006 - over 1˝ years ago. The new graphic is as shown on the right.

Conflict risk level for next 6-12 months as of: 6-Nov-2007
W. Europe 1 Arab Israeli 3
Russia Caucasus 2 Kashmir 3
China 2 North Korea 2
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

There are many scenarios that could lead to war. For example,

For those who think that a "minor" confrontation could not lead to all-out war because people are too "sensible" to do that, remember that Pakistan and India are in generational Crisis eras. The risk-averse people in Musharraf's generation are almost all gone, and the leadership throughout the country are the far more confrontational post-war generation. The possibility of a panicked response on one side or the other is great. That's how generational crisis wars begin.

If Musharraf survives the current crisis and the country returns to a more peaceful state (something not likely in a generational Crisis era), then we can consider changing the risk level back to 2.

As I've been saying for years, India and Pakistan are headed for a war re-fighting the 1947 genocidal war with 100% certainty. Only the timing is unknown. The current crisis may provide the catalyst. (6-Nov-07) Permanent Link
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Citibank announces additional $8-11 billion losses in mortgage meltdown

And there may be a lot more to come.

As of September 30, Citibank officials believed that they'd finally gotten things under control. They'd written off $2.2 billion in near-worthless securities, and the rest of the $55 billion in mortgage-backed securities (collateralized debt obligations which are collateralized by asset-backed securities, ABS CDOs) where in good shape.

These securities had nominal values of $55 billion, and they're in the highest quality (lowest risk) tranches of the ABS CDO marketplace. There were no securities safer than those.

On Sunday, Citibank (actually, Citigroup Inc), issued a press release announced the following:

"Citigroup Inc. announced today significant declines since September 30, 2007 in the fair value of the approximately $55 billion in U.S. sub-prime related direct exposures in its Securities and Banking (S&B) business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis)."

Citibank went on to explain that the addition writedowns became necessary because ratings agencies have downgraded sub-prime mortgage-related assets.

I mentioned this point a few days ago in an article leading up to the Fed announcement. The ratings agencies are doing this on a volume basis now -- downgrading tens of billions of dollars in CDOs every week.

Merrill Lynch had a similar double embarassment, initially predicting $4.5 billion in writedowns a few weeks ago, and then announcing an $8.4 billion writedown last week.

The Citibank press release gets very interesting when it explains WHY it doesn't yet know the extent of further writedowns:

"Although the principal collateral underlying these super senior tranches is U.S. sub-prime RMBS [[residential mortgage based securities]], as noted above, these exposures represent the most senior tranches of the capital structure of the ABS CDOs. These super senior tranches are not subject to valuation based on observable market transactions. Accordingly, fair value of these super senior exposures is based on estimates about, among other things, future housing prices to predict estimated cash flows, which are then discounted to a present value. The rating agency downgrades and market developments referred to above have led to changes in the appropriate discount rates applicable to these super senior tranches, which have resulted in significant declines in the estimates of the fair value of S&B super senior exposures."

Note the tricky word play here. The phrase "super senior tranches" makes them sound like they should be super safe. But no, this paragraph says that they're super-unsafe. Why? Because they can't be valuated in the marketplace, since there's no market for them.

Instead, their values must be ESTIMATED, based on, "future housing prices to predict estimated cash flows."

Wow! Do you really think anyone knows what future housing prices are going to be? A year ago, officials were telling us that the housing crisis was over, and that housing prices would start going up again this past year. Well, that didn't work out did? This past year, housing prices have tumbled, sales have tumbled, and foreclosures have surged. And it's only beginning, since the stream of "adjustable rate mortgages" (ARMs) that are going to reset to much higher interest rates has only just started, and will really surge next year.

The Citibank press release continues as follows:

"The fair value of S&B sub-prime related exposures depends on market conditions and assumptions that are subject to change over time. In addition, if sales of super senior tranches of ABS CDOs occur in the future, these sales might represent observable market transactions that could then be used to determine fair value of the S&B super senior exposures described above. As a result, the fair value of these exposures at the end of the fourth quarter will depend on future market developments."

Now, this is REALLY heavy. Up till now, Citibank has valuated all these securities by using computer algorithms ("mark to model"), based on ratings assumptions that are turning out to be fault.

But the really DREADED situation will occur when somebody actually SELLS some of these CDOs in a fair market. This will establish a market value for the CDOs, and will force OTHER holders to re-valuate them using "mark to market."

Everyone's absolutely dreading this, because there's an enormous fear out there that the market price of these CDOs will be NOTHING, or close to it. That's what happened to Bear Stearns when it announced in July that its hedge funds are almost worthless.

That's the reason for these SIVs (structured investment vehicles) and the mind-boggling "M-LEC," or Master-Liquidity Enhancement Conduit or "Super-SIV" (Structured investment vehicle). The purpose of these structures is to allow Citibank and other banks to sell these worthless securities to each other at artificial prices, which is fraud, but it's OK because the government says it's OK. Anything's better than any free market in these things.

So, what Citibank is saying is that it has NO IDEA how much more it's going to have to write down. Of the $55 billion they thought they had, they're writing down $8-11 billion. That leaves around $45 billion left. How much of that will be written down? They have NO IDEA. They're just hopin' and prayin' that it won't be too much.

And now, Dear Reader, let's talk about Y-O-U. Do you have investments in money market funds, hedge funds, pension plans, or any of a wide variety of investment vehicles? Are your investments safe?

Oh, really? You say they ARE safe? How do you know? How can you possibly know? If the brilliant financial engineers at Citibank and Merrill Lynch don't know, then how can you know? Are you really that much smarter than the financial engineers at Citibank and Merrill Lynch?

Recall that, according to a report from the International Monetary Fund (IMF) that I analyzed last month, there were $415 trillion dollars of CDOs and other credit derivatives outstanding globally, as of December, 2006. Ron Insana on CNBC says that the figure is up to $750 trillion now. This is in a world where the total GDP (value of all products and services produced in the whole world) is only $45 trillion.

So there's an unbelievable amount of pain yet to come, as the marking down process continues. The writedowns will affect mutual funds, investment trusts, hedge funds, savings banks, pension funds, college endowments, money market funds, insurance companies, and any other institution with money -- possibly including institutions that hold YOUR money.

From the point of view of Generational Dynamics, this has all been caused by the debauched and depraved abuse of credit by people in the Boomer Generation and Generation-X. These are the first generations with no personal memory of the starvation and homelessness of the Great Depression, and have convinced themselves that nothing like the Great Depression can ever happen again. They're going to be shocked by what happens, just as the officials at Citibank have already been shocked to learn that many of the securities that they thought were OK turn out to be worthless. (5-Nov-07) Permanent Link
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MarketPsych investor fear index forecasts sharply increased market turbulence.

With investor anxiety increasing, the index forecasts a return to the "mini-panic" level of August.

Since I wrote about the Marketpsych "Fear Index" in September, I've been following it on a daily basis. Each day I watch CNBC and make my own judgment as to whether investors are anxious or sanguine, and then the next day I check to see if my judgment is matched by a change in this fear index, and it's been pretty accurate so far. It appears to be a very powerful tool for assessing the level of investor anxiety and panic.

Here's the graph of the index as of today, annotated with some of the major events that have triggered ups and downs in the index this year:

MarketPsych Fear Index -- 2-Nov-2006 to 2-Nov-2007 <font face=Arial size=-2>(Source: Marketpsych)</font>
MarketPsych Fear Index -- 2-Nov-2006 to 2-Nov-2007 (Source: Marketpsych)

From the point of view of Generational Dynamics, the ups and downs of the stock market are not as important as the changes in behaviors and attitudes of the masses of investors, as it's the latter that indicates major generational changes that trigger huge historical events.

If you examine this graph, then you'll see the following:

In order to clarify the annotations on the above graph, I've prepared the following list of the events that I consider most likely to have triggered the major ups and downs in the index since mid-January. The actual data values are approximate, since I have no access to the data other than what I can read from the graph itself.

The index value for a particular day is subject to revision for a couple of days thereafter, and so the last couple of index values may change. But it's been pretty clear that something pretty dramatic changed after the Fed announcement on Wednesday, and investors are exhibiting genuine fear.

Let's review the big picture, what's really going on here. If you go back through history, there are of course many small or regional recessions. But since the 1600s there have been only five major international financial crises: the 1637 Tulipomania bubble, the South Sea bubble of the 1710s-20s, the bankruptcy of the French monarchy in the 1789, the Panic of 1857, and the 1929 Wall Street crash.

When comparing these international financial crises, the details are always different, but they're all remarkably similar in the following ways, as described in "The bubble that broke the world": A debauched and perverted use of credit, occurring at exactly the time that the survivors of the previous financial crisis have all died or retired; a huge asset bubble; the securitization of credit; and an upsurge in corruption. All of those elements are enormously present today.

From the point of view of Generational Dynamics, we're waiting until a "generational panic" triggers the inevitable collapse. The asset bubble MUST collapse; the credit securities (CDOs) WILL become worthless; the corruption MUST be punished.

The working hypothesis is that the "MarketPsych Fear Index" is a tool that tells us when this panic is likely to come. We've shown above that the index is showing a pattern that's similar to the last two "mini-panics" of 2007, and that the long-term trend of the index is up. We hypothesize that, therefore, there will be a new sharp spike up in investor anxiety and panic. Further, we hypothesize that if the current spike up in anxiety doesn't lead to a full-scale generational panic, then there will be further repeated similar cycles, until one of them DOES trigger a full-scale generational panic and crash.

Fed Chairman Ben Bernanke "cured" the August mini-panic by means of a dramatic and unexpected injection of liquidity into the financial system. It's possible that the Fed has enough firepower left to "cure" the coming mini-panic, possibly by shocking everyone by dropping the Fed Funds rate another 1% to 3˝%. However, he may not have the ability to do that, since it would weaken the dollar so substantially on world markets that the same international financial crisis may be triggered anyway, by a different route.

At any rate, this is a time of great danger to investors. If you're one of those giddy investors who believe that a new stock market crash is impossible, you might at least consider pulling out of the market until the next mini-panic is over. (3-Nov-07) Permanent Link
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Pakistan President Pervez Musharraf declares martial law and a state of emergency.

In a highly dramatic televised speech to the nation and the world, Pakistan President Pervez Musharraf defended his decision to assume essentially dictatorial powers in Pakistan. His declaration suspends the constitution, and curtails freedom of the press and the power of courts in Pakistan.

In his speech, he referred to the numerous terrorist bombings throughout Pakistan, killing several hundred people in just the last couple of months. He described how embarrassing it has been to explain to foreign leaders why these attacks have been occurring. He particularly mentioned his embarrassment at having to explain to Chinese leaders why a convoy of Chinese workers were attacked by suicide bombers.

He blamed the press for encouraging such terrorist acts, and he blamed the courts for preventing him from taking the necessary steps to stop the terrorist acts. He used these reasons as justification for suspending the constitution.

Musharraf's actions are provoking bitter condemnations within Pakistan itself, and harsh criticism from Westerners, most of whom are interpreting his actions purely politically. Secretary of State Condoleezza Rice, speaking from Istanbul in a meeting with Turkish leaders about the situation in Iraq, criticized the move because it diverted Pakistan from democracy.

There will be a lot more discussion of this in the days to come, but I wanted to post this right away in order to quote some of Musharraf's highly dramatic and emotional speech.

Pakistan President Pervez Musharraf, speaking to the nation and the world on Saturday <font face=Arial size=-2>(Source: CNN)</font>
Pakistan President Pervez Musharraf, speaking to the nation and the world on Saturday (Source: CNN)

Most of the speech was in Urdu, but he broke into English at one point. The following is my own transcript, and may contain errors. (I'll update this page if a better transcript becomes available.) (Corrections made on 4-Nov)

"I would like to direct this to our friends in the United States and India and the Commonwealth...

I would ask you to finally understand the criticality of the environment inside Pakistan. Pakistan is on the verge of destabilization, if not arrested in time. Now, without moving any further, time or delaying the issue. The saddest part of everything, that saddens me the most, that after all we have achieved in the past seven years I see in front of my eyes, Pakistan's upsurge taking a downward trend. I personally, with all my conviction, and with all the facts available to me, consider that inaction at this moment is suicide for Pakistan, and I cannot allow this country to commit suicide.

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Therefore I had to take this action, in order to preserve the democratic transaction which I initiated a few years back. I would like to repeat that... I started with a 3 stage transition:

  • From 1999 to 2002, [a dictatorship] where I remained in control.
  • 2002 to 2007 - five years of democratic rule, with all assemblies, and local governments fully functioning.
  • [This year] I launched the third phase, to be completed in only a few months -- return to full democracy, myself being only a civilizan president, if elected.

It's this third stage that is being subverted today, and I want to complete it with all my conviction. If we don't take action. I don't know what chaos may follow.

So therefore, I request you all to bear with us. To the critics and idealists, against this action, I would like to say, please do not expect or demand your level of democracy which you learnt over a number of centuries. We're also trying to learn, and we're doing well. Please give us time.

Please also do not demand and expect your level of civil rights, human rights and civil liberties, that you've learned over the centuries. We're trying to learn, and we're doing well. Please give us time.

I would at this time venture to read out an excerpt of president Abraham Lincoln, especially to all my listeners in the U.S.

As an idealist, Abe Lincoln had one consuming passion during that time of supreme passion - and this was to preserve the Union because the Union was in danger. Toward the end, he broke laws, he violated the Constitution, he usurped arbitrary power, and he trampled individual liberties, but his justification was that this was a necessity to preserve the Union. In explaining this, he wrote in a letter in 1864. Quote.

"[M]y oath to preserve the constitution to the best of my ability, imposed upon me the duty of preserving, by every indispensible means, that government -- that nation -- of which that constitution was the organic law. Was it possible to lose the nation, and yet preserve the constitution? By general law life and limb must be protected; yet often a limb must be amputated to save a life; but a life is never wisely given to save a limb. I felt that measures, otherwise unconstitutional, might become lawful, by becoming indispensable to the preservation of the constitution, through the preservation of the nation. Right or wrong, I assumed this ground, and now avow it."


We're also learning democracy - we're going through a difficult time. It's the nation that's important. For me and for every Pakistani, Pakistan comes first, and everyone else's considerations come after that. I look at it from this point of view. Whatever I do, it's for Pakistan, and whatever anyone else thinks, comes secondary. What I do with full conviction, and heart and soul, and mind in it."

The letter that Musharraf quoted from was written in 1864 by Abraham Lincoln, at the height of the Civil War, to defend his actions in violating his oath to obey the Constitution.

It was a letter to a southerner, Albert G. Hodges, defending his views. I recommend to all readers of this web site to take the time to read the entire letter.

From the point of view of Generational Dynamics, Musharraf's actions are quite understandable. The actions that he's taking are to preserve the nation.

As we've said many times on this web site, when a nation, any nation, enters a generational Crisis era, then individual rights are always sacrificed in order to preserve the nation and its way of life. However, such moves are always politically controversial, as Musharraf's are.

The easiest way to understand the political conflict in Pakistan is that it's a much more virulent form of the controversies going on in America today. On the one hand, we have President Bush advocating policies to prevent terrorist attacks such as occurred on 9/11, and on the other hand we have political opposition that objects to loss of civil rights in the form of potential wiretapping and torture of terrorism suspects. As bad as the animosity is in the U.S., it's a thousand times worse in Pakistan.

The situation in Pakistan is exceedingly dangerous and explosive right now, and we'll be following it closely.

I'd like to close this posting by quoting the final paragraph of Lincoln's letter Albert G. Hodges, that Musharraf excerpted:

"In telling this tale I attempt no compliment to my own sagacity. I claim not to have controlled events, but confess plainly that events have controlled me. Now, at the end of three years struggle the nation's condition is not what either party, or any man devised, or expected. God alone can claim it. Whither it is tending seems plain. If God now wills the removal of a great wrong [[referring to slavery]], and wills also that we of the North as well as you of the South, shall pay fairly for our complicity in that wrong, impartial history will find therein new cause to attest and revere the justice and goodness of God."

This is exactly what Generational Dynamics tells us, and what I've been saying over and over. Those who continue either to credit or blame President Bush for being the cause of some good things or bad things should understand that President Bush is NOT controlling events. Whether it's Iraq or Pakistan or Iran, events are now flowing far beyond the control of any politicians. The events are being controlled by huge waves of generational changes that were put into effect decades ago, and those huge waves cannot be stopped any more than a tsunami can.

Musharraf has imposed emergency control and martial law. He has no choice, as his country is becoming increasingly unstable, as younger generations assume leadership. Young people in these generations have no personal memory of the huge genocidal bloodbath that occurred in 1947 with Partition and the independence of India and Pakistan from British rule. People in these younger generations have NO IDEA that this massive bloodbath is coming again, and possibly quite soon.

There's one thing of which I'm fairly certain: Musharraf's 3-stage transition to democracy has been permanently derailed, and stage 3 will never be completed. I don't know what scenario will be followed, but I'm pretty certain that it won't be the one that Musharraf and many Pakistanis hope for.

Conflict risk level for next 6-12 months as of: 9-Feb-2006
W. Europe 1 Arab Israeli 3
Russia Caucasus 2 Kashmir 2
China 2 North Korea 2
Financial 3 Bird flu 3
Key: 1=green 1=Low risk 2=yellow 2=Med 3=red 3=High 4=black 4=Active

In my little "conflict risk" graphic, I've put the Kashmir problem (the epicenter of the coming war between Pakistan and India) at Level 2 (medium risk of regional war in the next six months). As I've explained, I have great admiration for both Pakistan's President Pervez Musharraf and his Indian counterpart, India's Prime Minister Manmohan Singh. Both Pakistan and India are nuclear powers, but these two leaders have engineered a remarkable détente that has prevented a conflict, and they've pulled back from the continuing seething dispute over Kashmir and Jammu.

Musharraf is being challenged both inside Pakistan and outside by new generations of leaders with no fear of the coming bloodbath genocide. Within a day or two, it should be possible to judge whether it's time to raise the conflict risk level for Kashmir to 3 -- high risk of war. (3-Nov-07) Permanent Link
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Investors appear to be sobered by latest Fed interest decrease.

Investors acted drunk and giddy after the September 18 interest reduction, evidently believing that the Fed had "saved the world," with the ˝% interest rate decrease. In the aftermath, investors blew the stock market bubble up larger than ever, and pushed Dow Industrials average up to a new historical all-time high on October 9.

Investors' logic the last few weeks was so bizarre that I never would have believed it possible, if I hadn't seen it for myself, and watched it unfold on CNBC:

I know from e-mail correspondence with certain people that there is absolutely no evidence that would convince them that the stock market was in a bubble, or that a bubble was even possible. Even reminding them of the Nasdaq crash in 2000 would have no effect.

But the atmosphere became distinctly different after the October 31 Fed action to lower interest rates an additional Ľ%. Many investors had hoped for another ˝% decrease, and were disappointed by just Ľ%. But that wasn't the biggest problem. The Fed also issued "guidance" that said, in effect: Don't expect any more interest rate decreases this year.

This has changed the entire atmosphere, and it was palpable on CNBC on Thursday, as worried pundits and anchors hardly knew what to expect. The Fed "safety net" was gone. No more could you hope for the Fed to bail you out if you did something stupid. The Fed made it clear that you're on your own now.

And there's plenty to worry about. Credit is getting hard to find again, not yet as bad as in the August "credit crunch," but getting closer.

The mortgage crisis appears to be accelerating, as noted in a page one article to appear in Friday's Wall Street Journal:

"The situation is now more negative than in the summer," said Pete Nolan, a portfolio manager at Smith Breeden Associates in Chapel Hill, N.C. He said that "in many cases, the fundamentals are catching up" with investors' worst fears. [chart]

The worry is that the huge financial edifice that is built on top of the now-shaky mortgage market could weaken, potentially causing lenders to tighten up on loans and slowing the economy. Besides the problems with banks and brokers, there was evidence of more problems in the mortgage market. Mortgage-servicing companies, which collect payments from borrowers, said delinquency and prepayment data were worse than expected.

"Mortgages are still deteriorating at an accelerating pace, and that's scary," said Karen Weaver, global head of securitization research at Deutsche Bank AG. "We haven't come near a stabilization, and we expect things to get worse as the bulk of resets" of interest rates on adjustable-rate mortgages "have yet to come."

The percentage of subprime mortgages -- those to home buyers with weak credit -- that were more than 60 days behind in their mortgage payments topped 20% in August, up from 18.7% in July and 17.1% in June, according to latest data from FirstAmerican Loan Performance.

Meantime, home prices in many markets have slipped. They were down more than 4% in the month of August from a year ago, as measured by the S&P/Case-Shiller index. The weaker prices have prevented some borrowers from refinancing into new loans loans, and have reduced the value of the collateral backing mortgage loans and securities.

Mark Zandi, an economist at Moody's, estimates that of the $2.45 trillion in especially risky mortgages currently outstanding -- including subprime mortgages, interest-only mortgages, mortgages that exceed Fannie Mae lending limits and others -- as much as a quarter could suffer defaults in the months ahead. Total losses on these mortgages, he estimates, could reach $225 billion. That would hit bondholders hard, since the value of mortgage securities is driven by the performance of underlying mortgages. And it could make such bonds harder to sell in the future.

Many expect the value of homes to continue to slip as well. Mr. Zandi puts the drop at 10%, from the market's peak in the fourth quarter of 2005 to its projected bottom in the fourth quarter of 2008. That would be a decline that would wipe out more than $2 trillion in home values. That's less than the $7 trillion in stock wealth wiped out by the tech bust, but still would represent a significant hit to the economy.

Because mortgages are bundled into securities sold to investors all over the world, the deterioration in mortgages' value is having a widespread effect. Many of the more complex securities, known as collateralized debt obligations, or CDOs, are held by banks and brokerage firms. They've been the cause of much of the big losses at those institutions.

In CDOs, risk is portioned out to different groups of investors. Those willing to take the biggest risks buy securities with the highest potential returns, while investors who want more safety give up some return to get it. Already, the riskier "tranches" of CDOs have sunk dramatically in value. An index that tracks risky subprime bonds [[the ABX index]] has fallen to a record low of 17.4 cents on the dollar, down 50% from August, according to Markit Group.

That decline, while worrisome, hit investors willing to take risk. But the recent turmoil stems from declines in the market for the safest securities. Rated triple-A, they should be affected by mortgage defaults only in extreme circumstances. An index that tracks triple-A securities is trading at 79 cents on the dollar, down from roughly 95 cents just a month ago.

At the top are "super senior tranches." It is a decline in value of these supposedly safe securities that is hurting many banks and brokerage firms.

In October alone, ratings firms Moody's InvestorsService, Fitch Ratings and Standard & Poor's have downgraded or put on watch for downgrade more than $100 billion in CDOs and the mortgage securities they contain. In a glimpse of how much banks have at stake, Swiss-based UBS holds more than $20 billion of super-senior tranches of CDOs. They're among the reasons UBS, which reported a third-quarter loss of 830 million Swiss francs ($712.8 million), has warned that its investment bank is likely to face further losses in the current quarter.

"There was some widespread miscalculation when it came to estimating the credit risk and market risk of the super-senior tranches," notes Ralph Daloiso, managing director of structured finance at Natixis, a French banking group.

The large Wall Street firms weren't alone in believing triple-A-rated debt securities were safe. In the last few years, bond insurers such as MBIA Inc. and Ambac Financial Group Inc., as well as financial guaranty units of American International Group Inc., PMI Group Inc. and ACA Capital Holdings, aggressively wrote insurance on super-senior tranches of CDOs that were backed mainly by subprime mortgages. These companies effectively agreed to bear the risk of losses on these securities.

Shares of Ambac and PMI yesterday fell 19.7% and 11%, respectively, and along with MBIA hit new 52-week lows, on growing investor worry that they may need to hold more capital against the risk they are insuring and could be hit with sizable claims down the road.

Over the past two weeks, some of the insurers posted significant net losses for the third quarter due to adjustments on credit derivatives they used to provide insurance on the bonds. The bond insurers have said, however, that they don't expect actual losses from the CDO tranches they have insured."

What's so dramatic about this article is how gloomy it is -- just as gloomy as the pundits and anchors on CNBC on Thursday. This is an enormous contrast from the bubbly articles you usually encounter in WSJ and on CNBC. That's how dramatically things have changed in just a couple of days.

From the point of view of Generational Dynamics, we're headed for a major stock market panic and crash, and a new 1930s style Great Depression. The panic will be led by the Boomer Generation and Generation-X, people who have no personal memory of the 1930s, and who have no idea what's going on in the world. It's impossible to predict when this full scale panic will begin, and all we can do is which for signals of increasing panic. The current widespread change in investor mood may be such a signal, or it may not.

A web site reader has referred me to the following YouTube video, interviewing Martin Summers, the Former East European projects officer for the New Economics Foundation:

What's interesting about this video is that he discusses many of the same concepts that I do. (Do you think he's seen my web site?) My favorite quote is:

"Many of the mechanisms for balancing the economy that were put in place following the end of the second world war have been deliberately dismantled by a following generation of politicians who believed in the magic of the market. That was stupid."
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